Rural Bankers Association of the Philippines-Microenterprise Access to Banking Services (RBAP-MABS) Program helped facilitate two sessions of the 2011 Microfinance Council of the Philippines Inc. (MCPI) Conference last July 28-29 at the Hyatt Hotel Manila. The conference themed, “Making a Difference: Multi-Stakeholder Action towards Responsible Microfinance” aims to promote responsible financial products and practices while addressing global pressing issues and challenges to microfinance.
On the first day of the conference, RBAP-MABS Chief of Party John V. Owens facilitated a session on Avoiding Over-indebtedness with Ms. Mila Bunker, President of Ahon Sa Hirap Inc. (ASHI) and Chairperson of MCPI. The session discussed the causes of over indebtedness and proper ways to conduct credit investigation and cash flow analysis. In particular, these would prevent a borrower from taking in more loans beyond their capacity to pay – a financial practice known as multiple borrowings. The practice of multiple borrowings was also examined as a precursor to over-indebtedness. However, it was emphasized that multiple borrowings by a client does not necessarily mean over-indebtedness if the client has the ability to pay for these multiple loans. Microfinance institutions (MFIs) must also consider the suitability of the products and services that they offer to their clients.
One of the most interesting sessions at the conference was the Training on Pricing Transparency by Mr. Chuck Waterfield, CEO of Micro Finance Transparency (MFO). Core to the discussion was the comprehension of why interest rates necessarily increase as MFIs provide smaller loan sizes, which fact is directly related to the increased operating costs to service small loans. Thus, increased operating costs beget increased interest rates to cover for such expenses.
One of the highlights of the presentation was the data showing the correlation of operating cost and interest rate curves from all MFIs. There is a distinctive steep rise in the interest rate as loan sizes get smaller and vice versa. This eye opening session made the participants reconsider the cost and pricing structures of their microfinance loans.
During the second day of the conference, one of the workshop groups that discussed the topic on Active Planning and Commitment Setting for Responsible Microfinance was composed of banks. Among others, the group of rural banks agreed to endorse the principles of client protection as well as join the advocacy for pricing transparency and the clamor to speed up the implementation of the credit information system mandated by Republic Act 9510.
Since different types of institutions are involved in microfinance, a clear framework of regulation is needed to suit these different institutions. This would prevent the practice of arbitrage. In accordance, a proposed microfinance code should also be revised so that rural banks are to be included. These two main issues must be anchored on a national action on multiple borrowings that requires concrete steps on consumer protection and a pro-active role of regulation as well as a well-functioning credit bureau.