relevance of rnicrofinance - adoption of National Policy on Microfinance in 1997, recent specific inclusion of microfinance policy and activity in the amended General Banking Law (2000), promulgation of microfinance-friendly BSP circulars on microfinance transactions by licensed banks and NBFIs.

74. The regulatory framework is so structured as to provide room for NGO MFIs to establish viable links with the formal financial sector and to become properly licensed financial institutions at several entry and progression levels -- Cooperative Banks, Rural Banks, Thrift Banks and "quasi-banks". Capitalization levels at entry are periodically reviewed by BSP to determine if the levels are either too high or too low. The approach, which has thus far worked, is based on considerations of the market in which an applicant bank intends to operate - category of the municipality, based on municipal revenue as a proxy variable the community's aggregate income level; as well as the projected business volumes for the applicant bank (which tracks the relationship between planned/expected asset size vis-a-vis capital adequacy levels).

75. Reforms in the legal system and judicial processes need to be made in order to catch up and keep in step with growth of the microfinance industry. There are still significant obstacles and problems related to recognizing and protecting security interest in pledged collateral, which could facilitate MFIs' access to capital markets through financial securities (capital market instruments). This is considered important because the Philippines has a capital market that is rapidly developing.

76. MFIs licensed by BSP as banking institutions are included in the formal deposit insurance system and, in principle, are subject to examination by PDIC for compliance with/observation of prudent operating standards. NBFIs in microfinance are subject to regulations of BSP [if performing quasibanking] and/or SEC [if not engaged in quasi-banking].'4 77. Most of the rural finance and MFIs which are registered with and licensed by the BSP - some categories of thrift banks, rural banks and cooperative banks and CFIs which are beyond BSP jurisdiction anyway - are not directly included in the central clearing and payments system. They participate in the central systems for clearing and payments through the larger commercial banks.

78. The operational structure of CFIs - particularly the open-bond associations -- has greater affinity to banking institutions and competition in the same local communities among banks and CFIs has increased. A number of CFIs have taken advantage of the liberal provisions in Philippine cooperative laws to change their organizational structure into "community-development" credit unions, which legitimizes their reaching out to entire municipalities to expand their membership or client base. The liberal provisions make it fairly easy for a closed-bond CFI to change into an open-bond CFI.

79. CFIs are larger in number, and in terms of client base and asset size bigger than NGO MFIs and cooperative banks, but are beyond BSP jurisdiction. This increases the vulnerability and exposure of large numbers of the lower income population to systemic risks, because (i) their deposits with their CFIs are kept by the latter with institutions in the formal banking system, and (ii) deposit protection is not a universal nor mandatory practice among CFIs and their federations. An urgent priority is to squarely address the need for an adequate and appropriate framework for prudential regulation of CFIs, in such a way that overall regulation of financial institutions is unified rather than fragmented.

# IX LESSONS **LEARNED FROM EXPERIENCES OF GHANA AND THE PHILIPPINES IN** MICROFINANCE REGULATION

80. The tiered regulatory approach has promoted the development of sustainable microfinance in the

> _14 NBFls are required to comply with the "19-LenderRule", which mandates that NBFIs may not borrow from 20 or more lenders for the purpose of re-lending or purchase of receivables or othter obligations._

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