35467

SUSTAINABLE BFNGwith the POOR

Case Studies inMicrofinance-

PHILIPPINESTulay Sa Pag-Unlad,

Inc. (TSPI)

1981 - 1996

Tom Dichter

August 1 998

The World Bank

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SECTORAL & ITRES(5"lri rl=NTER

MAR 0 9 2000

WORLD

SUSTAINABLE BAN INGwith the POOR

Case Studies inMicrofinance

PHILIPPINES

Tulay Sa Pag-Unlad,Inc. (TSPI)

1981 - 1996

Tom Dichter

August 1998

The World Bank

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Population (1996 est.) 72.4 million 1995 8.1%Population density 241 inhab./kM2 , 1996 8.4%

Source: World Bank (1997), Central Intelligence Agency (1997), and International Monetary Fund (1997).

SUSTAINABLE BANKING WITH THE POOR i

ii

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INTRODUCTION

Tulay Sa Pag-Unlad, Inc (TSPI) is a case of a microfmance NGO trying to hold its

organizational culture together while forces it has set in motion are beginning to have the

opposite, centrifugal tendency'. Yet there is more to this story than the commonly observed

attempt to expand too rapidly and ambitiously. The organizational tension is between a Christian

founding mission to help others; subsequent demands (led by a forceful CEO) to expand that

mission; and adapting too many external models too quickly in the interest of catching up with a

perceived state-of-the-art in microfinance. TSPI is trying to meet equally three rather different

goals: i) the goal of financial sustainability (the achievement of which has become a more and

more prestigious goal because of new benchmarks set in the microfmance world); ii) the goal of

targeting and reaching all levels of the Philippine poor; and iii) the goals of business

development, to which TSPI's Core Values make explicit reference.

When TSPI began in 1981, the Christian entrepreneurs who founded it wanted to help the

poor become self-sufficient business people. TSPI was to constitute a "bridge to progress" (the

organization's name in Tagalog). Soon after its founding, based more on the prospects of success

than on its track record, TSPI began expanding by cloning partners in other parts of the country.

This quickly stretched the young organization's resources.

With the arrival of a new CEO in 1989, outreach - in terms of numbers - remained

limited, and along with that realization, came a sense that the organization was not really

reaching the most needy of the poor.

Between 1990 and 1994, as a result of the new executive director's exposure to other

NGO-run microfinance programs, the organization became driven, in rapid succession, by the

prospects of: i) a significant scale of outreach to the "ultra poor;" ii) financial sustainability based

on application of best practices; and iii) the idea that TSPI had to convert its main operations to a

bank and do so urgently. Threaded through these intentions was the conviction that the Christian

mission of the organization would not only remain intact but would deepen its meaning, largely

because it would be reaching all levels of poverty in the country.

Recognizing that the intention to reach the bottom level of poverty - the ultra poor -

would have a cost in terms of sustainability, a temporary "Robin Hood tactic" was used: TSPI's

older financially viable lending windows (its "Individual Lending" and the "Sakbayan"

programs) would cross-subsidize the newer programs ("Solidarity" [1994] and

"Kabuhayan"[1992]) which were set up to reach the most impoverished groups.

During this period, TSPI was instituting, in rather fine detail, many microfinance best

practices in the newer programs, but without managing the organization well as a whole. The

1 The research for this case was carried out at the end of 1995. The case study should, therefore, be considered a "snapshot" of

the organization in 1995 and early 1996. The exchange rate used throughout is $1.00 to P (Philippine Peso) 25.

SUSTArNABLE BANKING WITH THE POOR

effort to become a bank, along with the resulting effort to change TSPI's image, began to haveeffects on staff morale.

This "snapshot" taken in late 1995 shows an institution with an increasingly diffusemission, with real consequences for TSPI's overall effectiveness. TSPI's capacity to stop andanalyze its impact, test its assumptions about the various markets it was entering and intended toenter, had become diminished. As its newer programs passed out of start-up stage, problemsbegan appearing rapidly. And even though the organization covered its costs in 1993-94(barely), it had not met the sustainability test. Finally, given the high rate of portfolio expansionin the few preceding years (at least 30% per annum) its summary numbers - a total of only 3,359active borrowers - suggest an interesting lesson: best practices cannot make up for lack ofstrategic coherence.

COUNTRY CONTEXT

At a December 1995 international meeting in Tokyo, a prominent Philippine Governmentofficial characterized the country as being in the process of "entigerment." The developmentalpath was generally positive; structural reforms were beginning to be felt, especially in the moreequitable distribution of incomes across regions.

ARE THE POOR "BEYOND THE FRONTIER?" ISSUES AFFECTING POVERTY ALLEVIATIONSTRATEGY IN THE PHILIPPINES

Many analysts in the Philippines disaggregate the poor into four categories, using apoverty "pyramid" with the least poor (the "entrepreneurial poor") at the top.2 The next leveldown are the self-employed; then come the "laboring" poor (unskilled, including itinerant farmlaborers); and finally the "ultra" poor (those unable to eat three times per day), estimated atbetween 17% and 23% of the population.

About 45% of the total population of 68.8 million lived below the poverty line in 1991, orabout 4.7 million families.3 Roughly half (47%) of poor families are in rural areas, where lackof physical infrastructure limits access to health, education, and income earning opportunities,though in some rural provinces things are beginning to improve, in part because of theGovernment's selection of 20 priority provinces for special attention. A number of urbanfamilies (23%) are also considered poor and suffering from environmental pollution, violence,housing insecurity, and overcrowded conditions.

Several things make poverty in the Philippines different however. First, the country has ahigh literacy rate (95%); even many of the ultra poor are literate. Second, households tend to be

2 Remenyi, Joseph, Where Credit is Due: Income-Generating Programmes for the Poor in Developing Countries. InternediateTechnology Publications, London, 1991

3 National Statistical Coordination Board Technical Working Group on Income Statistics, 1992.

SUSTAINABLE BANIUNG WITH THE POOR 2

extended, with multiple income earners; thus, elderly and female headed households suffer lower

rates of poverty than in other developing countries. Third, there are estimates of up to 15 million

informal sector entrepreneurs in the Philippines, employing perhaps one-fifth of the population.

Finally, the Philippine rate of overseas labor migration is one of the highest in the world. The

remittance income of these "Overseas Contract Workers" (OCWs) can only be guessed since a

portion of it is hidden, but the amount is large and there is little doubt that it contributes

substantially to GNP growth, and plays a significant role in private "self-help" efforts to alleviate

poverty.

It is generally assumed that a great many poor in the Philippines, as in other countries, are

"beyond the frontier," to use J.D. von Pischke's term. That is, they do not have access to formal

credit. Among recent government initiatives based on that premise is a 1993 Social Pact on

Credit, which led to the creation of a National Credit Council to rationalize the different

government-based programs. At the time of this case study, access to credit was central to the

Government's poverty reduction goal.

But while most studies in the Philippines conclude that credit demand is enormously

high, and access limited, the limitations of the data on which many studies are based allow for a

different interpretation. Examples can be found in a summary of such studies done by the World

Bank in June 1995.4 Noticeably missing from the study are data on overseas remittances (which

were expected to reach US$4 billion in 1995, a doubling of the 1994 figure) and their use in

providing business start-up and working capital; the size and nature of the "loan shark" sector; or

the role of ROSCAs and other traditional informal finance mechanisms. Thus, when the World

Bank study cites an Ateneo University study done between 1986 and 1987 showing that one third

of the population borrows funds, it is unclear exactly what that means. A 1992 survey done by

the National Economic and Development Authority is quoted saying that only 12% of the ultra

poor families availed themselves of credit in 1991." 5 Earlier in the same study, it is stated that

2% of the ultra poor are reached by NGOs, 7% to 10% are reached by cooperatives, and 5 % by

specialized government banks.6 If this is meant to be taken as cumulative, (which is not clear)

then a total of 14% to 17% of the ultra poor may have access to credit and savings services.

Given that the ultra poor subsist at the very margins of the economy, even the lower

figure of 12% of the ultrapoor the World Bank study cites as having access to credit and savings

services seems a number not to lament on but at which to be positively surprised. Yet this figure

is used as evidence of the gap between need and access. Moreover, the World Bank summary

4 Ledgerwood, Joanna. "Philippine Poverty Strategy Report: Access to Credit for the Poor". East Asia Country Dept., The World Bank,

June, 1995. 4 National Statistical Coordination Board Technical Working Group on Income Statistics, 1992.

4 Ledgerwood, Joanna. "Philippine Poverty Strategy Report: Access to Credit for the Poor". East Asia Country Dept., The World Bank,

June, 1995.

5 Ibid., p. 27

6 Ibid., p. 3

SUSTATNABLE BANKING WITH THE POOR 3

points out that the "ultra poor are hesitant to access credit" and cites a 1992 survey ' showing20.5% of the respondents saying that the reason for not availing credit was "no need"; 47.5%citing "burdensome requirements"; 41.4% "unaware of source"; 48.6% "no collateral to offer";and 49.4% "high interest rates". However, given the limitations of self-reported answers tomultiple choice questions on a survey worker's clipboard, it is just as likely that the ultra poor donot avail themselves of credit because the opportunity to use it productively (that is, carry thedebt) is just not there.

There is also a large supply of small credit in the Philippines. The National CreditCouncil's figure of P31 billion (US$1.2 billion) represents just the government's poverty-orientedcredit programs. This is clearly less than the total of small credit now available in thePhilippines. Excluding commercial banks, but adding to that P31 billion just one half of the sumtotal of the other credit programs detailed below (not all of which qualify as "small"), there isroughly P75 billion (US$3 billion) available in credit to all but the very bottom of the povertypyramid. Dividing that P75 billion by the 4.7 million families below the poverty line, wouldprovide about P16,000 (US$640) per family, which is not far from the level of lending perborrower currently going on in many microcredit programs.

It is possible to conclude, therefore, that official credit outreach efforts (of the formal andnon-bank financial structure) are relatively impressive in the Philippines. Moreover, theseofficial efforts, it should be emphasized, do not include the moneylenders (known as "5-6'ers"),nor the traditional ROSCAs, nor intra-family unit borrowing, nor financing from overseasworkers' remittances. In general, it would seem, those who can make productive use of creditcan find a way to get it, and often a way that is not exploitative.

Not only is the overall supply of credit large; it is also highly diverse. The govermment'sP31 billion (US$1.2 billion) available for poverty lending, represents the combined resources ofI 1 1 government credit programs implemented by 19 government agencies. The World Bankstudy emphasizes, "the need for a market orientation that is innovative and creative in opening upthis market [for the poor]." But that is happening, as the summary of bank and non-bank activityin section 2.3 explains below.

In sum, while not denying that there are severe problems of uneven distribution of creditin the Philippines, access to credit may not be the kind of obstacle to poverty in the Philippinesthat it is elsewhere.

THE PROBLEM OF ABSORPTIVE CAPACITY

The more relevant current obstacle facing microfinance in the Philippines may beabsorptive capacity. According to the National Statistics Coordination Board, just 22.4 % of allthose below the poverty line are considered to engage in entrepreneurial activities, or 629,000

7 Ibid., p. 28

SUSTAINABLE BANKiNG WITH THE POOR 4

families. Of these, 60% avail themselves of credit.8

Interestingly the World Bank in its September 29, 1995 Summary Philippines Strategy to

Fight Poverty, (Country Dept. I) states that "Growth alone can accomplish much for the poor of

the Philippines.. .In fact economic growth is the most powerful tool the National Government

has." Further the report argues that the "government should focus on a small number of elements

of a poverty alleviation strategy," such as investments in health, education, infrastructure (water

and sanitation services to poor urban areas, roads, and markets), and agricultural extension and

research.) The report specifically recommends against a government role in livelihood creation

and credit.

THE SYSTEM OF FINANCIAL AND SOCIAL INTERMEDIATION

The formal banking sector in the Philippines is liberalizing and becoming much more

competitive. Interest rates of financial intermediaries in microlending are unrestricted. The

general climate for microlending is good both in the forrnal and non-banking sector. Indeed, as

the following descriptions indicate, the financial intermediation system as a whole is increasingly

characterized by a wide variety of small loan products.

The Formal Financial Sector9

At the end of 1993, the formal financial sector included 10,174 bank and non-bank

offices, with total assets of P1,347 billion (US$54 billion).

Commercial Banks: On average, Philippine cities are served by 69 commercial bank

branches. In contrast, rural areas are served by one or less. However, the Commercial Banks'

Association has officially committed to providing financial resources for the poor. Besides

working capital loans, consumer lending was on the rise and by the end of 1995, loan sizes were

moving down from an average of P100,000 (US$4,000).

Specialized Government Banking Programs Aimed at the Poor: Among these are the

Land Bank of the Philippines which implements various government credit programs for the

poor, including loans to farmers (in 1992 P6.5 billion [$260 million] was lent to 715,000 farmers

through 6,345 cooperatives and 321 rural financing institutions, with a repayment rate of 88%);

and the National Livelihood Support Fund (NLSF) [with US$92 million as of April 1995]

intended for loans to NGOs and People's Organizations (POs). The Development Bank of the

Philippines has several windows, the first two of which provide small- and medium-term loans

(as low as P50,000 [US$2,000]) for working capital at commercial interest rates.

8 National Statistics Coordination Board, 1992.

9 This summary is taken from the Study "Formal Financial Sector in the Philippines", cited pp 4 to 12 in Ledgerwood (1995).

SUSTAINABLE BANKrNG WITH THE POOR 5

Thrift Banks: Thrifts are privately owned. At the end of 1993, their total loan portfoliowas P44 billion (US$1.8 billion). Minimum loan sizes ranged between P20,000 (US$800) andP 100,000 (US$4,000). At the end of 1993, there were 97 thrift banks with 573 branches.

Rural Banks: The easiest banks to form, at the end of 1993 they numbered 780 with P22billion (US$880 million) in total assets, offering loans between P10,000 (US$400) and P500,000(US$20,000). Since this type of bank is relatively easy to start, the largest number of new bankapplications (about 100 in late 1995) are in this category.

Cooperative Rural Banks: A growing sector, there were 40 of these (as of May 1995);five of which use the Grameen Bank group loan methodology; and 30 of which are sustainable.Total cooperative rural bank assets are over P1 billion (US$40 million). Sixty-four percent ofloans average P6,500 (US$260).

Additional Micro-finance Programs: The Department of Trade and Industry has amicrocredit project which funds more than 1,000 NGOs. There is also the Small BusinessGuarantee and Finance Corporation (SBGFC), which is beginning to look at moving into micro-lending. In late 1995, the government announced ajoint private sector and government initiativecalled the Punla Trust, aimed at capacity building for microfmance organizations andmicrofinance advocacy.

Non Bank Financial Intermediaries

Finance Companies: Concentrating on consumer credit and housing, there were 204 ofthese (as of the end of 1993) with assets of P8.2 billion (US$328 million).

Pawnshops: There were 3,032 of these at end 1993 with assets of P5.2 billion (US$208million). Pawnshops offer low transaction costs, rapid loan processing (15 minutes) and averageloan amounts between P500 (US$20) and P1,000 (US$40) at interest rates between 4% and 5%per month.

Lending Investors (LIs): LIs began in the mid 1970s and provide small consumer loans;salary-secured loans from P3,000 (US$120) to P20,000 (US$800); and secured real estate loansup to P1 million (US$40,000). From a total of 300 in 1986, LIs grew to 1,559 at the end of 1993,with total assets of P3.2 billion (US$128 million). Loan terms are 100 days to one year; interestrates are 35% - 45% p.a.; and loan repayment can be daily, bi-monthly or monthly. Loancollectors go to borrowers, transaction costs are low, and processing time is fast. Repaymentrates are as high as 98%.

Cooperative Credit Unions (CCUs): As these are not strictly regulated, totals are notavailable, but most towns have a CCU. Members can usually borrow 2 to 3 times the balance oftheir fixed deposits. The average loan size is estimated at P10,300 (US$412), and is used forbusiness or consumption.

SUSTAINABLE BANKING WITH THE POOR 6

Non-Stock Savings and Loan Associations: Also called "nonbank thrifts", these are the

savings and loan associations of govermnent or company employees. They are growing rapidly

and in 1995, they numbered 84.

Cooperatives: There were 104 credit cooperatives as of March 1994 with an average loan

size of P9,100 (US$364). The Philippine Medium-Term Cooperative Development Plan includes

the creation of 41 new cooperative banks and an apex cooperative bank.

NGOS/POs: Roughly 500 of the Philippines' approximately 20,000 NGOs promote

income-generating activities for the poor, and hundreds more credit NGOs have successfully

targeted the very poor. Several groups stand out: i) The PHILNET group is comprised of

Grameen Bank Replicators (23 as of mid- 1994), supported under a government program

launched in mid-1990; ii) the APPEND group ties together the lending NGOs spawned by TSPI;

and iii) the Money Shop model of the Gerry Roxas Foundation. However, most credit NGOs are

generally small (average 100 to 500 clients per NGO), lack appropriate financial systems and

trained staff, have limited capital resources, and are dependent on grant funding. Most if not all

are not on paths to financial sustainability.

TRENDS

In brief, those individuals who are involved in banking, interviewed in late 1995, were

seeing the rapid evolution of a modem, competition-driven, and most important, customer-driven

banking system. At the same time, recognition of microfinance as more than the rather small and

benign area it had been perceived to be in the past, was likely to result in some regulatory

reforms. One issue of special note is the legality of NGOs taking deposits in the form of

contributions to "capital build-up."

ORGANIZATIONAL BACKGROUND

Tulay Sa Pag-Unlad, Inc. (TSPI) was founded as an NGO in 1981 by Christian

entrepreneurs committed to helping the poor become self-sufficient. Initial funding of $90,000

for administration and $300,000 for on-lending came from the Opportunity Foundation of

Australia (then the Maranatha Trust) and Opportunity International, USA. TSPI is still an

affiliate of the Opportunity Network, a network of industrial country, Christian NGOs.

Initially, TSPI's emphasis was on job creation through enterprise development. TSPI

targeted clients who were referred mostly by local churches in Metro Manila and Bulacan.

In 1983, TSPI created a Volunteer Consultancy Programme which conducted Small

Business Management training for its clients. In 1984, TSPI piloted its first community-based

small business program through a Methodist Church in Metro Manila. In mid-1986, this

program became TSPI's first provincial affiliate or "partner," Kabalikat para sa Maunlad na

Buhay, Inc. (KMBI). This was followed by five more partner organizations: Alalay sa Kaunlaran

sa Gitnang Luzon, Inc. (ASKI); Hagdan sa Pag-unswag Foundation, Inc. (HSPFI); Talete king

SUSTAINABLE BANKING WITH THE POOR 7

Panylung Kapampangan, Inc. (TPKI); Rangtay sa Pagrang-ay, Inc. (RSPI); and Taytay saKauswagan, Inc. (TSKI).

To help set up these new partners, TSPI created a Provincial Partners DevelopmentOffice responsible for providing capacity building and financial assistance to the partnerorganizations, funded by grants from the Maranatha Trust, the Philippine Australian ConmmunityAssistance Programme, and USAID. In 1991, this arrangement was formalized through thecreation of the Alliance of Philippine Partners for Enterprise Development (APPEND). Thecreation of APPEND allowed TSPI to focus its efforts and funding more on its own clients, andover the years, it developed various lending programs.

DEVELOPMENT OF TSPI's LENDING PROGRAMS AND TARGET MARKET

TSPI operates primarily in and around Metro Manila (except for its Intermediary LendingProgramme aimed at its partners, which operate in other provinces).

TSPI's mix of programs by 1995 matched the categories in the "Poverty Pyramid" (seefigure 1 below.)

Figure 1. Philippine Poverty Pyramid and TSPI's Lending Programs

Entrepreneurial Poor(5% - 10% of households) Individual Lending Programor 0.5 million householdss

Self-Employed Poor(50% - 55% of households) Intermediary Lending Programor 2.5 million households - Solidarity Lending Program

Sakbayan Lending ProgramLaboring Poor and Ultra Poor(40% - 45% of households)or 2.0 million households / / \7 V~~~~~~~ Kabuhayan Lending Program

Based on Remenyi (1991).

1) TSPI's original lending program was the Individual Lending Program, aimed at the"entrepreneurial poor." To be eligible, the client's business must have been in existence for atleast one year and have total assets of less than US$200,000. Initial loans are typically forUS$2,000. Subsequent loans may reach US$16,000 depending on the needs of the business. Theprogram initially provided some training to clients.

SUSTAINABLE BANKING WITH THE POOR 8

2) In 1986, TSPI created the Intermediary Lending Program, establishing six partner

NGOs to provide credit in key cities around the country. These partner NGOs were to finance the

"self-employed" and "laboring poor," the second level of the poverty pyramid. Later TSPI

expanded this wholesale lending approach to 24 other existing NGOs, community groups and

cooperatives who in turn make loans to their members. Loan amounts range between US$4,000

and US$20,000 for an average term of two years. TSPI also provides technical assistance to the

intermediary organizations.

3) In 1990, TSPI implemented Sakbayan, its most successful program. Sakbayan means

"transport for the masses" and is also TSPI's first sectoral approach to credit. An urban-based

program, Sakbayan lends to the "laboring poor," in this case tricycle drivers, to purchase

motorcycles with side-cars used for public transportation. The loans are guaranteed jointly by a

group of six drivers, with the tricycles as secondary collateral. Loan limits are currently set at

US$2,800 per borrower or US$16,800 per group. The average loan term is 2.5 years.

4) Kabuhayan, began in 1992 to serve the "ultra poor," focusing on poor women living

in urban slum mostly in Metro Manila. Kabuhayan follows the Grameen Bank group lending

methodology. Borrowers must have been a permanent resident in the area for at least three years;

monthly income must not exceed $40 in Metro Manila and $30 in other areas. To become a

group member, the women must maintain weekly savings. Group members have a code of ethics

called the "Nineteen Decisions" which members must repeat at weekly meetings. Initial loans

range from US$20 to US$80.

5) TSPI's Solidarity Group Lending Program was created in 1994 to serve market

vendors and stall owners in urban and semi-urban areas of Metro Manila. Solidarity serves the

"laboring poor" and is modeled somewhat after the group lending methodology of BancoSol in

Bolivia Borrowers must have been a vendor for a continuous period of at least 12 months and be

capable of joining a group of four other borrowers. Loan amounts range between US$200 and

US$1,800 over terms of two to twelve months. This loan product had not progressed beyond the

pilot stage at the time of the fieldwork for this study.

VISION AND MISSION

TSPI's vision is "to see people live with dignity, sufficiency and responsibility,

demonstrating this through love and service in their community." It's official mission is

"to provide individuals and communities the opportunities to experience fullness of life through

enterprise development."

Two of TSPI's operating principles are:

Charging Positive Market Interest Rates: TSPI believes that access to credit and not cost

of credit is the main problem of the poor.

SUSTAINABLE BANKING WITH THE POOR 9

Savings as an Integral Part of Lending: TSPI see savings or "capital build-up" as aprerequisite to sustainability and improving the country's savings-per-capita to GNP-per-capitaratio. All group lending programs involve a savings scheme. TSPI plans to transform itsobligatory savings into voluntary savings as it moves towards becoming a bank.

TSPI's EARLY YEARS

In discussions with Benjamin Montemayor, TSPI's Executive Director, and in the printedstatements of Core Values and the draft guidelines adopted in Fall 1995, the word "calling" isused often. "The undertaking is a calling and a ministry, rather than a "job," says Montemayor."Calling is the key to our rnotivation. Our work is our calling," says the Core Values statement.

This motivation is threaded through the history of the organization. As Montemayor putit, "the old corporate culture was 'relational.' There was no hierarchy; there were no budgets, noperformance targets, and little if any sense of costs - in the early years, for example, TSPI boardmembers would regularly go to clients to give free business advice." The organization, and itspartners, were content to reach a few hundred borrowers and remain local. Montemayor came inat the beginning of 1989. Over the next two and a half years, through a series of retreats(justified, as in many things done at TSPI, by reference to scripture - in the case of the retreats -"Jesus going to the desert") and the help of a consultant, a new vision was shaped. During thisperiod, when TSPI was 60% to 70% USAID dependent, TSPI began using a more commercialapproach (including raising its interest rates). There was resistance to the idea of moving tohigher rates and to viability. "We'll lose our vision and we'll be just like a bank" was the waymany in the organization apparently felt. Indeed, 90% of the original staff left during thetransition.

TSPI's PROFESSIONALIZATION AS A MICROFINANCE INSTITUTION

The period between Montemayor's arrival in 1989 and the end of 1995 (culminating inthe application to the Central bank to launch the TSPI Bank), was marked by his increasinglyeye-opening encounters with the rest of the microfinance world. In 1990, Montemayor heardGrameen Bank's founder, Mohammed Yunus, speak. Montemayor recalls being stunned. "Forthe first time," he says, "I became aware." In 1991 he went to Bangladesh and spent one monthwith Yunus. "This is it" he said; he had seen that it was possible to reach the poor and achieveviability. He went to the TSPI Board and convinced them that the individuals to whom theywere lending were at the top of the poverty pyramid and TSPI's work was not therefore inkeeping with its mission. They had to reach the poorest.

Then he heard about Bancosol. He went to Bolivia and got "hooked on" sustainability.He saw for the first time that he could accomplish a high level of outreach while adopting "bestpractices." He felt he was coming back around to where he had started in his own career (he hadonce been a bank executive), seeing that "banking is banking."

SUSTAINABLE BANKING WITH THE POOR 10

Montemayor's connections with the microfinance world were widening rapidly. A fast

moving, fast talking, energetic leader, Montemayor is impatient to see things happen. "A

prophet is never understood in his own country" he says, so he brought his new connections into

the Philippines to "talk for us;" people like Pancho Otero (from Bancosol), who came to talk to

the Central Bank, and Mohammed Yunus. In 1993 as the result of almost a year of effort,

Montemayor succeeded in arranging a meeting between Yunus and the Philippine's President.

He feels that he is responsible for getting the term "Banking for the poor" into the Government's

Medium-Term Plan. Montemayor continued to travel: going to ADEMI in the Dominican

Republic; to South Africa for the Micro-Finance Network conference; and reinforcing his

growing belief that in order to reach the greatest number of poor possible, it would be necessary

to create a bank dedicated to microfinance.

Montemayor gets excited about something he's seen, takes the idea back to his staff and

orders up a new program or a new emphasis. "All our programs except for the individual lending,

were created after I came back from my trips," he says (though Sakbayan is a possible other

exception). By the end of 1995, he had fully introduced to TSPI the incentive system the

Alexandria Business Association in Egypt uses for its loan officers.

Trying new things, stopping old ways of doing things ("I'm dropping job creation as an

impact measure," he says when it is suggested to him that numbers of jobs created is a statistical

bone of contention), he's off and running on the next project, some would say, before the last one

has had a chance to reach cruising speed.

It is hard not to wonder "What's behind the rush?" if it is not some desire for

organizational legitimacy in the international microfmance field. However, urgency may be

counterproductive to mission. Indeed the draft guidelines and mission statement for the

Opportunity Network (of which TSPI is a member), state: "We would not undertake programs

when we have neither the appropriate strategy nor the human resources to execute them

effectively, even for the sake of growth."'"

SOURCES OF FUNDING AND ASSISTANCE

USAID has been TSPI's largest funder, providing P48.6 million (US$1.9 million) from

1990 to 1995. The Opportunity Network has provided P5.5 million (US$220,000) in the same

period. In addition, TSPI received P4.5 million (US$ 180,000) from a variety of other donors

including World Relief Canada and IMAI Japan.

TSPI began borrowing money at concessional rates in 1990 and in 1992 began taking

commercial loans and credit lines from the BPI (Bank of the Philippine Islands) Foundation, the

NLSF, and Grameen Trust, among others. By June 1995, these loans and credit lines totaled

P18.7 million (US$748,000), representing approximately 23% of TSPI's funding base. Total

assets as of June 1995, equaled P81.3 million (US$3.3 million) and were funded primarily (66%)

10 p. 12. Sept. 20, 1995 Opportunity Network Draft Guidelines.

SUSTAINABLE BANKING WITH THE POOR 11

with equity. Short-term liabilities were P8.9 million (US$356,000) or 11% of total assets.Therefore, total debt was P27.6 million ($1.1 million). TSPI's debt to equity ratio was 0.5:1 as ofthe end of their fiscal year, June 30, 1995.

Table 1. TSPI Basic Statistics *TKP Program SEDO Program Loans TOTALLoansKabuhayan Sakbayan Individual Solidarity Intermediary

Num. of Active Borrowers 1,898 1,076 95 50 240 3,359

Percent Female 100.0% 1.0% 55.0% 85.0% 60.0% 63.9%

Outstndg. Loan Amt. (US$) 60 1,932 264 24 96 2,376

Percent Delinquent 15.6% 5.9% 17.0% 50.0% 53.3% 9.7%

Average Loan Amt. (US$) 32 1,795 2,779 480 400 707

Number of Loan Officers 28 10 3 2 1 44

Source: TSPI.Note: *Statistics as of June 1995

INSTITUTIONAL STRUCTURE AND MANAGEMENTINSTITUTIONAL STRUCTURE

TSPI's structure consists of four main offices.

1) The Office of the Executive Director (the Executive Director (ED), Assistant ED, LegalOfficer, Bank Project Director, Assistant Director Corporate Planning, Audit Manager and anExecutive Secretary). This office is actively involved in creating the Private Development Bank.

2) The Small Enterprise Development Office (SEDO) runs four of the TSPI programs,and has its own director. These are Individual Lending, Intermediary Lending, SakbayanLending and Solidarity Lending Programs (Table 1). SEDO, as of October 1995 operatedthree branches. Since the three programs which lend directly to clients - Sakbayan, Solidarityand Individual, are offered through the same SEDO branches, the same account officers workon more than one program.

3) The Kabuhayan Program (TKP) is run from its own office, with its own director.TKP has four branches (Table 1).

4) The Finance and Resource Mobilization and Human Resource Office handles financeadministration, human resource development, training, and management information systems. In

SUSTAINABLE BANKING WITH THE POOR 12

addition, it is responsible for accessing grants, commercial, and concessional loans. It also

handles public relations and communications.

Figure 2. TSPI Institutional Structure

TSPI Organizational Chart

Z.. - Board of Trustees

President

Offc e Chair ecutiveD195war for

Philippinesanfoirmer Phlpin Ambssaors Dito te nieSats A" H new Beoardc o Directors

4 . -. u.

wouldnc be cetd fsourte Bak repnibltenohchsilnedtResucleal esalihdB&anchdg- :4) BricTb 63

Sozwce: TSPI.

TSPI's Board of Trustees (with a 13 member maximum) is comprised of people from

banking, business, development, international relations, and governance. All have a strong

commitment to Christian values. The Chair in late 1995 was a former Vice President of the

Philippines and former Philippine Ambassador to the United States. A new Board of Directors

would be created for the Bank, responsibilities of which still need to be clearly established.

TSPI also has a five member Management Committee (headed by the ED) responsible for

carrying out the directions set by the Board of Trustees.

HUMAN RESOURCES

The number of TSPI staff grew from 20 in 1989 when Montemayor came in to 104 in

September 1995, of which 72 were involved in credit operations. TSPI's personnel are hired on

the basis of their qualifications and Christian beliefs. Staff are paid lower salaries than the

private sector although TSPI concluded a compensation review in 1995 which was likely to

increase pay levels. At the time of the case research the entry level for clerical positions was

P3,200 (US$128) per month, the minimum wage in the Philippines. (Salaries for other positions

are discussed below). All employees receive a bonus in December of one month's pay ("13th

SUSTArNABLE BANKiNG WITH THE POOR 13

month pay").

Monetary incentives are given to employees based on monthly loan volumes andportfolio quality targets. The incentive scheme is described below.

Performance is evaluated twice yearly and salary adjustments (from 10% - 20%) aregiven annually. Benefits include paid vacation leave, sick leave, and emergency leave.Hospitalization and medical insurance coverage are provided to all regular employees, as well aslife and accidental death and dismemberment insurance. Loans to employees can be extended incase of emergencies at a minimal interest rate. Car loans are also available to field, supervisory,and management personnel.

SEDO Account Officer Training and Incentives

SEDO Account Officers go through five months of training, beginning with a half-dayorientation on the mission and values of TSPI. After learning about the mission, they attend athree-day orientation on TSPI structure and policies and the basics of credit, a three-day sessionon procedural flow, and a three-day presentation on group facilitation and account evaluation.This is followed by the Field Training phases, the longest part, which involves field exposure,loan processing, branch orientation, group formation, account evaluation, borrower interviews,pre-group recognition test, and loan release.

Account officer trainees then go through a lengthy (about 11 days) evaluation processinvolving essays, case study presentations, exams, panel interviews, trainer reports, borrowerinterview reports, an evaluation report of an actual account, review of the trainee's daily journal,etc. Trainees must be college graduates, no older than 27, preferably single and with no previousworking experience.

New SEDO Account Officers receive P3,800 (US$152) per month for the first six monthswhile on probation. Once permanent employees, they earn P4,000-4,500 (US$ 160 - US$180)per month. Their pay is supplemented by a comprehensive incentive scheme, first introduced inJanuary 1995. Incentives are calculated somewhat differently for each of the three lendingprograms handled by the SEDO branches.

For example, in the Sakbayan program, Account Officers must have a minimum of 20groups at the end of the month; outstanding loans must have increased from the previous month,must achieve 75% or more of cumulative quarterly targets (five groups every three months); andrepayment rates must be at least 98%. The incentive in the Sakbayan program ranges fromP1,000 (US$40) for 20 groups and 98% repayment, to P10,000 (US$400) for 50 groups and100% repayment. As of September 1995, less than half of the SEDO Account Officers qualifiedto receive incentives.

Branch Managers, who receive P10,000 (US$400) per month before incentives alsoreceive incentives based on the incentives received by their Account Officers and the overall

SUSTAINABLE BANKING WITH THE POOR 14

repayment rate of the branch at the end of the month. Area Managers also receive incentives if

their branches have all attained a minimum 98% repayment rate and achieved the monthly targets

at least twice during the quarter. The incentive structure for the Area Managers is the same as

that for the Branch Managers. Area Managers receive P15,000 (US$600) per month before

incentives (subject to the Board decision to increase salaries by 20% effective December 1995.)

Kabuhayan Account Officer Training and Incentives

Kabuhayan Account Officer training is somewhat shorter than the SEDO Officer training

and lasts four months. Some significant differences from the SEDO Officer training are the

concentration on Grameen Bank methodology (including reading a Grameen Bank Reader by

Professor Yunus), and more emphasis on group facilitation techniques, as well as exposure to

poverty mapping and means testing techniques.

Kabuhayan trainees do not need to be college graduates although they generally have

some post-secondary education. Kabuhayan Account Officers receive P3,800 (US$152) per

month for the first six months while on probation. Once they become permanent employees,

they earn P4,000 (US$160) per month.

Kabuhayan officers also receive incentives. They must have at least 80 borrowers at the

end of the month; outstanding loans must have increased from the previous month, and they must

achieve 75% or more of cumulative quarterly targets (1 to 1.25 groups per month); and

repayment rates must be at least 96%. Their incentive ranges from P200 (US$8) for 80

borrowers and 96% repayment to P5,000 (US$200) for 296 borrowers and 100% repayment.

Kabuhayan Branch and Area Manager incentives are structured similarly to those of

SEDO Branch and Area Managers. Kabuhayan Branch Managers receive P7,000 (US$280) per

month before incentives, P3000 (US$120) less than SEDO Branch Managers, while Area

Managers receive the same basic monthly salary as SEDO Area Managers.

PERSONNEL ISSUES

Staffing had become a severe constraint in TSPI by 1995. A low retention rate (and the

resulting strains and costs of recruiting replacements) was related in part to an expandingbanking marketplace. Competition for qualified young people was high, and TSPI had only

recently become keenly interested in the same kinds of candidates commercial banks want.

TSPI's image and name, salary levels, not to mention the nature of the work, all put it at a

disadvantage in this market. Sensing that many candidates are turned off when they hear thename "Bridge to Progress," TSPI tried using blind ads, calling itself "an internationalorganization." But candidates would come in and see the old TSPI offices located in a basement

and be turned off. In late 1995, TSPI moved into much more well-appointed headquarters,thereby achieving the look of a private sector organization.

SUSTAINABLE BANKING WITH THE POOR 15

Partly as a result of competitive factors, the Field Account Officers cadre in 1995 werevery young; for many this was their first job. In any case, once in the job, account officersseemed to like the idealism for the first few months, being in touch with the people - indeed,when offered positions back in the office, many refused -- but still the burn out (and leaving) ratehad become high. The work is hard, the field sites can be physically demanding, and movingabout in Manila's traffic can prove frustrating. The time spent moving from place to place usesup - it is "guestimated" - 40% of the work hours.

INSTITUTIONAL LINKAGES

In addition to its membership in several Philippine NGO and microenterprise networks,TSPI belongs to the Asia Network in Development (ANID) an alliance of NGOs engaged inmicro-lending operations in Asia; CASHPOR, comprised of Asia-Pacific agencies engaged inGrameen Bank replications; the Opportunity Global Network; and the Micro Finance Network(MFN), a global network of NGOs and financial institutions. A portion of the ExecutiveDirector's time is taken up with TSPI's involvement in these networks.

SEDO BRANCH OPERATIONS

As demonstrated by the amounts outstanding, the overwhelming majority of the assetportfolio in the SEDO programs consists of Sakbayan loans (over 80%)."

Table 2. TSPI SEDO Program Loan Details (as of June 30, 1995)Loan Size Loans Outstanding Interest Rate Term Repayment Savings(US$ 000) US$ (% monthly) (months) Schedule Required

Individual 2 - 16 260,000 25 - 30 18 semi- nonemonthly

Sakbayan 12 - 17 1.93 million 25 30 semi- 5% of loan("group of six") monthly +US$1.60/day*Source: TSPI.Note: *The US$1. 60 per day (or P40 per day) is returned with interest at the end of the loan term.

SAVINGS & LOAN PRODUCT OVERVIEW

Intermediary Loans

The Intermediary program grew out of a strategic decision in 1986 to expand outreachthrough supporting the creation of other microfinance NGOs in the Philippines. Intermediaryprogram loans carry an up front fee of 1.5%; loan sizes range from P50,000 to P400,000(US$2,000 - US$16,000); interest rates range from 6% to 15%, depending on the funding source;terms average 12 months; collateral requirements are (50% - 80% of the value of the real estateor 50% of the value of the vehicle); and payments are on a monthly or quarterly basis. TSPI also

II As the Solidarity program was in pilot stage and to a certain extent "on hold", no meaningful statistics were available.

SUSTAINABLE BANKING WITH THE POOR 1 6

had been providing training sessions for borrowers.

At the time of the case study, TSPI was trying to maintain the existing loan program,

about P2.4 million (US$96,000) with one staff person. Although the connection to partner

microfinance organizations provides a link to learning experiences elsewhere and increased

outreach without additional branches, the difficulty of monitoring these loans, and the

administrative costs has lowered any expectation of profit on these assets. As a result, these

loans have developed high delinquency rates, slightly over 50%.

Group Lending

As of June 30, 1995 Sakbayan active borrowers numbered 1,076 and Solidarity borrowers

numbered 50 (see Table 1). In the Sakbayan and Solidarity programs, the creation and

maintenance of the borrowing group is a key part of TSPI's initial operating cost and is seen as

essential for generating additional loan volume at relatively low cost. In addition, the

cooperation and trust which develop in the group are important goals for TSPI's larger mission of

instilling Christian values.

After the orientation session, applicants are required to attend four or five, one hour

meetings to form their group. This happens simultaneously with the preparation of their loan

application. It can take the account officer weeks just to assemble the complete documentation,

including interviews and character references. The group formation process ends with the Group

Recognition Test ("GRT"), a two-hour meeting conducted by a branch manager to test group

members' knowledge of each other and the group's understanding of the program details. Prior to

the GRT, the group will have elected their treasurer and secretary, who will also be the

signatories of the post-dated checks and therefore assume significant liability. They also become

the key contacts for the account officer.

Compulsory Savings

Both the Sakbayan and Solidarity programs have a "forced savings" component for two

reasons: (i) the accumulated savings provide additional loan collateral to TSPI; and (ii) the

savings demonstrate that the poor are potential users of deposit services. These "guarantee

deposits" have also become a significant source of funds for on-lending.Sakbayan borrowers must deposit 5% of the loan upon disbursement into their "Group

Savings Fund." Thereafter, with each loan payment an additional deposit (8% of payment) is

made to reach an amount at maturity equivalent to 15% of the loan. This savings fund is

returned to the borrowers at maturity, with interest (90 day Treasury Bill rate). However, in the

case of a subsequent loan by the same group, the savings are retained by TSPI and are added to

the new Group Savings Fund. The effect is consequently a much greater collateral value for the

subsequent Sakbayan loans. There is only one Sakbayan group on their third loan, and although

by that stage one might think that the accumulated locked-in savings would be a disincentive to

further renewals, this does not seem to be the case. Apparently the savings are welcomed as a

bonus and there are other reasons why the Sakbayan renewal rate is as low as it is (about 50%).

SUSTAINABLE BANKING WITH THE POOR 1 7

Solidarity borrowers face similar savings requirements except that they do not receiveinterest on their savings.

LOAN PRODUCT DESIGN FEATURES IN THE SEDO PROGRAMS

Eligibility

Sakbayan borrowers are 99% men, working as motorcycle or tricycle taxi drivers. Theyare organized into a Tricycle Drivers and Operators Association ("TODA") in eachneighborhood. The TODA, run by an elected executive, determines the routes and allocates theseto the active members.

A Sakbayan lending group must have 6 members and must be referred by a previousgroup from the TODA. Since the loans are for new tricycles the key capacity issue for TSPI inits application review is how many unallocated routes exist in the TODA.

It is stressed to each borrowing group that it benefited from a referral by a previous"batch" and thus its own repayment record will determine the ability of subsequent groups toborrow, and of course its own renewal ability. Various character references are sought as part ofthe loan documentation process.

Collateral requirements are fairly inflexible: one existing tricycle unit plus the new unitacquired with the loan. This means that first-time borrowers must borrow a friend's unit topledge as collateral if they do not already own a tricycle.

Solidarity loans are targeted at market vendors, who are predominantly women. Nocollateral is required, other than the group guarantee.

Individual program loans are targeted at small businesses with up to 10 employees andhave been managed by the owner for at least six months. The entrepreneur must have at leastthree years business experience, must provide security, guarantors, and at least 25% counterpartfunds (or cash equivalent) to support the loan. All SEDO loans are supposed to contain arecommendation from the local pastor or priest. While these do not constitute guarantees, andattest only to the applicants' character and Christian values, some priests do agree to "help in thecollection if the loan is not paid." After the initial screening (according to the eligibility criteriaabove), the account officer will talk to references, including the priest, and will visit the businessor the TODA to verify the basis for the loan proposal.

In addition to standard basic information on the individual, a Sakbayan loan file mustinclude vehicle registration, certificate of TODA membership, permit to operate additional unit,priest recommendation, photo of collateral, photo of applicant and wife, sketch of residencelocation, map of area with TODA terminal location and routes"2, residence certificate, and a cash

12 This requires the account officer to travel to head office to photocopy the Manila map.

SUSTAINABLE BANKING WITH THE POOR 1 8

flow projection. Legal documentation (for example, the chattel mortgage, promissory note, "co-maker" agreements, and appraisals) are added after the credit committee review. Similar legaldocumentation is required for the Solidarity group loans. Individual loan documentationincludes financial statements for the business, the license to operate, a certificate of tax payment,a review of the use of proceeds, and a rudimentary cash flow analysis.

Approval Process

The loan approval process, while an important determinant of loan portfolio quality, maybe a costly weak spot in the TSPI process, in part because of the length of time involved in whatis a fairly cumbersome (and perhaps at points redundant) process. The productivity of anaccount officer, and hence the growth rate of the overall loan portfolio, is of course a function ofthe time the officer spends on the approval process, which at the time of the case research wasexceeding 45 hours. The time from initial orientation session to release of the loan was about 21/2 months.

Until a few years ago, all loans were approved by the TSPI Board. This changed as TSPIgrew and since 1993 approval has been delegated as follows:

* up to P150,000 (US$6,000), two Office directors (for example, Operations andFinance);- between P150,000 - P300,000 (US$6,000 - US$12,000), two Office directorsand the Executive Director;* over P300,000 (US$12,000), two Office directors, the ED, and a Board Director.

TSPI justifies the continued requirement of a Board signature for all Sakbayan loans asproviding Board members with information about TSPI activities which they would nototherwise get.

Branch managers as of late 1995 had no lending authority, other than with the Kabuhayanprogram (see section 6 below).

The Credit Committee (the ED, Assistant ED, and the Director of Finance) meets twice amonth, to review five to ten applications. The file by this time has been reviewed thoroughly bythe branch manager, and often by the area manager or even the Assistant ED. The applicationhas been signed/approved by the branch manager and a brief summary of the file is preparedwhich contains information on the background of the group, payment record if a subsequent loan,the development (job) impact, and a reconmmendation.

Although the Conmmittee is not supposed to review the file in detail (it is usually a "donedeal" by that time), the time spent per file during these meetings is still considerable, plus thetravel time of account officers and branch managers.

SUSTAINABLE BANKING WITH THE POOR 19

Solidarity groups follow a similar approval process to that for Sakbayan, however, theloans do not need to go to the semi-monthly credit committee meeting and can be approved bytwo office directors at the head office. Individual loans are approved by the Credit Committeeaccording to the size of the loan.

Perhaps recognizing the complexity of the process, at the time of the study TSPI hadrecently introduced a decentralization of its credit approval procedures on a pilot basis, and wasproceeding with a streamlining of the documentation required for Sakbayan loans.

Loan Sizes

Since the price of a motorcycle plus sidecar is around P60,000 - P70,000 (US$2,400 -US$2,800) and there are six people in a group, the Sakbayan loans will vary fromP360,000 - P420,000 (US$14,400 - US$16,800). While there is no down-payment required, theuse of post-dated checks requires the use of a checking account for the group and a minimumbalance, of P2,000 - P3,000 (US$80 - US$ 120) which effectively serves as the group's initialequity.

Once the first Sakbayan loan is paid off, the group can apply for subsequent loans. Ifthere has been any difficulty with the loan, the second loan cannot exceed the amount of the first.Usually the subsequent loans are of a similar size, although individual allocations can vary sincethe subsequent loan may not be for an additional motorcycle. For example, an individualSakbayan member may choose to borrow P25,000 (US$1,000) for his wife's sari-sari store, orP40,000 (US$1,600) for motorcycle parts and repair shop. The group, and its guarantee, remain.

The Solidarity loan size ranges from P5,000 (US$200), per individual, for the initial loan,to P45,000 (US$1,800) for the fourth loan. The key amount, however, is that of the initial loan,since this determines whether borrowers choose to invest the time and opportunity cost in theformation of the group, relative to the alternative of continuing to deal with the private (or otherNGO) lenders in the marketplace. Solidarity loans can be approved without going to the semi-monthly Credit Committee.

In the Individual program, loan size is intended to fit a range still not serviced by formalbanks, that is, up to P400,000 ($16,000). Since this is not a group-based program, increasedemphasis is placed on collateral requirements - loan amounts cannot exceed 70%, 50%, or 40%of the appraised value of land, vehicles, or machinery, respectively.

Interest Rates and Fees

TSPI's interest rates were increased in 1992 when TSPI began expecting revenue to coveraggregate operating cost. Annual interest rates ranged in 1995 from 25% to 30% on a flat basis.These were the nominal interest rates, based on semi-monthly payments for Sakbayan andIndividual loans and weekly repayments for Solidarity loans. Despite the calculation of intereston the disbursed amount (flat) rather than on a declining balance, and the frequent repayment

SUSTAINABLE BANKING WITH THE POOR 20

periods, these rates were still significantly lower than the relevant competition. For example,pawnbrokers charged 4% - 5% monthly, private lenders around 5% monthly, and the "5/6"lenders in the market charged up to 20% monthly.

The impact of charging interest on a flat rate basis is significant - the effective annual ratebecomes almost double the nominal rate. However, as is the case elsewhere, borrowers seem tobe primarily concerned with the size of their regular payment, whether calculated on a daily orsemi-monthly basis, and not their effective annual cost of borrowing.

Though Sakbayan payments are semi-monthly, the group treasurer collects from thedrivers daily, according to a TSPI amortization schedule, and makes deposits to the group'schecking account weekly. While this procedure ensures sufficient funds to cover the semi-monthly, post-dated check, daily collection results in a high annual effective borrowing cost (ofapproximately 45% - 50%)." For comparison, the approximate effective borrowing cost of theIndividual Program is 50% to 55%; that of Solidarity 55% to 60%.

The above interest rates are applied to the original principal, rather than to the decliningbalance, and are before adjustment for the compulsory savings component, which results in afurther increase in the effective borrowing cost. In any case, it is clear that TSPI borrowers arepaying high effective rates of interest, particularly in the context of a 10% inflation rate, and yetthese rates are still lower than the relevant alternatives, if available at all.

In the Sakbayan program, appraisal of the collateral prior to the processing of theapplication is required at a cost to the borrower of between P500 - P700 (US$20 - US$28).Insurance is not required by TSPI, although increased incidents of theft may prompt someSakbayan borrowers to take out insurance on their own. There is a late payment penalty of 2%monthly, pro-rated until payment is received or negotiated. Since the penalty accrues daily, itacts as an incentive to repay promptly.

There are also significant non-cash costs to the borrowers. In the Sakbayan andSolidarity programs, group formation, group meetings, documentation, and approvals requiring apresence at head or branch offices. All of these activities impose time and opportunity costs onthe borrower.

Loan Delivery/Disbursement

In the Sakbayan program, checks are issued to the motorcycle dealer chosen by the group,who then delivers the bikes to the branch or head office where they are released by the branchmanager following a short presentation. The sidecar, usually covered by the loan, is attachedonly after a 1,000 Km break-in period during which the bike is not generating revenue.Therefore, Sakbayan loans have an initial one-month grace period.

13 The effective borrowing cost is expressed on an annual basis taking into account the effect of differing compounding periods.

SUSTAINABLE BANKING WITH THE POOR 2 1

In the case of Solidarity group loans, the group leader and treasurer will usually come tothe head office to pick up the check. Individual program borrowers must come to the branch toreceive their loan.

Repayment System

TSPI does not handle cash. Post-dated checks are used because according to Philippinelaw, it is a criminal offense to issue a check without sufficient funds. Consequently, regardlessof the civil claim of TSPI upon an event of default under the loan agreement, the threat of acriminal court case is what captures the attention of a delinquent borrower. Upon loan approval, aseries of post-dated checks is made out for the repayment amounts, signed by the group treasurerand leader and kept with the master loan file containing all legal documents at the head office.

TSPI receives semi-monthly payments under the Sakbayan and Individual loan programsand weekly payments with Solidarity loans.

Monitoring

Although the account officer is expected to visit the client one week after disbursement,and monthly, thereafter, to verify the use of the loan and file a monitoring report, the primarymechanism to alert the system of any problems is the use of post-dated checks.

Enforcement

The attention to legal documentation, chattel mortgages, appraisals, and loan to valueratios, is offset by the reality that seizing an asset is time-consuming and expensive. Therefore,every attempt is made to use the threats of seizure and criminal proceedings to bring thedelinquent borrower to the negotiating table. The threat of criminal proceedings resulting from abounced check is apparently greater than the threat of foreclosure supported by all the collateraldocumentation.

TSPI has a part time (16 hours per week) internal legal counsel, who works mainly onIndividual program accounts over P40,000 (US$1,600). At the time of the study, she hadsubstantial latitude to restructure problem loans, with a target of about 40% recovery of loanwrite-offs. To date, TSPI has never foreclosed on its security.

TSPI did not have a formal loan provisioning or write-off policy at the time of the study.For the 1995 fiscal year, it expensed a provision for 100% of loans more than six months pastdue and 50% of loans less than six months past due. It also wrote off all loans more than oneyear past due. The total amount of write-offs up to and including fiscal year 1995 amounted to2% of all loans disbursed since 1982.

SUSTAINABLE BANKING WITH THE POOR 22

KABUHAYAN OPERATIONSKABUHAYAN LOANS

The Kabuhayan program targets poor, self-employed women, and is modeled after theGrameen Bank. Begun in July 1992, by the following June it had two full and two start-upbranches. Kabuhayan staff are organizationally and physically separate from the SEDO branchessince these loans are based on a different methodology, and require a more intensivedevelopment effort. At the time of the research, Kabuhayan was still adjusting to a number ofstart-up problems (see below). Due to the time and expense required to build up loan volume,the Kabuhayan branches were expected to take about 6 years to "break even."

Significant attention is paid to the communities chosen for a Kabuhayan branch location.Assuming that a branch requires 2,000 clients to break-even, and achieves a 10% penetrationrate, the area must have about 20,000 permanent households earning less than P1,000 (US$40)per month. This area is divided into clusters consisting of 10 centers, each with six borrowinggroups, that is, 300 members. The area must also have a formal bank branch nearby, in order toprocess the cash collected by the loan officers and deposited to the TSPI account.

After the formation and training, the groups (of five women each) stagger their first loans,with the group deciding which two women receive the first loans. After a maximum of fourweeks of successful payments the second batch of two loans is released. The last loan isavailable after another short period of regular repayment. This staggered method of loandistribution is often referred to as the 2-2-1 system.

Group Formation

A person interested in a loan is first asked to form a group with four other borrowers.They must live within walking distance of each other; not be related; be resident for at least threeyears; and be prepared to attend the group training and contribute to the savings funds.

Each member of a borrowing group is interviewed by the Kabuhayan credit officer andcompletes a Means Test form. This takes into account the total income of the household (whichmust be less than P1,000 (US$40) per household member); the value of any personal assets; andthe house. The second loan is subject to another means test.

Group training - seven hours over seven days - covers information on the Kabuhayanprogram; the pledge and Kabuhayan philosophy (which functions also as a Christian message);group duties; and the lending system. Training ends with the Group Recognition Test.

As soon as four groups are formed, TSPI assists them with the formation of a "center,"with a weekly meeting place, elected officers and some administrative functions. The purpose isto support the establishment of relatively self-functioning units. This unit and meeting placethen become the contact point for the Kabuhayan credit officer - little or no client interaction

SUSTAINABLE BANKING WITH THE POOR 23

takes place in the branch office.

Product Design

Loan size varies from P500 to P2,000 (US$20 - US$80) for first loans; to P6,000 or more(US$240 and over) for the fourth. The term is 25 or 50 weeks. The loans are usually forworking capital purposes in small trading operations, but can also be used to purchase assets(such as cooking utensils). Whether the client base could support larger loan sizes, what thebasis for the loan amounts is, and whether the prospect of "graduation" to higher loan amounts issufficiently attractive to sustain group interest are questions that deserve further study.

The interest rate is 2.5% monthly on a flat basis, equivalent to an effective annual rate of35%. The up front 5% discount, however, (part of the compulsory savings plan described below)increases the borrowing cost to about 3.0% per month. This rate is effectively even higher whenthe weekly payment is taken into account. Ability to pay is taken into account when the weeklyamortization is discussed with the group. The record of repayment and loan renewals at higheramounts in some branches provides preliminary evidence of debt capacity.

The compulsory savings component consists of at least three funds: the CentreDevelopment Fund (for physical improvements to the center); the Capital Project Fund; and the"Topal" Emergency Fund. Group members contribute 5% of their initial loan, P7 (US$0.28)weekly savings and P35 (US$1.40) during training. Other sources of group savings are the 3pesos paid each week into the Emergency Fund and the beginnings of a small life insuranceprogram, at 1 peso/week per 1,000 borrowed.

Kabuhayan payments are tracked by computer, generating records for each center andcredit officer. Late 1995 past due rates ranged from 10% to 50%. Some Kabuhayan brancheshad excellent loan portfolio and others were clearly in trouble, leading to a skewed portfolio.There is no grace period, and if a payment is missed, the center or the group is supposed to makeup the shortfall. However, one of the problems with the Kabuhayan program is that groups havebroken down too easily and thus are not fulfilling the guarantee function.

Since the beginning of Kabuhayan lending in July 1992, disbursements have steadilyincreased, from P700,000 (US$28,000) in fiscal 1993 to over P3.0 million (US$120,000) infiscal year 1995. It was taking longer to develop an increase in the total loans outstanding,however, and the Kabuhayan part of TSPI generated operating losses in 1995 of around P4million (US$160,000), an amount covered with all SEDO profits. In terms of the number ofclients served, however, the Kabuhayan program accounted for over 50% of TSPI's active clients(1,898 out of 3,359).

SUSTAINABLE BANKING WITH TBE POOR 24

THE CLIENTS14

SAKBAYAN AND INDIVIDUAL LENDING - SEDO SOUTH OFFICE

The SEDO South branch manager supervises three account officers, one trainee and foursupport staff. There are 375 borrowers served out of this branch, with total loans of P19 million(US$760,000). Participation in the Sakbayan program represents 90% of the total TSPI clienteleand 85% in terms of loan volume. This branch also has 35 Individual program loans whichaverage about P80,000 (US$3,200). Repayment is respectively 99.5% and 98%. The branchmanager, Nonoy, says they will be re-starting the Solidarity loan program in his area, but otherssay they are not. The consensus seems to be that the problem with the Solidarity program wasthat TSPI was "not close enough to their market," that is, staff were spread too thinly.

Nonoy confirms that in this SEDO branch, recruiting and turnover are problems. He saysthis is entirely due to staff remuneration; saying the account officers are being paid 1/2 of theprivate sector and even if they were paid 20% more, the program still could not retain them.

Sakbayan CLIENT #1 - This man is in his 50s. He bought his first two tricycles withmoney he made working in Saudi Arabia. The cycle he bought through the Sakbayan program ishis third.

His cycle cost P56,000 (US$2,240). As noted earlier, TSPI pays the cost of cycle directlyto the dealer. (The husband of one of TSPI's employees is one of the major beneficiaries of thisprocess since he wholesales motorcycles. He offers a discount to TSPI for volume sales.)

The client said that he seeks to make only P100 (US$4) profit per day and stops workingwhen he reaches that amount. His two sons run the other two tricycles and he also pays a hireddriver part time. Maintenance is minimal. Indeed, when asked whether he had thought of goinginto jeepneys (which cost up to US$12,000), he said no, but mainly because of high maintenancerequirements. Given the current rapid changes in the nature of vehicular use in Metro Manila,there seems to be a growing consensus that tricycles may have a limited future in the capital area.

KABUHAYAN PROGRAM - DESMARINAS BRANCH

CLIENT # 1 - Elizabeth: Elizabeth lives in the Desmarinas resettlement area, somedistance from Manila proper. Her house is ten minutes away from the TSPI Kabuhayan Centerby jeepney and tricycle. Elizabeth lives with her husband, a factory worker, and four children inthree small rooms (a total of about 500 sq. feet). The roof is tin; the floor is cement. There areshelves, beds, furniture of a primitive sort, and a small television on which the children arewatching cartoons. Another television is visible through a curtain in another space. She camehere to purchase a plot from the government, a possibility she heard about from her brother-in-law who is a radio announcer. The plot - 100 square meters - cost P30,000 (US$1,200) which

14 These profiles represent a small selection of the clients visited during the case study. See the full case study for more profiles.

SUSTAINABLE BANKING WITH THE POOR 25

her brother-in-law purchased. To construct and outfit the house took another P22,000 (US$880)of which half was contributed by the brother-in-law and half their own savings.

Before coming here she had run a small sari-sari store and done manicuring. Now sheoperates another sari-sari store, in the front of the house in an 8 by 8 foot space. One bag of riceis visible, plus some items on shelves including perhaps 30 packs of cigarettes. She heard aboutTSPI and formed a borrowing group with four friends and neighbors.

Her first loan was P2,000 (US$80) for additional stock for the sari-sari store. Her regularrepayment amount is P52 (US$2) in principal and interest plus P12 (US$0.50) in savings. She isnow in her second cycle with a six-month loan. Her total payment each week is P242 (US$10),including savings. This results in a 50% effective annual rate of interest. She claims the totalstock she has is worth about P6,200 (US$250). She would like an additional P10,000 to P15,000(US$400 - US$600) to further develop her store.

Her best days are the weekend. On Saturdays she grosses about P1,300 (US$52). Shepays P760 (US$30) for a bag of rice and makes P90 (US$3.60) net per bag, which sells in acouple of days. It seems that her P5,000 loan would not go very far if she is using it for ricepurchases. If she grosses P3000 (US$120) per week and the P90 net on the P760 per bagpurchase is typical, this would mean she is netting between P500 and P775 (US$20-US$31) perweek, of which P242 (US$10) has to cover a loan for six months, though the cash is probablyused up in rice purchases alone in 6 to 8 weeks. Financing new purchases of rice after thatperiod is over will come entirely from rice sales alone.

One can see the point of initial stock, and the point of expanding stock, but there is noevidence of the latter and she herself denied the former. (We see again that money is fungible -the loan may well be going somewhere else). She notes that there are many such stores in theSolidarity loan program. Yet the population of this baranquay appears to be stable. When askedabout this, she replies that there is no conflict since everyone has different customers. Anyway,she says, when she gets her next loan she thinks she'll go into pig raising. Her four groupmateshave the following businesses: another sari-sari store; dried fish (ambulant seller); dried fish (in amarket place stall); and tailoring.

Let us assume that a minimum net weekly contribution to family income after loanservice for these women is P500 (US$20) per week. This represents an additional P25,000 toP26,000 (US$1,000 to 1,040) per year, or anywhere from 25% to 50% (or more) of what thehusband makes (based on the detail family income report). This is significant additional incomeand asset accumulation is probably evident in every case. The five women together have 21children, of which 11 are in school. The cost of transport alone to go back and forth to the localarea school is 4 pesos per day, or P20 per week per child. In addition, the women must run theirhouseholds. Electricity is only now entering the area and they will be willing to pay for it; watercosts between P3.50 and P10 per container, and they must pay for cooking gas.

Clearly these women (who do not fall into the ultra poor category) are likely to remainpoor, even with the loans, but they are improving the family's assets and quality of life. Yet

SUSTAINABLE BANKING WITH THE POOR 26

given their education, their husbands' education, and especially their own assessments of their

businesses, their economic activities are not poised for business growth. Their activities are

transient, vulnerable, and characteristic of the survivalist nature of such "enterprises."

CLIENT # 2 - (Note that her current Account Officer is the fifth one to deal with this

group and that the Account officer announced that she herself would be leaving in two weeks

time.) Client # 2 is in the business of repacking onion and garlic, and has added black pepper

and curry powder to her line. She began in 1993, as a helper to another woman and went on her

own in 1995 with the help of a TSPI loan. She used her entire P2,000 (US$80) loan in the first

day she received it to buy a stapler, plastic, staples, and a stock of onion and garlic from the same

supplier from which her former partner also buys. What about customers? She developed her

own market; she hired little kids to sell for her. She pays them P2 per strip (there are 30 pieces in

a strip). The strip retails for P15 and she s7ells it to the retailer for P10, so she nets 8 pesos after

the payout to the kids. The cost for curry is P50 (US$2) per kilo which fills about 1000 packets,

or P1.5 per strip of 30 packets. The packets themselves cost little as she buys them by the kilo

for P12. One has to add roughly 60 centavos for the plastic per strip plus about another peso for

30 staples-. So her net per strip is P4.90 (US$0.20).

In percentage terms this is profitable (if you do not count her labor and the loan service).

But this is a very labor intensive activity. Moving fast, one can fill individual packets at the rate

of 15 to 20 per hour, so to complete 3 strips of 30 will take a minimum of 4 concentrated hours.

Assuming that rate, she may net at best P15 each day which is P105 (US$4.20) per seven days.

Doubling that makes P210 per week. Only by tripling that production rate to P315 per week can

she support a P5,000 (US$200) loan. However, there is an increasing number of women in this

area who engage in this one activity.

CLIENT #3 - This woman has been making rag doormats for some time, and started a

second business, a sari-sari store, in 1994 using P1,000 (US$40) of her own savings. She used

her P2,000 TSPI Kabuhayan loan for additional capital, rice, soap, liquor (gin), and "junk food."

The store is separate from her house, in a space belonging to her mother. She sells rice at a rate

of 1 bag per week, and buys it in the marketplace from whomever she can get the best price; then

carries it home byjeepney. On average, she pays about P700 per 50 kilo bag. She does not

know her net income per bag but says that she makes P2 per kilo profit, thus P100 (US$4) net

per bag. One bag lasts about a week, but her big seller is alcohol and now she wants to get more

into that. She will use her next loan of P5,000 (US$200) to stock more liquor which is very

much in demand on weekends. Her husband is a construction laborer.

CLIENT DROPOUT AND THE OVERALL QUESTION OF PROGRAM VIABILITY

Montemayor admits that the ultra poor are difficult to serve. "The true bottom," he says,

"the squatters and the beggars.. .we won't touch them, we can't. You have to have someone who

is stable and economically active or they'll run away with your money." But his bigger concern

is sustainability. He notes how Grameen Bank staff and others are incredulous when he tells

them that his delivery cost is six to seven times his outstanding balances and that it will take six

SUSTAINABLE BANKING WITH THE POOR 27

or seven years to achieve financial viability in the Kabuhayan program. Montemayor claims that"volume is everything; we have to reach volume." That may be where the obstacle lies. The firstthing one sees in branch level sensitivity analyses is a 30% drop-out rate after the first loan cycle.Interestingly, the staff drop out rate is not taken into account in the sensitivity analysis. But one

has to wonder what the effect of Account Officer drop out is on client drop out, if relations withthe group are so unstable.

More important, however, is the issue of loan demand and debt capacity. A high drop-outrate can be a valid test of the market. If the drop out is because the client really does not need theloan at the price offered, or because the client cannot really use the loan productively after acertain level, or because the market is saturated, then the market is not there.

TSPI appears unwilling to entertain the possibility that microcredit in parts of MetroManila may be supply driven, but this is entirely possible.

In any case, a high drop-out rate after the first or second cycle means that TSPI maynever get to the profitable loans, and volume might not grow very fast or at all.

Montemayor often recounts how Professor Yunus of Grameen Bank baits newcomers byasking them whether they think Grameen is a bank or a development program. Then Yunussends them to the field and asks them the question when they come back. Montemayor doesn'tsay what the "correct" answer is. He prefers, apparently, like Yunus, to leave the question open.

But the answer to that question, and to the question of who exactly TSPI is trying to reachand how, appears to keep coming back to haunt the overall program. The poverty pyramid is, ina way, TSPI's way of hedging its bets. Individual lending is profitable, but it is, after all notmicrocredit. The Solidarity lending program was a way to reach out further but that so far hasnot worked very well. Repayment in the Solidarity program is a big problem, Montemayorhimself acknowledges. Low loan assets of P600,000 (US$24,000) and arrears greater than 50%suggest that this loan program is not working, and indeed the Solidarity program is on hold, in akind of limbo. The Individual loan program is experiencing declining revenues and is notmaintaining high portfolio quality. The Sakbayan program, also not really microcredit, is asuccess, but only so far, since it is targeted to a specific subsector which may have a limitedmarket and future. Kabuhayan, then, which is micro, is the attempt to answer the poorest-of-the-poor imperative.

Cross subsidization is a temporary answer to the question of TSPI viability, butMontemayor knows it is temporary; he feels, rightly, that each loan product has to stand on itsown. The pyramid also covers him on the Yunus riddle about "development." Both theSakbayan and the Individual lending programs are business lending. Solidarity is borderline,lying between business and "livelihood." Kabuhayan raises considerably more questions aboutwhether the clientele can really make productive (and thus developmental) use of the loan; andabout whether the lending is leading to business development.

SUSTAINABLE BANKING WITH THE POOR 28

The Opportunity Network Core Values and Guidelines documents, however, do not seem

to allow room for the Yunus riddle of whether the operation is a business or a developmentagency, or implicitly, a poverty alleviation agency. The Guidelines state over and over again that

"we are not a relief agency." The terms "business;" "business resources;" "small and micro

business loans;" and "resources which are business related" are used repeatedly. The overall

product is explicitly said to be "training and financial services.. .to develop.. .enterprises."

Nowhere does it say that the Network's objective is to provide subsidized lending for the

purposes of smoothing consumption; nowhere does it state that it is okay to subsidizeconsumption spending, or provide cash flow to acquire personal assets, or to deal with people

who are not in fact real entrepreneurs.

FINANCIAL SUSTAINABILITY

While TSPI did have audited financial statements for the fiscal year ending June 30,

1995, these statements consolidate data from all five loan programs. Since the loan programs are

quite different, and not all microcredit, performing ratio analysis or an SDI was not deemed a

worthwhile exercise. Moreover, there were discrepancies between data on TSPI hand outs and

the consolidated data in the audited statements, discrepancies which seemed to be a function of a

mixture of sources and information systems. A couple of tendencies, however, can be noted.

While TSPI in 1993-1994 covered cash and non-cash costs with overall interest income

(a result of internal cross-subsidization), plans for the TSPI development bank project lower

organizational sufficiency in the short-term future. According to an earlier World Bank Case

Study,'" TSPI started with an SDI of around 700% - 800% which declined to 54% in 1993-1994.

The SDI would revert, however, to a higher percentage with grant support for the extension of

the Kabuhayan program (which in 1994 was assuming expansion at the rate of 100,000 new

borrowers per year), and then dropping off steadily until the year 2000. Once the bank is

operating, the Kabuhayan program would become a separate NGO but benefit from cross-

subsidies from the other programs and eventually from the operations of the TSPI Bank, which

would significantly increase access to savings.

TSPI had built up a sizable equity base, primarily due to a few large USAID grants. Its

rapid growth in loan assets, from P34 million (US$1.36 million) in June 1994 to P55 million

(US$2.2 million), 80% of it in Sakbayan, in June 1995 did not however, generate a

commensurate increase in interest income to offset higher operating costs. In order to assess the

possible reasons for this reduced efficiency, further analysis of the underlying operations would

be required.

15 Coleman and Gosospe, October, 1994.

SUSTAINABLE BANKING WITH THE POOR 29

STRENGTHS AND WEAKNESSES IN TSPI'S PROGRAMS AND CREDITMETHODOLOGY

TSPI has a fairly well-wrought credit methodology worked out for its programs,following many principles of microfinance best practices. But while the approach isprofessionally conceived, and there are many safeguards against default and in favor of highrepayment, there seems to be more concerns with methodological detail than with overalleffectiveness or quality. Moreover, the execution of all programs (with the possible exception ofSakbayan) appeared to have suffered from stretching resources too thinly as the result of rapidexpansion, a result in turn of a strategy that is too diffuse.

The Solidarity program is a case in point. It suffered from not having its own staff, andaccount officers, the front line troops, had too many clients (or groups), in too many programs towatch carefully. TSPI was often not present at the field level to monitor what was going on.Additionally, local banks refused to deal with TSPI's borrowers, seeing them as dirty people whowould fill up their lobby. Moreover, while in some cases staff at the banks' central headquarterssaid okay to their involvement with TSPI, the branch managers had no incentive to go along withthe program, since they make no money on these transactions.

But perhaps the most significant problem with the Solidarity program was competitionfrom other lenders. Solidarity also found that many borrowers wanted larger loans, and weredissatisfied with the size of what was offered. In effect, TSPI motivated in part by an expandeddefinition of its mission, tried to create a product that may simply not have been in demand in thetarget area. Reflecting an urgency that appears to come from TSPI top management, it neitherdid its homework very well, nor did it put in place adequate staff resources.

In the case of Sakbayan, lack of full staff was also a problem. While it is the best of theTSPI programs, the reasons for it are somewhat external. Montemayor says that Sakbayan was"a pleasant accident." A government resettlement program had asked TSPI to start a Grameenreplication with tricycle operators. It worked right away, but its success is due to some unusualfactors: first the tricycle business is regulated, thus it is a controlled environment with franchisedroutes; second, in not giving the loans directly to the drivers, TSPI has an additional degree ofcontrol; third, the tricycle itself is collateral. Finally, groups are "pre-formed," that is, theborrowers are already members of a tricycle association.

Sakbayan is a good program. As the best product line TSPI has (with an average loansize of about $1,800, and almost 100% male clients, it does not fit the current microcredit mold),it will form the basis of the TSPI bank. However, as routes near saturation, and the economyimproves, what will happen when the tricycle market runs out?

In Kabuhayan, loan delinquencies were at 15.6%, and drop-outs were beginning to be aserious problem. Thus, the question of debt capacity must be raised. If repayment at the levelsof activity now seen, must depend, in a number of cases, on other sources than the activity itself,than debt capacity may indeed be limited. The Kabuhayan program contained branches of

SUSTAINABLE BANKING WITH THE POOR 30

differing quality, some have good records, some do not. This is due to staffing problems and

consequent differences in training quality.

Kabuhayan, representing the newest hope for scale in reaching the poor, may simply have

pushed things too fast. Since lending began in mid 1992, disbursements have grown almost five

fold. However, total loans outstanding have not increased as rapidly.

Finally, one comes back to the question of strategic focus. TSPI, under new leadership

since 1989, has extensively broadened its emphases rather than narrowing its focus to what can

work (and what is really needed). Moreover, it may have done so less on the basis of a careful

analysis of what makes developmental sense in the Philippines, and more on the basis of its

calling as a Christian organization. It holds on to its much older Individual program (with 95

borrowers) largely to subsidize losses in its newer poverty-oriented programs. This may be a

good tactic but it is not a strategy for achieving sustainability.

FUTURE CHALLENGES - THE TSPI BANK

At the time of this case study TSPI was putting much management energy into the

creation of a Private Development Bank (PDB). TSPI felt that a PDB would blend commercial

banking with a development orientation, allowing TSPI to mobilize savings and formalize credit

operations while maintaining its client focus. Roughly following the history of

Prodem/Bancosol in Bolivia, plans were to maintain the NGO to serve Kabuhayan clients and

develop branches for eventual sale to the bank.

In the Philippines, commercial banks require a minimum capital of P 1.25 billion (US$50

million). A PDB, in contrast, requires minimum capital of P40 million ($US 1.6 million) if

operating outside the Metro Manila line, which would allow TSPI access to Manila clients while

avoiding the quadrupling of capital necessary (P150 million) to operate within Metro Manila.

(Rural banks require lower capital than PDBs but are not allowed to operate in Metro Manila and

are limited to one branch per municipality.) TSPI would later increase the capitalization of the

bank in order to operate eventually in Metro Manila.

"We are now reviewing the organizational basis for TSPI and we need a greater sense of

accountability institutionally so that we will be credible to the Banks," Montemayor points out.

In 1995, TSPI changed its name to TSPI Development Corporation to try to overcome the image

of a soft NGO. In late falll 995, TSPI moved into new offices and the shiny woodwork and

marble on the first floor convey the kind of bank-like seriousness Montemayor wants the world

to see.

There were several practical reasons for planning the bank. The NGO habit in the

Philippines of taking savings as "capital build up" was beginning to cross the line into deposit

taking, not legal for NGOs. Not only does TSPI want to obey the law, but it also realizes that

one of the bridges to volume growth is accessing deposits.

SUSTAINABLE BANKING WITH THE POOR 3 1

A second argument for wanting to move headlong into being a bank, had to do with theregulatory, policy, and funding environment. In late 1995, the climate was more open than everfor starting a bank with relatively low capitalization, but the sense was that the rules couldchange and the window of opportunity might narrow. Also the USAID grant was to run out atthe end of 1996. There would be no renewals as USAID was already sharply reduced in thePhilippines, and was planning to put more emphasis on Governance and Participation and focusregionally on Mindanao.

Finally, there are several tax advantages to the PDB type of Thrift bank and the reserverequirement is 2% lower than it is for commercial banks.

Plans called for nine branches including a head office at the end of the bank's secondyear. TSP. was estimating start-up costs to be P2 million (US$80,000) per branch plus the costof operation for 18 months to break even. The bank would have to mobilize deposits from thegeneral public. Staff admits that marketing will be key, and says that as is often the case inThrift Banks, the competition will center around higher interest rates. A key question thereforeis whether sensitivity analyses were being done, since the assumptions of branch growth andbreak even seem a bit too firm and therefore unrealistic.

The senior staffer in charge of preparing the way for the bank says the solution to successis simple: they will just be a bank like other banks and will offer products that can make money.The most lucrative market around, he says, is the interim housing finance market, where Thriftsoffer bridge loans to new housing mortgages so they can occupy their residence before theregular loans come through, which take time. These are P 100,000 to P 300,000 (US$4,000 toUS$12,000) loans, which are lucrative because the banks making these also take in an originationfee.

But if, in the end, the TSPI bank were to be just another bank, then what would be thedevelopmental advantage? What of the mission of lending to the poor? A diffuse strategy and aconfusion of the mission of serving the poor with the ambition to be credible in a newlycompetitive financial environment seem to have been a recipe for just such contradictions.

SUSTAINABLE BANKING WITH THE POOR 3 2

BIBLIOGRAPHY

Central Intelligence Agency. World Factbook, 1997. Central Intelligence Agency: Washington,

D.C.,1997.

Coleman, Leigh and Emesto Gorospe. Developing Financial Instruments to Support Poverty

Oriented Financial Institutions. A Case Study: TSPI. Report to the World Bank,

Washington, D.C., October14, 1994.

Government of the Philippines. National Statistical Coordination Board Technical Working

Group on Income Statistics. Manila, the Philippines, 1992.

International Monetary Fund. International Financial Statistics Yearbook, International

Monetary Fund: Washington, D.C.,1997.

Ledgerwood, Joanna. Philippine Poverty Strategy Report: Access to Credit for the Poor. Report

prepared for the East Asia Country Department, The World Bank: Washington, D.C.,

June, 1995.

Remenyi, Joseph. Where Credit is Due: Income-Generating Programmes for the Poor in

Developing Countries. Intermediate Technology Publications: London, 1991. Tulay Sa

Pag-Unlad, Inc. Annual Report. TSPI: Manilla, various years.

World Bank. Philippines - A Strategy tofight poverty. World Bank Sector Report Number 14933-

PH Country Operation Division, Country Department 1, East Asia and Pacific Region,

November 13, 1995.

World Bank. Summary Philippines A Strategy to Fight Poverty. Country Operations Division,

Country Department 1, East Africa and Pacific Region. Draft Report No. 14933-PH,

September 29, 1995.

World Bank. World Development Report, 1997. The World Bank: Washington,D.C., 1997.

SUSTAINABLE BANKING WITH THE POOR 33

Appendix

SUSTAINABLE BANIING WITH TRE POOR - LIST OF CASE STuDrIES

1. BtNIN- Federation des caisses d'dpargne et de credit agricole mutuel (in French). Cecile Fruman.Avril 1997.

2. BENIN, FECECAM. Cecile Fruman. June 1997.

3. Bolivia: Assessing the Performance of Banco Solidaro. Peter Fidler. August 1998.

4. Burkina Faso: Le Projet de promotion du petit credit rural - PPPCR. Julia Paxton. August 1997.

5. Costa Rica: FINCA Village Banking. Julia Paxton, March 1998.

6. Egypt, Alexandria Business Association. Tom Dichter. December 1997.

7. Guatemala CARE Vilage Banks Project. Julia Paxton. October 1997.

8. Guatemala CARE - Proyecto de Banco Comulales (in Spanish). Julia Paxton, Octubre 1997.

9. Indonesia - Bank Rakyat Idonesia (BRI) Unit Desa 19 70-1996. Stephanie Charitonenko, Richard H.Patten, and Jacob Yaron. June 1998

10. Kenya KREP. Stephanie Charitonenko. August 1998.

1I. Mali CVECA - Pays Dogon (in French). Cecile Fruman. Avril 1998.

12. Mali Self-Managed Vilage Savings and Loans Banks (CVECA - Pays Dogon). Cecile Fruman.May 1998.

13. Niger Credit Unions (Caisses Populaires d'Epargne et de Credit). Korotoumou Ouattara, MayadaBaydas and Julia Paxton. April 1998.

14. Philippines - TSPI. Tom Dichter. August 1998.

15. South Africa: Get Ahead Foundation. Craig Chruchill. January 1998.

16. Thailand BAAC - The Thai Bankfor Agriculture and Agricultural Cooperatives. TetsutaroMuraki, Leila Webster, and Jacob Yaron. April 1998.

17. Zimbabwe, Zambuko Trust. Peter Fidler and Mohini Malhotra. April 1997.

Cases Available on the Web at: http://www-esd.worldbankorg/html/esd/agr/sbp/

SUSTAINABLE BANKING WITH THE POOR 34

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