Bangko Sentral Fhilipines (BCP), the Philippines Central Bank, has embraced microfinance. As a result the Philippines has probably the friendliest environment of any country in Asia for microlending - if you are a registered bank. This conducive regulatory environment is a major reason that several MFls have either formed banks or are trying to do so.

The General Banking Law of 2000 contains milestone provisions for microfinance. Key changes are: (1) microfinance loans may be given on the basis of borrower's cash flow, rather than traditional collateral; (2) interest rates on such loans must be market based (not subsidized) and reflect all operating costs, loan loss provisions and cost of funds; (3) repayment frequency of microfinance loans should also be based on the cash flow of the clients and can be as often as daily, if that suits their needs.

Central Bank Vice President, V.P Lirio told a Manila seminar in December that the significance of these new provisions was that they understood the peculiar nature of microfinance in scrutinizing such lenders. Existing microfinance banks, like CARD Bank, have educated authorities on non-collateralized lending, while the Coalition for Microfinance Standards (now the Microfinance Council, MC) has won recognition for microfinance as a legitimate and effective means of accessing financial services to the poor. Bangko Sentral's next step is, it is understood, to request the Monetary Board for microfinance lending to be exempted from certain restrictive regulations which normally apply to unsecured loans. These exemptions would only apply to Microfinace Banks who follow the standards set up by the MC, and closely supervise client's loan use and will have loan tracking systems and monitoring of arrears insured. However, it's ironic that the Central Bank is making it attractive for MFIs to become registered banks at a time when there is a moratorium on the creation of new banks.

There are in fact 300 rural banks in the Philippines which are defunct and quite a number of "distressed" or "soon-to-fail" banks, says Ms Noeme Javier, from Philippines Deposit Insurance. If MFIs should take over such a bank by agreeing on a rehabilitation plan with the authorities, a failed bank would carry the baggage of its portfolio, its liabilities and even its court cases, which would be a drag on the microfinance operation.

A better solution has been proposed by PHILNET President to the Central Bank, who askes, "The number of MFIs who want to become banks right now is probably less than five. Could Bangko Sentral lift the moratorium for a for a small number of specialized microfinance banks?"

Bangko Sentral is considering lifting the ban for a limited number of microfinance banks, and evaluating applications on the basis of the performance standards of the Microfinance Council.

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Extracted from Credit for the Poor, Issue #28, August 2000 .