Tight supervision of microfinance sector urged

MANILA, Philippines - The microfinance sector, which is composed of rural and thrift banks, non-government organizations (NGOs) and cooperatives, must operate under a tight framework of regulations if the country wants to achieve sustained inclusive growth, the Congressional Policy and Budget Research Department said.

In a policy paper, researcher Rosemarie R. Sawali stressed the need for a stronger supervision of the microfinance industry, particularly NGOs.

Citing the 2010 Microfinance Industry Report, Sawali said some NGOs had been taking deposits beyond what is required of them.

Sawali said while NGOs fall under the purview of the Securities and Exchange Commission (SEC), they remain largely unregulated. They are merely required to register with the SEC.

“The 2010 Microfinance Industry report raised the possibility that several microfinance NGOs may have collected savings beyond the compensating balance which should already be subject to regulation. The problem is that there is no standard way of determining whether the collected savings have exceeded the compensating balance because microfinance NGOs are not required to submit financial information to any agency,” Sawali said.

The pork barrel scam, which brought to fore the collusion among lawmakers, government officials and private individuals to pocket public funds, has cast a cloud over NGOs. It involved the gross misuse of the Priority Development Assistance Fund for legislators’ pet projects.

 â€œMicrofinance NGOs are not subject to any prudential regulation and supervision because they are not supposed to take deposits from the general public or their clients. However, there are microfinance NGOs which require a portion of the loanable amount to be retained as forced savings or capital build-up,” Sawali said.

 â€œA higher number of borrowers are served by microfinance NGOs and cooperatives which are not properly regulated, possibly posing risks not just to the clients but also to the integrity and sustainability of the industry as a whole,” Sawali added.

Aside from this, Sawali pointed out that the Cooperative Development Authority (CDA) lacks the capacity to fully regulate cooperatives. “For one, the CDA has yet to develop specific regulations for cooperatives engaged in microfinance as the agency is focused on developing the sector,” she said.

Sawali said while  the microfinance sector has tremendously grown in the past years, there has been only minimal improvement in the poverty incidence.

Data show that the industry served 4.7 million clients with outstanding loans of $1.2 billion as of June this year.

 â€œThe high unemployment rate and the minimal improvement in poverty reduction have been cited as major indicators of the lack of inclusive growth in the country,” Sawali said.

Sawali said encouraging micro-entrepreneurship could help ease the unemployment problem while the government works on  attracting more foreign direct investments that would generate employment.

Outstanding loans of BSP-monitored microfinance banks grew 24.2 percent last year to P7.9 billion. The number of borrowers also  steadily increased from 878,322 in 2008 to 1.1 million in 2012.

Rural bank was the biggest source of microfinance loans, accounting for 78.9 percent of the total exposure or about P6.3 billion and servicing 944, 758 borrowers based on BSP data.