Microfinance: New Paradigms Built on Age-old Fundamentals

RBAP-MABS Research & Project Monitoring Consultant Ferdinand Sia shares his learnings from Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor Espenilla Jr.’s keynote address at the 2011 RBAP-MABS National Roundtable Conference

BSP DG Espenilla

The 2011 RBAP-MABS National Roundtable conference held on May 23-24 opened with a Keynote Address by BSP Deputy Governor Nestor Espenilla Jr. His speech carried the theme that new products, delivery channels and more players in microfinance will benefit both banks and consumers, but fundamentals remain important.

Espenilla said that the Philippines is in the midst of a new paradigm of a solid network of stable, self-sustaining and dynamic rural financial institutions that are capable of adapting to new technologies to better serve the under-banked.  He recalled the industry’s atmosphere about fifteen years ago, when microfinance was offered only by a handful of banks through groups and center meetings. Today, microfinance includes housing loans and many other new products and services that can be paid through electronic money.

Mr. Espenilla cited three major changes that happened in microfinance in the last decade and a half, along with the corresponding actions that the BSP took to cope with them. First is the involvement of more diverse players in the industry, as telecommunications companies and network service providers entered the domain traditionally served only by banks. This milestone was supported by the BSP’s Circular 649 and 734, which are mainly on electronic money (e-money), e-money issuers and e-money network service providers. These new circulars paved the way for  e-money retail payments and the creation of a mobile banking ecosystem, and ensured consumer protection, financial stability and integrity.

Second, products and services have increased in breadth partly arising through increased competition. Diverse products are good for the consumers as they get more options to better suit their needs. Broader products are also good for service providers as they increase and diversify revenue streams. BSP’s circulars 678, 680 and 683 made the offering of housing microfinance, micro-agri loans products and microinsurance possible.

The third major change was the development of new delivery channels – mobile phones, internet, banking kiosks and retail merchants – which save travel time and cost for bank clients. To support this change, the BSP released Circular 694, which provides rules and regulations for micro-banking offices (MBO). The collection of bank branches, ATMs, MBOs, merchants, store-fronts and e-money cash agents will make financial services more accessible to clients even in far-flung areas.

In addition, the BSP also updated anti-money laundering rules and regulations to address obstacles in serving the unbanked population. With the new rules, customers known by the bank as having small account balances and low value transactions will be classified as low risk, allowing banks to offer a more customer-friendly acceptance process. Moreover, the BSP also allowed for the outsourcing of customer identification or KYC (know your customer) requirements to make the process faster.

NRT 2011 Session 1

Through all the significant innovations in the microfinance industry, Mr. Espenilla stressed that age-old business and banking fundamentals still need to hold for the industry to succeed in taking advantage of this paradigm shift. The BSP, for its part, has initiated Circulars and actions to encourage sound fundamental business conditions.

First, institutions must be fortified because only strong institutions will survive to enjoy the benefits from the new products and services. A strong institution requires improved governance, strong balance sheet and sound business plans. BSP Circular 696 defines minimum capital requirements for new banks, banks converting to another category, and banks relocating their head office to another location. The circular is expected to help rural banks better manage risks, reduce non-performing assets, and promote greater transparency and market discipline.

Second, a clear business model will ensure sustainable business offerings, which means offering products to credit-worthy clients, subscribing to sound business policies, and underwriting standards. Lastly, serving clients and protecting their interests should be an essential part of any bank’s business strategy. These include providing transparent information about products and services as well as improved disclosure policies. The BSP is now supporting this initiative and has been supporting various financial education campaigns to support this.

The Philippines’ efforts on microfinance have been lauded by Economist Intelligence Unit and the World Economic Forum, thanks in part to the BSP’s continued support for microfinance through circulars and initiatives. This unwavering support has allowed for the Philippine microfinance industry to continuously grow amidst challenges and difficulties, and the promise continues to live on to extend financial services to more of the country’s unbanked and underbanked.