Amando M Tetangco, Jr: Building a stronger economy through
microfinance
Speech by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines
(Bangko Sentral ng Pilipinas), at the Conference on Microfinance: Powering Innovations in
Microfinance, Asian Development Bank, Manila, 24 July 2008.
* * *
Microfinance Council of the Philippines President Rolando Victoria, ADB Vice President
Lawrence Greenwood, ADB ED Marita Magpili Jimenez, Mr. Barry Hitchcock, other officers
of ADB, fellow advocates and workers in microfinance, distinguished participants,
representatives from the banking community, special guests, good morning.
This two-day conference organized around the theme "Powering Innovations in Microfinance"
is truly a special event.
Ten years ago, one would not associate the words power and innovations with microfinance
in the Philippines. While some of today's leading microfinance NGOs were already around at
that time, microenterprises did not have access to formal financial services and had to resort
to informal lenders with very high cost of funds. Formal financial institutions were cautious of
this market due to high credit risk and transaction costs.
What a difference a decade makes! Today, microfinance is no longer a mere buzzword but
part of the financial mainstream, with 229 banks actively engaged in the sector. As of
December 2007, these banks had an outstanding loan portfolio of P6 billion, extended to
nearly 800,000 clients or an average of 7,500 pesos per borrower. Significantly, our
microborrowers have also become net savers; as of end 2007, their combined deposits with banks
have reached close to 2 billion pesos.
Indeed, microfinance has firmly established a track record across our country for nurturing
successful microentrepreneurs who have attained financial security for themselves and their
families. Equally important, microentrepreneurs serve as catalyst for development in their
respective communities.
What triggered the mainstreaming of microfinance in our country? Well, to put it briefly, it
resulted from the convergence of the need to find ways to liberate millions of our
entrepreneurial poor from the cycle of poverty; innovations, of course; and the willingness of
key stakeholders to adopt new ways of doing business.
I will now share the story of Bangko Sentral and how we responded to the challenge of
mainstreaming microfinance within our financial system.
The Bangko Sentral was mandated by the General Banking Law of 2000 to recognize
microfinance as a legitimate banking activity. As a start, we studied the practice of
microfinance around the world and engaged practitioners in many discussions. Next, we set
in place regulations that recognized and built on best practices; this included using group
support or liability, cash flow-based lending, and providing for frequent amortizations .
We also created an environment that allowed for new entrants into the market, particularly
microfinance-oriented banks which are licensed as regular banks but dedicate at least 50%
of their loan portfolio to microfinance. This became an ideal vehicle for microfinance NGOs
that wanted to transform into a formal financial institution.
In addition, we liberalized branching regulations and paved the way for innovations in
products and service delivery using information and communication technology (ICT) and
other similar means.
I should emphasize that even as we make room for innovations in the banking system, we
make a point to balance this by instituting prudent standards for the conduct of microfinance
operations. Among others, this includes prescribing the use of portfolio-at-risk to monitor and
measure portfolio quality. Likewise, we have instituted reporting requirements for banks with
microfinance operations.
This enabling policy and regulatory environment has allowed microfinance to flourish within
the banking sector. Today, banks are considered one of the main players in the country's
microfinance industry.
This commercialization is a reflection of global trends. Today, global financial giants are
setting up dedicated offices for microfinance. We also know of some microfinance institutions
that are publicly listed. And loan portfolios are being securitized.
The range of players involved in the industry is also becoming more diverse. Private equity
firms, commercial banks, and even cement and real estate companies are investing in
microfinance institutions around the world. Even mobile phone manufacturers are looking at
microfinance as a means to increase mobile phone penetration in several countries .
The entry of new players into the sector should drive the introduction of even more new
products and services, as well as new ways of doing business. At present, we see
microfinance institutions offering a whole menu of services that covers not only microcredit
but also microsavings to microinsurance. This is definitely a significant leap from institutions
previously offering only microcredit.
The technology and methodology of microfinance has also been used to provide financing
needs in the areas of agriculture and housing, among others. In the Philippines, practitioners
have developed the Micro-Agri Product and more recently the breakthrough Housing
Microfinance Product which the Bangko Sentral recognizes as variations of a microfinance
loan.
Indeed, we continue to innovate because the financing needs of microfinance clients go
beyond simple business loans. With more appropriately designed loan products,
microfinance institutions are now able to respond to the varied needs of their clients, diversify
their portfolios, and reduce the risk of business loans applied to agriculture or housing.
Parallel to the development of products offered by microfinance institutions, significant
changes are also taking place in their delivery channels. Microfinance institutions are
increasingly recognizing how information and communication technology can provide
revolutionary channels to better serve existing clients or an opportunity to reach new ones.
These new channels - such as mobile phones, automated teller machines (ATMs) and point
of sale (POS) card readers - have also brought with them significant improvements in
efficiency and convenience, while lowering costs for both the microfinance institutions and
their clients. In the Philippines, for instance, rural banks have tied up with mobile phone
companies to facilitate microfinance loan payments, deposits, and withdrawals through a
simple SMS or text message.
In other words, the microfinance landscape in our country continues to evolve... in step with
client needs and innovations in technology and the regulatory framework. The challenge
before us is to further broaden and deepen the reach of microfinance in the Philippines.
At the Bangko Sentral, we accept this challenge and commit to uphold an enabling policy
and regulatory environment that will allow microfinance to flourish further. We will continue to
monitor the many developments and innovations taking place in the world of microfinance so
that we can maximize the benefits we can derive from it.
To strengthen our capacity in this regard, we have organized a special unit which we call
Inclusive Finance Advocacy, to explore and facilitate the development of new options to
improve and increase access to financial services of our people. We have also created a
MicroSME Finance Specialist Group in our Supervision and Examination Sector for banks
with significant exposure to Micro and SME lending. This group has been trained on
riskbased supervision and the peculiarities of lending to the MSME sector. I should add that
these initiatives of the Bangko Sentral toward broader financial inclusion will continue to be
guided by a high-level Microfinance/ Inclusive Finance Committee.
Actually, our objective to have a more inclusive financial system is embedded in the other
policy initiatives of the BSP. We are continuously working on reforms for a more robust
banking sector. We are also working toward increasing the scale and scope of bank
operations to support the needs of the market, particularly those in the countryside.
What is clear is that banks now have more opportunities to provide a wider range of services
and products to their clients on the basis of the following: a liberalized branching regime;
Bangko Sentral's receptiveness to various product and technological innovations in banking
services; Bangko Sentral's support to further improve bank efficiencies by allowing, among
others, the outsourcing of some functions; and the expanded range of services and
opportunities that qualified rural banks can undertake, such as foreign currency deposit
accounts and equity investments in ATM networks.
Through these initiatives, we envision stronger banks with a broader geographical presence
providing competitively-priced and well-designed products for all market segments, including
the previously unserved.
With these in place, I am confident that we will continue to see further innovations toward
greater financial inclusion. In this context, I am reminded of Bill Gates who once said that
"Never before in history has innovation offered promise of so much to so many in so short a
time".
It is in this spirit that I ask all of you who are participating in this conference...and other
microfinance practitioners as well to continue to take advantage of the opportunities
innovations bring, to broaden and sustain the liberating and empowering force of
microfinance in improving the lives of our entrepreneurial poor and their families.
Finally, on behalf of the Bangko Sentral ng Pilipinas, I thank all of you for your continuing
support as we move forward to build better lives and a solid bedrock for a stronger economy
through microfinance.
Thank you and I wish you all a fruitful and successful conference.
Mabuhay ang microfinance!