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On Micro-Enterprise
By Ramon T. Ayco
August 1, 2007

I. Introduction been estimated that in 2001, 1.1 billion people

had consumption levels below $1 a day and
The Project Development Institute (PDI), 2.7 billion lived on less than $2 a day.
is a non-government organization (NGO)
working for genuine agrarian reform and * Microcredit Summit Campaign data
alternative rural development strategies
through participatory methods. Its vision is In the Philippines despite the fact that poverty
the establishment of viable, sustainable and incidence had declined from 49.3 per cent in
self-reliant communities in partnership with 1985 to 40 per cent in 2000, the number of
people’s organizations, other non-government poor people has risen from 26.2 million to
organizations and government agencies 31.3 million during the same period. Providing
undertaking genuine agrarian reform and rural employment for an increasing number of
development. job seekers is a reality which is difficult to
confront. Dramatic population increase and
Since the beginning, rural micro-enterprise the deterioration of public education have
development is always a part of PDI’s rural created a pool of unskilled workers who now
development programs. Now it is exerting account for 29.3 percent of the total labor
every effort in developing and expanding force (National Statistics Office 2003; World
its established rural micro-enterprises. We Bank Group 2001; Amante et al. 1999). Rural
are making this research paper on micro- poverty, aggravated by population growth,
enterprise development primarily as our guide. has pushed rural folk to migrate to cities. But
We hope that this will also help others. the failure of the stagnant industrial sector
to absorb them has caused many workers to
Poverty and unemployment remain unemployed (defined as lacking a job
or business and not looking for work because
There is no doubt, poverty is one of the of a belief that no work is available, temporary
biggest problem in the world today, and how illness/disability, bad weather, or pending
to solve this problem is one of the greatest job application/interview) or underemployed
task facing everyone of us. (working less than 40 hours during the
reference period and wanting additional hours
When estimating poverty worldwide, the of work). Around 30 percent of the labor force
same reference poverty line has to be used, in the Philippines has been consistently un- or
and expressed in a common unit across underemployed (National Statistics Office
countries. Therefore, for the purpose of global 2003).
aggregation and comparison, the World Bank
uses reference lines set at $1 per day for the In many cases many of the world’s poor
“poorest” or “very poor” people (or those in people cannot improve their own lives
the extreme economic poverty) and $2 per day because they have little access to the financial
for the “poor” people who are living in the products and services that help those in the
upper half of those living below their nation’s developed world bridge the gap when times
poverty line* (more precisely $1.08 and $2.15 are tough. Without life or health insurance,
in 1993 Purchasing Power Parity terms). It has diseases and illness go untreated and the death
On Micro-Enterprise page 1
of an income earner is a dramatic hardship excluded from the formal banking sector.
for a family. Without access to loans or Almost all of the borrowers do so to finance
credit, shop-owners cannot buy products in self-employment activities, and many start
bulk and farmers cannot buy machinery or by taking loans as small as $75, repaid over
even seeds after a natural disaster or a poor several months or a year. Only a few programs
yield the season before. Without access to require borrowers to put up collateral,
savings accounts, money is hidden in walls or enabling would-be entrepreneurs with few
floorboards where it can be stolen or lost in a assets to escape positions as poorly paid wage
flood or fire. laborers or farmers.

In many cases local money lenders are the Some of the programs serve just a handful of
only available source of capital. They provide borrowers while others serve millions. In the
loans to smooth incomes during rough times past two decades, a diverse assortment of new
or to help individuals improve their small programs has been set up in Africa, Asia, Latin
businesses, but they do so at exorbitant annual America, Canada, and roughly 300 U.S. sites
interest rates, often from 300 percent to 3,000 from New York to San Diego (The Economist
percent. Under this system, virtually all of a 1997). Globally, there are now about 8 to 10
borrower’s financial gains are passed directly million households served by microfinance
to the money lender. Individuals are unable to programs, and some practitioners are pushing
reap the rewards of their own hard work. to expand to 100 million poor households by
2005. As James Wolfensohn, the president of
The policymakers and practitioners who the World Bank, has been quick to point out,
have been trying to improve the lives of the helping 100 million households means that as
poorest and poor people face an uphill battle. many as 500–600 million poor people could
Reports of bureaucratic sprawl and unchecked benefit.
corruption abound. And many now believe
that government assistance to the poor often The micro enterprise and small business
creates dependency and disincentives that has always played a significant role in the
make matters worse, not better. Moreover, economic development of a Country. Its
despite decades of aid, communities and role might not have been as spectacular as
families appear to be increasingly fractured, that of the large corporation involving the
offering a fragile foundation on which to deployment of enormous physical, financial
build. and human resources. However, the collective
impact of the multitude of micro enterprises
Micro-finance for micro-enterprise has been tremendous, particularly in the area
of job creation. The small business has been
Amid the dispiriting news, excitement is a major source of jobs in the United States
building about a set of unusual financial (Birch, 1987). In Canada nearly 70% and, in
institutions prospering in distant corners of some regions almost 100% of new jobs are
the world. The hope is that much poverty attributed by small business (Tang and Kutryk,
can be alleviated—and that economic 1992).
and social structures can be transformed
fundamentally—by providing financial In the Philippines: the Department of Trade
services to low-income households. These and Industry (DTI) estimates that small and
institutions, united under the banner of medium enterprises (SMEs) comprise over
microfinance for micro-enterprise, share a 90% of Philippine enterprises and are among
commitment to serving clients that have been the principal drivers of economic growth and
page 2 On Micro-Enterprise
development. Micro, small and medium scale defined as “any one in any type of society
enterprises (MSMSEs), on the other hand, who evolves a new technical, artistic, or social
comprise about 70% of the country’s labor programme and puts it into practices”. So the
force in both the formal and informal sectors. primary function of the entrepreneurs is to
do things in a new way, which Schumpeter
II. Definition of micro- terms “the creative response”. To overcome
enterprise resistance and win the consumers is another
crucial function of the entrepreneur. The
The nature of entrepreneurship crucial function of “setting up a new
production function” makes the entrepreneur a
Over the centuries, the notion of concept involving a center of usual qualities.
‘entrepreneur’ and ‘entrepreneurship’ has
been used in various senses. Conventionally, What is a micro-enterprise?
entrepreneurship has been considered as an
inborn trait of the individual. In the Middle Basically a micro-enterprise is smaller than
Ages entrepreneur was a ‘person who was small and medium enterprises. It is a very
active and got things done’. In the 16th small (‘micro’), informally organized business
Century it describes those who risked their (‘enterprise’) undertaken by poor people. Each
lives and fortunes in Wars. In 17th and 18th micro-enterprise is different, so the size, type
century it denotes those who risked their of business, and legal arrangements can vary a
wealth in a business enterprise or financial great deal.
contracts (Gunning, 1992). Although the last
definition reflects the notion of entrepreneur To differentiate micro-enterprises to small and
and entrepreneurship, as we understand today, medium enterprises:
it doesn’t capture its characteristics. It does
not provide an answer to questions such as: Those who promote small enterprises
What does an entrepreneur do? What qualities act out of an entrepreneurial logic that
and attributes make an entrepreneur effective? demands know-how. Their activities are
This view of entrepreneurship has induced clearly defined and these “bosses” carry
academicians to focus on studies of business them out fully with the help of their family
communities. members and, above all, employees and
apprentices. These enterprises are often
The very notion of entrepreneur has registered (individual enterprises), pay taxes
changed over time. The classical economists and occasionally participate in professional
considered the entrepreneur, essentially in organisations. Technology remains relatively
relation to risk and profit. The entrepreneur simple but nevertheless requires investment,
uses the factors of production to obtain a profit light equipment, and permanent premises.
against the risk involved in the process. The promoters therefore need seed funds.
However, quantitative criteria are insufficient
John Stewart Mill calls him ‘undertaker’ who to define this category of units that have staffs
reaps the difference between interest and gross generally ranging from three to fifty or so
profit as remuneration for his exertions and people. This category can also include micro
risks. enterprises and some medium enterprises.
A whole group of enterprises with growth
Joseph Schumpeter stressed that the primary potential exists within this category and is
importance of the entrepreneur lies in his involved in a process of diversification and
ability to introduce innovations. He has been modernisation.
On Micro-Enterprise page 3
An entrepreneurial attitude (in the classic interested to see the whole objective of
sense of the word), a medium and long assisting micro enterprise should be reduction
term vision, and technical and managerial of poverty.
capacities are indispensable for those who
promote medium enterprises. They have staff Mrs. Nancy David views micro enterprise
with very specific functions, in specialised basically as a small undertaking run by
and sometimes diversified activities. In an individual who as proprietor takes up
most cases, they exist legally. Technological responsibility of the managing the venture.
complexity and mass production require Such micro enterprise may be subsistence
appropriate production means on specialised level firms in the informal sector somewhat
sites. Equity capital and sometimes profitable non-registered firms; registered
considerable working capital are therefore craft oriented small firms and registered
necessary. Their potential for accumulation well-established firms, desirous of
and growth is real. expansion.

Now, those who create micro enterprises use In the Philippines, REPUBLIC ACT NO.
simple technical skills and sometimes receive 8289 otherwise known as the MAGNA
help from family members or apprentices. CARTA FOR SMALL ENTERPRISES define
The very small scale of their activities only micro and small and medium enterprises as
allows them to meet their needs. Their legal follows:
status is often somewhat ambiguous but they
frequently pay taxes. Their activities require “Sec. 3. Small and Medium Enterprise as
simple technologies, small tools, and a small Beneficiaries. - ‘Small and Medium Enterprise’
amount of working capital to purchase raw shall be defined as any business activity or
materials and renew small equipment. They enterprise engaged in industry, agribusiness
do not always require permanent premises. and/or services, whether single proprietorship,
Their evolution potential remains low; they cooperative, partnership or corporation whose
operate in a schema of reproduction rather total assets, inclusive of those arising from
than of growth. Horizontal diversification is loans but exclusive of the land on which the
sometimes possible. particular business entity’s office, plant and
equipment are situated, must have value falling
Micro enterprises embody an impressive under the following categories:
array of initiatives, skills and talents,
which if effective forms of assistance can
be developed, have the potential to make Micro less than P 1,500,001
an enormous contribution to the economic
Small P1,500,001 P15,000,000
growth. Micro enterprise is not just the latest
buzzword in development assistance. Medium P15,000,001 P60,000,000

Mari Nowak define micro enterprise as an

entity employing less than five persons, “The above definitions shall be subject to
generating income from non farm production, review and adjustment by the said Council
service and trade. Hernando – de – Soto moto proprio or upon recommendation of
classified micro enterprise as subgroup sectoral organization(s) taking into account
of informal sector. Muhammad Yunus of inflation and other economic indicators. The
Bangaladesh finds little scope in describing Council may use as variables the number of
the character of micro enterprise rather employees, equity capital and asset size.”
page 4 On Micro-Enterprise
Characteristics of micro-enterprise example, what happens if one person want to
leave the business?
Micro-enterprises aim to make money, not
to give people something to do. They are not The cost of starting a micro-enterprise
concerned with ‘getting a job’ for the sake of doesn’t need to be high. In the Philippines,
having something to do. They may (probably one can start a business with only P50 (almost
will, in fact) help people to have richer, more $1) as a starting capital provided that whatever
purposeful lives, and provide new connections happens you don’t spend the profits and add
with their communities. But these are not these up to your capital until it became bigger
the main aim. Most people with learning and bigger.
disabilities (and long-term members of other
disadvantage groups) have very little money The amount of income can vary widely - and
which is under their control. More money it partly depends on what each person want to
brings new opportunities. achieve. Some people may be very happy if
their micro-enterprise makes just a little bit of
Micro-enterprises aim to make money money - enough, for example, to save up over
by seeking out ordinary commercial a year and spend on a good summer holiday.
opportunities. They make capitalism The US experience suggests micro-enterprises
work to the benefit of people who have often create a higher level of income than
been disadvantaged. They don’t generate that, and just a few make tens of thousands of
income through donations or grants (except, pounds.
possibly, as start-up money) and almost
certainly don’t depend on the social care People with very high support needs can have
industry. Micro-enterprises, like other micro-enterprises. If a business is set up in the
ordinary businesses, aim to offer ordinary right way, it can make an income with very
citizens a product or service for which little effort in return.
they’ll be willing to pay.
Likewise, the amount of time they require
Micro-enterprises are built on an individual can vary from a few days a year to a full-
basis. They are not schemes, projects, or time occupation. They’re designed to suit
standard packages to be delivered to whole each person, and some people may want, for
groups of people. They require thinking at the example, to run their businesses at events
‘micro’ level - about this person, with these that only take place a few times a year. Some
interests, living in this community. kinds of micro-enterprise may run with very
little effort (from a business point of view,
Micro-enterprises are usually ‘owned’ by one an ideal arrangement!). All this means that
person, and are very unlikely to be shared micro-enterprises can’t be viewed as an option
between more than three. If the micro- that will necessarily provide an alternative
enterprise has been created to match one weekday occupation.
person’s requirements, then it’s probably
only right for that person. And by keeping Informal economy
the ownership to one person, there’s the best
possible chance that the person will have Most if not all micro-enterprises belongs to
real control over it. There are times when the informal economy.
two people can make a success of sharing
ownership, but these are the exceptions - and The informal economy is made up of those
three people sharing is a risky option. For individuals engaged in entrepreneurial
On Micro-Enterprise page 5
endeavors who have no available knowledge appreciating and supporting entrepreneurs in
of entrepreneurial and lending services their area and in helping informal economy
and do not fully understand the long-run entrepreneurs look at their own work from
importance of interfacing their businesses with a business perspective. The study also
government agencies. found a need for fully funding structures
and incentives in the state so that more
In the United States, the Aspen Institutes entrepreneurs can be reached.
FIELD project has conducted studies on this
economy to provide a better picture of who Meanwhile in the Philippines, the official
makes up this sector and what the wants/needs definition (2) adopted by the National Census
are for developing these entrepreneurs. The and Statistical Board on November 6, 2002
following studies were completed in 2003: characterizes the informal segment of the
Philippine economy as:
The FIELD program describes the informal
economy “as that component of the overall Units engaged in the production of goods
market in which enterprises, employers and and services with the primary objective of
self-employed individuals engage in legal generating employment and incomes to the
but unregulated activities. While they do not persons concerned. It consists of household
comply with standard business practices, unincorporated enterprises that are market
taxation regulations and/or other business and non-market producers of goods as well as
reporting requirements, they are otherwise market producers of services.
not engaged in overtly criminal activity. It
includes both employed and self-employed These enterprises are operated by own account
workers; cash is the most common medium workers, which may employ unpaid family
of exchange; and inferior work conditions are workers as well as occasional, seasonally
commonplace for workers.” Micro programs, hired workers.
for the most part, are serving individuals in These enterprises may also be owned and
this sector, but it is thought the market is much operated by employers, which may employ
larger than the current reach. less than 10 employees on a continuous basis.

For the most part, these individuals were not Excluded are corporations, quasicorporations,
aware of services available to businesses. units with 10 or more employees, corporate
FIELD found that possibly a third of this farms, commercial livestock raising and
population would be candidates at any given commercial fishing. (NSCB 2002).
time for microenterprise services. This group As an economic and social group, the informal
contained those who expressed ambition and sector is composed of a variety of people with
interest in growth, as well as those who would different types of work – homeworkers, micro-
cautiously consider it. FIELD concluded entrepreneurs, street vendors and peddlers,
that they would benefit from sound business drivers and operators of taxicabs, jeepneys,
analysis and guidance that is found in high- tricycles and other public conveyances,
quality microenterprise programs. It is petty retailers, barter traders, small-scale
important that these services could be adapted construction workers, small-miners, small
to the specific needs and time and place farmers and fisherfolks.
constraints of the busy entrepreneurs.
As elsewhere in Asia, the informal sector
In addition, the study found that there is a role in the Philippines is rapidly expanding as a
for micro programs to assist communities in consequence of worsening unemployment
page 6 On Micro-Enterprise
due to retrenchment of industries; declining and contributing much to the economy of
agricultural production; falling real wages the country. With this it is important for the
due to inflation; and the widening income government to adopt a more active role in
inequality and poverty – where women, providing them with the assistance they need
men and children are struggling to earn their to cope with the difficulties of economic
living through extra legal means in order to shifts. In this regard, a number of Philippine
survive. In contrast to formal wage workers, laws and policies have been promulgated that
the informal workers have grown throughout either directly or indirectly seek to increase
the decades and have consistently remained a the informal sector’s access to productive
stubborn feature of the Philippine economy, resources, improve their working conditions
so much so that their activities have gained and welfare, and extend social protection.
acceptance as a survival strategy of the poor. Some of these were the result of long years
of advocacy on the part of informal workers’
There are an estimated 22.5 million Filipinos groups.
belonging to the informal sector, which
represents 75 percent of the total work force, To date, enacted laws and policies that
according to the Department of Labor and are congenial to the informal sector are:
Employment (DOLE). Agriculture and Fisheries Modernization
Act (RA 8435), the Magna Carta for Small
Many of the country’s informal sector Enterprises (RA 6977), the Cooperative
specifically in the cities are severely resource- Code of the Philippines (RA 6938), the
constrained small vendors operating not only Cooperatives Development Authority
in public markets but also in the sidewalks (CDA) Law (RA 6939) and the Social
and streets. Their survival in business relies Reform and Poverty Alleviation Act (RA
heavily on access to financing. This usually 8425 of 1998) which provides an entire
comes from the informal sector as well in section on microfinance services for the
the form of informal financiers called “5-6.” poor. Additionally, with the passage of
Two types of 5-6 financiers are found in the Executive Order 452, registered vendors
Philippine, each with a distinctive lending are encouraged to form an association for
mechanism, Filipinos and Indian nationals empowerment. This law may in the long run
popularly known as “Bombay”. prove beneficial to women since majority
of them earn income as vendors. Under this
Five-six (5-6) moneylenders charge a promulgation, the LGUs are mandated to
nominal interest rate of 20 percent over address vendors’ security at the workplace
an agreed period of time. A person who by providing vending sites around the
borrows 5 pesos from a 5-6 moneylender municipal hall.
over a period of one week repays 6
pesos, including 1 peso interest. Neither Moreover, under the Social Development
Filipino nor Indian 5-6 moneylenders Council of NEDA (National Economic and
require collateral or documents from their Development Authority), a Country Program
borrowers. The success of a borrower’s for “Institutionalizing Programs and Projects
business and loan repayment history for the Informal Sector through the Local
provide a gauge of the borrower’s Governments” was approved in 2003 with
credibility. DOLE initiating its implementation (or
roll-out) containing strategies pertaining to
As data shows informal sectors comprised recognition, social protection and access to
the bulk of the labor force in the Philippines productive resources.
On Micro-Enterprise page 7
On the other hand, some pertinent laws turning to self-generated employment in
and policies that have been passed need small-scale enterprise activities in the informal
further improvement and enforcement, sector to support their households.
most especially those with clear-cut gender
perspective, such as the Act for Women Women have proven to be the best poverty
in Micro and Cottage Business Enterprise fighters. Experience and studies have shown
(RA 7882), Act Promoting the Integration that they use the profits from their businesses
of Women as Full and Equal Partners of to send their children to school, improve their
Men in Development and Nation Building families’ living conditions and nutrition, and
(RA 7192) and the Implementing Rules on expand their businesses. As families cross the
the Employment of Homeworkers (DOLE poverty line and micro-enterprises expand,
Department Order No 5). their communities benefit. Jobs are created,
knowledge is shared, civic participation
increases, and women are recognized as
III. Women in Micro-Enterprise valuable members of their families and
Development communities.

Of the estimated 1.3 billion people in the The rationale behind women becoming
world living in poverty, more than 70% economic actors has been examined by
are female (UNDP 1995: 36). The number various researchers. Income generating
of women living in poverty has increased activities are not merely viewed as a tool
disproportionately over the past decade for economic needs of women. It is equally
compared with the number of men (Platform a powerful instrument to enable women to
For Action 1995: para 48). The feminisation determine their own lives (Bennet, 1992).
of poverty is a direct consequence of women’s Women are culturally well equipped to run
unequal access to economic opportunities. their business due to skill developed through
managing households, raising children etc.
In recent years, micro-financing for women’s Therefore, shift from family management
small and micro-scale enterprises has been to enterprise management (Harper and
seen as an effective way to promote and Vyakarnam, 1988) may be easier than a shift
support women’s self-employment and from paid employment to self-employment. .
access to credit. The promotion, financing
and strengthening of micro-enterprises was Historical background
also highlighted in the Beijing Platform For
Action as an important way of increasing the The focus on the contribution of women
productive capacity of women, and breaking in direct productive work was first brought
the “cycle of poverty” (Platform For Action out in 1970 by Ester Boserup in her book
1995: paras 55, 166). Women’s Role in Economic Development.
This work of Boserup is a compilation of her
research experience in India. It also provided a
Women in local economies conceptual framework for research on Women
in Development. Around the mid 1970’s, neo-
Women entrepreneurs play an important role Marxist feminists and dependency theorists
in local economies, and a large percentage of began looking at the relationship between
micro-enterprises in developing countries are women and development rather than the
undertaken by women. Increasingly women strategies for integrating women in economic
in urban and rural areas are successfully development. However, lack of understanding
page 8 On Micro-Enterprise
of women’s work in developing societies, regarding opportunity costs involved in
and Western biases in development projects entrepreneurship development as opposed to
reinforced the division between public and generate causal income (Kraus- Harper, 1992).
private spheres of women lives (Ghosh R). Micro enterprises are small undertakings
Women and development (WAD) like women run by individuals or groups who take up
in development (WID) focused on productive responsibility of managing a business venture
sector, and aimed at skill development for and often involved in the family activities. The
income generation. micro enterprises suit the life style of women
because of their multiple roles and need to re-
In 1980s, the gender and development approach organise time. Originally micro enterprises for
(GAD), influenced by social feminism, post women were extension of kitchen activities.
modern and post colonial theories, took into Now women have ventured into engineering,
account the totality of women’s lives, rejecting electronics and other industries … (David,
the public / private dichotomy which serves 1992).
to devalue women’s work at home. Focus on
women perspectives on development makes Hindrances
women the ‘subjects’ rather than ‘objects’
of development, ‘change agents’ rather than But there are hindrances that needs to
‘welfare recipients’. The GAD approach is to be overcome in order for women to fully
move women from the margin to the center participate in economic development through
(Hooks, 1984) by women getting a sense of micro-enterprises.
control over their lives. Entrepreneurship
activities for women are clearly within the Rural women frequently have primary
GAD framework. Development cannot be responsibility for agricultural production,
sustained unless people for whom it is intended in addition to domestic responsibilities and
are at the center of development activities. The childcare. These responsibilities place heavy
goal of development is not merely to initiate demands on women’s time, and micro-
a process of economic growth, but also a enterprise activities can potentially increase
process, which will improve the lives of the the workload of women. Improving access
people. The concept of empowerment through to labour-saving technologies in any of these
enterprise is underlined through this thinking. areas can free up time for income generating
Micro enterprise represents an important means micro-enterprise activities.
of earning income for women in developing
countries. Limited access to productive resources
(particularly capital, labour time and
It is not easy for women to find out a job that technologies), transport constraints, lack of
will be suitable with their family responsibility market knowledge, and lack of basic literacy
and household work. Thus many women and numeracy skills can restrict the capacity
are attracted by the idea of self-employment of women to participate effectively in business
in micro enterprises adjoining their house activities.
premises with flexible hours, which allow
them to take care of both home and business. Women, who generally do not have ownership
It provides employment and income to of land or capital goods, can be disadvantaged
alleviate poverty. by the collateral-based lending policies
of financial institutions. For example,
The difference between income generation and UNDP estimates that only 5% of the credit
entrepreneurship is in the conscious decision provided by multilateral banks reaches rural
On Micro-Enterprise page 9
women (UNDP 1995: 39). In some places, between investment and generation of regular
government and/or institutional regulations income, and availability of local markets
require that women seeking bank loans secure (IFAD 1991: 9).
their spouse’s signature.
IV. Micro-Finance for
Social attitudes concerning the value of Micro-Enterprise
traditional women’s work activities and their
potential abilities can limit the participation The need for microfinance
rates and ultimate commercial success of
female micro-entrepreneurs. In the past, Studies in India, Kenya and the Philippines
income-generation projects for women have found that the average annual return on
frequently been for marginal activities with investments by micro-enterprise ranged from
limited marketing potential and poor return 117 to 847 per cent. If they are so lucrative,
for labour. They have often been based on why didn’t these businesses start sooner? Lack
the implicit assumption that women’s income of capital. Poor people either have no money
is supplementary to that of the male head of to get started, or have to borrow from loan
household. Loans for men are usually larger sharks who charge usurious rates that wipe out
and more long-term than those provided for profits.
women. However, much evidence indicates
that women are very good credit risks, with What is really needed here is microfinance.
many small-scale credit projects for women
reporting very high repayment rates in a range Microfinance is the supply of banking
of sectors and activities. services to micro-enterprises and poor
families. It helps people to escape poverty
Development organisations such as co- by giving them collateral-free loans and
operatives, which restrict membership to other financial services to support income-
one household member, may also exclude generating businesses. A key to microfinance
women from access to resources such as is the recycling of loan dollars. As each loan
credit. There is often the risk that in women’s is repaid—usually within six months to a
micro-enterprise schemes, the benefits of the year—the money is recycled as another loan,
activities, including income earned and assets thus multiplying the value of each dollar in
accrued, will not necessarily be controlled defeating global poverty, and changing lives
by women for expenditure on their own and and communities.
basic family needs. Training and support is
needed for micro-enterprise projects, in bothMicrofinace is not only Microcredit. The latter
the micro-financing (management of savings refers specifically to loans and the credit needs
and credit) and micro-enterprise development of clients, while microfinance covers a broader
(small business and technical training) areas.
range of financial services that create a wider
range of opportunities for success. Examples
According to the International Fund for of these additional financial services include
Agricultural Development (IFAD), there savings, insurance, housing loans and remittance
are four key criteria for micro-enterprise transfers. The local micro-finance institution
development schemes aimed at poor rural might also offer microfinance plus activities such
women, which can both improve demand for as entrepreneurial and life skills training, and
credit and reduce the risks of indebtedness. advice on topics such as health and nutrition,
These are: modest financial investment, sanitation, improving living conditions, and the
low investment risk, short gestation period importance of educating children.
page 10 On Micro-Enterprise
Sometimes called “banking for the poor,” given the political context, but there are
microfinance is an amazingly simple approach also good reasons for caution. Alleviating
that has been proven to empower very poor poverty through banking is an old idea with
people around the world to pull themselves a checkered past. Poverty alleviation through
out of poverty. It is sustainable and can be the provision of subsidized credit was a
implemented on the massive scale necessary centerpiece of many countries’ development
to respond to the urgent needs of those strategies from the early 1950s through the
living on less than $1 a day. Relying on their 1980s, but these experiences were nearly all
traditional skills and entrepreneurial instincts, disasters. Loan repayment rates often dropped
very poor people, mostly women, use small well below 50 percent; costs of subsidies
loans, other financial services, and support ballooned; and much credit was diverted to the
from local organizations called microfinance politically powerful, away from the intended
institutions (MFIs) to start, establish, sustain, recipients (Dale Adams, Douglas Graham, and
or expand very small, self-supporting J. D. von Pischke 1984).
What is new? Although very few programs
From ancient slums and impoverished villages require collateral, the major new programs
in the developing world to the tired inner cities report loan repayment rates that are in almost
and frayed suburbs of America’s economic all cases above 95 percent. The programs have
fringes, millions of people, mostly women, are also proven able to reach poor individuals,
all part of a revolution. Some might call it a particularly women, that have been difficult
capitalist revolution . As little as $25 or $50 in to reach through alternative approaches.
the developing world, perhaps $500 or $5000 Nowhere is this more striking than in
in the United States, these microloans make Bangladesh, a predominantly Muslim country
huge differences in people’s lives. Many Third traditionally viewed as culturally conservative
World bankers are finding that lending to the and male-dominated. The programs there
poor is not just a good thing to do but is also together serve close to five million borrowers,
profitable. (Brill 1999) the vast majority of whom are women, and,
in addition to providing loans, some of the
Advocates who lean left highlight the programs also offer education on health
“bottom-up” aspects, attention to community, issues, gender roles, and legal rights. The
focus on women, and, most importantly, new programs also break from the past by
the aim to help the under-served. It is no eschewing heavy government involvement
coincidence that the rise of microfinance and by paying close attention to the incentives
parallels the rise of nongovernmental that drive efficient performance.
organizations (NGOs) in policy circles and
the newfound attention to “social capital” The microfinance revolution, begun with
by academics (e.g., Robert Putnam 1993). independent initiatives in Latin America
Those who lean right highlight the prospect of and South Asia starting in the 1970s, has so
alleviating poverty while providing incentives far allowed 65 million poor people around
to work, the nongovernmental leadership, the world to receive small loans without
the use of mechanisms disciplined by market collateral, build up assets, and buy insurance.
forces, and the general suspicion of ongoing
subsidization. The UN Year of Microcredit in 2005
and the Nobel Peace Prize Mohammed
There are good reasons for excitement about Yunus and Grameen Bank in 2006 have
the promise of microfinance, especially given considerable public recognition to
On Micro-Enterprise page 11
microfinance as a development tool. Christen sector—a “development” activity that
et al. (2004) reports an astonishing 500 million donors, governments, or social investors
persons served, mostly with savings accounts, might care about, but not as part of the
while the Microcredit Summit in their 2006- country’s mainstream financial system.
meeting in Halifax celebrated the milestone However, microfinance will reach the
of 100 million borrowers. Nevertheless, maximum number of poor clients only
microfinance still only reaches a fraction when it is integrated into the financial
of the world’s poor (Christen et al., 2004, sector.
Robinson, 2001). Hence, there is a recognized
supply challenge in the market (Helms, 2006). 4. Microfinance can pay for itself, and must
do so if it is to reach very large numbers
Key Principles of Microfinance of poor people. Most poor people cannot
get good financial services that meet their
These principles were developed and needs because there are not enough strong
endorsed by the Consultative Group to institutions that provide such services.
Assist the Poor (CGAP) and its 31 member Strong institutions need to charge enough
donors, and further endorsed by the Group of to cover their costs. Cost recovery is not an
Eight leaders at the G8 Summit on 10 June end in itself. Rather, it is the only way to
2004. CGAP is a consortium of 31 public reach scale and impact beyond the limited
and private development agencies working levels that donors can fund. A financially
together to expand access to financial services sustainable institution can continue and
for the poor, referred to as microfinance. expand its services over the long term.
Achieving sustainability means lowering
1. Poor people need a variety of financial transaction costs, offering services that are
services, not just loans. Like everyone more useful to the clients, and finding new
else, the poor need a range of financial ways to reach more of the unbanked poor.
services that are convenient, flexible, and
affordable. Depending on circumstances, 5. Microfinance is about building
they want not only loans, but also savings, permanent local financial institutions.
insurance, and cash transfer services. Finance for the poor requires sound
domestic financial institutions that provide
2. Microfinance is a powerful tool to fight services on a permanent basis. These
poverty. When poor people have access institutions need to attract domestic
to financial services, they can earn more, savings, recycle those savings into loans,
build their assets, and cushion themselves and provide other services. As local
against external shocks. Poor households institutions and capital markets mature,
use microfinance to move from everyday there will be less dependence on funding
survival to planning for the future: they from donors and governments, including
invest in better nutrition, housing, health, government development banks.
and education.
6. Microcredit is not always the answer.
3. Microfinance means building financial Microcredit is not the best tool for
systems that serve the poor. In most everyone or every situation. Destitute
developing countries, poor people are and hungry people with no income or
the majority of the population, yet they means of repayment need other kinds of
are the least likely to be served by banks. support before they can make good use
Microfinance is often seen as a marginal of loans. In many cases, other tools will
page 12 On Micro-Enterprise
alleviate poverty better—for instance, be temporary. It should be used to build
small grants, employment and training the capacity of microfinance providers;
programs, or infrastructure improvements. to develop supporting infrastructure like
Where possible, such services should be rating agencies, credit bureaus, and audit
coupled with building savings. capacity; and to support experimentation.
In some cases, serving sparse or difficult-
7. Interest rate ceilings hurt poor people to-reach populations can require longer-
by making it harder for them to get term donor support. Donors should try to
credit. It costs much more to make many integrate microfinance with the rest of the
small loans than a few large loans. Unless financial system. They should use experts
microlenders can charge interest rates with a track record of success when
that are well above average bank loan designing and implementing projects.
rates, they cannot cover their costs. Their They should set clear performance
growth will be limited by the scarce and targets that must be met before funding
uncertain supply soft money from donors is continued. Every project should have a
or governments. When governments realistic plan for reaching a point where
regulate interest rates, they usually set the donor’s support is no longer needed.
them at levels so low that microcredit
cannot cover its costs, so such regulation 10. The key bottleneck is the shortage
should be avoided. At the same time, a of strong institutions and managers.
microlender should not use high interest Microfinance is a specialized field that
rates to make borrowers cover the cost of combines banking with social goals.
its own inefficiency. Skills and systems need to be built at all
levels: managers and information systems
8. The role of government is to enable of microfinance institutions, central
financial services, not to provide them banks that regulate microfinance, other
directly. National governments should government agencies, and donors. Public
set policies that stimulate financial and private investments in microfinance
services for poor people at the same time should focus on building this capacity, not
as protecting deposits. Governments just moving money.
need to maintain macroeconomic
stability, avoid interest rate caps, and 11. Microfinance works best when
refrain from distorting markets with it measures—and discloses—its
subsidized, high-default loan programs performance. Accurate, standardized
that cannot be sustained. They should performance information is imperative,
also clamp down on corruption and both financial information (e.g., interest
improve the environment for micro- rates, loan repayment, and cost recovery)
businesses, including access to markets and social information (e.g., number of
and infrastructure. In special cases where clients reached and their poverty level).
other funds are unavailable, government Donors, investors, banking supervisors,
funding may be warranted for sound and and customers need this information to
independent microfinance institutions. judge their cost, risk, and return.

9. Donor funds should complement Microfinance Institutions (MFIs)

private capital, not compete with it.
Donors provide grants, loans, and equity Private suppliers of microfinance are normally
for microfinance. Such support should incorporated as member based Cooperatives
On Micro-Enterprise page 13
(COOP), Non Profit Organizations (NPOs) or nonprofits have managed to obtain funding
Shareholder Firms (SHFs). They are called from commercial banks and more and more
Microfinance Institutions or MFIs. commercial funding is being channeled to
MFIs are dedicated to alleviating poverty.
These frontline organizations reach out to Unlike other loan programs, microfinance
the very poor and deliver microfinance clients are not required to provide collateral to
services to local clients daily. They educate receive loans. This allows people who would
local communities about the opportunity not qualify for loans at traditional financial
to improve their lives with microfinance; institutions to receive credit. MFIs are also
make microloans and provide other financial very client-friendly; most usually go to their
services such as savings accounts, micro- clients to provide loans and receive payments,
insurance and money transfers; collect rather than requiring their clients to come to
weekly loan payments; and assist clients in them. A few of them also use focal centers
solving some of the life challenges they may where clients gather to conduct financial
face. Many are also integrating other social transactions and receive other social services.
empowerment strategies into their operations,
including healthcare and nutrition, financial Microfinance clients are excellent credit risks.
literacy, and environmentally-friendly In Grameen Bank’s experience, for example,
technologies, such as solar energy and biogas. the repayment rate is between 95 and 98
Such strenuous programs and innovations percent. In fact, it is higher than the repayment
require constant growth in skills and capacity. rate of student loans and credit card debts in
the United States. They value the opportunity
MFIs differ in size and reach: some serve a to improve their lives.
few thousand clients in their immediate area,
while others serve hundreds of thousands Like other financial institutions,
of very poor people through hundreds of microfinance institutions (MFIs) charge
branches covering large regions. interest for the loans they make to their
clients. The interest collected goes back
MFIs that operate as non-profit foundations into the program wherein part of it are
traditionally obtain their funds from donors, used to fund more loans and other part are
retained earnings and, in some cases, from used to cover the high cost of making very
public financial institutions. With an estimated small loans and personally servicing each
expenditure rate of at least US $ 500 million client every week. It also covers the cost
per year, development agencies remain the of managing the “center meetings”; the
most important external source of funding for peer support group process; and providing
MFIs. information on social services, personal
development, health and other critical
Grameen Bank for example provides funding information that helps clients improve their
for MFIs through direct loans, grants, loan lives and the future of their families. Their
guarantees and other innovative financing rates are also largely influenced by the rates
techniques. Other funding comes from MFIs themselves pay for borrowing the
individuals, philanthropists, foundations, and funds that they in turn lend to their clients.
governments and international institutions MFI interest rates can range from 18 to 60
such as the World Bank. MFIs also borrow percent, depending on the conditions in each
funds from traditional banks to loan to MFI’s service area. Without microfinance
their clients. Some of the more successful programs, the most common alternative
page 14 On Micro-Enterprise
for very poor people is the local “money of funds; 3) the control of operating costs;
lenders,” who regularly charge between 120 4) the control of outstanding payments and
and 300 percent. misappropriations risks (involving procedures
for loan loss); 5) profit (to build reserves for
It is important to note that in many countries hard times ahead, and more importantly, with
the “microfinance industry” is becoming a which to expand the number of clients served
competitive industry, leading MFI to lower and range of services offered.)
their interest rates, therefore improving the
cost of services for micro enterprises. Microfinance Institutions (MFIs) have
accelerated economic transformations by
One of the most attractive features of encouraging banks to significantly expand
microfinance is the goal of self-sufficiency the micro-enterprises access to microfinance
for both microentrepreneurs and MFIs. No services. In the Philippines, for instance, the
institution can survive without reaching Micro-enterprise Access to Banking Services
financial stability within a reasonable (MABS) program, assists clients rural banks
period. Microfinance Institutions must be to increase the financial services they provide
built to survive without subsidies. From a to the micro enterprise sector by providing
financial point of view, numerous experiences microfinance technical assistance and training
have shown that it is possible to create a to rural banks. Trained banks in turn offer
self-sustainable microfinance institution. microfinance loan and deposit services
In Eastern Europe , IMI (Internationale specially tailored to micro enterprise clients.
Micro Investitionen Aktiengesellschaft),
an investment company has invested in Today, it is estimated that 500 Million people
other 26 MFIs so far, many of them already all over the world need access to financial
reaching self-sufficiency in Georgia, Bosnia & services to develop income generating
Herzegovina, Albania, Ukraine etc. In Mexico, activities. In our opinion, donor money will
Compartamos, one of the leading MFIs in not be enough
Latin America is fully self sufficient, etc, etc. to reach this market, banks and financial
Many examples prove us that Microfinance markets should help build financial systems
can be run as a self-sustainable operation. all over the developing world that serve the
Another example is the Grameen Foundation.
It is spearheading several initiatives to give Microfinance schemes
MFIs access to the private market financing
options available to traditional banks. By There are many microfinance schemes
combining access to private market financing practiced and developed by different groups
with more efficient management and of people and institutions all over the world.
technology, MFIs can begin to move from Some schemes have specific unique features
reliance on philanthropy to self-sufficiency. totally different from the others, but most of
Grameen Bank in Bangladesh has proven that the schemes have almost the same features.
this can be accomplished. It is totally self- The best examples are the following:
supporting and accepts no grants or donations.
a. The Grameen Bank, Bangladesh
The financial viability of microfinance
organizations, depends on: 1) sufficient The idea for the Grameen Bank did not
volume of activity; 2) a satisfactory spread come down from the academy, nor from
between the interest on loans and the cost ideas that started in high-income countries
On Micro-Enterprise page 15
and then spread broadly.1 As the founder the scale advantages of a standard bank
Dr. Muhammad Yunus (1995) describes the with mechanisms long used in traditional,
beginning: group-based modes of informal finance, such
as rotating savings and credit associations
Bangladesh had a terrible famine in 1974. (Besley, Coate, and Glenn Loury 1993).2
I was teaching economics in a Bangladesh
university at that time. You can guess how The Grameen Bank now has over two million
difficult it is to teach the elegant theories of borrowers, 95 percent of whom are women,
economics when people are dying of hunger receiving loans that total $30–40 million
all around you. Those theories appeared like per month. Reported recent repayment rates
cruel jokes. I became a drop-out from formal average 97–98 percent, but relevant rates
economics. I wanted to learn economics average about 92 percent and have been
from the poor in the village next door to the substantially lower in recent years.
university campus.
Most loans are for one year with a nominal
Yunus found that most villagers were unable interest rate of 20 percent (roughly a 15–16
to obtain credit at reasonable rates, so he percent real rate). Calculations suggest,
began by lending them money from his own however, that Grameen would have had to
pocket, allowing the villagers to buy materials charge a nominal rate of around 32 percent in
for projects like weaving bamboo stools order to become fully financially sustainable
and making pots (New York Times 1997). (holding the current cost structure constant).
Ten years later, Yunus had set up the bank, The management argues that such an increase
drawing on lessons from informal financial would undermine the bank’s social mission
institutions to lend exclusively to groups (Shahidur Khandker 1998), but there is little
of poor households. Common loan uses solid evidence that speaks to the issue.
include rice processing, livestock raising, and
traditional crafts. Grameen figures prominently as an early
innovator in microfinance and has been
The groups form voluntarily, and, while particularly well studied. Programs that have
loans are made to individuals, all in the group been set up in North Carolina, New York
are held responsible for loan repayment. City, Chicago, Boston, and Washington,
The groups consist of five borrowers each, D.C. cite Grameen as an inspiration. In
with lending first to two, then to the next addition, Grameen’s group lending model
two, and then to the fifth. These groups of has been replicated in Bolivia, Chile, China,
five meet together weekly with seven other Ethiopia, Honduras, India, Malaysia, Mali, the
groups, so that bank staff meet with forty Philippines, Sri Lanka, Tanzania, Thailand, the
clients at a time. According to the rules, if U.S., and Vietnam. When Bill Clinton was still
one member ever defaults, all in the group governor, it was Muhammad Yunus, founder
are denied subsequent loans. The contracts of the Grameen Bank (and a Vanderbilt-trained
take advantage of local information and the economist), who was called on to help set up
“social assets” that are at the heart of local the Good Faith Fund in Arkansas, one of the
enforcement mechanisms. Those mechanisms early microfinance organizations in the U.S.
rely on informal insurance relationships
and threats, ranging from social isolation to b. BancoSol, Bolivia
physical retribution, that facilitate borrowing
for households lacking collateral (Besley and Banco Solidario (BancoSol) of urban Bolivia
Coate 1995). The programs thus combine also lends to groups but differs in many
page 16 On Micro-Enterprise
ways from Grameen.3 First, its focus is Seventh, borrowers are better off than in
sharply on banking, not on social service. Bangladesh and loans are larger, with average
Second, loans are made to all group members loan balances exceeding $900, roughly nine
simultaneously, and the “solidarity groups” times larger than for Grameen (although
can be formed of three to seven members. The first loans may start as low as $100). Thus
bank, though, is constantly evolving, and it while BancoSol serves poor clients, a recent
has started lending to individuals as well. By study finds that typical clients are among the
the end of 1998, 92 percent of the portfolio “richest of the poor” and are clustered just
was in loans made to solidarity groups and 98 above the poverty line (where poverty is based
percent of clients were in solidarity groups, on access to a set of basic needs like shelter
but it is likely that those ratios will fall over and education; Sergio Navajas et al. 1998).
time. By the end of 1998, 28 percent of the Partly this may be due to the “maturation”
portfolio had some kind of guarantee beyond of clients from poor borrowers into less poor
just a solidarity group. borrowers, but the profile of clients also looks
very different from that of the mature clients
Third, interest rates are relatively high. While of typical South Asian programs.
1998 inflation was below 5 percent, loans
denominated in bolivianos were made at an The stress on the financial side has made
annual base rate of 48 percent, plus a 2.5 BancoSol one of the key forces in the Bolivian
percent commission charged up front. Clients banking system. The institution started as an
with solid performance records are offered NGO (PRODEM) in 1987, became a bank in
loans at 45 percent per year, but this is still 1992, and, by the end of 1998, served 81,503
steep relative to Grameen (but not relative to low-income clients. That scale gives it about
the typical moneylender, who may charge as 40 percent of borrowers in the entire Bolivian
much as 10 percent per month). About 70–80 banking system.
percent of loans are denominated in dollars,
however, and these loans cost clients 24–30 Part of the success is due to impressive
percent per year, with a 1 percent fee up front. repayment performance, although difficulties
are beginning to emerge. Unlike most other
Fourth, as a result of these rates, the bank does microfinance institutions, BancoSol reports
not rely on subsidies, making a respectable overdues using conservative standards: if a
return on lending. BancoSol reports returns on loan repayment is overdue for one day, the
equity of nearly 30 percent at the end of 1998 entire unpaid balance is considered at risk
and returns on assets of about 4.5 percent, (even when the planned payment was only
figures that are impressive relative to Wall scheduled to be a partial repayment). By these
Street investments—although adjustments for standards, 2.03 percent of the portfolio was at
risk will alter the picture. Fifth, repayment risk at the end of 1997.
schedules are flexible, allowing some
borrowers to make weekly repayments and But by the end of 1998, the fraction increased
others to do so only monthly. Sixth, loan to 4.89 percent, a trend that parallels a general
durations are also flexible. At the end of 1998, weakening throughout the Bolivian banking
about 10 percent had durations between one system and which may signal the negative
and four months, 24 percent had durations effects of increasing competition. BancoSol’s
of four to seven months, 23 percent had successes have spawned competition from
durations of seven to ten months, 19 percent NGOs, new nonbank financial institutions, and
had durations of ten to thirteen months, and even formal banks with new loan windows
the balance stretched toward two years. for low-income clients. The effect has been
On Micro-Enterprise page 17
a rapid increase in credit supply, and a The bank has centered on achieving cost
weakening of repayment incentives that may reductions by setting up a network of
foreshadow problems to come elsewhere. branches and posts (with an average of five
staff members each) and now serves about 2
Still, BancoSol stands as a financial success, million borrowers and 16 million depositors.
and the model has been replicated— Loan officers get to know clients over time,
profitably—by nine of the eighteen other starting borrowers off with small loans and
Latin American affiliates of ACCION increasing loan size conditional on repayment
International, an NGO based in Somerville, performance. Annualized interest rates are 34
Massachusetts. ACCION also serves over percent in general and 24 percent if loans are
one thousand clients in the U.S., spread over paid with no delay (roughly 25 percent and
the six programs. Average loan sizes range 15 percent in real terms— before the recent
from $1366 in New Mexico to $3883 in financial crisis).
Chicago, and overall nearly 40 percent of
the clients are female. As of December 1996, Like BancoSol, BRI also does not see
payments past due by at least thirty days itself as a social service organization, and
averaged 15.5 percent but ranged as high as it does not provide clients with training or
21.2 percent in New York and 32.3 percent guidance—it aims to earn a profit and sees
in New Mexico.4 ACCION’s other affiliates, microfinance as good business (Marguerite
including six in the United States, have not, Robinson 1992). Indeed, in 1995, the unit
however, achieved financial sustainability. desa program of the Bank Rakyat Indonesia
The largest impediments for U.S. programs earned $175 million in profits on their loans
appear to be a mixed record of repayment, to low-income households. More striking, the
and usury laws that prevent microfinance program’s repayment rates—and profits—on
institutions from charging interest rates that loans to poor households have exceeded
cover costs (Pham 1996). the performance of loans made to corporate
clients by other parts of the bank. A recent
c. Rakyat Indonesia calculation suggests that if the BRI unit desa
program did not have to cross-subsidize the
Like BancoSol, the Bank Rakyat Indonesia rest of the bank, they could have broken even
unit desa system is financially self-sufficient in 1995 while charging a nominal interest rate
and also lends to “better off” poor and of just 17.5 percent per year on loans (around
nonpoor households, with average loan sizes a 7 percent real rate; Jacob Yaron, McDonald
of $1007 during 1996. Unlike BancoSol and Benjamin, and Stephanie Charitonenko 1998).
Grameen, however, BRI does not use a group
lending mechanism. And, unlike nearly all d. Kredit Desa, Indonesia
other programs, the bank requires individual
borrowers to put up collateral, so the very The Bank Kredit Desa system (BKDs) in rural
poorest borrowers are excluded, but operations Indonesia, a sister institution to BRI, is much
remain small-scale and “collateral” is often less well-known. The program dates back to
defined loosely, allowing staff some discretion 1929, although much of the capital was wiped
to increase loan size for reliable borrowers out by the hyper-inflation of the middle 1960s
who may not be able to fully back loans with (Don Johnston 1996). Like BRI, loans are made
assets. Even in the wake of the recent financial to individuals and the operation is financially
crisis in Indonesia, repayment rates for BRI viable. At the end of 1994, the BKDs generated
were 97.8 percent in March 1998 (Paul profits of $4.73 million on $30 million of net
McGuire 1998). loans outstanding to 765,586 borrowers.5
page 18 On Micro-Enterprise
Like Grameen-style programs, the BKDs lend Catholic Relief Services, Freedom from
to the poorest households, and scale is small, Hunger, and Save the Children. FINCA
with an emphasis on petty traders and an programs alone serve nearly 90,000 clients
average loan size of $71 in 1994. The term of in countries as diverse as Peru, Haiti,
loans is generally 10–12 weeks with weekly Malawi, Uganda, and Kyrgyzstan, as well
repayment and interest of 10 percent on the as in Maryland, Virginia, and Washington,
principal. Christen et al. (1995) calculate that D.C. The NGOs help set up village financial
this translates to a 55 percent nominal annual institutions in partnership with local groups,
rate and a 46 percent real rate in 1993. Loan allowing substantial local autonomy over
losses in 1994 were just under 4 percent of loan decisions and management. Freedom
loans outstanding (Johnston 1996). from Hunger, for example, then facilitates
a relationship between the village banks
Also as in most microfinance programs, loans and local commercial banks with the aim to
do not require collateral. The innovation of create sustainable institutional structures.
the BKDs is to allocate funds through village-
level management commissions led by village The village banks tend to serve a poor,
heads. This works in Indonesia since there predominantly female clientele similar to that
is a clear system of authority that stretches served by the Grameen Bank. In the standard
from Jakarta down to the villages. The model, the sponsoring agency makes an
BKDs piggy-back on this structure, and the initial loan to the village bank and its 30–50
management commissions thus build in many members. Loans are then made to members,
of the advantages of group lending (most starting at around $50 with a four month
importantly, exploiting local information term, with subsequent loan sizes tied to the
and enforcement mechanisms) while amount that members have on deposit with
retaining an individual-lending approach. the bank (they must typically have saved at
The commissions are able to exclude the least 20 percent of the loan value). The initial
worst credit risks but appear to be relatively loan from the sponsoring agency is kept in
democratic in their allocations. Through an “external account,” and interest income is
the late 1990s, most BKDs have had excess used to cover costs. The deposits of members
capital for lending and hold balances in BRI are held in an “internal account” that can be
accounts. The BKDs are now supervised by drawn down as depositors need. The original
BRI, and successful BKD borrowers can aim was to build up internal accounts so that
graduate naturally to larger-scale lending from external funding could be withdrawn within
BRI units. three years, but in practice growing credit
demands and slow savings accumulation have
e. Village Banks limited those aspirations (Candace Nelson et
al. 1995).
Prospects for replicating the BKDs outside
of Indonesia are limited, however. A more Like the Indonesian BKDs, the village banks
promising, exportable village-based structure successfully harness local information and
is provided by the network of village banks peer pressure without using small groups
started in the mid-1980s in Latin America along BancoSol or Grameen lines. And, as
by John Hatch and his associates at the with the BKDs, sustainability is an aim, with
Foundation for International Community nominal interest rates as high as 4 percent
Assistance (FINCA). The village banking per month. Most village banks, however, still
model has now been replicated in over 3000 require substantial subsidies to cover capital
sites in 25 countries by NGOs like CARE, costs. Partly, this is because many village
On Micro-Enterprise page 19
banks have been set up in areas that are Peer Selection
particularly difficult to serve (e.g., rural Mali
and Burkina Faso), and the focus has been Group lending has many advantages,
on outreach rather than scale. Worldwide, the beginning with mitigation of problems created
number of clients is measured in the tens of by adverse selection. The key is that group-
thousands, rather than the millions served by lending schemes provide incentives for similar
the Grameen Bank and BRI. types to group together. Ghatak (1999) shows
how this sorting process can be instrumental
Microfinance Mechanisms in improving repayment rates, allowing
for lower interest rates, and raising social
The five programs above highlight the diversity welfare. His insight is that a group-lending
of approaches spawned by the common idea contract provides a way to price discriminate
of lending to low-income households. Group that is impossible with an individual-lending
lending has taken most of the spotlight, and the contract.7
idea has had immediate appeal for economic
theorists and for policymakers with a vision of To see this, imagine two types of potential
building programs around households’ “social” investors. Both types are risk neutral, but
assets, even when physical assets are few. But one type is “risky” and the other is “safe”;
its role has been exaggerated: group lending the risky type fails more often than the
is not the only mechanism that differentiates safe type, but the risky types have higher
microfinance contracts from standard loan returns when successful. The bank knows
contracts.6 The programs described above also the fraction of each type in the population,
use dynamic incentives, regular repayment but it is unable to determine which specific
schedules, and collateral substitutes to help investors are of which type. Investors,
maintain high repayment rates. Lending to though, have perfect information about
women can also be a benefit from a financial each other.
Both types want to invest in a project with
As shown in Table 1, just two of the five an uncertain outcome that requires one unit
use explicit group-lending contracts, but of capital. If they choose not to undertake
all lend in increasing amounts over time the project, they can earn wage income
(“progressive” lending), offer terms that are m. The risky investors have a probability
substantially better than alternative credit of success pr and net return Rr. The safe
sources, and cut off borrowers in default. investors have a probability of success ps
Most also require weekly or semi-weekly and net return Rs. When either type fails,
repayments, beginning soon after loan receipt. the return is zero. Returns are statistically
While we lack good evidence on the relative independent.
importance of these mechanisms, there is
increasing anecdotal evidence on limits to Risky types are less likely to be successful
group lending per se (e.g., the village studies (pr < ps), but they have higher returns when
from Bangladesh in Aminur Rahman 1998; they succeed. For simplicity, assume that
Imran Matin 1997; Woolcock 1999; Sanae the expected net returns are equal for both
Ito 1998; and Pankaj Jain 1996). This section safe and risky_ types: prRr = psRs = R. The
highlights what is known (or ought to be projects of both types are socially profitable
known) about the diversity of technologies in that expected returns net of the cost of
that underlie repayment rates and screening capital, ., exceed earnings from wage labor:
mechanisms. _ R -.> m.
page 20 On Micro-Enterprise
Table 1
Characteristics of Selected
Leading Micro-finance Programs

Bank Badan
Grameen Banco-
Rakyat Kredit FINCA
Bank, Sol,
Indonesia Desa, Village
Bangladesh Bolivia
Unit Desa Indonesia banks

2 million
Membership 2.4 million 81,503 765,586 89,986
16 million
Average loan balance $134 $909 $1007 $71 $191
4–12 3–24
Typical loan term 1 year 3 months 4 months
months months
Percent female members 95% 61% 23% — 95%
mostly mostly
Mostly rural? Urban? rural urban rural
rural rural
Group-lending contracts? yes yes no no no
Collateral required? no no yes no no
Voluntary savings emphasized? no yes yes no yes
Progressive lending? yes yes yes yes yes
Regular repayment schedules weekly flexible flexible flexible weekly
Target clients for lending poor non-poor poor poor
Currently financially
no yes yes yes no
Nominal interest rate on loans
20% 47.5– 50.5% 32–43% 55% 36–48%
(per year)
Annual consumer price
2.7% 12.4% 8.0% 8.0% __
inflation, 1996

Sources: Grameen Bank: through August 1998, www.grameen.com; loan size is from December 1996, calculated
by author. BancoSol: through December 1998, from Jean Steege, ACCION International, personal communication.
Interest rates include commission and are for loans denominated in bolivianos; base rates on dollar loans are
25–31%. BRI and BKD: through December 1994 (BKD) and December 1996 (BRI), from BRI annual data
and Don Johnston, personal communication. BRI interest rates are effective rates. FINCA: through July 1998,
www.villagebanking.org. Inflation rate: World Bank World Development Indicators 1998.

Neither type has assets to put up as collateral, the average probability of success in the
so the investors pay the bank nothing if the population. Since the bank can’t distinguish
projects fail. To break even, the bank must set between borrowers, all investors will face
the interest rate high enough to cover its per- interest rate, r. As a result, safe types have
loan capital cost, .. If both types borrow, the lower expected returns than risky types—since
equilibrium interest rate under competition R - rps < R - rpr —and the safe types will
will then be set so that rp – =., where p – is enter the market only if their expected net
On Micro-Enterprise page 21
return exceeds their fallback position: R - rps types are always smaller than the expected
> m. If the safe types enter, the risky types losses to safe types. Thus, there is no mutually
will too. beneficial way for risky and safe types to
group together. Group lending thus leads to
But the safe types will stay out of the_ market assortative matching: all types group with like
if R - rps < m, and only risky that case, the types (Gary Becker 1991).9
equilibrium interest rate will rise so that rpr
= .. Risky types drive out the safe. The risky How does this affect the functioning of the
types lose the implicit cross-subsidization credit market? Ghatak (1999) demonstrates
by the safe types, while the safe types lose that the group-lending contract provides
access to capital. This second-best scenario is a way to charge different effective fees
inefficient since only the risky types borrow, to risky and safe types—even though all
even though the safe types also have socially groups face exactly the same contract with
valuable projects. exactly the same nominal charges, r* and
c*. The result arises because risky types
Can a group-lending scheme improve on this will be teamed with other risky types, while
outcome? If it does, it must bring the safe safe types team with safe types. Risky
types back into the market. For simplicity, types then receive expected net returns_
consider groups of two people, with each of R - pr(r*+(1 - pr)c*), while safe types
group formed voluntarily. Individuals invest receive_ expected net returns of R - ps(r*+(1
independently, but the contract is written - ps)c*). Thus, a successful risky type is
to create joint liability. Imagine a contract more likely to have to pay the joint-liability
such that each borrower pays nothing if her payment c* than a successful safe type. If
project fails, and an amount r* if her project r* and c* are set appropriately, the group-
is successful. In addition, the successful lending contract can provide an effective
borrower pays a joint-liability payment c* way to price discriminate that is impossible
if the other member of the group fails.8 The under the standard second-best individual-
expected net return of a safe type teamed with lending contract. If ps = 0.9 and pr = 0.8, for
a _ risky type is then R - ps(r*+(1 - pr)c*), example, the safer types can expect to pay
with similar calculations for exclusively safe less than the riskier types as long as the joint
and exclusively risky groups. liability payment is set so that c*> 1.4r*.

Will the groups be homogeneous or mixed? Efficiency gains result if the difference is
Since safe types are always preferred as large enough to induce the safe types back
partners (since their probability of failure is into the market. When this happens, average
lower), the question becomes: will the risky repayment rates rise, and the bank can afford
types be willing to make a large enough to maintain a lower interest rate r* while not
transfer to the safe types such that both losing money.
risky and safe types do better together? By
comparing expected returns under alternative Peer Monitoring
scenarios, we can calculate that a safe type
will require a transfer of at least ps(ps - pr)c* Group lending may also provide benefits
to agree to form a partnership with a risky by inducing borrowers not to take risks that
type. Will risky types be willing to pay that undermine the bank’s profitability (Stiglitz
much? Their expected net gain from joining 1990; Besley and Coate 1995). This can be
with a safe type is as much as pr(ps - pr)c*. seen by slightly modifying the framework in
But since pr < ps, the expected gains to risky Section 3.1 to consider moral hazard. Instead,
page 22 On Micro-Enterprise
consider identical risk averse borrowers with between both doing the safe activity, yielding
utility functions u(x). each borrower expected utility of ps 2u(Rs
- r*) + ps(1 - ps)u(Rs - r*- c*), or doing the
Each borrower may do either risky or safe risky activity with expected utility pr 2u(Rr
activities, and each activity again requires the - r*) + pr(1 - pr)u(Rr - r*- c*). If the joint-
same capital cost. The bank, as above, has liability payment c* is set high enough,
imperfect information about borrowers—in borrowers will always choose to do the safe
particular, here it cannot tell whether the activity (Stiglitz 1990).
borrowers have done the safe or risky activity.
Moral hazard is thus a prime concern. When This is good for the bank, but it saddles
projects fail, borrowers have a return of zero, borrowers with extra risk. The bank, though,
and a borrower’s utility level when projects knows borrowers will now do the safe activity,
fail is normalized to zero as well. and it earns extra income from the joint-
liability payments. The bank can thus afford to
We start with the standard individual-lending lower the interest rate to offset the burden.
contract. Borrowers either have expected
utility psu(Rs - r) or pru(Rr - r), depending on Thus, through exploiting the ability of
whether they do the safe or risky activity. If neighbors to enforce contracts and monitor
everyone did the safe activity, the bank could each other—even when the bank can do
charge an interest rate of r = ./ps and break neither—the group-lending contract again
even. But, since the bank cannot see which offers a way to lower equilibrium interest
activity is chosen (and thus cannot contract on rates, raise expected utility, and raise expected
it), borrowers may fare better doing the risky repayment rates.
activity and getting expected utility E[Usr]
= pru(Rr -./ps). The bank then loses money. Dynamic Incentives
Thus, the bank raises interest rates to r =
./pr. Now the borrower gets expected utility A third mechanism for securing high
of E[Urr] = pru(Rr -./pr), and she is clearly repayment rates with high monitoring costs
worse off than with a lower interest rate. In involves exploiting dynamic incentives
fact, if the borrower could somehow commit (Besley 1995, p. 2187). Programs typically
to doing the safe activity, she could be better begin by lending just small amounts and
off—with expected utility E[Uss] = psu(Rs then increasing loan size upon satisfactory
-./ps). Thus the borrower prefers E[Usr] to repayment. The repeated nature of the
E[Uss] to E[Urr], but the information problem interactions—and the credible threat to
and inability to commit means that she always cut off any future lending when loans are
gets the worst outcome, E[Urr]. not repaid—can be exploited to overcome
information problems and improve efficiency,
How can a group-lending contract improve whether lending is group-based or individual-
matters? The key is that it can create a based.10
mechanism that gives borrowers an incentive
to choose the safe activity. Again consider Incentives are enhanced further if borrowers
groups of two borrowers and group-lending can anticipate a stream of increasingly larger
contracts like those in Section 3.1 above. The loans. (Hulme and Mosley 1996 term this
borrowers in each group have the ability to “progressive lending,” and the ACCION
enforce contracts between each other, and network calls it “step lending.”) As above,
they jointly decide which types of activities keeping interest rates relatively low is critical,
to undertake. Now their problem is to choose since the advantage of microfinance programs
On Micro-Enterprise page 23
lies in their offering services at rates that borrowers with small loans at the start.
are more attractive than competitors’ rates. This feature allows lenders to develop
Thus, the Bank Rakyat Indonesia (BRI) and relationships with clients over time and
BancoSol charge high rates, but they keep to screen out the worst prospects before
levels well below rates that moneylenders expanding loan scale (Parikshit Ghosh and
traditionally charge. Debraj Ray 1997).

However, competition will diminish the Dynamic incentives can also help to
power of the dynamic incentives against explain advantages found in lending to
moral hazard—a problem that both the women. Credit programs like those of the
Bank Rakyat Indonesia and BancoSol are Grameen Bank and the Bangladesh Rural
starting to feel as other commercial banks Advancement Committee (BRAC) did not
see the potential profitability of their model. begin with a focus on women. In 1980–83,
In practice, though, real competition has yet women made up 39 percent and 34 percent
to be felt by most microfinance institutions of their respective memberships, but by
(perhaps because so few are actually turning 1991–92, BRAC’s membership was 74
a profit). As competition grows, the need for a percent female and Grameen’s was 94
centralized credit rating agency will also grow. percent female (Anne Marie Goetz and Rina
Sen Gupta 1995). As Table 2 shows, many
Dynamic incentives will also work better in other programs also focus on lending to
areas with relatively low mobility. In urban women, and it appears to confer financial
areas, for example, where households come advantages on the programs. At Grameen,
and go, it may not be easy to catch defaulters for example, 15.3 percent of male borrowers
who move across town and start borrowing were “struggling” in 1991 (i.e., missing
again with a clean slate at a different branch some payments before the final due date)
or program. BRI has faced greater trouble while this was true for just 1.3 percent of
securing repayments in their urban programs women (Khandker, Baqui Khalily, and
than in their rural ones, which may be due to Zahed Kahn 1995).
greater urban mobility.
The decision to focus on women has some
Relying on dynamic incentives also runs obvious advantages. The lower mobility
into problems common to all finite repeated of women may be a plus where ex post
games. If the lending relationship has a moral hazard is a problem (i.e., where
clear end, borrowers have incentives to there is a fear that clients will “take the
default in the final period. Anticipating that, money and run”). Also, where women have
the lender will not lend in the final period, fewer alternative borrowing possibilities
giving borrowers incentives to default in than men, dynamic incentives will be
the penultimate period—and so forth until heightened.11
the entire mechanism unravels. Thus, unless
there is substantial uncertainty about the end
Thus, ironically, the financial success
date—or if “graduation” from one program of many programs with a focus on
to the next is well-established (ad infinitum),
women may spring partly from the lack
dynamic incentives have limited scope on of economic access of women, while, at
their own. the same time, promotion of economic
access is a principal social objective (Syed
One quite different advantage of Hashemi, Sidney Ruth Schuler, and Ann P.
progressive lending is the ability to test Riley 1996).
page 24 On Micro-Enterprise
Table 2
Performance Indicators of Micro-finance Programs

Avg. loan as Average Average

Average loan
Observations % of GNP operational financial
Balance ($)
per capita sustainability sustainability
All microfinance 72 415 34 105 83
Fully sustainable 34 428 39 139 113
Lending method
Individual lending 30 842 76 120 92
Solidarity groups 20 451 35 103 89
Village bank 22 94 11 91 69
Target Group
Low end 37 133 13 88 72
Broad 28 564 48 122 100
High end 7 2971 359 121 76
3 to 6 years 15 301 44 98 84
7 or more years 40 374 27 123 98

Avg. return Avg. percent of Avg. percent Avg. number of

on equity portfolio at risk female clients active borrowers
All microfinance
–8.5 3.3 65 9,035
Fully sustainable 9.3 2.6 61 12,926
Lending method
Individual lending –5.0 3.1 53 15,226
Solidarity groups –3.0 4.1 49 7,252
Village bank –17.4 2.8 92 7,833
Target Group
Low end –16.2 3.8 74 7,953
Broad 1.2 3.0 60 12,282
High end –6.2 1.9 34 1,891
3 to 6 years –6.8 2.2 71 9,921
7 or more years –2.4 4.1 63 16,557

Source: Statistical appendix to MicroBanking Bulletin (1998). Village banks have a “B” data quality; all others
are graded “A”. Portfolio at risk is the amount in arrears for 90 days or more as a percentage of the loan portfolio.
Averages exclude data for the top and bottom deciles.

On Micro-Enterprise page 25
Regular Repayment Schedules that include some of the poorest regions of
South Asia and Africa.
One of the least remarked upon—but most
unusual—features of most microfinance Collateral Substitutes
redit contracts is that repayments must start
nearly immediately after disbursement. In a While few programs require collateral, many
traditional loan contract, the borrower gets have substitutes. For example, programs
the money, invests it, and then repays in full following the Grameen model require that
with interest at the end of the term. But at borrowers contribute to an “emergency
Grameen-style banks, terms for a yearlong fund” in the amount of 0.5 percent of every
loan are likely to be determined by adding unit borrowed (beyond a given scale). The
up the principal and interest due in total, emergency fund provides insurance in cases
dividing by 50, and starting weekly collections of default, death, disability, etc., in amounts
a couple of weeks after the disbursement. proportional to the length of membership. An
Programs like BancoSol and BRI tend to be additional 5 percent of the loan is taken out
more flexible in the formula, but even they do as a “group tax” that goes into a group fund
not stray far from the idea of collecting regular account. Up to half of the fund can be used
repayments in small amounts. by group members (with unanimous consent).
Typically, it is disbursed among the group
The advantages are several. Regular as zero-interest loans with fixed terms. Until
repayment schedules screen out undisciplined October 1995, Grameen Bank members could
borrowers. They give early warning to loan not withdraw these funds from the bank, even
officers and peer group members about upon leaving. These “forced savings” can now
emerging problems. be withdrawn upon leaving, but only after
the banks have taken out what they are owed.
And they allow the bank to get hold of cash Thus, in effect, the funds serve as a form of
flows before they are consumed or otherwise partial collateral.
diverted, a point developed by Stuart
Rutherford (1998). The Bank Rakyat Indonesia’s unit desa
program is one of the few programs to require
More striking, because the repayment collateral explicitly. Its advocates, however,
process begins before investments bear emphasize instead the role of dynamic
fruit, weekly repayments necessitate that incentives in generating repayments (Richard
the household has an additional income Patten and Jay Rosengard 1991; Robinson
source on which to rely. Thus, insisting on 1992). It is impossible, though, to determine
weekly repayments means that the bank easily which incentive mechanism is most
is effectively lending partly against the important in driving repayment rates. While
household’s steady, diversified income bank officials point out that collateral is
stream, not just the risky project. This almost never collected, this does not signal
confers advantages for the bank and for its lack of importance as an incentive device.
diversified households. But it means that If the threat of collection is believable, there
microfinance has yet to make real inroads should be few instances when collateral is
in areas focused sharply on highly seasonal actually collected.
occupations like agricultural cultivation.
Seasonality thus poses one of the largest BancoSol also stresses the role of solidarity
challenges to the spread of microfinance in groups in assuring repayments, but as its
areas centered on rainfed agriculture, areas clients have prospered at varying rates,
page 26 On Micro-Enterprise
lending approaches have diversified as well. of expanding access to increasing numbers of
As noted in Section 2.2, by the end of 1998, low-income clients. Second, sustainability
28 percent of its portfolio had some kind of provides the means to expand and maintain
guarantee beyond the solidarity group. outreach. These concepts underpin the guiding
principles described here.

V. Guiding Principles for Different types of micro and small

Selecting and Supporting enterprise clients have different
Intermediaries characteristics and demand different
services. Hence it is desirable to encourage
These guiding principles are joint product a range of institutions that use specialized
of the Donors’ Working Group on Financial methods to serve their particular market
Sector Development and the Committee niches. These can include commercial
of Donor Agencies for Small Enterprise and development banks, credit unions,
Development of the World Bank. It was mutual or community banks, non-
inspired by and is largely consistent with governmental organizations (NGOs),
the recommended standards for support set finance companies, cooperatives, savings
out by a UN expert group of leading small and credit associations, and other
and microenterprise practitioners convened specialized intermediaries. At the same
by Women’s World Banking in January time, however, this document is based on
1994. The donor committees adopted the the premise that fundamental principles of
principles in their current form in June 1995, finance apply widely and must be observed
following consultations with key donor by all institutions if they are to succeed.
agencies involved in small and microfinance. Moreover, donors must design their support
This document is intended for use by mechanisms in ways that are consistent with
project officers in donor and implementing best international practices and long-run
organizations, managers, and policy makers. development of a sound financial system.

The purpose of these principles is to establish This statement of guiding principles first
common standards for donor agencies to identifies characteristics donors should seek
apply in supporting broader access to financial in selecting institutions to support. It then
services for micro and small enterprises12. describes appropriate forms of donor support.
Such enterprises have historically lacked An annex lists reporting standards on outreach
access to the formal financial system, but the and financial performance.
growing success of many institutions provides
confidence that access can be provided
sustainably in many settings. It has now Institutional Performance Standards
become possible to identify and agree upon and Plans
the basic principles that support successful
micro-level finance, so that donors can work Intermediaries seeking support should be able
in concert to ensure that lessons of success are
to demonstrate the following characteristics,
translated to the institutions they support. either in current operations or through credible
plans underpinned by concrete measures.
The framework for donor support to micro Since institutions are at different stages of
and small enterprise finance centers on development, it may be appropriate in some
two equally important and complementary cases to adopt modified standards for limited
objectives. First, outreach embodies the aim support to new or transforming institutions.
On Micro-Enterprise page 27
Institutional Strengths be exclusive, as mainstream institutions
such as banks are encouraged to become
1. Institutional culture, structures, providers, but it must entail a distinct
capacities, and operating systems that commitment to reaching the poor.
can support sustained service delivery
to a significant and growing number 2. Client-appropriate lending: for
of low income clients. Requirements example, quick, simple and convenient
include a sound governing structure, access to small loans, often short-term,
freedom from political interference, that are renewed or increased based on
good fit to local context, competent excellent repayments. Use of collateral
and stable staff, a strong business substitutes (e.g., peer guarantees or
plan for expansion and sustainability, repayment incentives) or alternative
and mission and vision which create forms of collateral to motivate repayment.
a sense of purpose, ownership, and Emphasis on character-based lending for
accountability. smaller loans, with simple cashflow and
project appraisal for larger and longer term
2. Accurate management information loans.
systems that are actively used to make
decisions, motivate performance and 3. Savings services: savings mobilization
provide accountability for funds. Such services, where legally possible and
systems are essential for effective and economically feasible, that facilitate
efficient management. small deposits, convenient collections,
safety, and ready access to funds either
3. Operations that manage small independently or with another institution.
transactions efficiently, with high
productivity, as measured by variables 4. Growth of outreach: significant progress
such as loans per staff and operating in expanding client reach and market
costs as a percentage of average annual penetration, demonstrating both strong
portfolio (while maintaining portfolio client response to services offered
soundness). and competence in service delivery
4. Meaningful, transparent financial
reporting that conforms to international Financial Performance
standards and allows prospective funders
to evaluate performance adequately. At a 1. Appropriate pricing policies: offering
minimum, the raw data listed in the Annex loans at rates sufficient eventually to
should be reported, and institutions should cover the full costs of efficient lending
regularly monitor financial condition on a sustainable basis (after a reasonable
using appropriate financial ratios derived start-up period), recognizing that poor
from such data. entrepreneurs are able and willing to
pay what it costs an efficient lender to
Quality of Services and Outreach provide sustainable financial services.
Interest charges by the retail unit should
1. Focus on the poor: evidence of service be set to cover the costs of capital (at the
to low-income clients, women and men, opportunity cost, including inflation),
especially clients lacking access to other administration, loan losses and a minimum
financial institutions. The focus need not return on equity13.
page 28 On Micro-Enterprise
2. Portfolio quality: maintaining a portfolio Strategies for Donor Support
with arrears low enough that late payments
and defaults do not threaten the ongoing Funding based on large, ongoing subsidies
viability of the institution. For example, with a charity rationale has failed. Such
organizations with loans in arrears programs have drained resources without
over 30 days below 10 percent of loans becoming sustainable, and have contributed
outstanding and annual loan losses under to the mistaken notion that the poor are
4 percent of loans outstanding satisfy this unbankable. Funders should provide financial
condition. and other support in such a way to ensure the
quality of services provided and the widest
3. Self-sufficiency: steadily reducing outreach, as well as to foster the movement
dependence on subsidies in order to to scale, financial self-sufficiency, and
move toward financial self-sufficiency. independence from donor support, taking
Achieving operational efficiency into account the particular characteristics
[defined as covering all administrative of different types of institutions. Donors
costs and loan losses with client should ensure that institutions, in their effort
revenues] within a reasonable time to become sustainable, maintain a focus on
period, given local conditions. offering appropriate services to the poor.
International experience shows that
successful intermediaries have achieved Appropriate Uses for Grants
operational efficiency in three to seven
years, and financial self-sufficiency 1. Institutional development. Support for
[defined as covering all administrative institutional development is appropriate
costs, loan losses, and financing costs at all stages of an institution’s life, and
at non-subsidized rates from client for a wide range of institutions, although
revenues] within five to ten years. the nature and extent of such support
should evolve with the institution. Such
4. Movement toward financial support should become more selective, as
independence: building a solid and institutions become able to meet more of
growing funding base with clear their organizational development needs
business plans, backed by operational from within. It should also become more
capacities, that lead to mobilization of specialized, as institutions tackle more
commercial funds from depositors and the difficult problems.
financial system, and eventually to full
independence from donor support. 2. Capitalization. Grants for equity are
of strategic importance in enabling
Financial performance standards apply only to organizations to build a capital base.
activities that are an integral part of providing Capitalization can be used to generate
financial services. If programs also provide investment income, build the loan
non-financial services, such as business portfolio, and leverage funds from
advisory services, health, or education, they local banks. One of the key purposes of
should account for such services separately providing capital funding is to enable
from financial services. Standards for financial institutions to mix costs of grant funds
self-sufficiency do not apply to such services, with commercial sources during the period
and defining appropriate standards for non- it takes to build efficient operations and
financial services is beyond the scope of this scale. Externally-financed capitalization
document. should be used as a catalyst and
On Micro-Enterprise page 29
complement to domestic mobilization of system. Donors can act as catalysts to effect
funds by local institutions. Grant equity this transition through means such as:
contributions can also help institutions
seeking to become formal financial 1. Investor equity, from both official and
intermediaries to meet minimum capital private sources. Donor support can help
requirements. leverage private investment.

3. Operating losses. Donors should 2. Second-tier operations, which raise funds

avoid covering operating losses except from commercial sources and on-lend to
during a clear, time-limited start-up microenterprise finance institutions.
or expansion phase. By the nature of
the small loan business every program 3. Partial guarantees of loans made by
will take some time to reach a break commercial banks to NGOs.
even point. Donors should be willing
to provide support during that time. Coherence of Donor Policies
Afterwards, however, such support
becomes counterproductive. Institutions following sound principles for
sustainability must not be undermined by
4. Fixed assets. Donors may wish to others providing competing services below
support purchase of fixed assets, such as cost or in ways that cannot be sustained.
computers, vehicles or premises. Such When providing subsidies (grant or loan)
funding may be seen as contributions to to small and microenterprise institutions,
the equity base of the institution. donors should ensure that they coordinate
that support with other funders, such that
Appropriate Uses of Loans institutions are given clear incentives to
become financially viable. In particular,
Donor support through loans is appropriate donors need to consult each other regarding
for lending-based institutions that meet appropriate interest rates and other terms
performance standards. However, loan capital on which assistance to any given institution
from local and commercial sources should is supplied. Donors should also coordinate
be sought as early as possible, even at start- institutional support with sectoral policies
up. Care should be taken to avoid burdening such that financial institutions, including
young institutions with foreign exchange risk informal and semi-formal sectors, find
in loans denominated in foreign currency, enabling conditions for institutional
unless adequate precautions are taken. development and growth.
Donors are also advised to be careful not to
undermine savings mobilization efforts of Annex: Minimum Reporting
savings-based institutions, such as savings and Information14
credit associations, by making loans available
to them below the cost of mobilizing funds Donors should require regular reporting
locally. on institutional performance and should
base funding decisions on achievement
Commercial Sourcing of Funds of performance targets. The following
tables cover the minimum raw data that
The transition to fully commercial sources should be reported, but do not include
of funding requires special forms of support analytic indicators, such as financial ratios
that help introduce institutions to the financial or adjustments for subsidy or inflation.
page 30 On Micro-Enterprise
The intent is to ensure the quality and comparability of data so that financial analysis can
be conducted in a way that both donors and programs can interpret. Meaningful analysis
requires a firm base of data. These indicators are intended to furnish such a base.

Portfolio and Outreach

1. Number and amount of loans outstanding at beginning and
end of reporting period
2. Number and amount of loans disbursed during reporting
3. Number and amount of small saver deposit accounts at
beginning and end of reporting period. Show compulsory
and voluntary savings separately15.
4. Arrears (on a loans outstanding basis). Unpaid balance of
loans with payments overdue more than 30 days. There
should also be an aging of arrears report, covering, for
example, 60 and 90 days and one year.
5. Percentage of female clients.
6. Number of staff (only those involved with savings and credit

Interest Rate Policy

7. Effective annual interest rate paid by clients (incorporating
all required fees, and calculated on a declining balance
basis), both nominal and real. Effective rate paid to savers.
8. Local annualized interbank lending rate and 90-day CD rate.
9. Local annual inflation rate (give source).

Income and Expense Information

10. Interest and fee income from loans (excluding accrued
uncollected interest on non-performing loans)
11. Income from investments
12. Other operating income from financial services
13. Total income
14. Staff expenses (salaries and benefits)16
15. Other administrative expenses (includes depreciation)
16. Loan losses. All loans over one year in arrears should be
written off, as far as local rules permit. Institutions should
describe their criteria in recording loan losses.
17. Interest and fee expenses (itemized by source of funds)
18. Total expenses
19. Net operating profit
Other Income and Expenses
20. Non-operating income (if any)
21. Non-operating expenses (if any)
22. Donations:
22a. For operating expenses
22b. Capital contribution (identify purpose, e.g., loan fund,
equity, fixed assets)
On Micro-Enterprise page 31
Balance Sheet Information
23. Cash on hand and in banks
24. Mandatory reserves
25. Short term investments
26. Loans outstanding (must match indicator 1, above)
27. Less: Loan loss provisions
28. Net portfolio outstanding
29. Long term investments
30. Fixed assets (after depreciation)
31. Other assets
32. Total Assets
33. Savings and time deposits from target group clients
34. Other deposits
35. Loans from central bank
36. Loans from other banks
37. Other short term liabilities
38. Other long term liabilities
39. Paid-in equity (shareholders)
40. Donated equity
41. Retained earnings
42. Other capital accounts
43. Current year profit or loss
44. Total Liabilities and Equity

Analytic Performance Indicators analytic indicators to monitor the institution’s

financial condition.
The items listed here provide information in
a raw form. In order to evaluate and compare VI. Micro-Enterprise
performance, the raw data will have to be Development in the
analyzed, through computation of ratios and Philippines
other indicators. Informed opinions differ
on which indicators are most important. The following is the Interim Evaluation
Therefore, this document makes no attempt to Executive Summary of the Rural Micro-
specify those indicators. Rather, it provides for Enterprise Finance Project implemented by
an information base to allow the calculation the Government of the Philippines.
of a range of key ratios. Examples include:
net profit, average loan and savings account The Rural Micro-enterprise Finance Project
size, adjustments for subsidy and inflation, (RMFP) was supported by the Government
operational and full self-sufficiency, return of The Philippines through the Department
on assets and equity, administrative costs as of Finance (DoF) and Land Bank of the
a percentage of portfolio (required spread), Philippines (LBP) and executed by the
portfolio yield, and staff productivity. People’s Credit and Finance Corporation
(PCFC). Of the total cost of US$ 65
It is expected that every institution and the million, Asian Development Bank (ADB)
donors that support it will actively use such and International Fund for Agricultural
page 32 On Micro-Enterprise
Development (IFAD) financed US$ 20 Project objectives and target group. The
million and 14.7 million, respectively. The Project aimed at poverty reduction, the
project became effective in April 1996; all creation of employment opportunities and the
funds were disbursed by June 2002; the enhancement of rural incomes of the bottom
closing date was extended from July to 30 percent of the rural population, i.e., the
December 2002 in order to process all the poorest of the poor. The project supported
withdrawal applications. two components: an MFI-support component
comprising the establishment and strengthening
Evaluation mission. For the preparation of Grameen replicators, through an institutional
of a second project phase requested by the development loan of US$ 7.4 million; and
Government of the Philippines (GOP), ADB a credit component of US$ 34.1 million for
fielded a mission in mid-2002. IFAD carried on-lending to final borrowers through NGOs,
out an interim evaluation in July 2002. The cooperatives and local banks. By supporting
evaluation follows the standard approach of conduit institutions that employ the GBA,
the Office of Evaluation and Studies (OE) the project sought to provide 300,000 people,
and its new impact evaluation methodological 90% of them women, with access to credit
framework. Preliminary conclusions were for income and employment generating
presented during a wrap-up meeting on 1 microenterprise activities. Emphasis was to
August 2002 and finalized in a workshop on be given to the 20 poorest provinces. RMFP’s
24 January 2003. target impact was to increase rural family
incomes by at least 40%.
IMPLEMENTATION RESULTS Implementation partners and arrangements.
At the national level, three agencies were
The project rationale was based on the involved in project implementation: DoF, LBP
assumption that “access by the poor to and PCFC. DoF, on behalf of the Government
adequate and appropriate financial services of the Philippines, borrowed from ADB and
is a critical factor in helping to break the IFAD, assumed the foreign exchange risk
poverty cycle” and that such services and on-lent to LBP. LBP, an agricultural
had been successfully provided in The development bank created in 1963 to support
Philippines through the Grameen Bank agrarian reforms, was the official depository
Approach (GBA), with “significant income, and trustee bank of the RMFP funds. It would
employment and other social benefits.” act as a fund manager for PCFC, provide
At the same time, the Agricultural Credit transfer services, and assist in monitoring
Policy Council, a government agency and auditing. PCFC, the executing agency
which had replicated Grameen banking of the project, was established in 1995 as the
in The Philippines since 1990, had found country’s bank for the poor, with the mandate
that the costs of the donor-driven program of providing credit through conduit partners
were very high and outreach was low. to the rural population below the poverty
Despite warnings of IFAD team members level; its main business has been RMFP. At
at earlier missions, Grameen banking, with the local level, the Grameen Bank Approach
its emphasis on credit channelling through Replicators (GBARs) provide loans to the
joint liability groups of five women was final borrowers at their own risk and at interest
selected as the sole methodology. This rates of their own, but not lower than 24% per
made RMFP a risky project – yet the actual annum. RMFP was to be implemented with full
results have exceeded expectations by a recovery of costs and as a profitable activity for
wide margin. PCFC and the participating GBARs.
On Micro-Enterprise page 33
Changes in microfinance policy and selling factors. In the process, increasing
institutions. The project has profited from numbers of MFIs have adopted GBA and
improved macroeconomic stability, a legal adhered to the solidarity group approach of
framework conducive to the development of financial intermediation. But they have not
a differentiated rural banking infrastructure, done so out of compliance with government
and favourable attitudes to microfinance instructions, but because of the tested and
among the financial authorities. Issuance of proven advantages of that approach: credit
a national microfinance strategy in 1997, discipline and profitability. In the process and
recognition of microfinance in the Banking in contrast to the original focus on NGOs and
Act of 2000, exemption from BSP regulation cooperatives, an increasing number of banks
regarding unsecured loans and the lifting of – particularly rural banks - have turned into
the moratorium on branching out for banks GBARs, accounting for 54% of all actively
engaged in microfinance in 1/2001 have involved replicators, 57% of clients and 61.5%
created powerful incentives for rural banks of loans outstanding.
to engage in GBA as a commercial activity
with rapidly increasing outreach to the poor. Compared with targets. The project has
This has led to a shift in project emphasis exceeded all key performance targets such
from NGOs and cooperatives to rural banks. as 435,654 micro-enterprise clients (only
Based on the approval in July 2002 by the cumulative figures are available!) with
National Credit Council of a policy document increased employment (target 300,000);
on the regulation of microfinance, steps are 98% of which are women (target 90%),
now being taken to bring cooperatives under establishment or expansion of 92,504 self-
effective supervision, to transform deposit- help groups (target 50,000) in 14,828 centres
taking NGOs into banks, and to establish a and 447 branches (target 305); establishment
credit rating agency for microfinance. of three training centres and an additional
three in process (target three); 10.8% savings
Design changes. A prominent feature of mobilisation in relation to loan releases
the project has been its ability to learn from (target 10%); and disbursement of US$
experience and leave leeway to participating 34.1 million investment loan and US$ 7.4
institutions for experimentation and million institutional loan (fully complied
adjustment. Some freedom to modify the with). Recorded collection rates are high (on
design in line with lessons learned has been average, 98% from MFIs to PCFC, 96.2%
important to allow the methodology to be and past due rate 6% from final borrowers to
adapted to the organisational culture of each MFIs).
MFI and the characteristics of local clients.
In the process, GBA has moved from creed to Training, MIS and institutional
financial product, adopted by rural banks in development. Most training has been
increasing numbers. Among the modifications effectively provided by two MFIs, CARD,
are product diversity, variability in interest NWTF and by PCFC. These are now joined
rates and loan terms, group size and rules of spontaneously by increasing numbers of rural
loan release, meeting cycle, and the role of banks and other institutions providing training
groups vs. centres. and exposure opportunities to new replicators.
Training in microenterprise and social
Implementation results. PCFC has development to SHGs has been scanty; in a
successfully marketed microfinance for the number of cases, its place has been taken by
poor through GBA, using both liquidity and mutual monitoring, which could benefit from
training in the methodology as the two crucial organised strengthening. With ADB technical
page 34 On Micro-Enterprise
assistance, a MIS has been installed in a time period; nor do they take inflation into
number of institutions, but is not found useful account.
by most of them, as it is not integrated into
regular banking software. Its privatisation, Assets. Increase in assets (average of 25%
for which no pronounced demand was found from commencement) is less pronounced than
during the field visits, is still under discussion. increase in income. Assets are also used as
savings and may be sold as income levelling
RURAL POVERTY IMPACT strategies, particularly livestock. Assets are
also kept as loan protection insurance, to be
Targeting. As per the loan agreement, sold to repay the loan in times of hardship.
PCFC requires MFIs to conduct a means Increase in assets is more pronounced at
test or client-profiling index of each sub- higher loan cycles, but cannot be attributed
client to determine eligibility. The rigorous solely to the project. Growth in savings and
GBA discipline (i.e., small loan amounts, diversification of saving strategies within the
regular weekly meetings and instalments, household is an important impact, not only in
joint liability, strict centre discipline and improved asset base but also in terms of asset
mandatory savings) has shown to favour poor management. There were numerous examples
clients and serious microentrepreneurs. In where borrowers had been able to sustain
terms of leakage, it is estimated that about their market fluctuations due to the buffer of
20% of clients were above the means test accumulated savings. During the first phase
criteria at the time of joining the program of the project, the overall volume of savings
(yet they belonged to the non-poor vulnerable mobilisation has been limited. Some MFIs,
population). In actual fact, the MFIs have particularly cooperatives, have been more
mostly targeted the enterprising poor around effective in encouraging voluntary savings
the basic food threshold although, in several and financial asset growth – as proof that the
instances, the poorest households (chronically poor can save. It is important that a savings
below the food threshold) have been served. habit has been instilled, with the prospect of
Out of the 23 MFIs interviewed by the continual saving over time.
IFAD mission, only two rural banks and
one cooperative (and none of the 4 NGOs Micro-enterprise development. The
surveyed) reported concentrating on the “ultra project followed a minimalist approach
poor” as their main clients. to microenterprise development, focusing
mainly on finance. There was no provision for
Income. Impact assessments of different non-financial services and market linkages.
origins have shown that there are increases in The increased access to microfinance has
income, assets and employment generation. A stimulated microenterprise growth and
28% income differential between borrowers diversification. An estimated 75% of centres
and non-borrowers was identified by the with borrowers on the third loan cycle engage
ADB impact survey. A steadily rising rate of in three or more income generating activities.
income increase was noted with successive This is a major risk minimisation strategy
loan cycles in most households. However, for the household and greatly contributes to
in the absence of a baseline survey and food and livelihood security. It was found
given the methodological problems with that seasonality has a major effect on the
income data in the informal sector, these capability of the borrowers to repay their
data are of limited validity. Moreover, such loans but that by diversification of their
data are rarely presented on the basis of household livelihood portfolio, household
annual increases or for a precisely specified income fluctuations can be levelled. Further
On Micro-Enterprise page 35
graduation of microenterprise into small on viability, sustainability and outreach.
enterprises calls for graduation to individual Successful replicators share the original core
loans, further training and access to medium- social capital of Grameen banking:
term credit (the current framework provides
short-term credit only). • High moral commitment of leaders
based on values enforced through
Employment Generation. The increase in training;
employment was found to be significant.
According to the ADB survey, 8% of the • Peer selection and peer
responding members employed on average enforcement, precluding adverse
three workers from outside their household selection and moral hazard;
(the survey does not provide information on
household members working in the enterprises • Credit discipline, but have added
in addition to the owner-borrower). 40% of new social capital dimensions
these workers were hired full time, 38% part- of Grameen banking in the
time, 6% irregularly and 17% seasonally. Philippines;

Empowerment of women. 98% of GBAR • Bank status (rural);

clients are women and are to some extent
creators of GBA social capital in the • Deposit mobilisation through
Philippines. All positive and negative impact differentiated products;
dimensions presented concern women and
their families. This includes the recognised • Differentiated loan and insurance
benefits and risks of microentrepreneurship. products which cover all costs and
Women face additional risks of disapproval yield a profit; and
of husband and lack of time to attend
weekly meetings. These are main reasons • Client differentiation through
for dropping out. However, among those larger-size loan and deposit
who stay on, there is evidence of women products for poor and non-poor
having greater determination of their own members (generating additional
lives and livelihoods, plus stronger family loan capital to serve the poor) and
bonds through joint economic activities, graduation opportunities for the
shared household chores and social benefits. poor.
Ultimately, it is women, as much as PCFC
and MFIs that made this project a successful Food security. Profits from the enterprise
experience. are spent for daily household expenses. The
impact survey did not collect anthropometric
Social capital. The project has substantially data on children but shows that, on average,
contributed to the formation of social capital, a client-household spends P760 (+23%)
embedded in Grameen banking in The more on food per month than a non-client
Philippines, as the shared normative system household.
of a group or organisation which shapes
the capacity of people to work together and Policies and the regulatory framework.
produce results according to the group’s PCFC has been actively involved in the
or organisation’s purpose. Most GBARs policy dialogue on microfinance legislation
involved have passed the “performance test” and banking with the poor. To a considerable
for the worth of social capital in MFIs, based extent, the issuance of a national microfinance
page 36 On Micro-Enterprise
strategy, its recognition in the Banking Act of expansion strategy across the
2000, the opening of a central bank window country;
for microfinance, the lifting of the moratorium
on branching out for banks engaged in • Enterprise Bank, with 14,500
microfinance, their exemption from regulation Grameen borrowers (69%) out
regarding unsecured loans and the resulting of a total of 21,000, which as
expansion the branch network of some rural also experimented with USAID-
banks are due to PCFC’s active participation supported individual lending
and the weight of the underlying ADB/IFAD (MABS), but finds GBA far more
program. This also includes the recent increase profitable and its growth potential
in numbers of NGOs establishing banks. exponential;

Institutions. The promotion of Grameen • New Rural Bank of Victorias,

banking has enabled MFIs to significantly which abandoned the GBAR as
expand their operations and reach out to a failure and found individual
the poor. The early emphasis on NGOs and lending under MABS profitable,
cooperatives has shifted to rural, cooperative but with an outreach of a mere 342;
banks and thrift banks. Of the total number
of 189 GBARs which joined the project, • People’s Bank for Caraga, with
162 were actively involved by June 2002. 6,422 Grameen borrowers (56%)
Formal financial institutions account for 56% out of a total of 11,543, originating
of actively participating GBARs, 58% of from a failed NGO and a distressed
clients and 63% of PCFC loans outstanding. rural bank, now a new rural bank
In terms of repayment performance, with with broad ownership deriving
a global average past-due rate of 6% and a most of its profit from Grameen
collection rate of 96% across all GBARs, banking;
rural banks and thrift banks did best,
cooperative banks worst, with NGOs and • ASKI, an NGO with 10,626
cooperatives in between. The mission visited Grameen borrowers (79%) out of a
23 MFIs and three PCFC retail sites. Among total of 13,729, which almost failed
them, the rural banks are emerging as GBA with both group and individual
market leaders, including NGOs which have lending, but is now recovering,
established rural banks. Each MFI has its though still in the red, and will turn
own story to tell, among them: over its portfolio to a new thrift
bank in co-ownership with five
• CARD, with 56,400 Grameen other NGOs;
borrowers, the first NGO
establishing a rural bank and a • Cebu People’s Multi-purpose
seminal trainer of new entrants; Cooperative, which has graduated,
since 1997, some 55% out of 3,840
• Producers Rural Bank Corporation, Grameen clients to individual
with 12,500 GBA borrowers (72%) borrowers with full cooperative
out of a total of 17,300, which membership;
found GBA highly profitable and
proposes a Grameen franchising/ • Lagawe Highlands Rural Bank,
Build-Operate -Transfer business established by an NGO in 2000,
on a commercial basis as a rapid with 1,078 Grameen and 673
On Micro-Enterprise page 37
individual borrowers, which is highly profitable and produce a
struggling to survive - calling into share in profit far in excess of its
question the suitability of GBA in share in the loan portfolio; but in
marginal areas; and weak institutions, both Grameen
and non-Grameen banking does
• Sinpangabong Multi-Purpose not pay off, neither in terms
Cooperative, which is turning into of outreach nor in terms of
a sole Grameen replicator with profitability;
1,336 Grameen borrowers, but
finds it difficult to mobilise funds • Compared to 1993, the cost per
from poor clients in a marginal Peso lent has gone down: from
area and has little prospect of self- 47% (ACPC 1995) to 35% and
reliance. 34% in CARD and NWTF,
respectively, and 12.3% in
Savings and the safety of savings. The main Producers Bank’s GBAR program
deposit products in GBA are compulsory (IFAD mission);
savings as a part of instalments. Voluntary
savings in this initial phase are negligible. • The high profitability is due to the
In most of the financial institutions visited, high repayment of women and to
Grameen deposits account for 30-50% very high interest rates;
of Grameen loans outstanding. Savings
mobilisation by NGOs is tolerated by the • Outreach could be substantially
financial authorities if it does not exceed the increased by stronger support to
volume of their loans outstanding. In contrast branching out through institutional
to banks, cooperatives and NGOs are not loans;
effectively regulated and supervised and have
no deposit insurance. PCFC, as a custodian • The restriction of loans to
of the GBA program, has to take special productive purposes and
care in the selection of conduits and has an microenterprises (e.g., excluding
important role to play in the ongoing policy agricultural and educational
dialogue on regulation and supervision of loans) interferes with institutional
NGOs and co-operatives. autonomy;

The mainstreaming of Grameen replication • GBA as a group lending

in the Philippines. There are several methodology is flexible: clients
important conclusions from the case studies may stay in the groups, graduate to
which are, in contrast to earlier findings, of individual lending, or do both;
great relevance to the international debate
over group vs. individual technologies and of • Institutional sustainability and
sustainability vs. outreach: rapid increase in outreach to the
poor are not only compatible, but
• Mainstreaming GBA as a product also mutually reinforcing;
of regulated financial institutions is
feasible; •
Not every methodology is for
every bank: non-collateralised
• GBA as a product of healthy group lending works in some,
financial institutions can be collateralised individual lending in
page 38 On Micro-Enterprise
others: for reasons of management impact has been on financial institutions,
preference or others; and which have adopted and adapted Grameen
banking as a highly profitable outreach
• In either case, sound banking strategy to the poor and very poor as a new
practices and adequate monitoring, market segment. In its first phase, the project
guidance and staff training are has thus laid the foundation for sustainable
necessary. banking with the poor and its expansion
throughout the country.
Project policy. Converges with IFAD and
ADB rural and microfinance policies, with The risks of success. The project’s success
the exception of its exclusive focus on GBA; will breed failure if it comes under political
choice of approach should be left to the pressure to expand at a pace exceeding the
institutions and not imposed. existing human and organisational capacities.
Development takes time -the evolution of
Sustainability. Given the high profitability of microfinance in some of the now developed
GBA among several of the participating banks countries (albeit without donor support) has
and cooperatives, combined with access to been measured in half-centuries, rather than
sources of refinance, sustainability for them is decades. Rural banks in the Philippines have
no issue. With assistance from PCFC, NGOs just completed their first half-century of
may establish banks to make their financial development – and are just at the beginning
operations sustainable. While the Grameen of profitable banking with the vast numbers of
operations of MFIs, refinanced at market rates, rural poor.
are on principle viable, self-reliance remains a
distant goal; rapid expansion by existing and Performance of the project
new institutions will require continued access to
liquidity – and perhaps more vigorous savings Relevance of objectives. The poor have
mobilisation from the poor and non-poor. proven to be bankable, the MFIs have
adopted Grameen banking as a profitable
Innovation and replicability. The most outreach strategy to the poor, targets have
fundamental innovation of the project been over-fulfilled, there are virtually
lies in its commercial approach and the unlimited prospects for further expansion
mainstreaming of microfinance. Rural banks – provided MFIs continue to be given room
and NGOs-turned-rural bank have played a for experimentation and innovation, including
crucial role in the process: as autonomous the adoption of methodologies other than
partners which have adapted GBA as a Grameen, particularly for graduating clients.
financial product in innovative ways (see par. Two objectives are unrealistic if interpreted
7). In the process, franchising Grameen has rigidly: the sole focus on the ultra poor (as
emerged as a commercial proposition. this would exclude a number of rural poor and
raise portfolio risks and costs); and, with a
Overall impact assessment. The project view to the future, the sole focus on Grameen
has had a notable impact on income and banking. There are two suggestions for the
asset formation among the enterprising next phase: to respect the autonomy of strong
poor, including a number of the very poor – and healthy MFIs in selecting and modifying
sometimes within the very first cycle of credit. the approach; and to leave it to the MFIs
It has empowered poor women to organise whether they start with the ultra poor and
themselves in groups and expand or start their work their way up to the enterprising poor;
own microenterprises. Its far more significant or whether they start with the poor and work
On Micro-Enterprise page 39
their way down to the ultra poor, who are and participating in microfinance policy
IFAD’s target group. dialogue. Its own experimental GBA
retail lending sites are being turned over
Effectiveness and efficiency. Grameen to MFIs. Under political pressure, PCFC
banking has proven to be cost-effective; and needs to be strict in the selection of MFIs as
the project has proven to effectively reach its autonomous replicators and not just conduits
objectives. Reporting requirements are a relic for government funds. Documentation
of targeted subsidised credit programs and are requirements need to be greatly reduced.
unnecessarily onerous and costly. Reporting Institutional loans need to be used more
should be adjusted to, and integrated into, the constructively for the expansion of the
banks regular reporting to BSP. microfinance infrastructure.

The partners NGOs and community-based

IFAD. IFAD’s identification reports (1993)
had suggested to start with the enterprising The 15 largest MFIs account for 51% of
poor; and to be more open-ended with regard GBA clients; PCFC should focus on the
to the choice of methodology; but this was not selection of strong MFIs and phase out weak
incorporated in the final project documents. and unsustainable ones. Some NGOs have
IFAD’s involvement in the project after been seminal in GBA training and exposure;
approval was weak, as no representative in the future, this role will be increasingly
participated in review missions and related shared with banks. Under new legislation
briefings until 2002. under preparation, deposit-taking NGOs
have to establish banks. PCFC should
ADB. ADB duly emphasised policy reforms directly support the existing trend among
in rural and microfinance and the role of participating NGOs to establish banks.
PCFC in policy dialogue. ADB carried out
project reviews in 1998, 2000, 2001 and Co-financiers. DoF represents the government
2002 and funded an impact survey in 2002. in the project, on-lending the ADB and IFAD
It also provided a technical assistance grant funds through LBP to PCFC. With LBP,
(USD 600,000) for the development of a MIS it co-chairs the Natio nal Credit Council
system and other support activities to MFIs. as credit policymaker, with the intention
Reportedly, the RMG-MIS system found of bringing non-financial institution under
little sympathy among GBARs, while other effective regulation and supervision. LBP, the
activities such as “best practices” workshop government’s agricultural development bank,
were instrumental to exposing MFIs to has expressed an interest in a stronger role in
successful business cases. Interagency microfinance.
coordination between ADB and IFAD could
be substantially improved through greater Overall assessment and conclusions
and constant communication, undertaking
joint work programmes, missions and issuing Issues. In spite of the success of the project,
common project documents. there are also open areas of improvement
for the future. These include an increased
PCFC. PCFC, an apex financial institution coverage of the ultra-poor, without
for microfinance, has been effective, after a compromising the economic viability and
slow start, in selecting and preparing MFI sustainability of the MFIs and the project,
conduits, establishing a viable program, effective regulation and supervision of MFIs;
page 40 On Micro-Enterprise
support for institutional development and Recommendations:
branching out through equity vs. credit-
only; participation in the policy dialogue • Supporting expansion with
on regulation and supervision of MFIs; different technologies to poorest
avoiding onerous and distorting reporting areas and people; through strong
requirements which differ from those of the rural financial institutions,
central bank; reducing the length of the chain branching out and microfinance
of intermediaries; and multiple approaches franchising/BOT (Build-Operate-
vs. a single one to microfinance for the poor. Transfer); with institutional loans,
equity investments and technical
Insights: assistance;

• The project has achieved success • Supporting capacity building

and momentum in social capital and training services to new
formation, empowerment and entering MFIs by rural banks
poverty alleviation during the five and other GBARs, linkages
years of implementation; with microenterprise support
organisations, and microbanking
• The GBA methodology has been training for PCFC staff;
effective in replication and up-
scaling, but requires flexibility of • Strengthening impact on borrowers
in the hands of autonomous MFIs through capacity building,
to adapt to local and organisational comprising leadership and
culture; microenterprise training of center
• The exclusive focus on GBA
has enabled PCFC to market • Improving operations by abolishing
a product that is simple to onerous and distorting reporting
identify and install. Nonetheless requirements and adjusting PCFC
there is demand from PCFC interest rates to market rates;
for pilot-testing alternative and
complementary methodologies (for • Improving co-operation between
example testing of ASA and non- ADB and IFAD through joint
Grameen savings-based Self Help missions, product documents and
Groups); working schedules and by speeding
up the flow of IFAD funds;
• Pathways of graduation to
individual credit and loan terms •
Supporting microfinance
are crucial to impact sustainability;sector and policy reform in
they need to be further explored; accordance with the reform
and the role of GBA centres in loan covenant sections; strengthening
assessment redefined; and the capacity of PCFC to
participate in policy dialogue;
• Access to micro-enterprise skill emphasising effective regulation
training requires a stronger and supervision for all MFIs
emphasis on linkages with through a delegated system of
competent support agencies. supervision; and reviewing the
On Micro-Enterprise page 41
feasibility of the microcredit the Philippine Business for Social Progress.)
rating system proposed by NCC; However, in the 1980s government agencies
also became increasingly involved through
• Support the local, national and direct lending to beneficiaries. The most
international dissemination by salient of the earlier government programs
sharing experience at quarterly was the KKK launched in 1981. It fell into
PCFC meetings; packaging and some disrepute when it became overly
distributing the adapted Grameen politicized in the selection of beneficiaries and
technology through the Rural had a very low repayment rate.
Bankers Association of the
Philippines; and participating in The Philippines has recently undertaken
the Micro Credit Summit in New a major devolution of functions and
York , presenting the experience of resources to the local governments under
rural banks as Grameen replicators; the Local Government Code. However,
and the interests of the poor are expected to be
better protected in future local-government
• Support systematic studies implemented programs by the statutorily
in cooperation with research granted representation of NGO representatives
institutes, among them a study of on provincial and municipal governments
sustainability and outreach to the (of unto 25 percent of the strength of their
poor among rural banks and NGOs legislative bodies).
as Grameen replicators.
Livelihood programs were revived under the
VII. NGOs in Micro-Enterprise Aquino administration as a major component
Development in the of the anti-poverty program and proliferated
Philippines until as many as 154 programs, according
to one count, were being run by nine line-
In 1993, research showed that the lack of agencies, some of them lending directly to
credit funds was not the issue in micro- borrowers. Together with several government
enterprise development. The Philippine financial institutions and corporations also
private sector and government institutions financing livelihood programs, they are
have funds to lend in those times. The reported to have been spending P2.3 billion
problem were: (1) lack of strong institutions, a year,17 of which 40 percent was foreign
NGOs, cooperatives or banks, which could funded. While various agencies attempted
capably deliver credit and savings services to specialize in their clientele, in practice
to micro-entrepreneurs and poor households; there was a large measure of overlap,
(2) the view among many traditional sectors and possibilities of complementation and
that the poor could not pay back loans or be exploiting economies of scale remained
good clients of microfinance programs; and unutilized. One evaluation of several
(3) lack of national policies in support of programs being run by different bureaus of the
microfinance. same agency, the Department of Labour and
Employment (DOLE), found that most of the
There is a long history of NGO involvement programs had the same sort of beneficiaries
in livelihood programs in the Philippines, and were too small to be cost-effective (Bot
based originally on grant assistance from 1990). On an average, a loan of P10,000 had
bilateral donors, international NGOs, and generated about P23,000 of income a year,
even the private corporate sector (through as well as 0.9 jobs, divided almost equally
page 42 On Micro-Enterprise
between self and wage employment. About framework, and a series of comprehensive
one third of the projects financed were a main evaluations of individual programs has been
source of income for the household. There was initiated, similar to that of the DILP.
a close relationship between the success of
the enterprise and the repayment rate. Overall One of the larger livelihood programs was the
the payment rate was 68 percent, although Tulong sa Tao being run by the Department
less than 20 percent of the enterprises failed of Trade and Industry (DTI), which was
entirely, 15 percent earning insufficient assisted with an initial loan of US$8 million
income to make full repayment. There was by the Asian Development Bank (ADB)
no observable association between the in 1988 for the first NGO Micro-Credit
success rate and the size of the loan. Trading Project. Utilization was much faster than
enterprises were on average more profitable anticipated, and a second loan of US$30
than manufacturing and services, and “agro- million was released to DTI in 1991. About
industrial” enterprises (such as hog-raising) 20,000 beneficiaries were assisted through
the least profitable. the first loan, through about 200 NGOs, with
typical loan size being 10,000 to 15,000
In response to growing unease with some of pesos (US$400 to 600) and 61 percent of the
the problems of the program, and in keeping borrowers women.
with the new (1986) constitution that required
the state “to encourage non-governmental and Finally, it is worth noting that the channeling
community-base sectoral organizations”, as of funds for the expansion of micro-enterprise
well as with the medium-term development programs through NGOs and cooperatives
plan (1987-92) which recognized NGOs as is not linkage building in the usual sense of
“essential partners in the development effort”, linking the formal financial sector with the
a decision was taken that by the end of 1989 informal, or in this case the semi-formal
all line-agencies should discontinue direct sector. The funds in this case come mostly
lending and channel future assistance through from government and aid agencies, bilateral
financial institutions or NGOs. At the same and multilateral. Indeed one of the major
time a large number of the smaller programs issues with these programs is whether they can
were merged with each other (for example, be taken over by the formal financial sector, a
the various programs under DOLE into the question we will return to below in connection
DOLE Integrated Livelihood Program, or with sustainability.
DILP). NEDA, the planning agency, became
the coordinating and monitoring agency at theAn interesting question is what explains the
national level, through its Subcommittee on general shift in emphasis from financing
Livelihood. crop production in the sixties to financing
urban micro-enterprises in the eighties. The
However, in 1992 there were still reported answer has partly to do with the growing
to be 56 programs in existence, and data on realization of the importance of the urban
annual flows, target beneficiaries, lending informal sector and the extent of urban as well
terms and repayment rates remained hard to as rural poverty. In the Philippines, however,
come by. The greater decentralization of the the bulk of livelihood program activity is
program and use of NGOs, cooperatives and in the rural areas and small towns. Even for
credit unions as conduits has, it anything, households whose main source of income is
made the monitoring task more difficult. crop production, fishing or wage labor, non-
NEDA has initiated a review of livelihood farm activities constitute a vital supplementary
programs to come up with a new policy source of income.
On Micro-Enterprise page 43
The first few projects were started by NGOs in cooperatives were registered between 1987
1989 (the “pioneer NGOs” as they are referred and 1992, from less than 4,000 prior to this
to) working closely with the Asia Pacific period.18
Development Council in Kuala Lumpur as
part of an effort to replicate the Grameen The other development was the lifting of
bank model in several Asian countries. In interest rate restrictions on lending and
1990 a government agency, the Agriculture on deposits in the early eighties. Thus the
Credit Policy Council (ACPC), launched intermediaries can now recover, in principle
the Grameen Bank Replication Program, at least, the extremely high transaction costs
funded until recently partly by counterparts of lending to the poor, and their cost of funds,
funds from the Dutch Rural Development through interest rate spreads. The first ADB
Assistance Program. The two dozen or so loan, for instance, had DTI lending to NGOs
ACPC participants (most of which are still at 7 percent and NGOs on-lending at anything
very small) consist not only of NGOs but from 12 to 25 percent (which means that the
also of credit unions and cooperative rural minimum margin was 5 percent). The second
banks. In all about 12,000 borrowers have loan has raised the rate of interest at which
been covered by the end of 1992, P4 billion DTI lends to NGOs to 12 percent, which is
saved (more than 10 percent of the total loans closer to market rates.
disbursed) and valuable experience gained.
The repayment rate was about 95 percent for There are no restrictions on the on-lending
the ACPC project and ranged from the low to rate, except the general guideline that they
the high nineties for the pioneer NGOs. should not exceed commercial bank rates.
Since commercial banks do not make this
Sustainability type of loan and it can be conjectured that
it would be pretty high if they did, this still
Two related developments in the last decade leaves a large measure of flexibility to the
have cleared the way to the large-scale use on-lenders. Many NGOs have, in fact, left
of NGOs and cooperatives as intermediaries their nominal rates unchanged in deference
for lending to micro enterprises. The first to nominal-interest rate illusion, a leaf they
has to do with changes in the willingness have borrowed out of the informal lenders’
and legal ability of these institutions to book, while increasing their effective
assume credit risk, a role many of them were rates through such devices as charging a
new to. Livelihood programs in the past service fee which is invariant to the size
were financed largely by grants or highly and duration of the loan. Unfortunately, this
subsidized loans, repayable at convenience, serves as an unhealthy incentive to turn over
if at all. The dole-out mentality engendered loans too frequently for longer gestation
is a handicap the program has to contend activities with fixed asset investment.
with today in achieving satisfactory loan Weekly amortization is another frequent
repayment rates. In order for NGOs to practice (although desirable in itself) that
assume credit risk they must possess legal greatly increases the effective rate of
personality. The number of NGOs registered interest. While it is hard to pinpoint current
as foundations with the Securities and effective rates, they are clearly below rates
Exchange Commission has grown rapidly in of many informal lenders and there is little
recent years to over 21,000, although only an evidence of consumer resistance setting in.
estimated 4,000 of these are developmental
NGOs, and even fewer are involved in A more interesting question is what rate
credit activities. Similarly, over 12,000 NGOs should charge in order to cover their
page 44 On Micro-Enterprise
costs, one which most NGOs themselves commonly referred to in the Philippines. One
find hard to answer. Estimates vary from of the values sought to be engendered is the
30 to 60 percent per year, except for credit obligation to repay, an instance of a collateral-
unions, for which they are much lower. substitute. Week-long training costs for new
Costs are lower for credit unions because borrowers followed by a test are particularly
their beneficiaries tend to be much more high, but seem to be more than offset by the
homogeneous and conveniently located than high repayment rate of about 95 percent.
those of foundation-type NGOs. Most credit
unions are either based on public markets Costs also depend on loan disbursement and
or institutions where peer group pressure is collection mechanisms, which are minimized
much stronger, and where the engagement of through lending to groups organized in
collectors who do the rounds of stallholders centers, following the example of the Grameen
every week, or payroll deduction, is Bank. A great deal of further research is
relatively cheap and easy. Most important, needed into what NGO costs actually are
loans are made in a fixed ratio (from two under the program, and as important, what
to five) of fixed deposits or shares, which they would be were NGOs doing all the things
are liable to be forfeited in the event of they should to make the credit they provide
default, and all members stand to gain from productive, filling gaps in the support services
repayment discipline in the form of dividends infrastructure, providing non-credit inputs
and patronage refunds. Most credit unions etc. A program of case studies would be very
have been functioning viably for many years useful.
and are likely to continue to do so after the
infusion of DTI funds, although these can The ADB Project Experience
create some distortions.
The coverage of operational costs is only one,
A great deal depends, of course, on the level although the major aspect of sustainability.
of beneficiaries the NGO is seeking to assist, There is also the requirement that the
which determines whether collateral can revolving loan fund available for lending
be sought. Some NGOs are very flexible and on-lending does not suffer erosion from
about the type of collateral they will accept, defaults in repayment, or through inflation.
even utensils, small appliances such as Defaults can occur at two stages: from
table fans and radios, and fixtures such as borrowers to NGOs and from NGOs to
wooden shelves. They see this as a way of the government. In the first ADB loan, for
familiarizing borrowers with the concept instance, the repayment rate was as high as 85
of collateral in preparation for when they to 90 percent from beneficiaries to NGOs in
graduate to banks. The transactions-cost the first project and between 97 to 99 percent
saving advantage of such collateral is not from NGOs to DTI.
very high. One NGO had a bodega full of
such equipment collecting dust. At the other However, some NGO repayments had not
extreme in the cost savings advantage is the become due yet, since DTI loans can be for a
insistence by at least one well-known NGO maximum of five years. The average maturity
on post-dated cheques as collateral, another of NGO loans to borrowers is much shorter,
instance of mimicry of the informal sector. which gives NGOs a chance to turn their loans
over from DTI more than once. Since the
Where collateral cannot be sought, NGOs amortization period of the ADB loan to DTI is
have to put a great deal of effort into social the standard soft loan term of 35 years, with a
preparation or “value formation” as it is grace period of 10 years, DTI is in a position
On Micro-Enterprise page 45
to revolve the loan for a much longer period. the Philippines. Reaching even 10 percent
The lending rate of 12 percent is designed to of these, implies a target of about 650,000
cover both inflation and defaults, apart from borrowers, although it can be assumed at
DTIs own costs. It will be interesting to see to least one million belong to the poorest of
what it extent it actually does. the poor, however defined. The other reason
is a practical one, and is tied up with the
It will also be interesting to see how strong economics of poverty lending. The only hope
the relationship turns out to be between of covering operational costs at anywhere
the repayment rate to an NGO and the a reasonable rate of interest is to achieve
repayment rate of that particular NGO economies of scale. This will be illustrated
to DTI. Mismanagement on the part of with reference to the Grameen bank approach.
some NGOs could lead to the diversion of
repayments to other activities, not to speak The Grameen Bank Approach
of outright default by “fly-by-night” NGOs,
the possibility of which can not be totally Unit costs in the standard Grameen-type
discounted in a program as large as this. As operation organized around branches depend
a safeguard, and in order to ensure that other in the steady state on the number of field
NGOs with unsatisfactory loan recovery rates assistants per branch, and on the number of
are in a position to absorb the defaults, or centers per field assistant. A center consists of
in other words that they do in fact bear the five to six groups of five borrowers each. The
credit risk, the program guidelines require an two together yield the number of borrowers
NGO to have a networth of P100,000 and a per branch. The experience in the Philippines
risk asset to networth ratio of not more than has been that seven field assistants per branch
1:5. In order to encourage the participation are about optimal. The number of borrowers
of smaller NGOs of high standing, however, per field assistant, on the other hand, tends
the minimum networth criterion can be to vary with population density, which
waived, in which case borrowing by such an determines travel time, and therefore how
NGO under the program is limited to three many centers a field assistant can cover. Given
times its networth. Requirements such as this the fixed cost nature of a branch office for the
necessarily entail external audit requirements, entire operation within a branch, and of field
and the danger of making it more difficult for assistants for loans to all borrowers in the
NGOs to remain the kind of small, flexible centers under the field assistant, Grameen-type
and dynamic institutions which gives them operation exhibits strong economies of scale.
their comparative advantage in reaching
the poor. Finding the right balance between Given these economies of scale, unit costs in
prudential concerns and informality is one of the start-up and expansion phase depend on
the issues the program will have to resolve. the pace of expansion. We believe that it is
necessary to set up one or more branches at
Even if the real value of the funds the the very commencement of operations. If the
program now has at its disposal is preserved, number of centers and groups within centers
the third crucial aspect of the question of grows denser with the demonstration effect
sustainability needs to addressed: where will of a successful program, the cost of a field
funds come from in the future for expansion assistant is spread over an increasing number
of the program? Expand it must, for two of loans.
reasons. The first has to do with making a
critical minimum impact on poverty. There Exercises have been done for the Philippines
are over six million families in poverty in projecting how many years it would take to
page 46 On Micro-Enterprise
reach viability by a GB replication program and a cash surplus in the eighth, after which
designed to reach 650,000 borrowers by the it becomes possible for the NGO to start
end of the century, or about a quarter of the repaying loans in year nine. These projections
poorest of the poor households with a per are very sensitive to assumptions regarding
capita income below even the subsistence the pace of branch expansion and number of
level. The projections assume the adoption members recruited per branch, which will
of a decentralized model, taking into account require validation in the context of further
the existence of a number of NGOs in the experience. The largest branch in the country
Philippines with valuable accumulated so far has about 1,200 members, in Project
experience of Grameen methodology, the Dungannon. Operational costs in year one are
island nature of the Philippines, and the as high as 470 percent of the loan amount,
greater risk of things going wrong in a a reflection of the very small number of
monolithic organization. The projections members recruited in the first year, but decline
assume a fairly conservative first-year member to 42 percent in year five and 11 percent by
strength per branch of only 120 borrowers, year nine.19
building up to 600, 900, 1,400 and 1,500 in
subsequent years. Other factors determining While they are very approximate, the
viability are loan size, branch salary costs, projections show that a Grameen Bank
interest payable on borrowed loan funds replication on a large scale can be made
for on-lending, the repayment rate, and the viable, and is in a position to repay loans if
interest rate charged to borrowers. extended on suitably long terms with adequate
grace periods. Moreover, they show that in
The projections assume an average first loan the standard GB operation with full time staff
size of P1,500, followed by successive loans there is a trade off, or inverse relationship,
of P3,000, P5,000, P7,500, and thereafter between the start-up costs the program incurs
P10,000. Salaries are assumed to be at levels and the pace at which it expands. The faster it
competitive with those offered by the rural expands and commensurate with loan quality
banks. The interest rate on borrowed funds is and the training of groups and staff, the lower
assumed to be 10 percent, the repayment rate unit costs and accumulated losses are, and
90 percent, and interest charged to borrowers the shorter the period of time it takes for the
a nominal 30 percent. Since repayment is project to start earning them back.
weekly, an average of only half the principal is
outstanding over the term of the loan and the If loans can not be extended on suitably
effective rate is double. long grace-periods however, during which
operational costs come down to a level that
While this may seem high, the largest yields cash surpluses, the NGO would need to
Grameen project with over 6,000 borrowers, be supported with grants for the crucial first
Project Dungannon, is already charging it. two to three years while it goes through the
It is assumed, moreover, that 20 percent of painstaking process of social preparation of
borrowers drop out at each successive loan beneficiaries and training of its own staff. The
after repaying these loans. In order to replace ACPC-launched GB replication program does,
these borrowers, the branches go on recruiting in fact, provide for an operational subsidy for
new members to maintain a full complement two years limited to half of total operating
of 1,500 borrowers. costs.

On these assumptions the program begins to There is an alternative approach to replicating

yield a positive net income in the seventh year, the Grameen Bank model which does not rely
On Micro-Enterprise page 47
on the standard branch-based organizational the Grameen replicators themselves, which
structure, whether the branches are part of a would on-lend to qualified replicators, each
unified “bank” as in Bangladesh, or stand- implementing the program in a decentralized
alone “unit” branches as is being envisaged manner to encourage creativity and new
in the Philippines, and that is to economize approaches. The foundation would charge
on operational costs by utilizing the part- a service fee to cover its costs which would
time services of existing staff of NGOs or include those incurred on a strong monitoring,
cooperatives to handle the cash and book- evaluation, and research capability. However,
keeping entailed. Where the overhead in order to give participating NGOs more
represented by the branch manager and senior room to cover their operational costs, the
assistant in the standard Grameen branch can foundation could on-lend its cheap funds on
be shared in this way, it becomes possible then soft terms to the NGOs,21 instead of it going
to start with less than the full complement to the government to cover the exchange risk,
of field assistants, and to build their strength as in the case of the ADB-financed micro-
up more gradually than recruiting them all in credit project loans to DTI. With the benefit
the first year as the macro-projections above of soft loans it should also be possible for
assume. the foundation to access commercial loans,
and mix them with the soft loans to come
There is a need to experiment with this up with a composite rate of interest of about
economizing approach through further action 10 percent, the rate used in the projections
research. The concept essentially is to treat above. While it would not be possible to
the Grameen Bank approach as an add-on to base the program entirely on loans from the
existing activities, a financial “technology” for commercial banks, which are not prepared to
reaching the poorest of the poor through group “wholesale” to NGOs without guarantees, this
lending, rather than a discrete organization in pooling of commercial and donor funds could
itself. While it may not be possible to reach be thought of as a weak form of linkage, an
the same numbers in as short a period of time, intermediate step in the direction of linking
the long-run reach through this approach may the formal and semi-formal financial sectors,
be as great, at lower cost. the Grameen movement in this case.

The approach of the Grameen Bank has made

It should be possible for the government to
a good start in the Philippines, reaching the
agree to direct loans to the foundation if it
poorest of the poor with repayment rateswere not expected to furnish a guarantee.
that are much higher than any previous The ADB lends at present to the private
program on a comparable scale, yielding sector without government guarantee.
significant increases in household incomes
Direct lending would entail, of course, the
for beneficiaries. However, the movementADB accepting the risk of depreciation of
is constrained from achieving economies the peso since the loans would have to be
of scale because of the shortage of funds.
denominated in pesos, unlike loans to the
Managers of Grameen Bank-like NGOs private sector. This is a change of policy the
spend a disproportionate amount of their time
donors of soft loan funds would have to agree
looking for funds, available from bilateral
on. The scheme would have the advantage,
donors, international NGOs and multilaterals,
however, of pooling the resources of all
like IFAD20. donors, and of exploiting economies of scale
and expertise, while making a direct impact
One way for these managers to save time on poverty, which is what soft loan funds are
would be to fund a foundation set up by meant for.
page 48 On Micro-Enterprise
VIII. PDI’s Rural Micro- Bataan were not able to match the criteria.
enterprise Development In Zambales, the DAR presented some
voluntary-offer-to-sell (VOS) and compulsory
acquisition (CA) landholdings in barangays
As pointed out in the beginning of this Salaza and Bulawen in the municipality of
paper, rural micro-enterprise development Palauig. In Laur, Nueva Ecija, the area offered
was always a part of Project Development was the 3, 100 hectares that was once part
Institute’s rural development programs. of the Fort Magsaysay Military Reservation
Early Programs
The area in Zambales was chosen by PDI and
Early programs implemented by PDI includes: DAR Region III, and named as the Bulawen
the Bulawen Resettlement and Reconstruction Resettlement and Reconstruction Project.
Program; and the Laur Resettlement and Although it had focused on Zambales, PDI
Reconstruction Program. maintained its openness and willingness to do
another resettlement program in Laur.
When Mt. Pinatubo erupted in 1991, PDI
entered into negotiations with the Department The Bulawen Resettlement and
of Agrarian Reform (DAR) Region III for Reconstruction Project:
a resettlement project for the victims of the An Integrated Response to the Problems
disaster. Their focus was on establishing a Caused by
new community for the farmers who were the Mount Pinatubo Eruption, 1991-1998.
affected by the eruption, where DAR would
give certificates of ownership on farmlands Historical Context
to the project beneficiaries. PDI’s role was to
provide a long-term and medium-term support The PDI program in Zambales began
services plan to the settlers, as well as to in 1991 as a long-term response to the
organize the people and transform them into a needs of the Mt. Pinatubo victims. Using
viable people’s organization. the concept of genuine agrarian reform
as conceptual framework, PDI together
In August 1992, the DAR Region III formed with partner organizations instituted a
a land search team made up of representatives resettlement program for farmer-victims of
of PDI and DAR Region III for the purpose the volcanic eruption. Both the Department
of scouting suitable areas for the resettlement of Agrarian Reform Region III and PDI
project of PDI. With the help of the Provincial referred to this program as MARC or model
Agrarian Reform Officers (PAROs) within agrarian reform community. DAR Region
the region, the provinces of Bataan, Tarlac, III replicated the resettlement concept. The
Zambales, and Nueva Ecija were deemed DAR National Office adopted the concept
suitable for the project. but revised the operational design. It then
launched the Agrarian Reform Community
Criteria were created for these possible (ARC) Program the following year. This
resettlement sites. Among the criteria led to the identification and formations of
were questions of the qualification of the several ARCs in the province of Zambales.
landholdings for CARP (Comprehensive Potential beneficiaries were first identified
Agrarian Reform Program) coverage, the and then relocated to designated arable
availability or accessibility to transport lands. They were also provided support
services, etc. For some reasons, Tarlac and services.
On Micro-Enterprise page 49
PDI program was different from other Micro-enterprise projects
resettlement sites, mostly initiated by
government agencies, in such a manner As response to the need of the communities
that it provided land to the victims. The in Zambales for support, PDI set up several
problem after the eruption was the total loss community enterprises in eight different
of the land and not merely landlessness. sites within the province. The first part of
The program responded according to these the preparation phase focuses on resource
situations. Under the program each family generation through savings. Participating
received a 240 square meter homelot and organizations have undertaken problem
a 1.3-hectare farmlot. The program also focused group discussions and resource
provided other support services from, mapping exercises to make them fully aware of
housing to food production assistance, their needs and wants as well as their strengths
necessary to sustain the people through the and weaknesses. Skills training and values
long and arduous process of resettlement in a formation seminar have been undertaken
new place. as a necessary part of the social preparation
When the program completed its resettlement
phase, Sibol, the name given by the people These activities were made as a preparation
to their new home, became a new community. for the next stage of the program, which was
The problems and aspirations of the people the actual identification and implementation
were already beyond the Mt. Pinatubo of community enterprises based on the
eruption. The Sibol Agrarian Reform available resources and skills. Immediately
Beneficiaries Multi-Purpose Cooperative after the said activities, four community
Inc. (SARBMPCI) was one of the few enterprises have been identified as additional
remaining cooperatives in Zambales. The to the already stablished four other groups
women’s organization in the area, Samahan in Masinloc, Palauig, Botolan and Iba. PDI
ng Kababaihang Magbubukid ng Sibol conducted an immersion work in four more
((SKMSI) has also initiated several projects groups identified in the southern municipalities
on its own. PDI also expanded its program of Zambales.
reach by initiating LEISA (low external
input sustainable agriculture) programs in The following were the enterprises put-up by
Barangays Bulawen, Salaza and Sto. Niño. PDI and the peoples organizations (POs):
PDI also helped in the reorganization of the
people’s organizations in the above mentioned 1. Cashew production and processing.
barangays. The unique situation in each area The participants of this enterprise
nonetheless suggests that new and creative were mainly the women’s groups of
approaches be used. Instead of reviving Sibol and Bulawen. Cashew is the
the cooperatives in each of the barangays, second major product of Zambales
PDI organized associations of LEISA/SA next to mangoes. The women
practitioners. The LEISA practitioners in each purchased cashew nuts and processed
area were the direct beneficiaries of the PDI them into glazed, honey-roasted,
marketing program. salted and even sugar-coated flavors.
The finish product were more
For its effort for developing and putting into sellable and had longer shelf life.
practice such a concept, PDI was given world Processed cashew has more value
recognition in the Basic Needs category at the added than plainly roasted cashew
World Expo 2000 held in Hannover, Germany. products.
page 50 On Micro-Enterprise
2. Rare plants collection. The aetas of Micro-enterprise development scheme
Pangolingan have started their rare
plant collection and propagation The Community Enterprise Development
project. This project did not only Program in Zambales (CEDZ) was an
helped in the propagation of rare alternative approach to enterprise development
plant varieties; it also helped in for the people of Zambales. The program
generating additional income for made used of the talents, skills and creativity
the aetas displaced by the Mt. of community organizers in convincing the
Pinatubo eruption. This was one people to raise their own social and financial
activity that made used of their capital before the actual implementation of
skills and natural talents. The PDI the livelihood program. Through savings, the
Alternative Development Center people raised capital to be used as counterpart
housed the rare plant collection. It for the program. The very act of saving
also transformed into a community developed an important value-something
nursery maintained by both the aeta that was lost from the Filipino value system,
association and PDI. throughout the years. One of the objectives
of the program was to re-educate the people
3. Mango production. Mango remains with regard the positive end point of the act
the major product of Zambales. of saving. The very act of saving was in fact
PDI supported two cooperatives became a success indicator itself.
engaged in mango production. PDI
helped in identifying direct market The capital build up process also became a
links for the cooperatives in Metro learning process for the people. Through
Manila and nearby provinces. meeting and regular consultation among the
Together with the coops, PDI members of the savings group or association,
also put up a mango processing the people learned more about themselves
plant which absorbed surplus and their co-members that created an
mangoes. Processed mangoes rere atmosphere of mutual trust among the
very popular both in foreign and members of the group. Capital, raised from
domestic markets. the saving associations were also used by the
people for several other enterprises or other
4. Stick-making. Forest trees like uses. The people had many options as soon
the bamboo were being used to as a substantial amount, of both social and
produce barbecue sticks which were financial capital, had been raised. Enterprise
transported on a regular basis to development were only initiated after the
Metro Manila and Bulacan. The people raised their counterpart. No counterpart
estimated barbecue stick production means no enterprise. This policy was strictly
in the Palauig area then was enforced.
almost two tons per month. Stick
production in the municipality This also changed the complexion of
became a major industry. PDI development funding being funneled through,
provided consumption and by other institutions, in the form of grants or
production support to the families aids, in the province of Zambales. Access to
of these forest gatherers/stick development funding became competitive and
producers. PDI also helped in only used to support in part the social capital
providing direct market links to the raised or built up by the people. One of the
stick producers of Palauig. objectives of the program in Zambales was to
On Micro-Enterprise page 51
support or invest in the social capital of self- The Igorots were also aware of the Bulawen
help groups and other poor communities in the Resettlement and Reconstruction Program
province. of PDI and met up with representatives
of the NGO, asking to be included in the
The Laur Resettlement and Reconstruction resettlement program in Laur. Later, PDI
Program and DAR agreed to take the Igorots as
part of the resettlement project. When
The Laur Resettlement and Reconstruction representatives of the Igorots in Carranglan
Program (LRRP) was a response to the visited the PDI office in 1993, PDI had just
clamor of the Igorot victims of the July-16 completed the resettlement of more than 100
(1990) earthquake that struck Northern and families, victims of the Pinatubo eruption in
Central Luzon. Victims of the earthquake Zambales.
live desperately along the hillsides of the
Caraballo Mountains, neglected for more In November 1993, PDI and DAR signed
than four years. There were other disasters a memorandum of agreement jointly
that came before and after the July-16 undertaking the Laur Resettlement and
earthquake, like the Ormoc Flashflood and Reconstruction Program (LRRP) in Lot 29
the Mount Pinatubo eruption. The victims of the 3, 100 hectares of the CARP land. The
of the earthquake, much less those living in LRRP was patterned after the genuine agrarian
far-flung areas were totally neglected by the reform framework used in the Bulawen
government. Resettlement and Reconstruction Program.
The components of the program was similar,
Historical Context but a different organizing approach was used
since there was no urgency to resettle the
In 1993, after announcing of the release people, in the absence of any imminent danger
of the FMMR’s 3, 100 hectares and it in their places of origin.
being ready for CARP coverage, the DAR
offered a portion of this area to PDI for Under the LRRP, PDI shall extend assistance
another resettlement program just like to DAR in identifying and processing farmer-
that of Bulawen. Around the same time, a beneficiaries (FBs) for them to qualify as
group of Igorots from Carranglan, Nueva CARP beneficiaries in Lot 29. Other tasks of
Ecija, were searching for new lands where the NGO are to mobilize the beneficiaries and
they would settle down. This group had turn them into a viable people’s organization,
petitioned to various government line and develop immediate and long-term support
agencies and LGUs and has asked for services and projects for the FBs’ sustainable
new farmlands, for the 1990 earthquake development. DAR’s role in the program is to
destroyed their previous farmlands. That process the applications of the FBs as CARP
same year, a representative from the Good beneficiaries and generate individual CLOAs
Shepherd accompanied these Igorots to (Certificate of Land Ownership Awards) to
the Office of the Secretary-DARPO and their farm lots.
inquired on any resettlement programs
of the DAR in which these people could While DARPO was processing the segregation
be involved in. They were referred to the of the 3, 100 hectares into areas which will
South Nueva Ecija PARO, who said that be divided for the Mt. Pinatubo victims, the
there was a possibility that they would be pioneer settlers, private and public lands,
included in program involving the 3,100 and the generation of collective CLOAs in
hectare reverted base lands. these landholdings, DARCO requested the
page 52 On Micro-Enterprise
provincial PAROs to come up with their Micro-enterprise projects
respective provinces’ areas for DAR’s ARCs.
Reconstruction began side by side with the land
In June 1994, the Laur ARC, composed of the transfer work. The whole area was practically
four barangays, was launched. The CARPable undeveloped. Whatever developments the
area in San Josef and San Isidro totaled 3, 354 original settlers had introduced were minimal.
hectares, while Sagana and Pinagbayanan had The farmers began work in the area. The test
445 hectares. of the political will of the people had been
surmounted but the test of organizational
The 3, 100 hectares that was released is strength has just begun. The immediate
located within the barangyas of Sagana, San concerns were food, housing and clothing for
Josef and San Isidro. PDI is currently working the people.
on a resettlement project in the 750-hectare
Lot 29, which is part of the 3, 100 hectares. Through the LRRP, PDI provided a package
of support and basic services to the people to
PDI and some of the earthquake victims address these needs. These includes: housing;
immediately set out to integrate with some of production assistance and carabao dispersal;
the settlers in the nearest sitio site, Buracc. food for work; reforestation; health; daycare;
They discovered that there were already and water supply.
farmers in the areas that have cultivated
the upland fields since 1990, fields that PDI begun its micro-enterprise development
were intended for the Mt. Pinatubo victims. work through hog dispersal and goat dispersal
DARPO explained that the number of these projects.
pioneer settlers were small when they first
documented the area. It was unintentional that 1. Hog Dispersal. In 1997, the
their area was included for the Mt. Pinatubo women started to organize
Commission (MPC) area. They were hoping themselves and formed their own
that the MPC would include these pioneer women’s organization. The women
settlers in their projects. realize the need to empower their
ranks and expand their roles in
These pioneer settlers sought the assistance community building. In search of a
of PDI and asked to be included in the LRRP. project, they decided to raise pigs.
After several talks and negotiations, PDI So PDI started a hog dispersal
finally included them in the project. Both the project which started in Buracc. At
Igorot migrants and the original farmer-settlers the start five pigs were dispersed.
received their land titles in 1996. Each Igorot Each pig dispersed had to be repaid
family resettled in Laur received a two-hectare by two female piglets, three if the
farmlot and a 500-square-meter homelot. The dispersal included feeds for the
farmers in the lowland portions were provided pig. The piglets, in turn would be
with logistical support in the surveying and dispersed to other members of the
titling of their home and farm lots. The organization. In 1998, it started in
people in the barangay have recognized the Manganese, located in Lot 29, with
effort of PDI. PDI became a member of the six pigs. The pigs are “screened”
barangay council and one of the three member by their health, weigh, and the like.
organizations of the Land Tenure Improvement By June 1999, there were already
(LTI) Committee, which was organized to settle 44 hogs dispersed under the
land problems within the military reservation. program.
On Micro-Enterprise page 53
2. Goat Dispersal. Since Buracc San Isidro will become a primary source of
is an upland area, it is a natural upgraded goats as well as milk and meat. PDI
environment for goats. The goat has Anglo-Nubian and Bower goats in its
dispersal program started in June demonstration farm. The program has also
1997 with 18 heads (15 females dispersed several local goats. The imported
and 3 males). By September, the goats are thoroughly being acclimatized in
number of goats had been increased the area and being used to upgrade the local
to 32. Eight of the goats were breeds. Goat’s meat and milk became the -
dispersed to farmers. The rest were products of this program.
maintained in a one-hectare pasture
enclosed by hog wire. Inside the PDI has dispersed hogs and carabaos to
pasture, a shed was constructed to deserving farmer-beneficiaries. Together with
house the goats at night. the goat dispersal program, family income
has substantially improved over the last year.
PDI started planting napier, In particular, the carabaos are most needed
flamingia, rensonii and kakawate in making the land productive. Aside from
as feed for the goats. A working on their own land, farmers rent out
veterinarian from the Bureau of their carabaos to nearby farms, providing
Animal Industry visits the goats additional income to farmers. Backyard hog
regularly. To improve the stock, raising is handled by the women. Piglets are
three Anglo-Nubian goats were sold to nearby markets and become another
acquired in 1998 and two Saanen good source of income for the Igorot farmers
goats in 1999. However, the as well as the lowlanders.
hybrids goats, save for one, did not
survive the harsh environment of PDI’s New Programs
upland Laur.
The first programs of PDI in Zambales and
On its sixth year of implementation, the Nueva Ecija were successively followed
program covers a larger area of operation by the following programs: 1) Sustainable
and has a wider beneficiary reach. PDI covers Rural Development Program (SRDP); 2)
the whole of Laur, Nueva Ecija for policy Rural Empowerment through Agrarian
advocacy and focuses on Laur Poblacion, the Asset / Development (READ) Program;
sitios of Buracc, Manganese, Casa Rijal and and 3) Central Luzon – Sustainable Rural
the barangay proper of San Isidro, and the Development Program (CL-SRDP).
adjacent barangay of Sagana for its impact
program. In Laur Poblacion, PDI supports a Under these programs, PDI continue its
LEISA practitioners group, who grows rice agrarian reform and rural development
and onions in lowland, irrigated areas. The activities. Even if PDI was quite successful
LEISA group, composed of 25 individuals, has in its effort in LTI, the next problem have
had 100% repayment record for the past four to be confronted: how to help the agrarian
cropping seasons. reform beneficiaries in their obligations to
continuously pay their land amortization and
Meanwhile, PDI’s goat dispersal project uplift their economic status.
developes into Goat’s Meat and Milk
Production Program. PDI’s objective is for After the land has been acquired, economic
Laur to become a new center for goat raising support services are critical for the peasants
in South Nueva Ecija. The area in barangay to be sustainable under an increasingly
page 54 On Micro-Enterprise
unfavorable production environment due to by 11.11.11-Pilipinas 2000 Mini Project/
erratic rainfall caused by global warming, Philippines. Under this program, PDI
the decline of soil fertility due to increased pursues the implementation of genuine
application of agrochemical inputs, the high agrarian reform and rural development.
cost of production inputs, inadequate technical
and managerial capacity of the farmers and Together with Institutional and Organizational
the insufficient support of the government to Strengthening; Capability Building for
post harvest facilities, credit, marketing and People’s Organizations; and Research and
extension. Policy Advocacy, SRDP has a component of
Livelihood Support for POs which includes
On top of these, the peasants have to compete rural micro-enterprise development.
with well-organized, well-financed and
technologically advanced corporate and Under this Livelihood Support for POs, as
large-scale farms of developed economies PDI develops the already stablished and put
courtesy of World Trade Organizations up new micro-enterprises, it also conducted
(WTO). All of these have contributed to skills training on enterprise development.
the decline of farm productivity that has The training aims to provide the farmers
resulted in the further impoverishment of the with the necessary knowledge and skills,
peasants. They are comparatively in the same which they could apply on their own, as a
state as when they were tenants and farm group or as individuals. The participants
workers. Those who are helpless in the face of these trainings are from the different PO
of poverty resorted to illegal selling of land partners of PDI. Preparatory activities were
rights and mortgaging. The situation leads to undertaken before the training to identify
a new cycle of land concentration among the indigenous knowledge and resources
financial elites. available in the community. Skills training
was a vital part of the capability building of
PDI, together with the Nagkakaisang people’s organizations.
Magsasaka ng Gitnang Luzon (NMGL) and
Pagkakaisa ng mga Samahan ng Magsasakang “ Training on Paper Making”.
Making The training
Kababaihan – Gitnang Luzon (PASAMAKA- was attended by more than 30 participants,
GL), embarked on supporting livelihood composed of women and youth. During the
opportunities for the different people’s training, women from Bataan learned the
organizations and members of the peasants’ process of converting raw materials from the
and women’s federation. environment into paper.

In this context, activities that support skills “Hog Management Training”.

Training Hog raising
upgrading and the development of income- remains the main alternative source of
generating activities for the rural poor livelihood of women. The hog dispersal
are being conducted such as small-scale program has a dual purpose of providing
livelihood projects that can be done at home an additional livelihood to the family while
or allow for processing at the household level. offering an alternative savings scheme. This is
why PDI continues to conduct training on Hog
Sustainable Rural Development Program Management in the expansion area of PDI’s
(2000) rural development work.

The Sustainable Rural Development “ Training on Candle Making”.

Making The training
Program (SRDP) is a Block Grant provided was conducted by one of PDI’s board of
On Micro-Enterprise page 55
directors. The women from Bataan learned Rural Empowerment through
how to make candles that can be used for Agrarian / Asset Development (READ
decorative and functional purposes. Program) 2001-2004

Training on agriculture and farming The program “Rural Empowerment through
techniques”. PDI conducts and also
techniques Agrarian / Asset Development (READ
coordinates with the municipal agriculturist Program)” became the main program of
in providing trainings on agriculture and PDI in this period wherein PDI enlarged the
farming techniques. Farmers should be able to area of operation from the first provinces of
maximize the used of their land. One way of Zambales and Nueva Ecija to other provinces
doing this through proper farming techniques. and covers entire Central Luzon. The READ
Program was supported by the German
PDI aslo provides assistance for off-farm and Protestant Church Development Service
extra farm enterprises to qualified people’s (EED/EZE) with funds from the Federal
organizations. Women’s organizations Ministry for Economic Cooperation and
established rice and feeds retailing outlets in Development (BMZ). This 3-year program
their respective areas. The women have put up aims:
a counterpart fund, labor nd structure for the
program. • to build autonomous rural people’s
organizations that can undertake
Planning and Assemblies/Orientation critical engagement with the
Seminar on Livelihood. This orientation state on agrarian matters through
seminar is given to all the recipients institution building.
of the livelihood assistance program.
The recipient POs are provided with • to promote and develop
the principle behind the assistance. It is sustainable economic activities that
explained to the POs that the assistance is meet the most urgent or priority
composed of a grant and a loan that will be needs of the farmers and Aeta
repaid on easy terms. The grant will come indigenous people, to integrate
in the form of training, technical assistance backward and forward linkages
and social preparation activities. The loan and close the production-market
component will be the responsibility of finance-organization loop.
the PO based on an agreement with PDI.
The loan component will also require a • to develop agrarian reform
counterpart fund from the recipient PO. participatory paralegal and policy
The orientation seminar on livelihood is research, advocacy and lobby work
one of the social preparation activities with the people’s organizations.
under the grant component.
Economic Support Measure
Simple Bookkeeping. The training on
bookkeeping and financial management The READ program rightly emphasizes the
provides practical training for the POs importance of the development of agricultural
engaged in livelihood activities. This is a production in the post-land-transfer phase and
necessary preparatory activity for each PO its pre- and post-production linkages.
who will be receiving assistance from PDI.
The training is also useful in the day to day PDI also provided direct assistance to farmers
operation of the POs. in their socio-economic initiatives by micro-
page 56 On Micro-Enterprise
finance and through capacity building of
the people’s organizations and program • The PO is carefully prepared to
beneficiaries and facilitating access to other develop capacities to carry out the
productive resources (e.g. planting materials, economic endeavors professionally
market links). before providing loans. This
includes project development
The micro-finance were given through a Small and management, financial
Project Fund (SPF) with the total budget of management and technical
PHP 500,000 (7,500 Euro) per year which is trainings when needed.
the main budget item of the Economic Support
System (ESS) program component. Most of • PDI emphasizes the importance of
the individual loans for POs amount to 5,000 creating own savings and makes
to 25,000 PHP (75 to 375 Euro) which are own capital build-up a condition
really “small” projects. for approving projects from the
Major aspects of PDI’s ESS and SPF
• PDI wants to support farmers in a
• PDI encourages and equips the way that they become “bankable”
POs with knowledge and skills farmers.
to grasp opportunities to take up
economic development in their • Because of the primarily
hands rather than providing a educational and capacity building
“package of economic measures” function of the ESS and the small
amount of the fund, a substantial
• Beside the direct economic contribution to broad-based
benefits, the main objective of poverty alleviation cannot be
the ESS is to provide a forum in expected.
particular for women to organize
themselves and to develop • For the beneficiaries capacity
management capacities (holding development, other agencies are
meetings, bookkeeping, etc.) and tapped for providing trainings
provide a room to gain experiences and other inputs (e.g. planting
in entrepreneurship. materials, infrastructure).

• Through ESS, economic endeavors • Linking with private business is

of the POs are supported. also encouraged and sometimes
facilitated by PDI.
• PDI has developed reasonable
“Guidelines for SPF” in 2001 in • The monitoring of the
accordance with the respective economic projects is done by
guidelines by EED/EZE. After the Livelihood Officer of PDI.
submission of a proposal, usually The projects are additionally
intensive discussions with the monitored by the Program
applying organizations are Coordinator of PDI.
conducted before the proposal is
submitted by the PO for approval • Economic ventures supported
to the board of PDI. through the SPF
On Micro-Enterprise page 57
The actual activities financed from the SPF widespread activity of the ESS. The pigs
in many places were new projects added to are raised and individually owned by the
the already stablished hog and goat dispersal women. They also benefit from the income
program. Most of the support is directed to when piglets are sold. The calculations
women. From the present SPF between 2001 show the profitability of the activity which
to 2003, 55% of the available funds of 4,600 was confirmed by all the discussion partners
Euro have been used for hog and goat raising during the evaluation. The benefit of about
projects (PHP 307,000 out of PHP 561,000). 5,000 to 10,000 PHP (750 to 150 Euro) a
year is comparable to the income that could
The new projects of women POs are, for be earned from simple farm labor for the time
example, dressmaking, meat processing, candy invested.
making, communal variety stores. Farmers
organizations have received support, for However, in pig raising risk is also
example for water buffaloes and water pumps, involved, but the advantage for the
nursery or agro-forestry measures. women is that the work can be done
alongside all the other activities. This
The most encouraging successes exist same advantage also applies to other ESS
with hog dispersal which is also the most activities.

Table 3. PDI Enterprises in Central Luzon and Palawan

( July 2002-October 2003)


-Carinderia 5,000.00 750.00 1,583.33 4,666.67
-Local Trading 12,000.00 1,800.00 4,036.00 9,764.00
-Hog Dispersal 42,500.00 18,700.00
(17 Hogs)

-Carabao & Cart 18,000.00 2,700.00 9,000.00 11,700.00
Making 9,000.00 1,150.00 300.00 9,850.00
-Sari-sari Store 50,000.00 7,800.00 36,061.75
(Upgrading &

-Stick Marketing 12,000.00 1,740.00 9,260.00 4,480.00
-Variety Store & 20,000.00 3,000.00 23,000.00
Rice Marketing 3,175.00
-Hog Dispersal 10,000.00 10,800.00
( 5 Hogs )

page 58 On Micro-Enterprise
-Micro Finance 25,000.00 16,280.00
-Hog Dispersal 25,000.00 11,000.00 4,800.00 31,200.00
-Botica sa Brgy. 5,000.00 1,050.00 6,050.00

-Transport Jeepney 300,000.00 49,500.00 250,000.00
-Hog Dispersal 30,000.00

-Hog Dispersal 12,500.00 5,500.00
( 5 Piglets )

-Hog Dispersal 12,500.00 5,500.00 3,600.00 14,800.00
( 5 Piglets )

-Greeting Card 4,000.00 480.00 4,480.00

1. Footwear Making 10,000.00 1,500.00 5,808.52 5,691.68
( Grace Lasala )
2. Wood/Aluminum 12,000.00 1,800.00 7,900.00 5,600.00
Note: All Hog
Dispersal c/o READ

-Hog Dispersal 25,000.00 11,000.00 10,800.00 25,000.00
(10 Piglets)
( Sto. Rosario )
-Carabao Loan 27,000.00 3,240.00 800.00 29,400.00
-Irrigation Pump 20,000.00 2,400.00 600.00 21,800.00

( Victoria )
-Hog Dispersal 24,000.00 1,000.00 36,000.00
( 10 Piglets )

-Laur Womens
Fed’n ( 8 Org. )
a) Hog Dispersal 50,400.00 100,800.00
( 42 Hogs )
b) Goat Dispersal 4,200.00 8,400.00
( 7 Goats )

On Micro-Enterprise page 59
Womens Asso.
( 8 Org )
Hog Dispersal 15,600.00 31,200.00
(13 Hogs)

1. Samahan ng
Kababaihan ng
-Hog Dispersal 25,000.00 11,000.00 36,000.00
( 10 Piglets )

2. Samahan ng
Kababaihan ng
-Hog Dispersal 12,500.00 5,500.00 18,000.00
( 5 Piglets )

3. Samahan ng
Magsasaka ng
-Seed Dispersal
a) 3 Sacks of Fert. 2,400.00
25 kg. (800/sack)
b) 15 Bags of Org. 2,250.00
Fert. ( 150/bag)
c) 15 Bags of Inorg. 6,000.00
Fert. ( 400/bag)
1,278.00 11,928.00

-Seed Dispersal 636.12.00 5,938.12
( 4 Sacks of Cert.
seeds 50 kg )

5. SMB (Burabod)
-Seed Dispersal 795.12 7,421.12
( 5 Sacks of Cert.
seeds 50 kg )

6. Seed Grower
a) 3 Sacks 800 @
b) 15 Sacks Org.
250 @
c) 17 Sacks Inorg.
500 @
-1 Sack Seed 1,794.00 16,744.00
page 60 On Micro-Enterprise
From July to December, 2004, various small specifically in the provinces of Bulacan,
projects have been initiated in the target areas Nueva Ecija, Zambales, Bataan and Palawan.
of Central Luzon and Northern Palawan, The Small Projects grants are as follows:

Table 4. Enterprise Development Under the SPF

In Central Luzon and Northern Palawan
For the Period July-December, 2004

Approved (Php)
Date Area Small Project PO and Signatory

July 3 Nueva Ecija Goat Dispersal 64,000.00
Freddie Segundo
Burabod, BFARMC,
5 Palawan Seaweed Prod. 20,000.00
Ruben Duldig
Burabod Women’s Asso
6 Palawan Hog Dispersal 20,000.00
Alma Inoc
7 Palawan Seaweeds Prod. 20,000.00
Francisco Glimao
Galoc Fisheries Asso
8 Palawan Hog Dispersal 17,500.00
Rafael Selestial
Luac Women Asso.
10 Palawan Hog Dispersal 25,000.00
10 Zambales Hog Dispersal SKP, Violeta Vidal 2,500.00
SKT, Josephine
10 Zambales Hog Dispersal 2,500.00
SKT, Pat Amir
10 Zambales Hog dispesal 2,500.00
10 Zambales Hog Dispersal SKT, Salvacion Canno 2,500.00
14 Zambales Hog dispersal SKKP, Elsa Novo 2,500.00
Hog dispersal; NAKAP, excelencio
14 Zambales 2,500.00
14 Zambales Hog Dispersal SKBA, Josephine Elan 2,500.00
LAKAS, Nenita
14 Zambales Hog Dispersal 2,500.00
15 Zambales Pasambot Nursery 18,000.00
Carlito Dumulot
Manggahan Proje
16 Zambales PASAMBOT 14,400.00
On Micro-Enterprise page 61
Freddie Segundo
16 Nueva Ecija Carabao Loan 25,000.00
Aug 4 Nueva Ecija Mango Seedlings TUFA, Freddie S 100,000.00
12 Zambales Local Trading NAKAP, Mary Balinay 10,000.00
Rice Trading Canimango Women’s
16 Palawan 15,000.00
Balisungan Seaweeds
Sept 6 Palawan Seaweeds Prod 24,000.00
Asso, Lucas Paguia
Cabugao Seaweeds Asso
9 Palawan Seaweeds Prod 28,000.00
Licas Paguia
SKT, Pat Amir
15 Zambales Wetmarket 25,000.00
Zambales Handicraft SKAB< rolly dela Cruz 15,000.00

Honey Prod @
23 Bataan 18,500.00
proces Restum
Samahan Ng Magsasaka
Oct 1 Bulacan Pina Production 144,000.00
Ng Kaybanban, Eddie
LAKAS, Carlito
2 Zambales Various Forest Prod. 70,000.00
4 Nueva Ecija Pina Production TUFA, Pablo Bocabe 150,000.00
14 Zambales Local Trading SKAB, Rolly dela Cruz 50,000.00
Card Making LAKAS, Carlito
20 Zambales 10,000.00

TOTAL …………………………………………………………………………… Php 903,400.00


The Central Luzon – Sustainable Rural people’s organizations assisted by PDI-

Development Program (CL-SRDP) NMGL-PASAMAKA have taken a foothold.
Intervention has been on upgrading these
The land tenure struggle launched by initiatives into a more productive cooperation
organizations within Luzon in PDI coverage that would provide additional income and self-
areas resulted in the transfer of ownership of help economic activities such as collective
thousands of hectares to peasants and IPs. In sweet potato production, goat raising and
order to sustain gains from the land tenurial pineapple production: CLOA is the first
struggle, the question of productivity needs step towards developing an alternative
immediate attention. economic self-reliant agenda. The formation
of “communal farms” are good signs of
In realizing the importance of self- advancing community-oriented values for
sufficiency, growing initiatives from the economic self-sufficiency.
page 62 On Micro-Enterprise
The ESS component of the CL-SRDP is PO, PASAMBOT, was provided a grant of
designed to develop PO capacity in enterprise PHP 150,000 to establish a multi-purpose
development and business management. bodega (see Table 6). Overall, PO economic
Taking root from the gains of agrarian projects aimed to benefit 3,506 members.
reform, this initiative would have the long- Seventy percent of the loans were released in
term perspective of capital generation and 2005 after a methodical preparation for the
accumulation to promote agro-industrial POs to establish basic foundations for their
development with the active participation economic projects. PDI provided a mentoring
of ARBs and other asset holders like IPs role in feasibility studies, developing project
and women. Within the CL-SRDP (five- designs and loan proposals.
year consolidation program), the immediate
objectives are to scale up viable enterprises in The 11 types of enterprises have been selected
at least three focused crops or commodities either due to their market potential or due
in every province, link producers to markets, to compelling livelihood needs of the PO
develop off-farm and non-farm enterprises, and its community. The major enterprise
promote value-adding technology and assist clusters supported by the ESS (in terms of
producers in product development. loan volume) are seaweed production (PHP
598,000), livestock production (PHP 591,750)
Up to the interim evaluation of CL-SRDP on and pineapple production (PHP 498,000).
December 2006, PDI has already provided The next major items are agro-forestry (PHP
PhP 2.86 million in loans to 39 Pos engaged 350,000) and palay seed dispersal (PHP
in 11 types of enterprises (see Table 5). One 200,000).

Table 5. Starting aid, by cluster of economic activity and volume of loan,

(as of June 2006)

Economic Activity Amount of Loan Cumulative Rate of

Repayment Repayment
2005 2006 Total
Nursery (4) 150,000 150,000
Agro-Forestry (4) 350,000 350,000
Forest Trees (1) 100,000 100,000
Seaweed production (6) 598,000 598,000 87,000 14.5%
Livestock (goat, carabao, hog) 196,750 395,000 591,750 101,400 17.1%
Pineapple Production (4) 444,000 54,000 498,000 28,500 5.7%
Honey Production and 30,000 65,000 95,000 39,500 41.5%
Processing (3)
Water Sprinkler (1) 135,000 135,000 45,000 33.3%
Virgin Coconut Oil (1) 87,070 87,070
Palay seed dispersal (2) 200,000 200,000
Sweet potato production (1) 60,000 60,000
Total 2,003,750 861,070 2,864,820 301,400 10.5%

Source: PDI, Summary Report for Starting Aid, December 2006

On Micro-Enterprise page 63
Table 6. Starting aid, by cluster of economic activity
and volume of loan,
(as of June 2006)

Amount of Loan Number

Number of
Economic Activity of Loans/
2005 2006 Total Beneficiaries
Multi Purpose Bodega 150,000 150,000 1 351
Nursery 150,000 150,000 4 1,100
Agro-Forestry 350,000 350,000 4 1,100
Forest Trees 100,000 100,000 1 25
Seaweed production 598,000 598,000 6 120
196,750 395,000 591,750 12 323
(goat, carabao, hog)
Pineapple Production 444,000 54,000 498,000 4 117
Honey Production and
30,000 65,000 95,000 3 264
Water Sprinkler 135,000 135,000 1 13
Virgin Coconut Oil 87,070 87,070 1 25
Palay seed dispersal 200,000 200,000 2 42
Sweet potato production 60,000 60,000 1 26
Total 2,153,750 861,070 3,014,820 40 3506

Source: PDI, Summary Report for Starting Aid, December 2006

The overall repayment performance (during •

PASAMA Sweet Corn Project
the last two years) is 10.5 percent. Of the in Pampanga - PASAMA
eleven clusters, five show movement in members are ARBs cultivating a
amortization payments, the highest being section of their newly acquired
41.5% of the honey producers and processors land for sweet corn production.
and 33.3% (for repayment of the water They availed of a PHP 135,000
sprinkler loan). Pineapple production has loan from PDI to irrigate the farm
been found to be very viable financially using a water sprinkler. With this
and economically and, in Bulacan, in fact, input, production increased to
the provincial government has provided an average 15,000 ears of corn
additional capital of half a million pesos to (from a previous 10,000 ears)
the POs. However, the initial good yields and, correspondingly, gross sales
are not translated to loan repayment as the increased to PHP 75,000 (from
PO immediately recycles the revenues for PHP 38,000 previously). The
expansion. added benefit of the project is that
the ARBs are now able to harvest
Effects on Productivity and Income twice a year, thus doubling the
sales to PHP 150,000 per year.
Most of the enterprises capitalized by PDI This earns them a net profit of PHP
loans are in their early stages of development. 74,000. They started repaying the
Some examples are the following: loan in December 2005. As of
page 64 On Micro-Enterprise
Table 7. Comparative Income Statement

w/o PDI Intervention

Prod’n. Average Cropping Production Gross

Crop Profit
Area Harvest in a Year Cost Sales

Sweet Corn 6 has 10,000 ears 1 cropping 38,000/ha 50,000/ha 12,000/ha

6,000 kls. X
Field Corn 5 has 6 tonnes 1 21,000 27,000/ha

Palay 15 has 58 cavans/ha 1 18,000/ha 29,000/ha 11,000

25,000 prod., 73,500 20,500/

Sugarcane 10 has. 70 tonnes/ha 1
28,000 post prod. price 1,050 has
w/ PDI Intervention
Water Pump / Water Sprinkler
15,000 ears/ 37,000/ha
Sweet Corn 6 has 2 38,000/ha 75,000/ha
ha x2
8,000 x 9, 72,000 /ha 51,000/ha
Field Corn 5 has 8-10 tonnes 2
10,000 x 9 90,000/ha 69,000/ha
Palay 15 has 80 cavans/ha 2 18,000/has 25,000/ha
100-110 tonnes/ 25,000 prod., 110,000/ 41,000/
Sugarcane 10 has. 1
ha 44,000 post prod. ha has

December 2006, they have repaid buying and processing raw honey
PHP 45,000 or 33 percent of the (i.e. bottling). The loan was
loan amount. This repayment used to cover labor costs and
represents 45 percent of their buying capital. With the loan, the
operating profit for the year. The participants were able to increase
thirteen (13) project participants their production from a previous
share 25 percent of the operating 650 bottles to 1,300 bottles with
profit while another 5 percent of a gross value of PHP 143,000.
the profit accrues to the PO. The cost of acquiring raw honey
is PHP 70 per bottle and the
• LAKAS Honey Production selling price (after processing and
in Zambales – LAKAS is a bottling) is PHP 110. Less cost
130-member organization of of raw honey and other costs, the
indigenous people (Aetas) and operating profit per cycle is PHP
is a recipient of a PHP 15,000 39,400. The income distribution
loan acquired in June 2006. Only structure indicates that the loan
5 members of the organization is immediately deducted from the
are directly involved in the gross income. The net income is
project, hence, 5 is the basis for structured three ways: 10 percent
equity distribution and incentive goes to the Scholarship Fund of
structure. The project is about the PO, PHP 15,000 is retained
On Micro-Enterprise page 65
Table 8. Honey Production
Comparative Income Statement

w/o PDI Intervention w/ PDI Intervention

Particulars Price of Product per kilo Price of product per kilo
from other buyer TOTAL from NAGSIKAP TOTAL
Sales 650 bottles P100/btl. 65,000 120 71,500
Cost of Goods Sold 650 bottles P70 45,500 75 48,750
Gross Sales 19,500 22,750
Less: Operating Expenses
- Labor Cost (200 x 3
2,400 2,400
persons x 4 cycle)
- Empty bottles (650
650 650
x P1)
- Supplies 500 500
- Transportation (200/
cycle x 4 cycles) 800 800

- Food (150/cycle x 4
600 600
Total Operating Expenses P4,950 P4,950
Net Income P14,550 P17,800
Less: Principal Capital P10,000 P10,000
Net Income
After the deduction of P4,550 P7,800
Principal Capital

as revolving capital and the rest the enterprise. For the December
is distributed among the five 2005-October 2006, PASAMA
participants. reported that its first cycle sales
reached PHP 100,000. Less
• Pineapple Production of production cost of PHP 42,200,
PASAMA-Laur, Nueva Ecija it earned an operating income of
– Pineapple production has long PHP 57,800. Further deducting
been proven to be a high income loan amortization payment of
earning cash crop. In Mindanao, PHP 13,500, the PO earned a net
big plantations like Dole and Del income of PHP 44,300. The net
Monte, export the commodity to income structure indicates that
international markets. In Cavite, 30 percent goes to the PO and 70
rich farming families manage 2-3 percent (i.e. PhP 31,010) does to
hectare pineapple farms with high the 20 participants of the project.
return on investments. PASAMA- In sum, the net benefit to each
Laur aimed to introduce pineapple participant during the first cycle is
production in Nueva Ecija. In PhP 1,550. Up to December 2006,
November 2005, it took up a the PO has repaid less than 10
PHP 150,000 loan from PDI for percent of its loan from PDI.
page 66 On Micro-Enterprise
• Pineapple Production of sales of PHP 400,000 (for 2
SAMAKA-SJDM, Bulacan – croppings). Less production cost
SAMAKA-SJDM is a 32-member of PHP 12,000 per hectare (@
Municipal PO. In October 2005, 2 croppings = PHP 120,000),
it availed of a PHP 144,000 loan the PO earned an operating
from PDI to engage in pineapple income of PHP 280,000. The
production. Lessons learned net income structure is not clear.
from exposure trips in Cavite and Records show, however, that
application of sloping agriculture PHP 61,800 was allocated as
land technology in Bulacan proved revolving capital, PHP 1,800
beneficial not only to the PO accrued to the PO as share of the
but to the larger community. In organization and PHP 216,400
fact, the Provincial Government accrued to the 15 participants
offered half a million in credit (or a per capita income of PHP
assistance for similar initiatives in 14,426).
the province. SAMAKA-SJDM
accounts indicate that the capital • Hog Dispersal Project in
infusion from PDI enhanced their Palawan - After a series of
capacity to provide adequate inputs consultation and workshops to
on the land. Experimenting on a the POs, PDI-PAMT (Palawan
1.2-hectare area, the PO could Area Management Team) acted
make 2 croppings on the primary upon the request of POs to
and another 2 croppings on the sponsor viable livelihood projects
crowns thus earning total sales of in the area. PDI-PAMT dispersed
PHP 388,500. Less production female 15 high breed piglets
cost of PHP 140,000, the PO could to women’s organization in
theoretically earn a net income of Barangay Galoc and Barangay
PHP 248,000. Luac.

• Sweet Potato Production of This is how the hog dispersal

NASAKA-Kinaragan, Bataan program works. Each of the
- NASAKA-Kinaragan availed swine that is dispersed and is
a PHP 60,000 production loan successfully bred by the members
from PDI in May 2006 for of the women’s organization, will
sweet potato production in 5 be repaid in turn with 3 female
hectares of land involving 15 piglets. These piglet repayments
participants. The loan was used will also be dispersed to other
to cover production cost. For the members of the organization until
period June to October 2006, all of the members have their own
the PO consisting of 15 Aeta hog/swine.
project participants have been
able increased their production A number of issues and lessons can be inferred
to 50 sacks per hectare from 20 from the preceding data:
sack previously or a total of 250
sacks. With good market access, • The loans are covered by formal
they were able to sell each sack contracts indicating loan maturity
for PHP 800 thus earning total and terms of
On Micro-Enterprise page 67
Table 9. Sweet Potatoes
Comparative Income Statement

w/o PDI Intervention

Projects Area Average Cropping in Production
Sales Profit
Harvest a Year Cost
2,000 x 5 50,000 – 10,000
Sweet Potatoes 5 has. 20/has = 100 1 500/sack
= 10,000 = 40,000
w/ PDI Intervention
12,000/has P800/sack 140,000
50 sacks/has 2
Sweet Potatoes 5 has = 60,000 X 250 sack x2
= 250 cropping
= 120,000 = 200,000 = 280,000

payment. Each contract is skills as well as capital from

differentiated by type of enterprise where they would be in a better
or agricultural production. Loans position to access formal credit
for pineapple production, for from government or private
example, would have a maturity financial institutions.
of 18-20 months representing
the total production cycle. While • The PO assumes the
some POs have structured their responsibility of fulfilling the
revenues to include allocation for loan obligations. While the
loan repayment, others have yet projects are actually operated
to map this out in their revenue by selected participants, the
structures. PO retains supervisory and
managerial authority in the
• Agricultural credit is generally internal distribution of capital
considered high risk by formal and definition of the revenue
financial institutions. PDI, structure. This set up strengthens
however, has to respond to the PDI-PO partnership in
agricultural credit needs of program implementation
ARBs and CADT/CADC through NMGL, BUKAL and
holders in view of constraints PASAMAKA-Luzon.
in securitizing these ownership
instruments and generating Trading Capital
capital therein. In short, PDI
transitionally absorbs the Another aspect of ESS is Trading Capital.
risk with the estimation that Like Starting Aid, it was designed to develop
the ARBs and CADT/CADC POs capacity in business management but
holders or their organizations this time focused on trading enterprises. The
will be able to accumulate trading capital was given in the 2nd quarter of
enterprise knowledge and 2006.
page 68 On Micro-Enterprise

Table 10. TRADING CAPITAL, by volume

As of June 30, 2006

Activity Amount Beneficiary Location

Buy & sell of various local products PhP 150,000.00 PASAMA Nueva Ecija
Buy & sell of various local products PhP 500,000.00 NAGSIKAP Zambales
Buy & sell of cashew nuts PhP 30,000.00 SAMMARU Palawan
Total PhP 680,000.00

- END –


1. The Microfinance Promise by Jonathan Morduch; Journal of Economic Literature; Vol.

XXXVII (December 1999), pp. 1569–1614

2. International Labour Organization; South-East Asia and the Pacific Multidisciplinary

Advisory Team (SEAPAT); ILO/SEAPAT’s OnLine Gender Learning & Information Module;
Unit 2: Gender issues in the world of work; Labour market gender issues by country;
Philippines; ILO’s Philippine Country Objectives (1996-1998)

3. Financing for Micro-Enterprises, Small and Medium-sized Business and Poor Households in
the Philippines by Mario B. Lamberte, President of the Philippine Institute for Development
Studies. This paper was presented at the ESCAPADB Joint Workshop on Mobilizing
Domestic Finance for Development: Reassessment of Bank Finance and Debt Markets in
Asia and the Pacific held at Bangkok, on 22-23 November 2001.

4. Development of Small Enterprises for Women with Disabilities in the Philippines: The
KAMPI Experience; by Venus M. Ilagan - President, KAMPI

5. Empowering Filipino Women in the Informal Economy through Persistent Policy Advocacy;
by Josephine C. Parilla and Phoebe O. Cabanilla; This is a summary of a long paper entitled
“Legal Policies and the Situation of Women in the Informal Sector In the Philippines”
prepared for a workshop convened by the Committee on Asian Women in Bangkok, January

6. The “Bombay 5-6”: Last Resource Informal Financiers for Philippine Micro-Enterprises; by
Mari Kondo
On Micro-Enterprise page 69
7. The Year Of Microcredit By Larry Baum

8. Entreprises: a basic typology; by MAE- février 2002

9. Credit Needs of Women Micro Entrepreneurs in Urban Area - Problems & Perspective;
Project Report; A Project Sponsored by KRPLLD, TRIVANDRUM ; by M. Ramanunny,
Programme Officer, KUDUMBASHREE, November 2003

10. The NDT Initiative With Micro-Enterprises; NDT Website

11. Micro-enterprise Development – UNDP Gender Division of Labour; pepared for the
Australian Agency for International Development, 1997.

12. Promoting Entrepreneurship: A Focus on 4 Industry Clusters; Policy Center forum

discusses policy issues and strategies in the tourism, furniture, fine jewelry, and footwear
industries; By the AIM Policy Center

13. The State of the Microfinance Industry: An interview with Arnaud Ventura, Planet Finance;
produced by Ellen Olafsen, July 9, 2004

14. The Economics of Microfinance by Beatriz Armendáriz and Jonathan Morduch

15. The cost of ownership in microfinance organization; by Roy Mersland; Agder University
College, Kristiansand, Norway; 15. January 2007

16. Micro and Small Enterprise Finance: Guiding Principles for Selecting and Supporting
Intermediaries; Committee of Donor Agencies for Small Enterprise Development; Donors’
Working Group on Financial Sector Development, October 1995; Committee of Donor
Agencies for Small Enterprise Development; Secretariat, World Bank

17. Lending to Micro Enterprises Through NGOs in the Philippines by Prabhu B. Ghate

18. Asset Development and Sustainable Livelihoods for the Rural Poor: An Interim Review
of the PDI’s Central Luzon Sustainable Rural Development Programme; by Eddie L.
Quitoriano; December 2006


page 70 On Micro-Enterprise

Part of the inspiration came from observing credit cooperatives in Bangladesh, and, interestingly,
these had European roots. The late nineteenth century in Europe saw the blossoming of credit
cooperatives designed to help low-income households save and get credit. The cooperatives started
by Frederick Raiffeisen grew to serve 1.4 million in Germany by 1910, with replications in Ireland
and northern Italy (Guinnane 1994 and 1997; Aidan Hollis and Arthur Sweetman 1997). In the
1880s the government of Madras in South India, then under British rule, looked to the German
experiences for solutions in addressing poverty in India. By 1912, over four hundred thousand poor
Indians belonged to the new credit cooperatives, and by 1946 membership exceeded 9 million (R.
Bedi 1992, cited in Michael Woolcock 1998). The cooperatives took hold in the State of Bengal,
the eastern part of which became East Pakistan at independence in 1947 and is now Bangladesh.
In the early 1900s, the credit cooperatives of Bengal were so well-known that Edward Filene, the
Boston merchant whose department stores still bear his name, spent time in India, learning about
the cooperatives in order to later set up similar programs in Boston, New York, and Providence
(Shelly Tenenbaum 1993). The credit cooperatives eventually lost steam in Bangladesh, but the
notion of group-lending had established itself and, after experimentation and modification, became
one basis for the Grameen model.

In a rotating savings and credit association, a group of participants puts contributions into a pot that is given
to a single member. This is repeated over time until each member has had a turn, with order determined by list,
lottery, or auction. Most microfinance contracts build on the use of groups but mobilize capital from outside the
area. ROSCA participants are often women, and in the U.S. involvement is active in new immigrant communities,
including among Koreans, Vietnamese, Mexicans, Salvadorans, Guatemalans, Trinidadians, Jamaicans,
Barbadans, and Ethiopians. Involvement had been active earlier in the century among Japanese and Chinese
Americans, but it is not common now (Light and Pham 1998). Rutherford (1998) and Armendariz and Morduch
(1998) describe links of ROSCAs and icrofinance mechanisms.

The financial information is from Jean Steege, ACCION International, personal communication,
January 1999. Claudio Gonzalez-Vega et al. (1997) provide more detail on BancoSol. Further
information can also be found at http://www.accion.org.

Data are from ACCION (1997) and hold as of December 1996. Five of the six U.S. affiliates have only been
operating since 1994, and the group as a whole serves only 1,695 clients (but with capital secured for expansion).
A range of microfinance institutions operate in the U.S. Among the oldest and best-established are Chicago’s
South Shore Bank and Boston’s Working Capital. The Cal-Meadow Foundation has recently provided funding for
several microfinance programs in Canada. Microfinance participation in the U.S. is heavily minority-based, with a
high ethnic concentration. For example, 90 percent of the urban clients of Boston’s Working Capital are minorities
(and 66 percent are female). Loans start at $500. Clients tend to be better educated and have more job experience
than average welfare recipients, and just 29 percent of Working Capital’s borrowers were below the poverty line
(Working Capital 1997).

Figures are calculated from Johnston (1996) and data provided by BRI in August 1996.

Ghatak and Guinnane (1999) provide an excellent review of group-lending contracts. Monica Huppi and
Gershon Feder (1990) provide an early perspective. Armendariz and Morduch (1998) describe the functioning of
alternative mechanisms.
On Micro-Enterprise page 71
Armendariz and Gollier (1997) also describe types might be left in the market. In this mechanism in
parallel work.

In typical contracts, group members are responsible for helping to pay off the loan in difficulty, rather than having
to pay a fixed penalty for a group member’s default. While clients lack collateral, they are assumed to have a large
enough income flow to cover these costs if needed. In practice this may impose a constraint on loan size since
individuals may have increasing difficulty paying c* + r* when loan sizes grow large.

Ghatak (1998) extends the results to groups larger than 2, a continuum of types, and preferences against risk. See
also Varian (1990) and Armendariz and Gollier 1997) on related issues of efficiency and sorting.

See the general theoretical treatment in Bolton and Scharfstein (1990) and the application to microfinance
contracts in Armendariz and Morduch (1998).

Rahman (1998) describes complementary cultural forces based on women’s “culturally patterned behavior.”
Female Grameen Bank borrowers in Rahman’s study area, for example, are found to be much more sensitive to
verbal hostility heaped on by fellow members and bank workers when repayment difficulties arise. The stigma is
exacerbated by the public collection of payments at weekly group meetings. According to Rahman (1998), women
are especially sensitive since their misfortune reflects poorly on the entire household (and lineage), while men
have an easier time shaking it off.

Included in the term micro and small enterprises are a wide range of enterprises (industry, transport,
commerce, services, agriculture, etc.) ranging in size from part time, seasonal activities of a single
person to small, formal enterprises employing several non-family members.

It should be understood that the costs of non-financial assistance provided to entrepreneurs may
continue to be subsidized. However, it is crucial that these costs be separated from the costs of lending
operations, so that the financial viability of lending operations can be assessed.

For institutions that offer a full spectrum of financial services, information should apply only to that
portion of the institution’s activities and overheads focused on small and microenterprises.

Many programs require clients to deposit minimum amounts or pay into savings funds in order to be
eligible for loans.

Staff and administrative expenses should be those that relate to the provision of financial services. If an
institution has significant non-financial activities, it should account for those costs separately, including
the proportion of overhead expenses needed to support those activities. Costs paid directly by donors,
such as expatriate salaries, should be included.

25 Philippine pesos is approximately 1 US dollar (1993).

The reasons have to do with the de-politicization of the movement after the Marcos years, but also
no doubt with the decision of the Land Bank (the main provider of crop production loans) to get out
of retail lending directly to farmers and into wholesale lending only through cooperatives. Thus what
is happening on the non-farm side (lending through semi-formal intermediaries) is happening in a
much bigger way on the crop production loan side. Land Bank lending has expanded dramatically as a
page 72 On Micro-Enterprise
result and fears are being expressed that the country is about to go through boom and bust cycle. The
cooperative movement is also split between the old cooperatives and the new, or “government” ones.

There have not been any careful studies yet on actual operating costs of Grameen NGOs, partly because they are
in a state of flux, attempting to expand coverage of borrowers as fast as possible in order to achieve economies
of scale. One estimate, however, of cumulative costs incurred till the end of 1992 for 12 of the ACPC replication
projects on which data is available, including program expenditure by the ACPC itself, is about 45 percent of
loans disbursed. Some of the better participants, with higher than average repayment rates, rate of expansion of
orrowers, and savings, which are ploughed back into the loan fund such as BINHI, had brought operational costs
down much faster, to 19 percent in the second year.

The International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, was
established as an international financial institution in 1977 as one of the major outcomes of the 1974 World
Food Conference. In April 1996, IFAD approved a loan in the amount of approximately US $ 14.7 million to the
Government of the Philippines to co-finance, together with the Asian Development Bank (ADB), the Rural Micro-
Enterprise Finance Project in the Philippines.

This strategy is not without dangers. For critical debates on the impact of cheap credit and easy money
policies: see Seibel, chapter 2; Adams and Von Pischke, chapter 9; Abugre, chapter 10.

On Micro-Enterprise page 73