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LESSONS:

Rural Microenterprise Finance Project in the Philippines (Loan 1435-PHI[SF])

sector: Finance | country: Philippines

1. Covenants on regulation need to be more sensitive to the laws and standards practiced in the financial sector. In particular, the covenant to regulate deposit mobilization of nongovernment organizations (NGOs) and formulate an appropriate law (if necessary) was difficult to comply with. NGOs are outside the authority of any regulatory agency, unless they transform themselves into regulated financial institutions. The Agricultural Sectors (Divisions), which initiated ADB s microfinance programs in the past, might have inadvertently overlooked the vital nuances of the covenant and implications for the financial system. As a subsector of the financial system, microfinance should conform to the rigors of that system. [Main text, para. 83]

2. Any efforts to target the poor must (i) clearly define the target group; (ii) identify the barriers to their market entry; and (iii) include interventions and/or mechanisms to break these barriers in the project design to ensure the target group s participation. The ultra poor the bottom 30% of the rural population were the main target of the project design. However, the ultra poor were not defined clearly, which prevented targeting from being more focused and concrete. Likewise, barriers to this target group accessing the institutional credit market were not identified well. Further, given the difficulty of estimating incomes in rural areas, the participation of the bottom 30% of the rural population in the Project cannot be assessed reliably. [Main text, para. 84]

3. Microfinance is not effective in reaching large numbers of the ultra poor on a sustainable basis. The ultra poor and destitute have a different set of needs that can be addressed more effectively by other forms of social development inputs. Safety net programs, such as guaranteed employment, food aid, and skills training, are some examples. Over time, these interventions could help them graduate to credit-taking capability and become full-fledged microfinance clients. [Main text, para. 85]

4. The project brought microfinance into the mainstream of the formal financial system. This was accomplished by facilitating the participation of rural banks, cooperative banks, and thrift banks that have emerged as major providers of microfinance. The critical factors that contributed to this achievement were (i) the availability of project funds that catalyzed the expansion in the supply of microfinance services, (ii) the favorable policy and legal environment provided by the Central Bank and the passage of a social reform and poverty alleviation act, and (iii) the flexibility of ADB and the executing agency to adjust and respond to changing market demand conditions. [Main text, para. 86]

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