Microfinance Horizon

By Daxim Lucas

28 November 2010 [PhilippineDailyInquirer]

MANILA, Philippines – Eleven years after bringing the concept of microfinance to the mainstream, the pet project of former Bangko Sentral ng Pilipinas Governor Rafael “Paeng” B. Buenaventura has taken root in the local banking industry.

Microfinance today is a multibillion-peso industry that is helping improve the lives of thousands of borrowers and beneficiaries.

However, four years after Buenaventura’s death on Nov. 30, 2006, a new challenge has emerged that threatens not only the future of his legacy, but also the viability of an industry crucial to the livelihood and well-being of millions of Filipinos.

“There is an unfolding crisis in the microfinance industry of India,” says Leonilo Coronel, who is the executive director of RBB Foundation—an organization put up several years ago to continue the advocacy of the late banker.

“More alarmingly, we see patterns in India which, if left unchecked, could duplicate themselves here.”

Victim of own success

The microfinance school of thought started in Bangladesh, but it was in India that the industry really found its scale.

According to Coronel, the Indian microfinance industry has become so successful that it is now in danger of becoming a victim of its own success.

“To grow their client base, [microfinanciers] had to lower their credit standards so that they could lend more money to more borrowers,” he says.

The result is the steady erosion of credit quality across the industry.

“Default rates in India are rising,” Coronel says, fearing that the same may soon happen in this country.

Cheaper than loan sharks

Over the years, RBB Foundation has helped the microfinance industry in the country grow by providing training and capacity-building programs for entities entering the industry.

Together with groups like PinoyME, founded by the late President Corazon Aquino, the foundation is helping spread the gospel of microfinance across the country.

The result is, people once considered “unbankable” now have ready access to affordable capital.

Before microfinance took off, the only access people had to financing was through loan sharks, commonly known as “five-six” lenders.

Thankfully, Buenaventura’s vision of providing the poor with better access to capital is shared by the likes of former Development Bank of the Philippines chairman Antonino Alindogan, former Monetary Board member Teodoro Montecillo, Bank of the Philippine Islands president Aurelio Montinola, JP Morgan Chase Philippines chairman Roberto Panlilio, former Bankers Association of the Philippines president Deogracias Vistan and Paeng’s elder brother, Cesar Buenaventura—all of whom serve as the foundation’s trustees.

Credit quality

In trying to head off an Indian-style crisis, the people behind RBB Foundation believe that local microfinance institutions have to share information about creditors the way banks in more advanced economies do.

“To maintain credit quality in microfinance, we need something akin to a credit bureau,” Coronel says. “This will entail building a central database, where information about microfinance borrowers will be stored for the use of lenders.”

Under this scheme, the database will be used as reference by lenders to check the credit of potential borrowers.

Instead of conducting tedious and expensive door-to-door or bank-to-bank checks, credit investigators may simply submit the name of a potential borrower to a credit bureau for verification.

“Immediately, they will see if the borrower has outstanding loans with other microfinance institutions, what their repayment track records look like and, more importantly, if they have been subject to credit checking by other banks recently (an indication that they have been “shopping around” for loans),” he explains.

According to the official, the credit bureau marks the next stage of development for the microfinance industry.

“This is what we’re doing to preserve Paeng’s vision and legacy,” Coronel says.

Indeed, such an effort to maintain credit quality amid the temptation to throw caution to the wind is something Paeng would have approved of.