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Achieving Financial Inclusion in the Philippines Through Microfinance Programs
Financial inclusion is no longer a taboo subject in the Philippines. Such a facet is even more essential to ordinary Filipinos or those who previously had no participation in the financial services industry. The World Bank calls these individuals unbanked.
Other than opening their bank accounts, there are many ways ordinary Filipinos may obtain essential financial services regardless of their income or savings. One such way is through microfinance programs in the Philippines.
What is microfinance?
Also called microcredit, microfinance refers to small loans an entity (public or private organization) grants to poor and low-income individuals or households. The goal is to provide financial assistance for microenterprises and small business purposes. Through this, they may be able to raise the household’s income levels and living standards.
Microfinance provides various financial services, though loans are the most common. Others are savings, deposits, transfers, and insurance. With microfinancing, Filipinos need not rely on meager self-funding or informal funding sources such as 5-6. Unfortunately, Filipinos are more familiar with this unorthodox lending than microfinance.
How does microfinance work?
Traditional financial institutions such as banks and commercial service providers do not necessarily extend loans to poor and low-income households because they are considered high-risk borrowers. This is because they do not have a credit history to back their loans, and they cannot always offer collateral. Moreover, the costs involved in smaller transactions mean lower perceived profitability.
Microfinance programs in the Philippines provide them access to financial opportunities that are not otherwise available to them. Speaking of which, there are two types of microfinance services:
- Individual lending – This is a loan provision for one client, and there is no need for a guarantor or collateral.
- Group lending – Also called solidarity lending, this loan provision is intended for several individuals. Collateral or guarantor is required through a group repayment pledge. A joint liability scheme wherein paid members must cover unpaid members is also implemented.
Speaking of providers, there are at least three microfinance providers in the Philippines, namely:
- Banks (mostly thrift and rural banks)
Banks can offer various microfinance products for local enterprises, especially agro-entrepreneurs. The services require no collateral and usually simpler requirements.
- Credit cooperatives
Cooperatives are quasi-banks, and one of their main products is microfinance. While these entities are community-based, they also extend financial services to their members as part of their capital contributions. A portion of the loanable amount is put into the members’ savings accounts.
- Microfinance NGOs
Non-government organizations whose principal mandate is to empower the community where it operates through social development. One key aspect is financial inclusion through microfinance, supporting local enterprises through individual, group lending, or a combination of both.
How can microfinance programs in the Philippines help Filipinos?
The Filipinos are known for their resourcefulness, wherein they would do anything to alleviate the hardships they experience. Microfinance programs provide them an impetus to raise their living standards with the help of the government or NGO. Here are other ways by which microfinance programs help Filipinos.
Microfinance ensures funds for low-income borrowers, especially Filipinas.
Most micro, small and medium enterprises (MSMEs) in the Philippines are women-owned and run. Therefore, providing them access to funds for their entrepreneurial endeavors improves their livelihoods and income sources. In addition, long-term financial support also ensures the development and sustainability of their livelihood. This is especially true for women living in rural areas who are slowly gaining financial independence.
What’s more, microfinance programs in the Philippines do not act as dole-outs. Instead, women are educated under these programs so they can be more competitive in making financial decisions. Programs usually offer financial literacy, including financial planning skills enhancement.
Microfinance meets the risk protection needs of Filipinos.
Microfinance services are offered at lower-than-bank interest rates since the basic target is community development. This figures in the loanable amount — the maximum guaranteed sum must not exceed 1,000 times an individual’s daily minimum daily wage rate. Furthermore, the amount of daily repayments, contributions, fees, and charges must not exceed 7.5% of the daily minimum daily wage rate.
These programs do not intend to take advantage of people’s financial illiteracy by charging them with loanable amounts with the highest interest rates. Instead, it is quite the opposite—providing them with financial assistance so they can help themselves alleviate poverty in meaningful ways. For one, poor people are vulnerable to income fluctuations and inflation rates. There should be a way to minimize their exposure to risks, and this is where the role of microfinance programs has been a great help.
Microfinance helps rebuild and revive livelihoods.
Development is hampered when communities are disrupted by economic or health (such as the coronavirus pandemic of 2020) disparities or conflicts. Microfinance programs are instrumental in reviving livelihoods and rebuilding the communities or areas they serve. This is specifically helpful among micro entrepreneurs in the Visayas and Mindanao regions.
Building or improving these communities’ economic base gives the locals the drive to participate more economically. Additionally, the more entrepreneurs are able to recover and maintain their business operations, the better the employment prospects and other income-generating activities in the areas.
Microfinance diversifies economies.
With microfinancing, small businesses are nurtured. This supports efforts to diversify business activities and the overall Philippine economy beyond capitalistic and industrialized undertakings.
As such, capacity-building provides Filipinos with an opportunity to contribute to the strengthening of the economy. Microfinance programs serve as an intermediary through which people can expand opportunities and mitigate poverty. Microfinance is not just an alternative but a chance to improve the quality of life of the Filipino people. With it, they may enhance their earning capacity and build assets that will take them out of poverty.
Contrary to common belief, Filipinos can get out of poverty given suitable financial instruments in a dignified manner. Microfinance programs in the Philippines are the financial instrument that addresses this purpose. These programs can effectively strengthen the Filipino people’s social and human capital. Moreover, such programs effectively financially include the citizens and provide them with various ways to mobilize funds and earn for themselves.