The Bangko Sentral ng Pilipinas ("BSP" or Philippine Central Bank) released two recent issuances on microfinancing ("MF"): Memorandum No. M-2012-003 prescribing new reporting requirements on microfinance operations, and Circular No. 744 (Series of 2011) recognising Microfinance Plus as a new type of microfinance loan. Both regulations promote the policy of the Philippine Government to effectively meet the financial needs of the poor and the basic sectors of the country.
Microfinancing is defined as the provision of financial services such as loans, deposits, and insurance to the poor and low-income households. In general, they provide for the underserved sector's microenterprises and small businesses to enable them to raise their income levels and improve their living standards.
Microfinance loans are typically not collateralised. These usually have terms which are relatively short (one year or shorter), backed up by a joint and several guarantee of one or more persons. As an exception, such loans can also be secured depending on the borrower's capacity to put up a collateral.
The Philippines is well regarded as a leader in terms of the regulatory framework and legal environment for MF services. In fact, the Economist Intelligence Unit Global Microscope on MF has named the Philippines as the best for year 2010 (among 55 countries) in this area which considered such criteria as supportive institutional framework and stability. With the recent development in making MF reports more up-to-date, the MF regulatory regime in the Philippines will continue to be perceived as accommodating to banks providing MF services.
Last 30 August 2011, the BSP has published the implementing rules and regulations ("IRR") of the Agri-Agra Reform Credit Act of 2009 ("RA 10000"). RA 10000 mandates banks to extend credit, i.e. at least 25 percent of their loanable funds, to qualified farmers, fisherfolk. and other agricultural beneficiaries. Out of the 25 percent allocation requirement, 10 percent is allotted to agrarian reform credit. The said law allows other modes of compliance such as extending loans for relevant infrastructure like farm-to-market and post-harvest roads, and loans for accredited warehouses, millers, and wholesalers. The recently issued IRR of RA 10000 in effect strengthens the Philippine Government's thrust to encourage banks to beef up their MF activities.
In line with state policy to promoting MF services, BSP Memorandum No. M-2012-003, dated 10 January 2012, recognises the growing significance of microfinancing in alleviating poverty and spurring economic development in the Philippines. It aims to equip BSP with effective supervision over banks by amending current reportorial requirements on their MF operations. As such, there is greater transparency and enhanced corporate governance on the part of banks with MF activities, either wholesale or retail. The prescribed changes on the reports are as follows:
- Reportorial template – renaming of report titles, sub-accounts, and sub-items; new data on wholesale MF loans and micro-deposits;
- Definition of terms – redefinition of microenterprise loan plus or microfinance plus, wholesale microfinance loan, conduit bank/quasi-bank, conduit non-bank, micro-loan, other loans – microenterprises, regular embedded deposits, regular savings of clients with micro-credit, micro-deposit, micro-deposits from clients with micro-credits, micro-deposits from clients without micro-credits, and other banking office ("OBO");
- Submission and contents of reports – a Report on Microfinance Products is required to be submitted monthly, and an Income Statement on Retail Microfinance Operations quarterly, both within fifteen (15) banking days after the end of the respective month or quarter; a bank with wholesale MF operations, sanctioned under the Philippine Manual of Regulations for Banks, must identify whether any required data is inapplicable to it; such changes become effective for the period ending 31 March 2012;
- Records in Microfinance-oriented other banking offices ("MF-OBOs") and micro-banking offices ("MBOs") – authorise MF-OBOs (a permanent office or place of business other than the head office engaged in approved non-transactional banking-related activities) and MBOs (an OBO that primarily caters to the banking needs of MF clients and overseas Philippine citizens) to engage in limited MF activities and maintain relevant records and documents; and
- Reconciliation of MF reports, e.g. matching micro-loans with total MF loans.
With these changes, MF reports will reflect a more transparent and faithful representation of banks' microfinancing operations. Further, regulatory supervision by the BSP may be enhanced given that more specific details and classifications are spelled out in the new reports. The introduction of new MF products and the growing exposure of banks in wholesale MF loans necessitate the amendment of the report format. Government regulators must be keen to give incentives for banks providing MF services to comply. Ultimately resulting from these reforms on MF reporting is a step further to realise the government's policy of financial inclusion of all sectors of society.
On the other hand, BSP Circular No. 744, dated 28 December 2011, amended Circular No. 694 to include Microfinance Plus as one of the Types of Microfinance Loans. The new Circular defines Microenterprise Loan Plus or Microfinance Plus as "loans granted to the basic sectors, on the basis of the borrower's cash flow, for their growing microenterprises and small businesses." These loans range from PHP 150,001 to PHP 300,000 (approximately USD 3,488 to USD 6977 at an exchange rate of USD 1 = PHP 43). The higher range of the Microfinance Plus recognises the increasing credit requirements of growing microenterprises, which traditionally had a limit of 150,000 MF loans allowed to be extended.
In addition, prospective borrowers must meet specific requirements to qualify as recipients of microfinance services, like having a savings account, a track record of at least two loan cycles in the PHP 50,000 to 150,000 range (USD 1,163 to USD 3,488) demonstrating business success, increasing credit demand, and enhanced capacity to pay. The Circular also expands the array of microfinance products and services in the country, seeking to cater to the financial needs of the less privileged sectors of society. Consequently, banks get another interest-earning lending option to offer as a microfinance loan product in their MF portfolio. Thus, covered institutions are encouraged to explore offering the Microfinance Plus loan type given the growing interest and trend towards microfinancing in both the public and private sectors.