(66) Department of Finance's Joselito Almario on Providing Financial Services to the Poor
Category: DEVELOPMENT-AT-WORK SERIES
24 July 2014 - Director Joselito S. Almario, Director at the Department of Finance and Deputy Executive Director of the National Credit Council (NCC), was the guest speaker at the Development-at-Work Forum held last 23 July 2014 at AIM, Makati City. He shared the story of how the government and the private sector are working together to provide financial services, particularly credit, savings and insurance to the poor.
In the early 1970s, the main challenge was providing credit to the poor; there were market imperfections most experts concluded. If the private service, particularly private banks, didn’t want to provide credit to the poor, could the government do it then? Thus, the government implemented many credit programs for the poor. Even government agencies that were not financial institutions were implementing credit programs to address what was perceived as market imperfections: there was Masagana 99 (Bountiful Harvest 99) which provided loans to help farmers harvest 99 canvas of rice per hectare; there was Biyayang Dagat (Ocean’s Gift), a credit program for the fisherfolks, and Tulong sa Tao (Help for the People), loans for livelihood projects. But all these government-managed credit programs experienced very low repayment rate among the borrowers, even if government agencies were offering subsidized credit programs with minimal or no interest rates. There was also the mindset among those borrowers that what the government agencies were offering were dole-outs. Government credit programs failed. Director Almario teased, “Masagana 99 became Masamang 99, and Biyayang Dagat became Buwayang Dagat.”
So many looked at the private sector for help. But the private sector then was afraid to provide credit to the poor. Why? Because there was this fear and perception that the poor could not re-pay, Director Almario explained. The private banks thus required cumbersome requirements from borrowers for security and to ensure that the poor they were lending to can pay. As a result, many became intimidated by these requirements and did not access the financial services being offered by the private sector.
When the poor didn’t have any access to credit, where did they go aside from the government credit programs? They went to informal lenders, loan sharks, 5-6. Director Almario explained, “They are not generally not bad because they are providing access to credit to the poor.” But here’s the problem. The most common form of informal lending is the five-six (5-6) wherein clients pay six pesos for every five-peso loan. Daily interest rate for this lendind scheme is 20 percent; weekly is 140 percent; monthly 560 percent; and 7,200 percent per annum. Director Almario asked the audience, “If you need a loan today, would you get a loan at 7,200 percent per annum interest rate? No, right? But why is the poor accessing this loan? We have been saying that the poor cannot pay, but they are accessing 5-6 with interest rates of 7,200 percent per annum. Who says the poor cannot pay?”
The director posed this question, "Maybe we just didn’t have the policy to address this (lack of credit for the poor). Maybe we just don’t know how to attack this problem. Even with also those subsidized credit programs, the problem worsened. The programs did not answer the lack of access to credit; outreach was still low, and worse they increased dependence among the borrowers and resulted in the prevalence of “dole-out mentality.”
How then can we convince the private sector to come in and lend to the poor? In 1993, then President Ramos asked various government agencies to sit down and address this problem. Thus, the National Credit Council was created, a body composed of both government and private sector representatives including civil society tasked with creating an enabling credit policy environment in the Philippines. The Council was put under the wings of the Department of Finance, with Landbank of the Philippines as the Secretariat. The Council was created to address the decades-long problem of the poor’s lack of access to credit. Director Almario summarized the conclusions of the Council: “Maybe it is not the cost of credit that is the problem, maybe it is the thinking that the poor cannot pay. If the government gets into the role of providing access, will the private sector come in? Or will they just see the government as another competitor, giving out low interest rates? It is not cost that matters, it is the access.”
In 1997, National Strategy and Regulatory Framework for Micro-credit was formulated. Director Almario pointed out some flaws in this framework, particularly its title, “Why micro-credit, why not micro-finance? Do the poor only need credit? How about other financial services? How do we involve the private sector?” In 1999, there was the nationalization of all government credit programs. This calls for the phase-out of subsidized credit programs and prohibits the involvement of non-credit-granting government agencies in any credit program. Director Almario recalled that everybody was against this move because all government agencies will loose their “pogi points” if they stopped providing credit to their constituents. There was a lot of resistance. With the nationalization of the government credit programs, profit-oriented microcredit programs were left solely to authorized credit-granting organizations while the delivery of credit-related public support services was exclusive responsibility of not-for-profit organizations.
Director Almario then presented the basic principles that guided the strategies of the government after the nationalization of credit programs.
- The private sector should have a greater role in increasing access to credit for the poor. But again, this faced resistance among many sectors, even the civil society did not agree with this fearing that the private sector would charge high interest rates.
- If the private sector would be the lead, what would the government do the? Government would concentrate in coming up with policies to encourage private sector to provide access to credit . The government created market-oriented financial and credit policies, which pushed the private sector to provide financial services. Director Almario explained, “If we give a cap of 12 percent on the interest rate that the private sector could charge, nobody would lend.”
- Aside from providing loan and guarantee programs, the government started providing capacity-building to their constituents
The above principles became the backbone of microfinance in the Philippines. In 1997, the National Strategy for Microfinance (NSM) was formulated by the National Credit Council (NCC). The Strategy recognizes the importance of market-based microfinance and of creating a hospitable policy environment. Director Almario then presented the gains of this strategy after more than 10 years of implementation There are now 1,410 institutions all over the country providing microfinance, of which 200 are rural, cooperative and thrift banks, 800 are cooperatives, and 400 are non‐government organizations. A decade ago, the director recalled, commercial banks did not want to enter this arena, now they are acting as wholesaler of microfinance funds,and are now actively engaged in providing the poor greater access to micro credit to finance their livelihood and small business activities. Average repayment rate is 95 percent, some MFIs report 99 percent re-payment. This is proof that the poor can pay if they were given access to credit.
To build on these gains, more micro-finance services were provided to the poor. Aside from credit, other finance services were also provided such as savings, payment service and remittance services. What remains to be a challenge is providing insurance to the low-income groups. Without any risk protection, the poor are very vulnerable and susceptible to unforeseen circumstances. Director Almario enjoined the audience to reflect on this challenge: How can we provide insurance to the poor? If poor people do not have disposable income, how can they buy insurance? And we have the same old problem of private sector hesitant to provide insurance to the poor. They don’t want to touch the poor.
The director added, “Maybe we have been looking at it the same way we have looked at the lack of access to credit. Maybe insurance products are not designed for the poor. Maybe there is just no policy direction to guide where insurance is going. For example, insurance contracts are laden with legal jargons; there are many fine prints. Is this kind of contract applicable to the low-income sector? There are cumbersome requirements for applying for insurance and benefit availment.
In 2010, the Philippine government outlined its policy thrusts and direction for the establishment of a policy and regulatory environment that will encourage, enhance and facilitate the safe and sound provision of microinsurance products and services by the private sector. Thus, the micro-insurance framework came to be. The framework outlined the following strategies:
- Increased participation of the private sector in the provision of microinsurance services;
- Establishment of an appropriate policy and regula‐ tory environment for the safe and sound provision of microinsurance by the private sector;
- Mainstreaming of existing informal insurance, in‐ surance‐like, and other similar activities/schemes: and
- Institutionalization of financial literacy (learning/ education) program that will highlight the impor‐ tance of microinsurance, the applicable rules and regulations, the duties and responsibilities of the providers, and the consumer rights of the insured.
Where are we? There are now 30 providers of micro-insurance including large commercial insurance providers; 22 mutual benefit associations with 1 institution alone covering 4 million lives. 134 licensed agents of which 34 were rural banks; and 20 million Filipinos insured.
What are the implications of ASEAN Integration to micro-finance?
- Cross-border supply –financial services including micro-finance can jump from one country to another;
- Consumption abroad - people can also buy financial services from abroad even if that kind of service is available locally.
- Commercial presence – Bank of Tokyo or Malaysian Banks creating branches or offices in the Philippines, nobody can stop them from doing so.
- Movement of natural persons – A Filipino expert on financial services can go to another country and provide those services.
Given the above implications, should we be afraid of the ASEAN Integration? Should we be afraid of these changes? But Director Almario pointed out that maybe we were asking the wrong question. The question should be, “Do we have comparative advantage with ASEAN countries in micro-finance? Where is the PH in terms of micro-finance?
The director presented the results of a study conducted by the Economist Intelligence Unit (EIU) on Micro-finance in 2013. The Philippines is the 4th in overall microfinance business. The country is ranked 8th in terms of having a supportive institutional framework for microinsurance, and first terms of the regulatory framework for microinsurance (since 2009). Another study on the landscape of micro-insurance in Asia 2013 showed that the Philippines has the highest micro-insurance coverage in Asia with coverage of 20.6 percent of the population. Other countries in the region lagged far behind the Philippines in the area of microinsurance. Figures from the World Bank showed that the microinsurance penetration rate in the Philippines in 2013 was 20.4 percent, while neighboring countries such as Thailand only had 14.1 percent coverage and Malaysia with 3.6 percent.
Now, should we be afraid of ASEAN Integration? The director challenged the audience. "With all these advantages, the question should be, 'Can we penetrate ASEAN countries in terms of micro-finance?' If micro-credit provides the unserved and undeserved their present financial needs, micro-insurance will provide for their future unforeseen and unexpected financial needs."
To know more about microinsurance in the Philippines, click here.
About our Resource Speaker:
Mr. Joselito S. Almario is a Director of the Department of Finance and concurrently holds the position of Deputy Executive Director of the National Credit Council (NCC), As NCC Deputy Executive Director, Mr. Almario was instrumental in the formulation and development of the Philippine National Strategy and Regulatory Framework for Microfinance in the Philippines. He likewise headed the various technical working groups that crafted and finalized the performance standards for cooperatives engaged in savings and credit operations and more recently, the Performance Standards for Microfinance Institutions. Mr. Almario also sits, among others, in the Board of the People’s Credit and Finance Corporation, the main wholesaler of funds for MFIs; the Cooperative Development Authority, and the Agricultural Credit and Policy Council (ACPC) and acts as the government’s focal person in the implementation of the ADB-assisted Microfinance Development Program in the Philippines. He is currently working on the Manual of Rules and Regulations for Savings and Credit Cooperatives and the necessary measures, including the passage of the enabling laws, for the effective supervision and examination of credit cooperatives.
About the Development-at-Work Seminar Series:
The AIM Zuellig Graduate School of Development Management hosts numerous talks and public lectures on different aspects of development management. These seminars and lectures are free and open to the public, unless stated otherwise. For information on future seminars, visit the News and Events section of this website or like us on Facebook https://www.facebook.com/aimszgsdm).
This forum was initiated and co-organized by the students of the Executive Master in Development Management (EMDM) in Public Finance Program, and attended by representatives from various government institutions such as Philippine Deposit Insurance Corporation, Insurance Commission, Landbank of the Philippines, Development Bank of the Philippines, Securities and Exchange Commission, and Bureau of Internal Revenue.
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