‘Sachets’ and strides in banking for the poor

You'll see them hanging in colorful strips in every convenience store, these small, inexpensive sachets of milk, laundry detergent, shampoo, instant coffee—even gin.

“These ‘bottom-of-the-pyramid’ commodities show there’s a profitable market for products that will meet the needs and wants of the poor,” said the economist Dr. Victorina Zosa, who heads the research office at the University of San Carlos.

The banks’ equivalent of the manufacturers’ sachets are microfinance services, especially microcredit. From only 121 banks in 2004, at least 225 banks already offered microfinance in 2007, Pia Bernadette Roman of the Microfinance Unit of the Bangko Sentral ng Pilipinas (BSP) told me via e-mail.

In a 2006 paper on microfinance for The Globalization Research Trust, Tom Clougherty defined microfinance as “the provision of financial services, whether loans, deposit accounts or insurance, to poor and low-income individuals and households. What primarily distinguishes microfinance from the traditional provision of financial services, aside from the small sums of money involved, is the absence of collateral as security for a loan. Instead, money is advanced on the basis of reputation.”

The number of borrowers who have obtained microcredit from rural, thrift or cooperative banks in the Philippines has grown 77 percent in the last three years, from 485,136 in 2004 to about 860,000 last year. The total loan portfolio rose from P2.95 billion (US$72 million) three years ago to P8.2 billion ($201 million) last year, the BSP reported.

One significant development, Roman said in a separate paper, was the General Banking Act of 2000, which ordered the BSP to revise the rules to encourage banks to offer microfinance services. “In the past, the banking sector had a general aversion to microfinance because of past failed experiences with directed credit programs, the perception that the poor are high-risk due to the lack of collateral, and the high transaction costs,” she added.

Banks that provide microfinance are exempted from a central bank moratorium on the creation of more branches. In 2001, the BSP opened a rediscounting window for microfinance providers. No ceilings are set for interest rates. Banks may, relying on their own assessment, decide to waive collateral from certain borrowers.

Roman emphasized that microfinance transactions “are business transactions and not dole-outs or charity.” While microfinance providers are allowed to do away with traditional documentary and collateral requirements, they are expected to recover the amounts they’ve lent; otherwise, they soon lose funding sources and fold up.

The United Nations Development Program estimated that in 2006, 400 to 500 million households worldwide were in need of microfinance. Only 30 million had access to it.

“Bottom-of-the-pyramid strategies, the idea that the poor represent an enormous, albeit diffuse, market worth trillions of dollars and that companies can profitably sell to this market so long as they meet the consumers’ needs, are growing in popularity among leading companies in a range of industries,” Clougherty said. “This can only be of benefit to the developing world.”