Lending to Micro Enterprises Through NGOs in the Philippines

This chapter deals with NGO programs of lending to micro enterprises in the Philippines. It contains four sections: a brief background on the programs themselves, the premises underlying them, questions of sustainability, and some research priorities. The programs discussed represent a major attempt underway in the Philippines to reconstruct the nature of the financial landscapes by using NGOs and “peoples organizations” as intermediaries to make a major dent on poverty by lending to micro enterprises. The term micro-enterprise program refers to the promotion of small self-employment activities through the provision of credit, training and other inputs. Two types of approaches will be briefly described in this chapter: the first approach is to concentrate on qualitative change of a limited number of enterprises, offering them a rather comprehensive range of services. The second approach, that refers to so-called “minimalist programs”, is directed at expansion of a large number of enterprises through the provision of a minimum of services. NGOs and peoples organizations such as cooperatives and credit unions are usually regarded as semiformal. Although regulated in certain aspects they retain the essential informality of the informal sector. Thus the programs discussed in this paper can be viewed as an attempt to develop and use the semi-formal sector to fill a void left not only by the formal, but also by the informal sector, which practices its own form of credit rationing. To the extent the informal sector does lend to micro enterprises, these programs can also be viewed as an attempt to improve the terms of such lending, by providing stronger competition to the informal sector. There is a long history of NGO involvement in livelihood programs in the Philippines, based originally on grant assistance from bilateral donors, international NGOs, and even the private corporate sector (through the Philippine Business for Social Progress.) However, in the 1980s government agencies also became increasingly involved through direct lending to beneficiaries. The most salient of the earlier government programs was the KKK launched in 1981. It fell into some disrepute when it became overly politicized in the selection of beneficiaries and had a very low repayment rate. The Philippines has recently undertaken a major devolution of functions and resources to the local governments under the Local Government Code. However, the interests of the poor are expected to be better protected in future local-government implemented programs by the statutorily granted representation of NGO representatives on provincial and municipal governments (of unto 25 percent of the strength of their legislative bodies). Livelihood programs were revived under the Aquino administration as a major component of the antipoverty program and proliferated until as many as 154 programs, according to one count, were being run by nine line-agencies, some of them lending directly to borrowers. Together with several government financial institutions and corporations also financing livelihood programs, they are reported to have been spending P2.3 billion a year 1 , of which 40 percent was foreign funded. While various agencies attempted to specialize in their clientele, in practice there was a large measure of overlap, and possibilities of complementation and exploiting economies of scale remained unutilized. One evaluation of several programs being run by different bureaus of the same agency, the Department of Labour and Employment (DOLE), found that most of the programs had the same sort of beneficiaries and were too small to be cost-effective (Bot 1990). On an average, a loan of P10,000 had generated about P23,000 of income a year, as well as 0.9 jobs, divided almost equally between self and wage employment. About one third of the projects financed were a main source of income for the household. There was a close relationship between the success of the enterprise and the repayment rate. Overall the payment rate was 68 percent, although less than 20 percent of the enterprises failed entirely, 15 percent earning insufficient income to make full repayment. There was no observable association between the success rate and the size of the loan. Trading enterprises were on average more profitable than manufacturing and services, and “agro-industrial” enterprises (such as hog-raising) the least profitable. In response to growing unease with some of the problems of the program, and in keeping with the new (1986) constitution that required the state “to encourage non-governmental and community-base sectoral organizations”, as well as with the medium-term development plan (1987-92) which recognized NGOs as “essential partners in the development effort”, a decision was taken that by the end of 1989 all line-agencies should discontinue direct lending and channel future assistance through financial institutions or NGOs. At the