Rallying Behind Microfinance Institutions: These Heroic Economic Front Liners Likewise Need Help

By: Rapa Lopa with Eugene Kaw and Robert Sanders

For the past eight weeks in the Philippines, the COVID-19 pandemic has meant staying indoors and complying with the rules of the enhanced community quarantine (ECQ). For millions of Filipinos, this has also meant eight weeks of zero income with rising expenses for basic necessities remaining the same.  This global crisis is a lingering one and will likely continue until a vaccine is made available.   Until then,  people’s economic survival, living situation, and way of life are endangered.  

In response, the Philippine government has allocated and disbursed funds to try and help fill the said income void.  According to the President’s latest report to Congress, the government has already disbursed 98% of its initial PhP100 Billion allocation for the Social Amelioration Program (SAP) through the Department of Social Welfare and Development (DSWD). Of this amount, PhP54.6 Billion has been received by 10 million families, out of 18 million total family-beneficiaries. Likewise, the Department of Labor and Employment (DOLE) has utilized PhP4 Billion out of its PhP5.8 Billion allocation to help affected formal and informal workers, as well as displaced OFWs. (1)

To complement the government’s subsidies, the private sector has also chipped in.  Through “Project Ugnayan” alone, 20 top business groups raised over PhP1.5 Billion (2) to fund the distribution of grocery vouchers to urban poor residents in the Metro Manila Area. Similar initiatives from NGOs and other charitable foundations have provided cash and in kind donations in the millions to communities that have been partially or have not been reached by the government subsides.

Substantial as these combined government, private sector, and civil society efforts may be, they are  unfortunately not enough and are bound to dry up given the drawn out timeline. If no sustainable mechanism is established  to make cash available for the vulnerable, the fight versus hunger and reducing extreme poverty will experience its biggest setback in years.  Thus, it’s time to shift gears and find ways to connect cash to the enterprising poor who are eager to restart their livelihood and provide for their family’s needs. 

Microfinance Institutions 

In its 2016 Human Development Report, the United Nations Development Program (UNDP) already predicted that “Progress in human development can stagnate or even be reversed if threatened by shocks from environmental degradation, climate change, natural disasters, global epidemics and conflicts. Vulnerable and marginalized groups —those already left out—are the major victims.” (3) As countries tirelessly work to flatten the disease curve, the next battlefield is how to revive a flattened economy, where the spotlight is focused on hunger and extreme poverty.  

For over four decades, Microfinance Institutions (MFIs) have played an important role in the country’s efforts to provide financial services to the unbanked informal sectors, composed of micro-entrepreneurs who work tirelessly to lift themselves out of poverty.  These are the people most economically vulnerable of falling through the cracks and are now in danger of slipping back.

In a rapid assessment conducted last March 2020, Microfinance Council of the Philippines, Inc. (MCPI) recorded 9 million unique micro-entrepreneur clients among 21 MFI members surveyed. To assist these clients, these MFIs have circulated an aggregate micro-loan portfolio of around PhP60 billion (4) in the poorest urban and rural communities of the country, including capacity building interventions that increase the chances of their clients’ success. This translates to 9 million households empowered to earn income for food, medicines, education, and even generate savings. 

Building a More Resilient Microfinance Sector

MFIs recognize that their targeted clients are highly at risk to all forms of shocks that can dramatically disrupt livelihoods and aggravate the struggle to get out of poverty. With scarce assets lost to  disasters, MFIs’ loan portfolio liquidity are at risk with MFI clients’ inability to spend for their daily consumption converging with their inability to pay their loans. Consequently, the MFIs’ ability to sustain their operations is greatly reduced as they also manage emerging risks. 

As a risk mitigation measure, some MFIs have already diversified their financial services by offering various types of micro insurance to their members.  According to Dr. Aris Alip of CARD, together with other microinsurance industry players, they already provide affordable and relevant risk protection plans to more than 25 million poor and low income individuals in the country.  

However, these measures appear inadequate.  After the typhoon Yolanda experience in the Visayas in November 2013,  a post-disaster assessment was conducted by the Philippine Business for Social Progress (PBSP) with the Center for Agriculture and Rural Development, Inc. (CARD), ASA Philippines Foundation, Inc (ASA); Taytay sa Kauswagan, Inc. (TSKI), and Negros Women for Tomorrow Foundation, Inc. (NWTF).    It was learned that an estimated 500,000 micro-entrepreneur clients with an average loan size of Php10,000/client were affected, resulting to a combined portfolio of around PhP 5 billion at risk.

Through a US$ 4 million grant from USAID, PBSP extended wholesale loans to the 4 MFIs, which retailed around PhP139.23 milion worth of softer term loans to refinance over 30,000 micro-entrepreneur clients while their pre-disaster loans were placed under moratorium.  Within a two-year period, the clients bounced back and repaid 100% of the disaster recovery loans to the MFIs, which in turn repaid their loans to PBSP.  

In line with the USAID agreement, PBSP then transferred PhP172 million from the reflows and incorporated RestartME, Inc. together with the 4 MFIs, which also donated Php5 Million each.  Since then, RestartME has refinanced around 8,000 micro-entrepreneur clients affected by other disasters and has now allocated a total loan portfolio of PhP126 million from its funds.  

Undoubtedly, these humble beginnings of establishing a more resilient microfinance sector still faces a steep uphill climb.  The pandemic just emphasized how much steeper it will be.

The Steeper Climb Ahead

In the same March 2020 study, MCPI underscored that the combined portfolio of 21 members amounting to approximately PhP59.7 billion is now classified as outstanding loans after declaring a payment moratorium in support of the government’s call to ensure the welfare of the clients.  Also worth highlighting is that these MFIs maintain a workforce of 48,957 employees with an estimated combined monthly personnel cost of PhP1 billion. 

To address this, the MFIs indicated their need to access PhP27 billion worth of concessional loans to finance the additional emergency relief needs and livelihood recovery of their clients, as well as their compromised liquidity in order to minimize, if not prevent, job displacements.  It has been more than a month since the study and it is not known how many of these MFIs have been able to raise the financing they needed.  In Luzon alone, the total financing needed by MFIs is placed at around PhP 8.5 Billion. (5)

Given the situation, the challenges appear to revolve around three key areas of concern:

1. The immediate welfare of MFI clients.  The ECQ strategy has significantly impacted the regular sources of household daily income of the large majority of the population who are poor.  While there are relief efforts which distribute essential goods, resource exhaustion and donor fatigue are bound to set in. The transition to general community quarantine (GCQ) also means the eventual lifting of the moratorium on payments and the corresponding resumption of bills collection. These households are going to need cash to cover their living expenses. 

2. Refinancing livelihood.  To bring back daily income source, poor household members need to be able to get back to their jobs (on the assumption that they still have one).  Other household members, often the women in the family, will also need to begin or restart their livelihood, which would require financing and capital infusion. 

3.  The business survival and recovery of MFIs. A key factor is the MFIs’ ability to collect the outstanding loans of clients to secure the minimum liquidity to fund their monthly operating costs.  Unless this liquidity challenge is addressed, some MFIs may be forced to downsize operations and manpower.  Many of these MFI employees are just as vulnerable as the clients they are serving.  For MFIs that would manage to survive, they would have better chances of recovery if they are able to rebuild their loan portfolio as shown by the Yolanda experience of MFIs. 

Working with MFIs in the Reboot of the Economy

As the country face the important challenge of rebooting the country’s economy, the idea to pursue what analysts call a more “compassionate economy-in-crisis” (6) is imperative -- one that puts primacy on inclusive interventions, and ensures that even the most vulnerable will directly benefit.  Helping MFIs is a significant step towards that aspiration through the following proposed interventions:

1. Restructuring exposure. In the immediate term, financial institutions already involved with MFIs may choose to restructure their existing exposures to ease the financial pressures on the latter.

2. Raising funds. Said entities might also explore the possibility of raising additional funds from international financing institutions to develop new loan windows that can offer more concessional rates for MFIs. Companies and their corporate foundations might also wish to make some of their funds available to rehabilitate MFI finances. After all, a significant source of some corporate revenues come from the huge consumer market at the base of the pyramid.  Moreover, around 15-20% of the MFI clients like sari-sari stores serve as the last mile of distribution chains. 

3. Collaborating with the government. To further stop the deterioration of credit quality, former Finance Secretary Cesar Purisima and his colleagues at think tanks Milken Institute and Asia House floated the idea of putting up a government loan guarantee fund of around PhP50-100 billion, which was estimated to have a multiplier effect of 20 times, to serve as a “spark plug” for the borrowing market. (7)

4. Maintain Republic Act 10693 (Microfinance NGOs Act). To enable  Microfinance NGOs to expand their outreach to a greater number of poor people especially in the hard-to-reach areas and implement community development programs funded by tax incentives, Dr. Aris Alip, a recognized Microfinace stalwart, recommends that the government maintains the current 2% income tax imposed on Microfinace NGOs as provided by the said law.  

5. Strengthen the Microinsurance Industry. To enable Micro Insurance (MI)-Mutual Benefit Assciations (MBAs) to generate adequate funds and create better insurance products that will address needs of the marginalized sectors during extraordinary times, Dr. Alip recommends that tax exemption for Mi-MBAs owned by the communities should be upheld.  While the industry recognizes the current efforts of the Insurance Commission, the industry’s services need to be more proactive in times of national emergencies through a calamity fund and with government policies strengthening Mi-MBAs and microinsurance companies.  

6. Connecting and Innovating. Beyond financing, MFIs will also need to find new ways of running their business. In keeping with the “new normal,” loan officers will need to transact with their clients differently, perhaps online. Technology and financial integration companies could work with MFIs and provide innovate solutions in order to leapfrog current operational limitations.

As the country paid tribute to health front liners, may the same recognition, effort, and generosity be extended to help and reinforce the tireless and selfless work of the microfinance workforce who have made it their life’s mission to accompany the unbanked poor in their struggle to rise out of hunger and poverty. Certainly, there may be other ways to support the MFIs and their marginalized clients that have not been identified here.  It is hoped that other ideas will emerge towards supporting these heroic economic front liners.  

References

 1. “Report to the Joint Congressional Oversight Committee, Monday, 04 May 2020,” Official Gazette, p.2.

 2. https://www.pdrf.org/media/newsroom/business-groups-raise-1-5-billion-to-help-metros-urban-poor-under-project-ugnayan-initiative/

3. UNDP 2016 Human Development Report , “Making Human Development more resilient”, p.122-123

4.   Microfinance Council of the Philippines Concept Note, March 2020.

5.  Ibid.

6. Cesar Purisima, Laura Deal Lacey, and Harvey Chua. “Views From An Expanding Overton Window: Tools For Reimagining A More Compassionate Economy-In-Crisis.” OneNews (2020).

7. Ibid.