New microfinance trend worries Phillippine Central Bank

THE BANGKO Sentral ng Pilipinas has begun looking into banks that have established non-profit arms that also offer microfinance services, citing the need to protect public interest.

The central bank, in its yearend report on microfinance, noted that banks that are engaged in microfinance have set up non-profit arms or foundations to engage in the same activity.

“In recent years, several banks that are offering microfinance are adopting a new strategy: the establishment of NGOs (nongovernment organizations) and/or foundations engaged in microfinance,” it said in its report.

“In this regard, the Bangko Sentral is looking at such arrangements and ascertain that adequate standards in governance, transparency and operations are upheld to ensure safe and sustainable institutions.”

Microfinance players in the Philippines include thrift banks, rural banks, cooperative banks, cooperatives and NGOs. Microfinance loans are small loans, as low as P5,000, which are extended to the poor to finance entrepreneurial activities.

Pia P. Roman, the central bank’s microfinance unit officer, said the Bangko Sentral would come up with rules governing banks and their NGOs.

The rules, aimed at providing “clearer guidelines on governance,” should be out within the first half.

“The trend before was NGOs, since they were not allowed to offer financial services, put up small banks to be able to offer more services,” Ms. Roman said in an interview.

Today, however, banks are beginning to do the reverse by setting up NGOs to extend their reach.

Ms. Roman said this is advantageous for banks since NGOs are not covered by strict regulatory requirements such as maintenance of a certain level of capital.

“NGOs have also more flexibility to do what they want,” she said. However, this may pose risks, such as banks doing business with their own NGOs.

“It has to be clear that the (bank’s and its NGO’s) operations are separate,” she said. “

Tomas S. Gomez, president of the Rural Bankers Association of the Philippines said the guidelines would be welcome.

“We support that what we want is a clear delineation and a level playing field between NGOs and banks engaged in microfinance,” he said. “These institutions should be complementary and should help each other.”

He said the rules should promote proper governance, given the potential for governance and management risks in these set-ups.

“NGOs are not exactly regulated by the BSP so there are differences in regulation and accounting standards,” he pointed out.

Central bank data as of June 2008 showed there were 230 thrift, rural and cooperative banks. They extended P6.46 billion in microfinance loans to over 800,000 borrowers.

The central bank recognized microfinance as a legitimate banking activity in 2000, in line the provisions of the General Banking Act of 2000.


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