Philippines: Microfinance lenders are getting the message

Nov 2007
Lodon, United Kingdom, November, 16 2007 - Practitioners suggest that greater competition and technological innovations rather than government intervention is the best way to reduce costs and bring down lending rates.

Running a small bank that is big on microfinance can be tedious work. Take it from Omar Andaya, whose family owns Greenbank, a rural bank based in Butuan city in the southern Philippine island of Mindanao.

Each week, Mr Andaya has to send out credit officers to collect loan payments of 500-1,000 pesos ($11.5-$23) from 32,000 micro-borrowers.

But thanks to mobile phone banking, at least a thousand or so of Mr Andaya’s borrowers have began to simply “text” the money to the bank using cellular phones linked to Globe Telecom, the country’s second-biggest wireless phone company.

“We have increased our credit officers’ efficiency,” Mr Andaya says.

The bank has about a third of its 1.1bn peso loan portfolio lent to village store owners, farmers, snack food makers, and other borrowers who owe no more than 150,000 pesos. “Text-a-payment,” as the scheme is called, has proved so cost-effective that Mr Andaya deducts half a percentage point from the monthly interest rates of borrowers who use the facility.

But the experiment could have much wider relevance in the world of microfinance, where many organisations are looking at ways to reduce costs and bring down lending rates.

It may be cheaper to borrow from a microfinance company than the moneylenders that are often the only other source of funds for the poor.

Even so, rates of up to 6 per cent per month can be onerous for borrowers, making some in the industry suspicious of the motives of private sector investors who have flooded into the sector.

Industry websites and chat rooms are full of debate about the potential conflicts.

In a recent paper, officials at the Consultative Group to Assist the Poor, an arm of the World Bank that focuses on microfinance, suggested the industry’s encounter with the capital markets was making it more difficult to balance “social and commercial objectives”.

The debate has begun to influence policy in several countries.

The authorities in the Indian state of Andhra Pradesh closed down some microfinance branches last year after borrowers alleged they were paying excessively high interest rates and being pressed by aggressive debt collectors.

India’s government is debating whether to regulate the sector.

The left-wing government of Ecuador has been pressing legislators to cap interest rates.

In Argentina, the government has launched a heavily subsidised lending programme, which critics say distorts the market and makes it more difficult for microfinance organisations to operate successfully.

Defenders of the commercial approach insist that high interest rates are an inevitable part of the sector’s business model.

Microfinance institutions operate very high expense ratios, paying sometimes more than 20 cents in expenses for each dollar that they lend out, more than double the levels typical in the conventional banking industry.

“This is a very labour-intensive industry,” says Scott Budde, head of Global Social Community Investing, at New York-based TIAA-CREF, which provides retirement services to the non-profit community in the US and has invested in the sector.

Practitioners suggest that greater competition and technological innovations rather than government intervention is the best way to reduce costs and bring down lending rates.

The Philippines’ experience seems to offer a way forward.

Smart Communications, one of two local mobile carriers offering the service, says that 5.5m of its 27m subscribers have signed up for its mobile commerce system, which allows users to buy goods and services, pay bills and transfer money using SMS.

Globe, its rival, says its mobile commerce platform has half a million active users out of 18m subscribers.

The limited number of “exchange points” – where cash can be exchanged for virtual money held on mobile phones – is constraining growth to an extent, but a growing number of rural banks are following in the footsteps of Mr Andaya’s Greenbank.

About 40 rural banks offer mobile banking services in partnership with Globe, for example.

Smart is partnering with Microventures, a social business enterprise, and the Centre for Agriculture and Rural Development, the largest microfinancing institution in the Philippines, to put up some 8,000 stores in southern Luzon that will offer mobile banking and internet services.

John Owens, a microfinance consultant, says international donors are “pretty impressed” with how rural bankers and telecoms companies, as well as central bank regulators, are working together on the issue of microfinance.

Source : Financial Times

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