$150 Million Loan to Support Microfinance Development in the Philippines

Manila, Dec 14, 2005 (ABN Newswire) - ADB is lending US$150 million to help reduce poverty in the Philippines by improving access of the poor to financial services. The loan agreement was signed by Finance Secretary Margarito Teves and ADB President Haruhiko Kuroda.

The program is part of a pipeline of projects endorsed by ADB's Board of Directors in July for consideration during 2005-2007. ADB's pace and sequencing of policy-based support is linked to continued progress of macroeconomic and fiscal reforms in the country. The continued fiscal consolidation in the Philippines paved the way for endorsement of the program.

The Microfinance Development Program will support the Government's program for expansion of a sound microfinance sector that will encourage private-sector participation in the delivery of microfinancial services, address systemic weaknesses, and promote access to sustainable, competitively priced financial services for the poor and their microenterprises. The program will reinforce the National Strategy for Microfinance developed by the National Credit Council, chaired by the Department of Finance.

The program aims to remove restrictions on competition, improve governance, and promote efficient operations and expansion of private-sector-led microfinance institutions (MFIs). Transparency and truth-in-lending will be introduced to all types of MFIs to ensure that borrowing costs are fully disclosed to the poor, while the tax regime for MFIs will be clarified.

"Access to microfinance services can help the poor build viable businesses and pursue livelihood activities," says Julie Rogers, an ADB Principal Financial Sector Specialist. "As such, access to microfinance services can improve household incomes, and thus reduce poverty."

Bangko Sentral ng Pilipinas' (BSP's) initiatives to encourage the banking sector to provide microfinance services to the poor will be supported under the program. This includes the relaxation of bank branching regulations and the increased use of cell phone-based technology for low-cost money transfers and payments, particularly remittances from overseas Filipino workers. The program will promote the introduction of new financial products and the mobilization of savings in MFIs, providing a cheaper source of finance for MFIs which in turn will lower the cost of credit for the poor.

Microfinance is the Government's central strategy for poverty reduction under the Social Reform and Poverty Alleviation Act. Although the Philippines has achieved good progress in promoting microfinance, more than two-thirds of the country's poor, or 17 million people, still do not have access to microfinance services. Instead, the poor rely heavily on self-finance or informal sources that may be very costly, limiting their ability to participate in and benefit from development opportunities and income-generating activities.

To increase their efficiency, MFIs will be trained to meet the new uniform set of performance standards formulated by the NCC and its technical working group of public and private-sector representatives. The performance standards set benchmarks that will enable MFIs to compare themselves with international best practices.

As part of the Government's continuing privatization program, ADB assistance will also be provided to help prepare a privatization plan and divestment options for the Philippine Postal Savings Bank. With the private sector at the helm, the Postal Bank will play a vital role in encouraging savings and providing greater credit access to microentrepreneurs in the countryside.

The program will also support efforts to improve the regulatory environment for savings and credit cooperatives, which can play a key role in reducing poverty. Government will issue prudential rules and regulations - such as minimum qualifications for boards of directors and management - to ensure safe and sound operations of more than 4,500 savings and credit cooperatives. Regional consultations are underway on the draft rules and regulations that have been prepared by the Government and cooperative sector representatives.

Through the National Anti-Poverty Commission (NAPC), the program will support a nationwide financial literacy program to increase awareness of the basic concepts and importance of microfinance and managing financial resources. To increase consumer protection for the poor, NAPC will set up a website that will allow the public to easily access information, make inquiries and refer alleged violations to the proper regulatory agencies. "These activities should help empower the poor and reduce their vulnerability to illegal and unsound practices," adds Ms. Rogers.

A $500,000 grant from the Japan Special Fund, funded by the Government of Japan, will help promote financial literacy, build viable MFIs, and establish a consumer protection framework. The Government will provide $215,000 equivalent for staff and office facilities. ADB's loan, which comes from its ordinary capital resources, carries a 15-year term. Interest will be determined in accordance with ADB's LIBOR-based lending facility.

The Department of Finance is the executing agency for the program. Implementing agencies include the Bangko Sentral ng Pilipinas, the Cooperative Development Authority, Bureau of Internal Revenue, Securities and Exchange Commission, Philippine Postal Savings Bank, and NAPC, which is mandated to oversee development and strengthening of the microfinance sector.