Addressing Constraints in the Provision of Financial Services to MicSMEs and Poor Households

This paper discusses the role of the policy environment in helping banks provide financial services to micro, small and medium enterprises (MicSMEs) and poor households in a sustainable manner.

The paper states that the financial sector reforms initiated by the government in the 1990s have laid the ground for promoting microfinance in the Philippines. MFIs, however, still face constraints in expanding their services to MicSMEs and poor households. These include macroeconomic instability, inadequate infrastructure, shortage of capital, competition with government banks, inadequate supervision, and loan portfolio regulations. The government must address these constraints to promote market-based microfinance in the country. Recommendations include:

• Government budget should reflect its prioritization of infrastructure in rural areas;
• Bangko Sentral ng Pilipinas (BSP) should rethink the circular it issued in 1999 prohibiting microfinance banks from mobilizing deposits;
• Large commercial banks should be encouraged to infuse equity into small banks;
• Government banks should not compete with private banks;
• BSP must adopt a risk-based supervision approach for microfinance and upgrade the capability of its staff to utilize such an approach;
• Government should review loan portfolio regulations to give small banks more flexibility in selecting clients.