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EPRES,
SIXTEENTH CONGRESS ) fs rts
REPUBLIC OF THE PHILIPPINES ) Ps
First Regular Session )

HOUSE OF REPRESENTATIVES

Introduced by Representative Rufus B. Rodi
Representative Maximo B. Rodriguez, Jr., Representat

Representative Ma. Lourdes Acosta-Alba

_4154

House Bill No.
EXPLANATORY NOTE

In all parts of the country, microenterprises comprise the bulk of business
enterprises in the country. The Department of Trade and Industry (OT!) estimates
that, as of 2011, at least 99.6% of all businesses in the Philippines were classified as
micro, small, and medium enterprises (MSMEs), while the remaining 0.4% were
large enterprises. Of the total number of MSMEs, at least 91.0% were micro
enterprises, with asset sizes not greater than Three Million Pesos (P3 million) and
with up to 10 employees.

At their very core, micro enterprises enable poor families to undertake
entrepreneurial activities to meet their minimum basic needs, including income
generation, However, one major barrier for micro entrepreneurs is their lack of
access to credit or capital. One way for them to, access such funding is through
micro finance.

"Microfinance", as defined in this bill, “refers to the viable and sustainable
provision of a broad range of financial services to poor/unbanked/financially
underserved/low-income households engaged in livelihood and microenterprise
activities. It uses nontraditional and innovative methodologies and approaches such
as, but not limited to, the extension of small loans, simplified loan application
procedures, group character loans, collateral-free arrangements, cash flow based
lending, alternative loan repayments, minimum requirements for CBU/minimum
balance retention, and small denominated savers’ instruments-aimed to improve
their asset base and expand their access to capital and savings.”

However, the microfinance sector has yet to be acknowledged by government
as an integral partner in poverty alleviation. Moreover, the unique structure and
purpose of microfinance institutions (MFis) have yet to be recognized as different
from those of purely commercial enterprises.

Therefore, we are proposing the Microfinance Code of the Philippines to
develop the microfinance sector in the country. This measure seeks to define the
rights and responsibilities, institute performance management and standards, and
provide an accreditation process for MFls.

It also seeks to provide an enabling policy environment for MFls through
appropriate incentives and support. Finally, this measure will promote a social reform


strategy that will empower the poor, aid them in managing financial risks, and, in
doing so, expand access to micro finance services, such as: microcredit,
microsavings, health care, and others. This Act also opens up access to a broad
range of financial, business, and other human development services. The ultimate
goal of the Microfinance Code of the Philippines is to lift people out of poverty and
enable them to live more productive, self-sufficient lives.

In view of the foregoing, the approval of this bill is earnestly sought

ae Jr.
oh dee Acosta-Alba



SIXTEENTH CONGRESS )
REPUBLIC OF THE PHILIPPINES —_)
First Regular Session )

HOUSE OF REPRESENTATIVES

introduced by Representative Rufus B. Rodriguez,
Representative Maximo B. Rodriguez, Jr, Representative Rolando A. Uy
Representative Peter M. Unabia, Representative Juliette T. Uy,
Representative Ma. Lourdes Acosta-Alba

House Bill No. _ 4154

AN ACT
CREATING THE MICROFINANCE CODE OF THE PHILIPPINES

Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:

CHAPTER 1
GENERAL PROVISIONS.

SECTION 1. Short Title - This Act shall be known as the "Microfinance Code of the
Philippines"

SECTION 2. Declaration of Policies - It is the declared policy of the State that there
shall be more equitable distribution of opportunities, income and wealth, sustained
increase in the amount of goods and services produced by the nation for the benefit
of the people, and expanding productivity as the key in raising the quality of life for
all, especially the underprivileged.

Towards this end, the State recognizes the indispensable role of the private
sector in fostering local enterprise development and social entrepreneurship,
including the provision of microfinance services to microenterprises.

In recognizing the greater role of the private sector in the provision of financial
services, the State shall provide an enabling policy environment that will facilitate the
increased participation of the private sector and pursue financially inclusive and pro-
poor financial and credit policies, such as microfinance and its allied services.

SECTION 3. Basic Principles - A microfinance institution shall conduct its operations
in accordance with the basic principles of microfinance, which include, but are not
limited to the following:

a. The poor shall be given access to appropriate financial services that are
convenient, flexible, and reasonably priced, including, but not limited to credit,
savings, and insurance;

b. Microfinance can and should be undertaken on a sustainable basis, where
providers shall be able to recover all of its costs to allow sustainable operation
and regular provision of financial services to the poor,

¢. Microfinance institutions must aim to provide both financial and social
protection programs to an increasing number of disadvantaged and/or
underprivileged people;


d. Microfinance institutions shall abide by the Client Protection Principles, such
as, but not limited to, appropriate product design and delivery, prevention of
over indebtedness, promotion of transparency, practice of responsible pricing,
fair and respectful treatment of clients; privacy of client data and mechanisms
for complaint resolution;

e. Financial services, alone, is insufficient to achieve the goal of serving
increasing numbers of poor and excluded people sustainably, thereby
Tequiring that the microfinance sector develop financial and social
performance standards that will help define and govern the industry toward
greater outreach and sustainability,

SECTION 4, Scope of Application - This Act shall apply to non-stock, non-profit
corporations and/or non-government organizations (NGOs) engaged in and/or
associated with the practice of microfinance in the Philippines

SECTION 5. Definition of Terms - The following terms shall mean

a. "Compensating Balance" refers to the proportion of the total loan of a
microfinance institution client, which is retained with the microfinance
institution as capital buildup (CBU) or savings. This amount serves as a hold-
out deposit on the loan of the client and can be used by the microfinance
institution to off-set the client's outstanding balance in case of default. In view
of this, the client is considered a net borrower from the microfinance institution
rather than a net saver (i.e., as a borrower of its own savings rather than as a
depositor who finances other client's borrowings/loans)

b. "Council" refers to the Microfinance Regulatory Council.

c. "Microfinance" refers to the viable and sustainable provision of a broad range
of financial services to poor/unbanked/financially underserved/low-income
households engaged in livelihood and microenterprise activities. It uses
nontraditional and innovative methodologies and approaches such as, but not
limited to, the extension of small loans, simplified loan application procedures,
group character loans, collateral-free arrangements, cash-flow based lending,
alternative loan repayments, minimum requirements for balance retention,
and small denominated savers’ instruments-aimed to improve their asset base
and expand their access to capital and savings.

d. "Microfinance Loans" refers to small loans granted to the basic sectors, as
defined in the Social Reform and Poverty Alleviation Act of 1997 (Republic Act
8425), and other loans granted to the poor and low-income households for
their microenterprises and small businesses so as to enable them to raise
their income levels and improve their living standards. Microfinance loans are
granted on the basis of the borrower's cash flow and are typically unsecured.

e. "Non-stock, Non-profit Microfinance Institution (MFls)" refers to a duly
registered non-government organization (NGO) with the primary purpose of
providing microfinance programs, products, and services, such as, but not
limited to, microcredit and microsavings; referred herein as "Microfinance
NGO".

f. “Social Performance" refers to the effective translation of an institution's social
mission into practice.


CHAPTER 2
THE MICROFINANCE REGULATORY COUNCIL

SECTION 6. Establishment of the Microfinance Regulatory Council - The Securities
and Exchange Commission (SEC) shall have the power to establish and/or register a
self-regulatory organization for the microfinance sector to be known as the
Microfinance Regulatory Council, herein referred to as the "Council".

SECTION 7. The SEC may prescribe rules and regulations which are necessary or
appropriate in the public interest or for the protection of microfinance institutions to
govern self-regulatory organizations and other organizations licensed or regulated
pursuant to the authority granted in this Section, including the requirement of
cooperation within and among all microfinance institutions to ensure transparency
and facilitate exchange of information

Likewise, the SEC shall prescribe the requirements for the establishment of
the Council, such as industry representation, governance structure, selection and
appointment of directors, and such other requirements to ensure free, fair, and
healthy competition in the industry.

SECTION 8. The powers and functions of the Council shall be exercised by a board
of directors composed of 15 members. The Council may establish a Secretariat as
may be necessary.

SECTION 9. Functions of the Microfinance Regulatory Council - The Council shall
have the following functions:
a. Provide a national policy and strategy for the practice of microfinance in the
Philippines;
b. Maintain a national registry of microfinance institutions;
©. Institute and operationalize a system of accreditation for non-stock, non-profit
microfinance institutions;

Issue a Certificate of Accreditation to the MFIs;

e. Collect reasonable accreditation and monitoring fees, which shall be used for
operational requirements;

f. Require regular submission of reports by microfinance institutions;

g. Monitor the financial and social performance of microfinance institutions to
ensure compliance with the provisions of this Act and its implementing rules
and regulations;

h. Suspend or revoke any Certificate of Accreditation upon determination that a
microfinance institution no longer meets the criteria for accreditation;

i. Perform such other functions as may be necessary to accomplish the
purposes and objectives of this Act.

2

CHAPTER 3
ORGANIZATION, REGISTRATION, AND ACCREDITATION OF MICROFINANCE,
INSTITUTIONS

SECTION 10. Organization and Registration of Non-stock, Non-Profit Microfinance
Institutions - A non-stock non-profit corporation and/or non-government organization,
in accordance with the provisions of the Corporation Code of the Philippines and this
Act, may operate as a microfinance institution


SECTION 11. Rights and Responsibilities of Microfinance NGOs - Microfinance
NGOs shall have the following rights and responsibilities:

a. Engage in direct lending to microfinance borrowers up to a ceiling specified by
the Council, at anyone time, or such other amount as it may deem necessary
or appropriate;

b. Microfinance institutions organized as non-stock non-profit corporations may
accept compulsory savings and/or voluntary savings, or capital build-up only
from its members for purposes of maintaining a Compensating Balance in
relation to the same member's loan, For the avoidance of doubt, acceptance
‘of member savings to this purpose shall not cause the microfinance NGO to
be deemed engaged in deposit-taking operations;

c. Charge reasonable interest and collect such necessary fees and charges
incidental to its microfinance operations;

d. Borrow money or incur such obligations for the purpose of relending to
microfinance borrowers, subject to existing laws; Provided that a microfinance
NGO may not be deemed as engaged in quasi-banking activities if the
proceeds of such borrowings are used for relending to microfinance
borrowers;

‘e. Accept donations or grants or contributions in accordance with existing laws
and regulations;

f. Invest its funds in any sound, non-speculative enterprises and instruments,
‘subject to such rules and regulations of the relevant regulator;

g. Maintain a transparent and comprehensive management information system;

h, Publication and disclosure of audited accounts at the end of every Financial
Year;

i. Regular submission of reports to the Council;

j. Engage in such other microfinance-related activities, subject to such rules and
regulations of the relevant regulator.

Nothing in this section shall be construed as precluding a microfinance
institution from performing such services or exercising such powers as may be
granted by existing laws or as may be incidental to its activities as a non-stock, non-
profit corporation

SECTION 12. Accreditation of Microfinance Institutions Registered as Non-Stock,
Non-Profit Corporation. - NGOs shall seek accreditation as a pre-requisite for
engaging in the practice of microfinance in the Philippines.

CHAPTER 4
PERFORMANCE MANAGEMENT AND STANDARDS.

SECTION 13. Financial Performance Management - Non-stock, non-profit
microfinance institutions shall develop and implement systems, practices and
controls for efficient, effective and sustainable financial operations through prudent
fesource management, asset-liability management, liquidity management, and
financial information management.

SECTION 14. Social Performance Management - Non-stock, non-profit microfinance
institutions must have an institutionalized process of translating social mission into
practice which includes setting clear social goals, monitoring progress towards these


objectives and using information to improve performance and practice, Social
performance information must be integrated into the MEI's work, operational
routines, and value system to affect decision making practices at both operational
and strategic levels.

SECTION 15. Financial Performance Standards - The Microfinance Regulatory
Council shall establish a set of parameters for assessing the financial performance of
non-stock, nonprofit microfinance institutions, such as, but not limited to, the
following: portfolio quality, efficiency, sustainability, and outreach.

SECTION 16. Social Performance Standards - Non-stock, non-profit microfinance
institutions, at the minimum, shall define and monitor its social goals; ensure board,
management, and employee commitment to social performance; treat clients
responsibly; design products, services, delivery models, and channels that meets
clients’ needs and preferences; treat employees responsibly; and balance financial
and social performance.

CHAPTER 5
MICROFINANCE PROGRAMS, PRODUCTS, AND OTHER SERVICES

SECTION 17. Minimum Core Programs and Services - Non-stock, non-profit
microfinance institutions shall provide, any of the following programs, products, or
services.

a. microcredit and financial literacy programs;

b. microcredit and capital build-up or microsavings

SECTION 48. Other Programs and Services - The following are the other programs
and services that MFls may undertake:
Agricultural Microfinance;
Housing Microfinance;
. Microinsurance;
Mobile or any innovative channels;
Money Transfer and other related remittance services;
Other innovative programs, products and services, which are not
contrary to existing law and/or regulations.

>o2009

CHAPTER 6
INCENTIVES

SECTION 19. Access to Special Credit Window - Duly accredited MFls shall be
given ready access to special credit facilities sponsored by or made available
through government financial institutions at preferential rates.

SECTION 20, Technical Assistance - Non-stock, non-profit microfinance institutions
are entitled to access any form of technical assistance from the government, donors,
and other support organizations-in facilitating the linkage between the poor
households/microenterprises and microfinance institutions, community organizations
and capacity building of the target clientele; social preparation activities, and those
that will lead to the broadening and deepening of microfinance services such as:


development of microfinance products, training in microfinance technologies, and
upgrading of performance standards, operating systems and procedures.

SECTION 21. Tax Fairness for Duly Accredited Non-stock, Non-profit Microfinance
Institutions - Transactions of non-stock, non-profit microfinance institutions, to the
extent of the practice of microfinance between its clients, shall be exempt from value
added tax and documentary stamp tax. Provided, That, the amount that would have
been paid as taxes and saved by the microfinance institution by virtue of its
exemption to the aforementioned taxes shall be used for furtherance of its operations
and meeting its social objectives

SECTION 22. Tax on Donations to Microfinance Institutions - Donations to non-
stock, non-profit microfinance institutions shall be fully deductible from the gross
income of the donor, subject to the provisions of Section 34(C) and qualifications set
forth in Section 101 of Republic Act No. 8424, as amended, otherwise known as the
“National Internal Revenue Code of 1997."

CHAPTER 7
TRANSITORY PROVISIONS

SECTION 23. Compliance Period - Non-stock, non-profit microfinance institutions
shall comply with the provisions set hereto, within three (3) years from the effectivity
of this Act.

SECTION 24. Exemption from Liability for Unremitted Taxes - The Bureau of Internal
Revenue, in consultation with the Council, shall issue a circular detailing the
standards, guidelines, rules, and regulations of a tax amnesty program for non-stock,
non-profit microfinance institutions with tax assessments duly issued, arising from
microfinance loans and other related programs and services extended

CHAPTER 8
FINAL PROVISIONS

SECTION 25. Implementing Rules and Regulations - Within six months after the
effectivity of this Act, the Council shall promulgate the rules and regulations for the
implementation of this Act

SECTION 26. Prohibitions -

a. No person, juridical or natural, shall engage in or hold itself out as engaged in
microfinance, or shall use as part of its name the term "microfinance" or any other
title or name, which tends to give the public impression that it is engaged in
microfinance activities, unless it is an accredited entity and has secured authority for
that purpose in accordance with this Act

b. The use of "microfinance" or any other name or title or combination of names and
titles or any other deviation from the requirements of this section shall not be made,
except upon prior authorization by the Council.

SECTION 27. Penal Provisions -A fine of not less than Ten thousand pesos
(PIO,000.00) and not more than Fifty thousand pesos (P50,000.00) or imprisonment


of not less than six months but not more than six years or both, at the discretion of
the court, shall be imposed upon

a. Any individual or individuals, or in case of an organization, its officers, directors,
trustees and managing officers, who shall knowingly and willingly:
1) Engage in any activity sought to be regulated under this Act without a
validly subsisting authority from the relevant regulatory authority;
2) Hold themselves out to be a microfinance institution, either through
advertisement in whatever form, whether in its stationery, commercial paper,
or other document, or through other representations without authority;
3) Make use of a trade or firm name containing the words "microfinance" or
"MFI" or any other designation that would give the public the impression that it
is engaged in microfinance as defined in this Act without authority;
4) Knowingly and willingly make any statement in any application, report, or
document required to be filed under this Act, which statement is false or
misleading with respect to any material fact;
5) Engage in other acts inimical or adverse to the microfinance industry as
may be defined by the Council; and
6) Violate the provisions of this Act.

b. Any officer, employee or examiner of the Council directly charged with the
implementation of this Act or of other government agencies, who shall commit,
connive, aid, or assist in the commission of acts enumerated under Subsection 1 of
this Section

SECTION 28. Repealing Clause - All laws, issuances, rules and regulations
inconsistent with any provision of this Act shall be deemed amended, modified, or
repealed accordingly

SECTION 29. Separability Clause - If, for any reason, a provision or part hereof is
declared invalid or unconstitutional, the other provisions not affected thereby shall
remain in full force and effect.

SECTION 30. Effectivity - This Act shall take effect fifteen (15) days after its
publication in any newspaper of general circulation.

Approved,