Philippines: Microfinance Firms Take to Ratings

Jun 2009
Manilia Philippines, June, 05 2009 - Local Microfinance institutions have started to submit themselves to assessment by international rating firms in a bid to improve operations and attract investments from abroad.

For Joseph Omar O. Andaya, president and chairman of the Rural Green Bank of Caraga, having his bank rated by Milan-based Microfinanza Rating not only opened doors to a million-peso loan, it also helped him see where his bank was weak.

Negotiations are now ongoing with BlueOrchard Microfinance Investment Managers, a fund based in Switzerland, for a loan of as high as P400 million, a quarter of the bank’s P1.6-billion loan portfolio.

Mr. Andaya, the incoming president of the association of rural banks, said Microfinanza pointed out Green Bank’s strengths and weaknesses compared to other institutions in the region.

The weaknesses included high operating costs and inefficient operations. But one of his bank’s biggest strengths? His clients, the chief of the Butuan City-based bank claimed.

"The fact you had yourself rated shows you are committed to improving your business, regardless of what score you get," Mr. Andaya said.

Painting a picture

Microfinanza Rating is yet to set up a Manila office. Planet Rating has, which also serves as its regional headquarters for Asia. A third rater, Microfinance Innovation Center for Resources and Alternatives (MICRA) Philippines, Inc., is a local organization.

Planet Rating, in a presentation during the annual convention of rural banks in mid-May, said ratings would help investors make up their minds whether to invest in a microfinance institution or not. Wholesale funders, on the other hand, would get a sense of this institution’s creditworthiness.

Investments, loans, even grants would beef up a microfinance firm’s resources for lending.

MICRA Philippines, in a presentation during the same convention, said microfinance institutions get a diagnosis of where they are weak and need to make improvements.

Independent ratings culture

Tomas S. Gomez IV, outgoing president of the Rural Bankers Association of the Philippines (RBAP), said the organization had begun to promote an "independent ratings culture" among its members.

Rural banks are among the most active players in the microfinance industry; others are nongovernment organizations (NGOs) and cooperatives. Central bank data showed that 230 rural, thrift and cooperative banks lent a total of P6.46 billion to around 800,000 borrowers last year — a 13% increase from the year before.

"We all know that any firm that subjects itself to the scrutiny of an international rater is a cut above the rest," Mr. Gomez, the president and chief executive of Nueva Ecija-based GM Bank Inc., said.

GM Bank will undergo assessment by Planet Rating next month.

While attracting foreign investments is the main goal of securing a rating, Mr. Gomez said independent scrutiny of banks’ operations would help them improve their services to clients.

These clients are often poor and without jobs. They apply for microfinance loans, which are small loans that don’t require the collateral normally asked by banks. Borrowers, mostly women, use the funds to start small businesses.

The Arroyo administration regards microfinance as a poverty-reducing tool.

Loans are usually short-term, and repayments are often made on a daily or weekly basis. Defaults are very low — rural banks boast of a 98% repayment rate — since a black mark will effectively cut the poor borrowers’ access to the quick-disbursing funds.

Joselito S. Almario, deputy executive director of the National Credit Council, said before international rating firms came in, microfinance institutions — notably NGOs — were assessed based on the "PESO" standards. These were used by wholesale lenders such as the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines before committing funds. PESO stands for portfolio quality, efficiency, sustainability and outreach.

A step forward

For the central bank, ratings present another step forward for microfinance players.

Pia B. Roman, head of the inclusive banking advocacy group of the Bangko Sentral ng Pilipinas, said the Philippines’ highly-profitable microfinance sector could emerge as a new asset class for international investors, at a time when what were thought safe bets have turned toxic.

"It’s another indication of the commercialization of microfinance because when [firms] get rated, they can get access to funds," Ms. Roman said.

Many investors had expressed interest in the country’s microfinance sector, she claimed, but this was before the crisis. They had backed out, wary of assets in emerging economies including the Philippines.

Planet Rating, for its part, noted that microfinance institutions’ loan portfolios had grown at an annual average of 44% to over $345 million in 2007 from under $30 million at the start of the decade.

"We made a strategic decision to locate our East Asia office in the Philippines, where microfinance continues to commercialize, professionalize, and innovate in ways that have captured the attention and imagination of the rest of the microfinance world," said James Soukamneuth, Planet Asia director for Asia, in an e-mail to BusinessWorld.

"With the continuing commercialization and professionalization of the microfinance industry, ratings promote sound, sustainable, and transparent development of the sector," he said.

RP catching up

Other Asian countries took to ratings earlier than the Philippines, he noted. Cambodia, for instance, needs ratings because its microfinance institutions depend largely on international investors.

Not the Philippines, where microfinance players generally tap wholesale loans from large banks such as DBP and Landbank for lending to their clients.

Yet this also means that the potential for investments from abroad and, therefore, growth is strong, Mr. Soukamneuth said.

The RBAP’s Mr. Gomez said that while attracting investments take a back seat to improving operations for microfinance players for now, the time will come when they will have to deal with investors knocking on their doors. When economic conditions improve, then surely investors’ risk appetites will return, he added.

"[Getting funds] is not the main reason why banks want to get rated because there is ample liquidity in the market," he said. [But] in a couple of years, [microfinance] should attract foreign investments both in the form of debt and equity."

Mr. Soukamneuth agreed: "Once international investors learn more about the microfinance sector here in the Philippines, we are confident that a rating culture will evolve in ways that make microfinance institutions more attractive to a wider array of market participants."


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