Alicia Alonzo
About Microfinance
The Problem of Poverty
Imagine raising a family on less than P15,000 a year (P1,250 a month).
It seems inconceivable, yet this is the reality nine out of ten Filipinos face every day (2005 Pulse Asia Survey).
A person from the DE economic class has little chance of finding a job because he or she is under-educated and barely literate. Starting a micro business, such as street vending or driving a tricycle, is usually his or her only (legal) option for earning a living.
Due to the massive size of the lower income segment, nearly 90% of businesses registered with the Department of Trade and Industry are microenterprises.
But why, despite their popularity, do microenterprises remain tiny and inefficient, unable to pull their owners out of poverty?
Traditional banks do not lend to people who have no collateral and can only afford to borrow a few thousand pesos at a time.
Poor people thus turn to loan sharks to borrow the money that they need to survive, paying interest rates of as much as 200% a year. This high cost of capital wipes out any profits that a fledgling micro business might produce, keeping its owner mired in poverty no matter how hard he or she works.
The Microfinance Solution
What is microfinance?
Microfinance is the practice of providing credit, insurance, savings and other financial services to very poor clients who are unable to avail of such services from traditional banks and insurance companies. Microfinance services are delivered to the poor through microfinance institutions (MFIs).
How does micro credit address the problem of poverty?
By providing the poor with access to capital, microfinance gives them the tools to start small businesses and generate income. This enables the poor to move up the economic ladder and become self-sufficient.
Why are traditional banks unable to lend to the poor?
Traditional banks have higher overhead costs compared to MFIs. Therefore, they require a minimum size for loans or deposits to justify the cost of servicing such accounts. These minimum requirements are too large for poor people to meet (the average size of a micro loan in the Philippines is only P5,000).
Traditional banks support the cause of microfinance by making funding available to MFIs, who then repackage these funds into smaller amounts that the poor can access.
MFIs charge higher interest rates than traditional banks to reflect the higher administrative costs of processing micro loans.
Can the poor be trusted to pay back their loans and handle money responsibly?
Yes. Actual repayment rates of micro loans are consistently above 90%. An MFI borrower is at least as good a credit risk as a traditional bank borrower.
MFIs in the Philippines report a number of success stories of microentrepreneurs who started with as little as P5,000, but in less than five years were generating as much as P500,000 in annual profit.
The microinsurance and savings products offered by MFIs have also enjoyed wide acceptance, proving that the poor do understand the value of managing risk and providing for the future.
What are the limitations of microfinance?
Poverty has many causes. Some of these causes are very urgent in nature (i.e. war, disease, natural disasters), and require grants or more immediate forms of aid to be solved.
Microfinance needs to be combined with the right government initatives in infrastructure, public policy, health care, education, and peace and order for it to achieve its full potential.
