Amando M Tetangco, Jr: Overcoming obstacles to agricultural microfinance
Remarks by Mr Amando M Tetangco, Jr, Governor of the Central Bank of the Philippines (Bangko
Sentral ng Pilipinas), at the Regional Experts' Consultation Meeting "Overcoming Obstacles to
Agricultural Microfinance in Southeast Asia", Manila, 1 March 2007.
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President Corazon Aquino, Dr. Balisacan, distinguished resource persons, special guests, and
participants to the Regional Experts' Consultation Meeting on "Overcoming Obstacles to Agricultural
Microfinance in Southeast Asia." Good morning.
It is a distinct honor to be part of this Consultation Meeting to discuss and identify strategies to
accelerate the development of agricultural microfinance in our part of the world. In a region like ours
where the agriculture sector continues to have a significant impact on our economy and the lives of
our people, this Consultation Meeting is indeed most welcome, and necessary. In the Philippines, the
agriculture sector accounts for 20% of our Gross Domestic Product, employs around 40 percent of our
country's labor force, and provides most of the food requirements of our total population of 86 million.
Given its importance, policies and programs continue to be crafted and implemented to support and
transform our agriculture sector into a modern, productive, efficient, and competitive sector.
In 1975 for instance, Presidential Decree 717 was issued to ensure the flow of credit to the agriculture
sector. In particular, it mandated banks to set aside 25% of their loanable funds for agricultural
agrarian reform credit. For a number of years, bank compliance to this law exceeded 25% of their loan
portfolio.
This changed with the implementation of the Agrarian Reform Program, as the profile of farm land
ownership shifted from vast tracts of land held by a few owners, to many small landholdings owned by
numerous farmers. Thus, while the number of credit transactions increased with more farm owners,
the size of the loans was significantly smaller. For small farm owners, as well as landless agricultural
workers, microfinance is the key to acquiring much-needed working capital. In the Philippines,
microfinance services are provided mainly by banks, NGOs and cooperatives.
The national framework for regulation, which encompasses all types of microfinance institutions,
focuses on portfolio quality, outreach, efficient and sustainable operations, and transparent
information. The basic premise of the framework is that all deposit-taking institutions, particularly
banks and cooperatives, are subject to prudential regulation, while microfinance NGOs which collect
savings greater than the compensating balance should be subject to regulation and supervision.
Circular 272 issued January 2001 by the Bangko Sentral ng Pilipinas provided the enabling policy and
regulatory framework for microfinance in the banking sector. Parallel to this, Bangko Sentral mounted
capacity building programs and sustained information campaigns.
Microfinance has flourished since then. Today, 223 banks are involved in microfinance with a
combined loan portfolio of about P4 billion lent out to over 660,000 borrowers. Nevertheless, there is
still much more that we can do. It is fitting therefore that we are addressing the obstacles to gaining
access to agricultural credit through microfinance, a methodology and technology that has been
proven successful. It is important to remember that the success of microfinance is anchored on the
following fundamental principles: First, microfinance is typically linked to households and their
microenterprises. The household is seen as one with diverse activities and multiple streams of income
and expenditures. Microfinance therefore looks at the regular cash flow of the household and the
microenterprise - not the loan use, in determining the size, term and repayment structure of the loan.
As a result, microfinance loans are primarily short term loans with frequent repayments.
Second, microfinance loans are characteristically used for additional capital to grow an existing
business. The loan amounts are not very large. Some microfinance institutions even use a growth-loan
process where the clients start off with a very small loan and can only access larger loans
incrementally after showing a good repayment record. This has been proven successful in mitigating
risks and in establishing credit discipline among the borrowers.
There are several other basic principles of microfinance, but I have focused on these 2 characteristics
as they are the features that seem fundamentally incongruent to the financing needs of the agriculture
sector. In particular, cash flow lending and frequent repayments do not fit the seasonal nature of
agricultural incomes. In addition, short term financing, as well as the relatively small loan amounts,
result in a lack of term financing which is important to particular types of agricultural activities. The
risks for both types of financing are also very diverse. Agriculture finance bears unique risks such as
price and yield risks.
Having said this, it does not mean we are dismissing the possibility of combining some of the best
practices of microfinance with salient features of agriculture finance to create a product that addresses
the needs of the agriculture sector, specifically the poor farming households. Definitely, there is room
for complementation.
First, many clients of microfinance are also engaged in agriculture activities. In the Philippines, it has
been proven that those who are involved in small agricultural activities also manage other forms of
enterprises. These agricultural workers usually maintain microenterprises to meet consumption needs
and other short term expenses of the household. In this regard, microfinance may be extended to this
worker, with some modifications on the proven methodology and technology of microenterprise
lending. For instance, traditional client selection using character and cash flow analysis... may be
supplemented by technical criteria relating to the particular agricultural activity. This way, the selection
process is more attuned to the intricacies of the household, its microenterprise, as well as its
agricultural activity.
Second, the basic feature of flexibility in microfinance can be similarly applied to agriculture finance.
Flexibility in terms of repayment schedules, delivery channels and even collateral requirements is very
important. Some microfinance institutions that have successfully catered to the agriculture market
have created flexible repayment schedules and payment options that attract a wide range of
agricultural activities. Clients are still expected to have frequent repayments with the option of having a
certain percentage of the loan as bulk payment. While these schedules take the crop cycle and
produce sales into consideration, they still emphasize that repayment is expected regardless of the
results at the end of the crop cycle. Flexibility in delivery channels can also be very beneficial for
agriculture finance. Microfinance institutions, both in the bank and non-bank sector, continue to
expand their branching networks, thereby enhancing access to finance. Innovations in technology are
also increasing delivery channels for microfinance. In the Philippines, for instance, the development of
mobile phone banking and electronic cash platforms have provided the opportunity for both enhanced
access and lower costs.
Finally, flexibility insofar as collateral requirements is also an option for agriculture finance.
Microfinance institutions have proven that collateral substitutes such as group guarantees, peer
pressure or even the use of personal property have been effective in reducing reliance on traditional
capital and in ensuring repayment. This may be studied further to see what arrangements could be
flexible, yet prudent enough for agriculture loans. Risk mitigating factors that are applied by
microfinance institutions such as portfolio diversification, inclusion of savings and insurance products
may also be effective for agriculture finance.
It is important that we remain innovative and open to new ideas to see where we can introduce further
refinements that we could apply for the agriculture sector. Nevertheless, it is equally important that we
continue to be prudent in the use of microfinance in the agriculture sector which has its own
intricacies, uniqueness and particular risk profile.
The Bangko Sentral approved the Micro-Agri Product last year is a case in point. With this, we have
allowed banks with microfinance operations to extend credit to those with small agricultural activities
using microfinance methodologies. In doing so, these micro-agri loans are given the same regulatory
treatment as microfinance loans, even as we set parameters to ensure that risks associated with
agriculture finance are properly managed. With this initiative, we expect to see more banks serve the
unmet needs of small farmers.
Indeed, we at the Bangko Sentral ng Pilipinas continue to find more and better ways of providing
access to credit to our agricultural farmers and workers. We are therefore looking forward to the
success of this Consultation Meeting so that our respective countries will be able to facilitate the
growth and development our agriculture sector. In this manner, we shall meet the food requirements of
our people and uplift the quality of life of our agricultural workers.
Thank you and good morning to all of you.