26 Dec 2014

Financial inclusion and SME financing in the Philippines

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On December 6th, a conference was held at the initiative of meso IMPACT Finance, for the release of a study on the contribution of the financial services and the agricultural sector to the inclusive growth in the Philippines.


What does inclusion mean ?

This means bringing the capacity to get persons out of poverty through the access to basic services like schooling and training, and the possibility to open a bank account for savings.
The main output of this study is that the market would become more vigorous through a greater inclusion of the traditionally or historically marginalized populations, while most of them live in the countryside or in peri-urban areas that are sometimes slums.
In many emerging countries, a significant part of the population is still marginalized and then excluded from the local economic growth. The question is how to generate a consistent creation and distribution of wealth that will set up the basement for eradicating poverty and accessing the status of “developed country” (1).
The case study of the Philippines has been chosen because this country is where meso IMPACT Finance operates. This country is weighting significantly in South-East Asia at various levels : population, annual GDP growth, education standards, quite diversified economy (manufacturing including food, construction, electronics, BPO – Business Process Outsourcing).

The Philippine economy at a glance

The Philippines has been experiencing a revival of its economy since 2009 … after sluggish growth during the previous decades.

Philippines - Key-figures

Philippines – Key-figures

Poverty line (2)

Despite an era of vigorous and unstopped growth since 2009 (6,3 % average annual GDP growth rate from 2009 to 2013), 30 % of the population is living on less than US$ 2 a day. This is a sign that there is still a huge potential for growth among most the economic sectors.
In its updated Asian Development Outlook 2014 report, the Development Bank (ADB) has forecasted a 6,2 % GDP growth in 2014 in the Philippines, and further 6,4 % in 2015.

The World Economic Forum (3) listed the Philippines as the world’s 59th most competitive nation in 2013, thus recording a significant enhancement from its ranking at 87 in 2010.

The most pressing domestic challenges are to improve infrastructures, attract more investment to generate more stable jobs, and further reduce poverty.


 Strengthening financial services to sustain growth

Access to financial services is an important challenge in the Philippines, as the country is spread on 7.107 islands. This results in a low banking penetration in the population, similar to Indonesia which counts 18.307 islands for a 250 million population.
For every 10,000 adults in the Philippines, there is only one bank and two Automatic Teller Machines (ATMs). Out of the 1.634 cities and municipalities of the countries, 37 % do not have a banking office. 15 % of the total population lives in unbanked cities and municipalities.
Even if there is a growing penetration of banks and ATMs, the distribution is highly concentrated in larger cities. The situation varies a lot from the National Capital Region (NCR), Metropolitan Manila, where there is at least one bank in every municipality, to the Autonomous Region in Muslim Mindanao (ARRM), with 93% of unbanked cities. The National Capital Region, including Manila and the suburban areas, also concentrates 43 % of the deposit accounts and 68% of the total amount of deposits (4).
Only 2 out of 10 households (or 26,6 % of adults) have a deposit account in a formal financial
institution – even if 85 % of the Filipino population have access, theoretically, to a financial institution in their vicinity – and only 10,5 % of adults took out a loan in a formal financial institution in 2012 (5).

From mainstream to micro financial services providers

There are numerous providers of financial services for lower and middle-income people and for micro, small and medium‐sized enterprises (MSMEs) in the Philippines.
The financial sector is classified in 2 basic categories : banks which are regulated by the Philippine Central Bank and NBFIs (non-bank financial institutions) which are not regulated.
At June 2014, there are 664 registered banks, out of them 628 are family-owned rural and thrift banks. They are historically serving the low-income population from the rural and suburban areas. Around 200 of them offer microfinance services.
The population of NBFIs is more diversified with 6.114 players that can be broken down in three main groups. The largest one (5.971 entities) includes the pawnshops which are identified by the Philippine Central Bank as entities for financial inclusion. They are very successful as the access to credit is easy (few documentary requirements and widespread location all over the country). In the second group in term of global outreach are microfinance-oriented NGOs (around 25) that count for +/- 60 % of the total active borrowers and loan portfolio in this segment of credit. Stuck between the banks and the rest of the NBFIs, the third and smallest group is the emerging category of financing private companies, which specialize on granting loans to MSMEs whose financing needs are too high to be covered by microfinance institutions. The estimated number of those financing companies is 40.
Alongside this classification, it must be mentioned the informal lenders, many of them known as “Mumbai’s”. Most are Punjabis (from India) who run the profitable “5-6” business : basically it consists in lending 5 and getting 6 in return including interest, after 30 days. This is definitely the most expensive among all the credit options described.

MSMEs, key drivers to an inclusive growth – A focus on financial services and agriculture

The study releases highlights through concrete case studies that an inclusive business-model is possible inside a win-win game-play whose achievements are more jobs and revenues for the local population and sustainable financial profits for the local companies and institutions.
Two sectors of the Philippine economy have been chosen : the financial services owing to its potential power of collecting and channeling the capital to the inclusive business activities ; the agriculture whose paradox is the poor development and competition against the immense operational capacities (manpower and biological diversity throughout the entire archipelago).
Both sectors need a structural improvement in order to sustain an inclusive growth in the Philippines : the first one with developing financial products targeting the underserved populations ; the second one with relocating a part of the value creation process at farmers’ level, not only at multinational companies’ level.

A copy of the study (including a foreword from Mr. Alain Kinsch, Consul General, a.h. of the Republic of the Philippines in Luxembourg) is accessible upon request. Please contact : xh(at)mesoimpactfinance.com


(1) According to the International Monetary Fund, “At a global poverty line of US$1–2 per day poverty in richer countries is insignificant. Thus, developed countries could be defined as countries with negligible poverty at such a poverty line”
(2) Poverty incidence is the share of the population whose income or consumption is below the poverty line, defined as being $0.90 per individual per day in 2012, according to the Philippine Statistical Authority
(3) World Economic Forum, The Global Competitiveness Index 2013 – 2014 : Country Profile Highlights
(4) All of these figures are extracted from Financial Inclusion in the Philippines, Bangko Sentral ng Pilipinas (first quarter 2013)
(5) All of these figures come from the study « Financial Inclusion in the Philippines » issued by the Bangko Sentral ng Pilipinas (BSP), in the 1st quarter of 2013

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