This section distills key lessons learned during MABS-4 and provides guidance on areas that still need to be addressed to expand access to financial services.
Microfinance services in the Philippines have expanded dramatically in the past five years, and competition for clients has been increasing. Global and domestic factors have also influenced this growth in services, which is characterized by rapidly changing market demands for greater access to information from financial providers, product innovations, an improved regulatory environment, and stricter compliance rules for banks that require them to meet higher standards of financial stability, transparency, and increased disclosure requirements.
The microfinance bubbles experienced in countries such as India and Morocco, which resulted in excessive competition and increased over-indebtedness, provide important lessons for microfinance players and regulators in the Philippines. So far, regulators and financial players have acted proactively to prevent a similar crisis, but more work remains to be done. In particular, growing competition and a lack of financial services for small enterprises sandwiched between microenterprises and medium-sized enterprises need to be addressed.
Credit Reference Sharing
The Philippines remains one of the few countries without a comprehensive credit reference bureau system. Although much has been accomplished in the past few years, with banks voluntarily sharing negative credit information on borrowers with poor histories, more needs to be done to avoid over-indebtedness by clients. Delays in implementation of the Credit Information Sharing Act and the inability to require all financial institutions to share credit histories of all borrowers in the financial system restrict access to financial services, and as seen in countries such as India, can lead to clients borrowing beyond their means. USAID should continue to support development of the government-supported Credit Information System and, more importantly, development and expansion of private efforts to support more comprehensive steps in sharing credit information of all borrowers.
Financial Transparency and Greater Competition
The microfinance market has also changed significantly, with clients demanding greater access to information and more transparency from financial institutions. BSP has acted proactively by issuing several circulars on financial disclosure and consumer protection practices. Changes in interest rate transparency guidelines, which came into effect on July 1, 2012, should have a significant competitive impact on banks and other financial institutions and should reduce effective interest rates on loans offered by rural banks and other microfinance institutions. Because all banks and financial players will now have to express rates using a standard effective interest rate policy, consumers should be able to more effectively compare loan interest rates. This should have a positive impact on reducing costs and increasing access to a larger range of potential microfinance clients. Implementation of this policy across all financial institutions, including players not normally supervised by BSP, will be important to ensure a level playing field but, overall, this development should augur well for expansion of credit in the Philippines.
The Road Ahead
Using alternative channels to engage clients. The next generation of clients (Generation Z, born after 1994) demands almost instant access to information and are increasingly more mobile. These clients are also increasingly reliant on social networks and will demand interaction with their banks in new ways, which will force banks to focus on alternative channels to meet the needs and characteristics of this market. Financial institutions will no longer be looked on as a place to go, but rather as institutions that help people organize their financial lives wherever they are. These clients probably will gravitate toward financial institutions that can interact with them on their level and will increasingly demand greater access via their mobile phones. USAID and the Philippine government should continue to support development of alternative channels for banks and other financial players to continue to promote deeper and broader financial inclusion, especially among youth that are entering the workforce as the next generation of entrepreneurs.
Continuing support for mobile money and mobile banking. The next level of product development will be aided by the ease of access to financial products through mobile phones. Mobile banking and the related use of mobile money are already demonstrating their game-changing role, allowing for greater financial inclusion than is possible via brick-and-mortar branch networks. Kenya has already demonstrated the significant role of mobile financial services and the impact it can have on society. USAID should take advantage of the promising start of mobile money use by certain rural banks and their clients, as well as support the continued use of mobile financial services in the Philippines. Finally, investing in appropriate financial education should help to fast-track mobile financial services and the important impact this can have at the community level.
Viewing conditional cash transfer recipients as potential bank clients. Rural banks engaged in servicing the Philippine government’s Conditional Cash Transfers program have a unique opportunity to translate “financial inclusion” into more concrete terms. Instead of merely transferring cash to the poor, the Philippines can follow examples from around the world and promote conditional cash transfers directly to mobile money-enabled bank accounts to promote greater financial inclusion for the unbanked and under-banked. A recent study by the World Bank showed that the Philippines still has a fairly high percentage of unbanked poor. Although this was similar to other countries such as Kenya and Colombia, recent advances in offering mobile money (as in the case of Kenya) and making conditional cash transfers directly to financial accounts (as in the case of Colombia) have led to significant increases in financial inclusion in these and other countries. The Philippines is fortunate to have not only two mobile money providers (electronic money issuers) but also the ability to link mobile money-enabled wallets to bank accounts. By combining the power of mobile money wallets and linking them to bank accounts, along with appropriate financial education, the Philippines could dramatically increase the level of financial inclusion with just this one change to the way conditional cash transfers are disbursed.
Using the MABS Approach to address the “missing middle”, although rural banks have done a good job of serving the microenterprise sector, and thrift and commercial banks have done a relatively good job of serving medium and large enterprises, small enterprises are usually stuck in the middle. The same approaches deployed under the MABS Approachfor cash-flow lending relevant to the Philippine setting and environment can be applied to small enterprises that are often not served due to a standard approach of collateral-based lending and limited use of enhanced financial services such as lines of credit or purchase order financing. USAID should support development of new approaches to continue development and enhancement of greater access to financial services to this important but often overlooked “missing middle” of the financial landscape in the Philippines.