Credit, not cash

Ben D. Kritz

Ben D. Kritz

MICROFINANCE has not appeared on my radar for some time (since October 2013, to be exact), but an interesting program I recently learned about has brought the topic back to the top of the stack, so to speak.

Mr. Yong-Ki Shin—a mechanical engineer by formal training and a banker by profession—is a 20-year veteran of the Asian Development Bank (ADB), who now heads an NGO called the Global Foundation for Asian Community Empowerment, or G-FACE. The NGO has been in business in this country since the late 1990s.

G-FACE’s program is a clever amalgamation of microfinance and conventional livelihood programs: Within a selected barangay, up to five groups of five people each are given loans of P150,000 for a revenue-generating small enterprise (raising cows or pigs is apparently a popular choice), which is expected to turn at least a small profit in a reasonable amount of time. The loans are not handled by the NGO, but by a regular bank, and are charged regular interest rates.

So far the Community Empowerment Program (CEP), which was piloted in 2008, has only been implemented on a limited scale due to funding and other practical constraints, but where it has been put into practice it has been a resounding success. The various small businesses have all been at least modestly profitable—providing the participants with an income that actually increases over time—and loan repayment rates have been excellent. While the loans’ interest rate of about 12 percent may seem a bit stiff, it is half or less of the prevailing interest rates for more conventional microfinance loans (most are at 25 to 30 percent, and in some cases considerably higher); and because they are working with a regular bank, the program participants are establishing their own footprint in the formal banking system.

Two barangays in Cavite (one in Maragondon and one in neighboring Magallanes), where the CEP has been implemented, have even managed to create local scholarship funds, this year sending a total of 21 students to college.

The program is one of those things that sound too good to be true: It’s actually lifting people out of poverty, providing educational opportunities, and enabling financial inclusion, and doing so in an almost entirely community-managed way—even the scholarship funds are handled by the two barangays’ business centers set up for the purpose. CEP also sidesteps the biggest problems of group lending under the standard microfinance model, as well as the social harm and material inadequacy of the government’s Conditional Cash Transfer program, something which is held in very low esteem by G-FACE’s gregarious president.

So what’s the catch? There appears to be only one, so far: scalability. The results have certainly been remarkable —for an upfront investment of P1.5 million, 50 above-minimum-wage jobs and 21 four-year college scholarships were created—but whether that can be recreated on a larger scale is questionable. Based on official poverty figures, there could be as many as 5 million potential borrowers, or a million borrowing groups requiring a total of P150 billion in funding.

The funding is the easy part; this year’s CCT budget is P62.3 billion, so if a similar amount was budgeted to CEP or a program like it, the entire population below the poverty line could be covered in three years’ time.

The real problem is that as a successful small program increases in size, particularly if it does so rapidly, errors such as loan defaults and enterprise failures that may not have been apparent in early stages multiply rapidly. This keeps the loans’ risk elevated, which in turn keeps borrowing costs high, which puts additional pressure on the default rate; this has been the experience of virtually every microfinance institution following the Yunus model. Some have adapted and some have not; many of those who have—including Grameen Bank, the bank founded by Muhammad Yunus —have done so by becoming more commercialized and reducing their microfinance business.

The problem is complex, but it is not insurmountable. In order for a program like CEP to be successful, it has to be coordinated with the government’s broader economic and development objectives. Not everyone can raise cows at the same time. And if the program were government-managed, measures would have to be taken to separate the government’s roles as lender and facilitator; part of what ensures transparency in the G-FACE program is that the NGO only serves as the latter.

The payoff if the challenges can be overcome, however, is potentially enormous, certainly more substantial than the CCT program’s feeble indications of improved school enrollment rates and marginally better public health. And a program based on credit, not cash, has one thing going for it that the latter never will in that which generates interest income. Since the Philippine government will owe well over $500 million for loans to fund the CCT program in the next few years, anything that might help pay that tab should be given serious consideration.


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