Upgrading Financial Services for the Rural Folk

In the remote areas of this country where there are no commercial banks, or even rural banks, you will find cooperatives to be the catalysts of local economies. It is from them that financing for micro and small businesses are sourced and where people can keep and save their hard earned money.

Go to the countryside and you will find many of them serving the needs of the rural folks --- enabling the common folk and starting them off to become entrepreneurs, and for those already running their sari-sari store, or copra trading business, financing the sustenance and growth of their micro and small businesses.

But most of these cooperatives, with their modest successes, have arrived at the crossroads where they need a stimulus and the capacity for further growth. It would seem that these institutions have reached their limits in terms of their capacity for development or would need a push to accelerate growth.

It is the cooperative of this kind, in this environment, that Small Business Corporation’s Capacity Building Program for Pre-MFIs (micro-finance institutions) was envisioned to help. To prepare and make Pre-MFIs fit for growth and expansion and eventually become a stable, viable institution accredited with SB Corp.

“Pre-MFIs” are MFIs that fail to pass the accreditation criteria of SB Corp. Hence “pre” connotes their failure to perform at par with the standards of established MFIs.

The bottom line is to help develop MFIs to create the environment that will provide greater financing access to micro-enterprises.

A component of the Rural Micro Enterprise Promotions Program (RuMEPP) and funded by a grant from the International Fund for Agricultural Development (IFAD), the SB Corp. has implemented this program in the poorest provinces of the country where cooperatives in their fledgling stage abound, and where there are no accredited MFIs under RuMEPP that can avail of SB Corp.’s wholesale funding.

RuMEPP has a financing component for micro-enterprises that is channeled through SB Corp. under its Microfinance Wholesale Lending Program. The program through SB Corp. lends to MFIs, which in turn relends to micro enterprises. However, this is hampered by the lack of qualified MFIs able to pass the eligibility criteria and risk rating process of SB Corp.

Rationale

“We are helping MFIs located in the poorest provinces of the country where there are no  SB Corp.- accredited MFIs. The program will help Pre-MFIs comply with the requirements and pass the accreditation criteria of RuMEPP and SB Corp.,” explained Ms. Josefina Vengco, Program Manager of the MFI Capacity Building Program of SB Corp.

“Such is the case of the Cordillera Autonomous Region and the province of Saranggani.  Since the beginning of RuMEPP in 2006 up to the present, the provinces in the CAR and Saranggani province have had no SB Corp.- accredited MFIs, she added.

While there are active cooperatives in these areas that have shown success in membership growth, loan portfolio quality, and business development, they are not operating at their optimum and not at par with established micro finance standards. The Capacity Building Program of SB Corp. for Pre-MFIs have identified cooperatives in these areas that will undergo capacity building to address gaps in their lending operations, portfolio and risk management, and good governance.

“Ultimately, the end result after capacity building is that these MFIs will be enabled to improve their performance and pass the standards for accreditation and avail of RuMEPP financing from SB Corp. They will be financially stronger and better managed MFIs,” Vengco emphasized.

“All these will redound to micro and small enterprises having better access to financing which over the long term will stimulate growth in the local economy and improve living standards,” added Vengco.

Capacity Building Program

Located at the opposite ends of Saranggani Province, the first two MFIs that have undergone the capacity building program are the Malapatan Multi-Purpose Cooperative (MMPC) and the Kiamba Municipal Employees Cooperative (KiMECO). both are municipalities in Saranggani Province. Capacity Building was conducted by the Microfinance Innovation Center for Resource and Alternatives Philippines Foundation, Inc (MICRA) as the business delivery services (BDS) provider chosen through a rigorous selection process.

Initially, the program involves a diagnostic phase which will cover an assessment of business strategy, policy, manpower, organizational structure, operations and financial position of the cooperative.  In the diagnostic phase, the BDS provider will also analyze the MFI’s market position and strategy.

“By the end of this phase, the BDS provider would have formulated, based on the assessment, a customized capacity building program designed so the program will yield a strengthened institution, capable of servicing the credit needs of the mSMEs,” Vengco pointed out.

“Phase two of the program will be the implementation of the action plan recommended in phase one. The BDS provider will conduct either of several modes of intervention such as trainings, workshops, consultancy, mentoring, and/or coaching. Towards the end would be an evaluation of the results of the intervention, and afterwards, monitoring to determine the MFI’s adherence to the changes introduced by the program,” explained Vengco.

Problems of Coops

Based on the diagnostics, and typical of most Pre-MFIs, the problems of the cooperatives are in the areas of portfolio growth and quality, lack of credit and admin policies and guidelines, organizational structure, product development, and funds management.

For example, while MMPC has considerably grown in assets, membership, and portfolio size, it was overwhelmed by such growth because it was not prepared to manage it. Being so, it was difficult for MMPC to sustain the rapid growth and to meet performance standards.

“Without the needed policies, systems and procedures, and governance structures and principles in place and institutionalized, it would be difficult for MMPC to sustain its growth and be profitable,” explained Vengco.

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In the case of KiMECO, their growth is being hampered by their lack of capability to do accounts and portfolio management, and risk management. They are also unable to leverage their assets to spur growth being too dependent on internal funds for lending operations.

“The ability to manage risks and tap other fund sources would go a long way to achieve a sustainable and balanced growth in its loan portfolio and asset size,” Vengco said.

“KiMECO would also need to improve their organizational structure, to clarify roles and responsibilities so that proper accountability can be established,” she added.

Intervention

To address these problems and concerns of the cooperatives, the program through its BDS, MICRA proposed a customized action plan of capacity building interventions for each cooperative which were to be conducted over a period of about four months. Once the proposed interventions are approved by the cooperatives’ respective Board of Trustees, then they are slated for implementation.

MMPC underwent capacity building in Strategic Development Planning, Financial Portfolio Management, Market Research for Market Positioning and Manualization of Policies and Procedures.

For KiMECO, the interventions were in portfolio and risk management, Marketing and Product development, Accounts Management, and Organizational Structuring and Staffing, and policy formulation and institutionalization.

The intervention consists of classroom type of lectures, group dynamics, case studies, field work and workshops, and coaching and mentoring.

Results of Capacity Building

While the cooperatives’ learning from the capacity building effort may be immediately implemented and discernable, their impact is not abrupt, but could be seen only over the long term. The important thing is that the cooperatives are made aware that the capacity building intervention will not bear fruit without their judicious improvement in management and implementation of new policies, and the organizational changes required of them.

For example, according to Gerry Cabonegro, Chair of MMPC they are now working towards the attainment of the recommended improvements set by MICRA and spurred by its capacity building interventions.

“These areas of improvement are in the adoption of best practices in micro-finance to be integrated into MMPCs credit policy and manual of operations.  Hopefully, the improvement in policies and process efficiencies will improve the quality of our portfolio,” says Cabonegro.

“We are also working to strengthen our credit committees and other Board of Directors’ oversight committees to enhance governance and be compliant with good governance principles,” he added.

Already, as a result of the capacity building intervention by MICRA and SB Corp., the coop is now capable of product development, conducting market strategy sessions, enhancing its customer service orientation and doing market surveys.

In Kiamba, the KIMECO has also shown a determination to pursue their learnings from the capacity building intervention. It is now practicing the disciplines of portfolio management.

For example, explains Jane Rojas, KIMECO Chair, the coop has adopted the portfolio at risk (PAR) to manage its problem accounts. “We realized that the longer the occurrence of default, the harder it is to collect from these problem accounts,” she says.

“We also are now provisioning for probable losses. The net surplus of our financial operations is now correctly computed and reliable as basis for paying out dividends,” Rojas pointed out.

“Portfolio quality is projected to improve with the policy changes in portfolio management. For example, non-earning assets will be limited to five percent of total portfolio. Operational self-sufficiency is set at 130 % and liquidity is ensured by aggressive collection efforts in proportion to its disbursement rate,” she added.

Other areas of learning which the KIMECO has started to implement are: product development, risk management, documentation of processes and policies, and appropriate organizational structure and staffing.

It will be the long term results of the capacity building that will be the judge of its success. However, Vengco is positive that the future is bright for these two Pre-MFIs, and they will be able to truly live-up to their moniker as the bank of the people.