"Rural Microenterprise Finance Project"
PCR: PHI 25351 ASIAN DEVELOPMENT BANK PROJECT COMPLETION REPORT ON THE RURAL MICROENTERPRISE FINANCE PROJECT (Loan 1435-PHI[SF]) IN THE PHILIPPINES February 2005 CURRENCY EQUIVALENTS Currency Unit – Peso (P) At Appraisal At Project Completion (March 1996) (December 2002) P1.00 = $0.0384 $0.0186 $1.00 = P26.00 P53.52 ABBREVIATIONS ASA – Association of Social Advancement ASHI – Ahon sa Hirap BSP – Bangko Sentral ng Pilipinas BME – benefit monitoring and evaluation CARD – Center for Agriculture and Rural Development EO – executive order GFI – government financial institutions IFAD – International Fund for Agricultural Development LBP – Land Bank of the Philippines MIS – management information systems MFI – microfinance institutions NCC – National Credit Council NLSF – National Livelihood Support Fund NWTF – Negros Women for Tomorrow Foundation PCFC – People’s Credit and Finance Corporation RMFP – Rural Microenterprise Finance Project SHG – self-help groups SEC – Securities and Exchange Commission SDR – Special Drawing Rights TSKI – Taytay sa Kauswagan, Inc. TCC – Training Coordinating Committee NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars. CONTENTS Page BASIC DATA i MAP v I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 4 C. Project Costs 5 D. Disbursement Performance 6 E. Project Schedule 7 F. Implementation Arrangements 7 G. Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants, Contractors and Suppliers 9 K. Performance of the Borrower and the Executing Agency 9 L. Performance of the Asian Development Bank 10 III. EVALUATION OF PERFORMANCE 11 A. Relevance 11 B. Efficacy in Achievement of Purpose 11 C. Efficiency in Achievement of Outputs and Purpose 14 D. Preliminary Assessment of Sustainability 14 E. Institutional Development and Other Impacts 15 F. Environmental, Sociocultural, and Other Impacts 15 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 15 A. Overall Assessment 15 B. Lessons Learned 16 C. Recommendations 16 APPENDIXES 1. Project Framework 19 2. Flow of Funds and lending Terms 22 3. Project Achievements 23 4. Graphical Presentation of Disbursement 25 5. Status of Compliance with Major Loan Covenants 26 6. Technical Assistance Completion Report 36 7. PCFC Accreditation Criteria 38 SUPPLEMENTARY APPENDIXES A. Impact Study B. IFAD RMFP Interim Evaluation Report C. Profile of Conduits BASIC DATA A. Loan Identification 1. Country Philippines 2. Loan Number 1435 (SF) 3. Project Title Rural Microenterprise Finance 4. Borrower Republic of the Philippines 5. Executing Agency People’s Credit and Finance Corporation (PCFC) 6. Amount of Loan US $ 20,000,000 (SDR13,618,000) 7. Project Completion Report Number PCR: PHI 879 B. Loan Data 1. Appraisal – Date Started 15 August 1995 – Date Completed 7 September 1995 2. Loan Negotiations – Date Started 8 March 1996 – Date Completed 8 March 1996 3. Date of Board Approval 23 April 1996 4. Date of Loan Agreement 8 May 1996 5. Date of Loan Effectiveness – In Loan Agreement 30 September 1996 – Actual 18 April 1997 – Number of Extensions 4 6. Closing Date – In Loan Agreement 1 July 2002 – Actual 31 December 2002 – Number of Extensions 1 7. Terms of Loan – Interest Rate 1% p.a. – Maturity (number of years) 35 years (inclusive of grace period) – Grace Period (number of years) 10 years 8. Terms of Relending (to Land Bank of the Philippines) – Interest Rate 4.5% p.a. for incremental investment credit 1.0% p.a. for institutional development of GBA Replicators – Maturity (number of years) 20 years (inclusive of grace period) – Grace Period (number of years) 6 years 9. Terms of Onlending To PCFC – Interest Rate 5.25% p.a. for incremental investment credit 1.0% p.a. for institutional development of GBA Replicators – Maturity (number of years) 20 years (inclusive of grace period) ii – Grace Period (number of years) 6 years To GBA Replicators – Interest Rate 10.0% p.a. for incremental investment credit (increased to 12% in 1997) 3.0% p.a. for institutional development of GBA Replicators – Maturity (number of years) Not to exceed 7 years (inclusive of grace period) – Grace Period (number of years) 3 years From GBA Replicators to SHG members – Interest Rate Not less than 24% p.a. – Maturity Ranges from 6 months to 1 year 10. Disbursements Dates Initial Disbursement Final Disbursement Time Interval 24 July 1997 26 September 2003 72 months Effective Date Original Closing Date Time Interval 18 April 1997 1 July 2002 62 months C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 3.3 - Local Currency Cost 61.5 163.69 Total 64.8 163.69 2. Financing Plan ($ million) Financing Source Appraisal Estimate Actual ADB-Financed 20.0 17.56 IFAD-Financed 14.7 13.49 PCFC 9.3 7.76 GBA Replicators 15.7 105.81 Beneficiaries 5.1 19.08 Total 64.8 163.69 ADB = Asian Development Bank, IFAD = International Fund for Agricultural Development, PCFC = People’s Credit and Finance Corporation, GBA = Grameen Bank Approach. iii 3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual A. Incremental Investment Credit Loan 34.080 31.31 B. Institutional Development Loan 7.442 5.77 C. GBA Replicator’s Own Resources 15.694 105.81 D. Beneficiary Capital 5.148 19.08 E. Project Admin, Supervision and Monitoring 2.235 1.72 Price Contingencies 0.232 Total 64.830 163.69 4. Project Performance Report Ratings Ratings Development Implementation Implementation Period Objectives Progress From 1 Nov 1998 to– 30 Nov 2000 Satisfactory Satisfactory From 1 Nov 2000 to –31 Dec 2001 Satisfactory Partly Satisfactory From 1 Jan 2001 to 31 Jan 2004 Highly Satisfactory Partly Satisfactory From 1 Feb 2001 to –31 Dec 2003 Highly Satisfactory Satisfactory D. Data on Asian Development Bank Missions No. of No. of Specialization of Name of Mission Date Persons Person Members -Days Fact- Finding 28 Mar– 5 18 Sr. Project Economist 21 Apr 1995 Project Economist Senior Programs Officer Consultants (2) Appraisal 15 Aug– 6 54 Sr. Project Economist 7 Sep 1995 Financial Analyst Senior Programs Officer Counsel Consultants (2) Inception 23 Sep– 2 79 Sr. Project Economist 16 Nov 1998 Asst. Project Analyst Loan Disbursement 23-24 Mar 1 2 Control Officer 1999 Special Loan Administration 17 Sep 1999 1 1 Sr. Project Economist Midterm Review 6–23 May 3 29 Sr. Project Economist 2000 Asst. Project Analyst Project Economist Financial Analyst Review 1 7–29 August 3 45 Project Economist 2001 Poverty Reduction Specialist Associate Projects Analyst iv Review 2 18 Mar–15 2 12 Poverty Reduction Apr 2002 Specialist Assistant Project Analyst Project Completion Review 18–29 1 10 Financial Sector October 2004 Specialist I. PROJECT DESCRIPTION 1. In 1996, the Asian Development Bank (ADB) approved a loan of $20 million equivalent to the Government of the Philippines for the Rural Microenterprise Finance Project (RMFP), which aimed to support the Government’s efforts to strengthen rural financial institutions by assisting organizations that employed the Grameen Bank approach (GBA) of providing credit to the poor. The objective of the Project was to reduce poverty, create employment opportunities, and enhance incomes of the poorest of the rural poor (the ultra poor) – the bottom 30% of the rural population as measured by income.1 The promotion of women in development was the Project’s secondary objective. 2. To achieve these objectives, RMFP sought to (i) increase the availability of credit assistance through GBA Replicators to the target group for investment in income and employment-generating microenterprises; (ii) expand the formation, growth, and strengthening of self-help groups (SHGs), composed primarily of poor rural women; (iii) promote and achieve rapid growth in savings and savings mobilization schemes among the target group; (iv) strengthen the institutional capacity of GBA Replicators to provide simple and accessible financial intermediation services (credit and savings) to the target group; (v) assist in the development of a self-sustaining financial system for the rural poor by establishing a nationwide network of GBA Replicators; and (vi) improve the policy environment for the microfinance program. 3. RMFP was formulated in response to the need to expand a proven system for organizing SHGs and delivering savings and credit services directly to the rural ultra poor. Prior to RMFP, ADB had approved three microenterprise credit loans in the Philippines, totaling $113 million. 2 Generally, these projects had successfully addressed the credit needs of rural enterprises and landholding poor. However, by design, they did not specifically target the landless poor or women, although the enterprises financed under the projects may have provided employment to the ultra poor indirectly. The GBA has been recognized as a long-term, successful and sustainable system for bridging effective financial services to the ultra poor, and has produced significant income, employment and other social benefits in Bangladesh, Malaysia, and the Philippines. In response to the Government’s commitment to providing financial services to the ultra poor through the adoption of the Social Reform Agenda in 1994 and the creation of the People’s Credit and Finance Corporation (PCFC) in 1995, the Project was designed to support the training and credit needs of a nationwide program that could meet the needs of a significant percentage of the country’s ultra poor through the expansion of the GBA over the following 6 years (1996-2001). 4. RMFP included the following two credit lines: 1 The project was classified as Poverty Reduction (primary objective) and Gender and Development (secondary objective) under the old project classification system. 2 ADB. 1988. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the NGO Microcredit Project. Manila (Loan 940-PHI, for $8 million, approved in December 1988, completed in October 1991); ADB. 1991. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the Second NGO Microcredit Project. Manila (Loan 1137-PHI, for $30 million, approved in November 1991, completed in May 1997); and ADB. 1992. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the Small Farmers Credit Project. Manila (Loan 1216-PHI, for $75 million, approved in December 1992, completed in March 1998). 2 (i) Investment credit facility. A credit line to the accredited GBA Replicators or microfinance institutions (MFIs) for onlending to about 300,000 target SHG members for incremental investment in their microenterprises. (ii) Institutional credit facility. A credit line to provide institutional development loans to the accredited MFIs to support a portion of (a) the start-up costs for about 270 new MFI branches and ongoing development costs for about 35 existing branches; (b) the training of about 2,500 GBA branch managers and field and office staff; and (c) the costs associated with institutional preparation and formation of SHGs. 5. ADB provided a loan of $20 million (SDR13,618,000) from its Special Funds resources . The International Fund for Agricultural Development (IFAD) provided a loan of $14.7 million (SDR10,150,000). The two loans with a total amount of $34.7 million were to finance 80% ($27.3 million equivalent) of the MFIs’ total incremental investment credit requirements through the investment credit facility and a portion ($7.4 million equivalent) of the institutional development costs for new and expanded programs of MFIs through the institutional credit facility. 6. ADB also provided an advisory technical assistance (TA) 3 aimed at strengthening the financial and institutional management and monitoring capacities of PCFC and participating MFIs. It was designed to (i) enhance the financial and management capabilities of MFIs participating in the Project through the development of an appropriate accounting, financial monitoring, reporting, and management system; (ii) assist MFIs to develop appropriate management systems and accompanying management information service; and (iii) assist PCFC and MFIs to establish, install, and initially supervise an appropriate benefit monitoring and evaluation (BME) system. The project framework is in Appendix 1. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 7. RMFP was consistent with ADB’s country strategy and program and the country’s development objectives. It was consistent with the ADB’s country operational strategy for the Philippines, which was also in line with the Government’s 6 -year Medium-Term Philippine Development Plan (MTPDP) 1993-1998. 4 The Project was designed to increase income and employment opportunities in rural areas by providing financial resources to microfinance institutions for onlending to the ultra poor, and by strengthening the capacity of MFIs to become self-sufficient. The Project was designed to provide two credit lines for microfinancing and institution-building, develop efficient and effective market-based rural financial services, and increase savings mobilization in rural financial markets, particularly among the poor. To guide the microfinance sector towards a healthy development path, the policy reform agenda was incorporated in the loan covenants calling for (i) the consolidation of nonagriculturally-based microcredit programs, (ii) regulation of deposit taking by MFIs, (iii) the removal of an interest rate ceiling for nonagriculturally-based microcredit programs, and (iv) the privatization of PCFC. 3 ADB. 1996. Technical Assistance to the Republic of the Philippines for Strengthening Rural Microfinance. Manila (TA 2558–PHI, for $600,000, approved in April 1996, completed in December 2003). 4 Which was designed to achieve poverty alleviation, social equity and sustainable development through (i) strong and sustainable economic growth, (ii) nurturing international competitiveness, (iii) fostering the private sector as the engine of economic growth, (iv) promoting human development for “people empowerment,” and (v) combating poverty. 3 RMFP was formulated through extensive dialogue with the Government and stakeholders, with good levels of participation and ownership. 8. The project preparatory technical assistance (PPTA) 5 provided an in-depth study on Philippine rural finance and concluded that, at the time of the project formulation, a sound microfinance industry was hampered by an inconsistent and inefficient Government credit program. It also pointed out that many nongovernment organizations (NGOs) and cooperatives could not optimize their potential to become self-sustaining grassroots financial intermediaries because of a lack of institutional capability. It recommended a comprehensive rural financing project designed to develop a sustainable microfinance system through capacity building of MFIs, policy dialogue to consolidate and rationalize Government credit programs, and decentralized credit operations by viable NGOs and cooperatives targeting the rural poor. Overall, it was identified that financial services affordable and accessible to the rural poor was a major constraint to increasing incomes. 9. With a growing number of NGOs successfully undertaking commercially viable microfinance operations and committed to international best practices and donor-funded assistance since the project appraisal, the Government had been encouraging microfinance NGOs to develop sustainable microfinance programs. RMFP was therefore timely and relevant and complemented the Government’s efforts to develop sustainable microfinance institutions by expanding the operations of the GBA Replicators. RMFP has provided much needed long-term funding sources (up to 7 years) through PCFC to a greater number of MFIs than targeted. It has not only helped cooperatives and NGOs but also rural banks, thrift banks and cooperative rural banks strengthen their institutional capabilities and expand their microfinance operations. Greater self-sufficiency has been achieved over the years, although microfinance institutions have not yet reached 100% self-sufficiency6 on average. This shows that RMFP was relevant at completion, and contributed to progress towards a sustainable microfinance sector. While MFIs have provided lending at market interest rates affordable to the end-clients, that has been possible only through the provision of concessionary loans from ADB and IFAD to the Government. The application of ADF resources and the IFAD concessionary loan was relevant in this aspect. The flow of funds and lending terms are in Appendix 2. 10. In the implementation of the Project, there were two major divergences from the original design. At the appraisal stage, the Project aimed to provide financial and institutional assistance through PCFC to NGOs and cooperatives. In reality, conduit organizations were expanded to include regulated financial institutions: rural banks, cooperative banks, cooperative rural banks, and thrift banks. Second, the Project supported modified GBAs in addition to the original GBA. These two major changes enabled RMFP to respond to market needs and expand its outreach successfully to the target beneficiaries. 11. There were several other design changes made during implementation. In September 1997, ADB agreed that the interest rate for onlending from PCFC to participating MFIs be increased from 10% to 12% in order to cover all the operational costs of PCFC. PCFC realized the need to conduct a stricter credit evaluation of candidate MFIs before the beginning of the project’s operations and to monitor all lending activities during implementation more closely. Subloan size limits were increased in November 1998 by: (i) increasing the ceiling of investment 5 ADB. 1991. Technical Assistance to the Republic of the Philippines for the Rural Credit Study. Manila (TA 1617– PHI, for $640,000, approved in November 1991, completed in October 1994). 6 The average financial self-sufficiency (FSS) ratio of all microfinance institutions (MFIs) as of July 2000 was 90.0%. Majority of MFIs could barely cover operational costs if they were not subsidized, and if they were following international accounting standards and funding its expansion with commercial-cost liabilities. 4 loans to any one branch of a MFI from P2.5 million to P3.5 million per year, or from P7 million to P10 million over the course of the Project; (ii) increasing the ceiling of institutional loans to any one branch of an MFI from P0.7 million to P1.0 million over the course of the Project; (iii) initiating separate institutional loans of not more than P2.5 million to MFIs with the training coordinating committee (TCC) recognized and endorsed training program; and (iv) increasing end-borrower loan size limits from P5,000 to P6,000 maximum for first cycle loans, and up to a P25,000 maximum for end-borrowers who have successfully completed a minimum of three n loan cycles (increased from P14,000). These changes were necessary i order to conduct effective onlending in response to market needs while maintaining outreach to the ultra poor. B. Project Outputs 12. The project outputs by component as anticipated during appraisal were as follows. (i) For the investment component (a) creation or expansion of about 300,000 microenterprises; and (b) savings generated equivalent of at least 10% of cumulative GBA branch loans. (ii) For the institutional component (a) about 270 branches established and 35 branches expanded, reaching an average client level of 1,500 per branch; (b) improvement and expansion of training facilities and materials, expansion in the number of trainers at three training centers, evaluation and classification of about 25 qualified GBA branches as training branches; (c) 2,500 field staff trained for 3-6 months each in GBA concepts and skills; and (d) international exposure of at least 30 managerial staff to other GBA-type programs. (iii) In addition, the following policy reforms were anticipated: (a) consolidation of 50% of the nonagriculturally-based microcredit program; (b) regulation of deposit-taking activities of microfinance institutions; (c) removal of the interest rate ceiling for nonagriculturally-based microcredit programs; and (d) privatization of PCFC. 13. Expected outputs under the investment component were fully achieved. Funds onlent by the participating MFIs have benefited 618,906 microenterprises, more than twice as many as the target number. More than 97% of the end-borrowers were women, exceeding the target of 90% women clients. Savings generation was strongly promoted by the Project. Savings mobilized as of end-2002 were estimated at P839 million, accounting for 36% of the total loan proceeds disbursed. Savings included the center fund of typically 5% against the loan amount, and capital-build up of a minimum of P25 per week (2.5–12.5% against the loan amount), both of which are compulsory, and other voluntary savings. Expected outputs under the institutional component were fully achieved. The institutional loan has supported a portion of the start-up and expansion costs of the 505 GBA Replicator branches, comprising 94 cooperatives, 85 cooperative banks, 90 NGOs, 213 rural banks, 14 lending investors, and 9 thrift banks. It has 5 also supported the training of 2,505 branch managers and field officers of 125 MFIs, of which 317 were from cooperatives, 530 from cooperative banks, 571 from NGOs, 1,048 from rural banks, 12 from lending investors, and 27 from thrift banks. 14. Three of the four government actions called for under the policy component were taken. A President's Executive Order (EO) (No. 138, 10 August 1999), directed government nonfinancial agencies and government-owned and controlled corporations (GOCC) to immediately begin rationalizing their ongoing directed credit programs in accordance with the rationalization program of the National Credit Council (NCC).7 Of the 27 nonagriculturally-based microcredit programs, 21 (78%), were either terminated or consolidated with existing credit programs and transferred to government financial institutions (GFIs) by the end of project implementation. EO 138 also directed GFIs to operate wholesale lending based on the prevailing market rates. BSP placed all deposit-taking institutions that collect savings beyond the compensating balance under its prudential supervision. 15. Privatization of PCFC was held up by an unsuccessful bidding process in October 2000. The Social Reform and Poverty Alleviation Act (Republic Act 8425 of 1998) limited the eligible private investors, if PCFC was to be privatized, to qualified nongovernment organizations, people’s organizations and cooperatives. PCFC did not receive enough bids for privatization in the bidding. Recent government actions, however, seem to have made the PCFC privatization plan irrelevant. On 22 September 2004, a President's Executive Order (EO 362) directed that the National Livelihood Support Fund (NLSF) be merged with PCFC according to guidelines, rules and regulations to be formulated by the Land Bank of the Philippines (LBP) and the NLSF secretariat. The announcement may lead to the scrapping of the PCFC privatization plan, as it paved the way for PCFC to have access to NLSF financial resources under a fund management contract. From a project operation’s point of view, noncompliance with the privatization clause did not affect project costs, time schedules, expected benefits, or other measures of efficiency. The PCFC privatization issue is further discussed in para 56. A table of project achievement is in Appendix 3 C. Project Costs 16. It was estimated that the total cost of the Project would be $64.8 million equivalent, which would include financial contributions from MFIs and PCFC as well as the financial and in- kind contributions of SHG members. It was estimated that the ADB and IFAD loans would account for 54% of the total Project cost (42% for investment credit and 12% for institutional development loans). PCFC would provide a portion of investment credit funds and the project administration cost, amounting to 14% of the total Project cost. Finally it was estimated that MFIs would finance 24% and their clients 8% of the total Project cost. The actual contribution of the ADB and IFAD loans was 19%, much lower than the estimated 54%, and the contribution of PCFC was 5% compared with an estimated 14%. MFIs and clients made a greater than estimated contributions with a combined share of 76%. This was because of greater mobilization of savings and diversification of MFI funding sources beyond the Project’s investment credit facility. Table 1 shows the estimated and actual shares of the Project financing sources. 7 The United States Agency for International Development (USAID) through its Credit Policy Improvement Project diagnosed the Government credit policy and assisted the Government to prepare EO 138. 6 Table 1. Estimated and Actual Shares of the Project Financing Sources Cost Estimates Actual Financing Item Amount Share Amount Share Amount Share Amount Share ($ million) (%) (P million) (%) ($ million) (%) (P million) (%) ADB/IFAD 34.7 54 903 54 31.0 19 1,494 22 PCFC 9.3 14 265 14 7.8 5 374 5 MFIs/Clients 20.8 32 541 32 124.9 76 4,996 73 Total 64.8 100 1,709 100 163.7 100 6,864 100 ADB = Asian Development Bank, IFAD = International Fund for Agricultural Development MFI = microfinance institutions, PCFC = People’s Credit Finance Corporation. Source: Microfinance Council of the Philippines, Inc., PCFC. D. Disbursement Performance 17. After a delay in the first 2 years, most of the loan proceeds were disbursed from 1999 to 2002 (Table 2). At the start of project implementation, PCFC marketing research concluded that existing NGOs and cooperatives would not be able to absorb the total resources provided by investment and institutional credit facilities under the Project. Realizing the need to increase the number of MFI conduits, PCFC encouraged rural banks and other regulated financial institutions to start microfinance operations based on GBA. However, as it was new to the formal market without a long track record of success, GBA was initially not fully supported by banks. It took some time before they were finally convinced to train new staff, carry out group formulation and social preparation of new SHG members, and build up their branch membership. Because of these early delays, the loan closing dated was extended from 1 July 2002 to 31 December 2002. 8 Table 2. Disbursement of the Loan Proceeds (P million) Year Projected Actual Disbursement Disbursement 1996 68.00 0.00 1997 137.00 7.65 1998 212.00 104.19 1999 303.00 451.05 2000 408.00 461.69 2001 582.00 531.12 2002 497.74 Total 1,709.00 2,307.66 Source: Project file, PCFC. 18. The delays during the beginning of the implementation period were also caused by several technical factors: (i) the lengthy government procedures in releasing funds to the Project’s imprest account, (ii) discussions between ADB and PCFC on revising the relending rate from 10% to 12%, and (iii) ADB’s requirement that statement of expenditure (SOE)-2 forms be submitted, which forced PCFC to attach information on end-borrowers to the disbursement request forms for submission to ADB and to conduct field verification of MFI’s onlending to end- borrowers. Despite these delays, from 1999 the Project gained momentum. At completion, 201 participating MFIs had disbursed a total of P2,308 million loans to 618,906 clients. The estimated number of participating MFIs had been exceeded by 61%, total disbursement by 8 IFAD loan was closed on 26 September 2003. 7 35%, and the number of beneficiaries by 106%. Both the ADB loan for the investment and institutional facilities and the IFAD loan for the investment facility were fully disbursed. Only the IFAD loan for the institutional facility (SDR303,344.47, 1.3% of the total ADB and IFAD loan) was undisbursed and cancelled. The collection rate from end-borrowers to MFIs was 95.84% as of December 2002. The repayment rate from MFIs to PCFC was 99.12% as of the same date. A graphical presentation of disbursement is in Appendix 4. E. Project Schedule 19. As discussed in para.17, early delays were caused by the time required for the formal financial institutions to prepare for micro lending and to adopt GBA. From 1999, the project accelerated. Because of these early delays, the loan closing date was extended for 6 months. F. Implementation Arrangements 20. Under Project implementation arrangements, PCFC as the Executing Agency (EA) was to: (i) select and accredit the MFIs that would participate in the Project, (ii) conduct and monitor onlending operations, and (iii) monitor overall progress of the Project. PCFC was also to establish the training coordinating committee (TCC) and coordinate training programs. These implementation arrangements were adequate and no change was made during the project period. G. Covenants 21. All the reporting requirements were complied with, including the submission of quarterly progress reports containing information on loan operations, annual financial statements, and financial standards of PCFC. All the other project-specific covenants, including policy reform covenants, were complied with, except the privatization of PCFC because of the unsuccessful bidding in 2000 (see para.15). Status of compliance with covenants is in Appendix 5. H. Related Technical Assistance 22. ADB provided advisory technical assistance attached to RMFP, aimed at strengthening the financial and institutional management and monitoring capacities of PCFC and participating MFIs. The TA design was relevant as a lack of institutional capacity prevented MFIs from becoming self-sustaining financial institutions for the target clients. It was designed to: (i) enhance the financial and management capabilities of MFIs participating in the Project by developing appropriate accounting, financial monitoring, reporting, and management systems; (ii) assist MFIs to develop an appropriate management system and accompanying management information service; and (iii) assist PCFC and MFIs to establish, install, and initially supervise an appropriate benefit monitoring and evaluation (BME) system. 23. A total of 58.5 person-months of domestic consulting services were provided for: (i) organizing and conducting training courses and workshops on: “GBA implementation and organizational management”, “GBA orientation for managers and officers”, “Training of trainers”, “BME”, and “Financial management;” 8 (ii) convening a PCFC forum to discuss operational issues with MFIs, strengthening PCFC’s role as an efficient microfinance wholesaler and prominent knowledge center on GBA operations; (iii) developing three management information system (MIS) modules (a loan and financial tracking system, a financial management and control system, and a BME system), and the operations manuals for these systems; (iv) installing systems to target MFIs, conducting training on the systems for MFIs, and carrying out trouble-shooting services; and (v) preparing an impact study of RMFP. PCFC as the EA for the TA conducted TA activities efficiently. 24. The TA is rated as partly successful. The training component of the TA helped a wide range of MFIs under RMFP strengthen their institutional and management capacity to conduct successful microfinance operations. The installation of MIS modules developed under the TA to MFIs was not in line with expectations because: (i) MFIs continued to use existing systems; (ii) the developed three systems were not intefrated into a whole system; (iii) limited support and internal resources were devoted to customizing the systems to meet individual MFI needs; (iv) there were difficulties in integrating the systems with the existing MIS for other types of loans; and (v) lack of information on such issues as penalties to interests and principal in areas and data needed for compliance with the BSP report. 25. The major lessons from the TA were as follows: (i) each MFI has particular needs for system development, depending on its operational focus, the size of its operations, the type of institution, and other characteristics, so there is no generic model which can fit all; (ii) recognizing this, assistance for system development should be flexible enough to meet each beneficiary’s need for a customized system; (iii) a thorough diagnosis of target MFIs’ operations management and monitoring should be conducted, taking into account current technological progress and application, before new systems are developed and offered; and (iv) alternatively, assistance geared towards offering solutions would be more appropriate than a “one-fits-all” system. 26. Despite limited success in installing the MIS modules, the TA heightened the MFIs’ recognition of the need to develop MIS to support and monitor their operations through training and consultations. The RMFP impact study provided a comprehensive view of the project impact on the target beneficiaries. The TA is rated as efficacious. The TA completion report has been prepared concurrently with this project completion report (see Appendix 6). The TA helped the microfinance industry take a sound development path. I. Consultant Recruitment and Procurement 27. Associated Resources for Management and Development, Inc. was selected in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for the selection of domestic consultants. 9 J. Performance of Consultants, Contractors and Suppliers 28. No significant problem was encountered in packaging contracts, preparing tender documents, and evaluating bids. K. Performance of the Borrower and the Executing Agency 29. Performance of the Government. Before the announcement of EO 138 in August 1999, which provided for a phase-out of directed credit programs operated by government nonfinancial agencies, three programs were targeted at poor households: Tulong sa Tao of the Department of Trade and Industry, the Self-employment Assistance Program of the Department of Social Welfare and Development, and the Grameen Bank Replication Project of the Agricultural Credit Policy Council. These programs had a combined client base of 150,000 reached through over 2,000 conduits. However, they had been heavily criticized for being inefficient, highly politicized, uncoordinated and unsustainable. EO 138 aimed to use government financial resources more efficiently and to place a greater focus on small-scale borrowers and the basic sectors. NCC formulated and implemented a national microfinance strategy, eliminating overlapping and duplicated credit programs and employing rural banks, credit cooperatives and viable credit NGOs to increase access to financial services by the poor. The Government positively responded to the policy reforms called for by the Project, namely, (i) consolidation of 50% of nonagriculturally-based microcredit programs, (ii) regulation of deposit-taking activities of microfinance institutions, and (iii) removal of the interest rate ceiling for nonagriculturally-based microcredit programs (see para 14). 30. Performance of the Executing Agency. PCFC is a government-owned finance company registered at the Securities and Exchange Commission (SEC). It is supervised by LBP and has a capital of P1 billion, comprising preferred shares of P900 million and common shares of P100 million, wholly owned by NLSF, a national fund operating under the supervision of LBP. PCFC provides wholesale funds to some 200 active MFIs for onlending to poor clients. Its loan o portfolio, exclusively f r microfinance, amounted to P2.55 billion as of June 2004. This is estimated to be about 50% of the total microfinance loan portfolio in the Philippines, according to the Microfinance Council of the Philippines. PCFC has 96 employees including 38 account officers in charge of its accredited MFI accounts. As of end-2003, PCFC was audited to have total resources of P 2.87 billion, a loan portfolio of P2.46 billion, a net worth of P1.15 billion, total liabilities of P1.65 billion including the ADB and IFAD Loan of P1.35 billion, and a net income after tax of P53 million. It reported a past due rate on loans of 1.55%. 31. PCFC’s performance as the Executing Agency (EA) was highly satisfactory. Its efforts in expanding a panel of conduit MFIs to regulated financial institutions (rural banks, cooperative banks, cooperative rural banks and thrift banks) and qualified new NGOs and cooperatives were highly commendable, and contributed to a greater than targeted outreach to beneficiaries, and to nearly full utilization of the ADB and IFAD Loan. As of 1995, potential GBA Replicators had a total cumulative lending of P119 million or $4.6 million at the exchange rate then prevailing. This was far short of the $34.7 million ADB and IFAD loan for onlending facilities, which indicates the important role played by PCFC as the EA. 32. The established accreditation criteria and rating system for MFIs, and the vigorous marketing, consultative and training activities of PCFC, helped the Philippine microfinance institutions expand towards higher profitability and self-sufficiency during the RMFP implementation period. PCFC accreditation criteria is in Appendix 7. The PCR mission 10 confirmed the strategic importance of microfinance operations for the rural banks, cooperative rural banks and thrift banks that were visited. These institutions regarded microfinance as (i) a profitable banking business, (ii) a way to reach the landless poor and expand their client base, (iii) a means of product bridging to other financial services, and (iv) a contributor to income generation and job creation in regional economies. The combined share of loan disbursement by banking institutions in the RMFP facilities was 61.5%, while the share of NGOs was 23.5%, and that of cooperatives was 13.1%. 33. PCFC also acts as a knowledge center for microfinance best practices. Regular training programs, workshops, and seminars are organized by PCFC for its new and potential MFIs in cooperation with its 7 accredited training centers: training institutes of the Negros Women for Tomorrow Foundation (NWTF), the Center for Agriculture and Rural Development (CARD), Taytay sa Kauswagan, Inc. (TSKI), Producers Rural Bank, People’s Bank of Caraga, Mallig Plains Rural Bank, and Enterprise Bank. Such training programs are in line with PCFC’s marketing strategy for MFI accreditation and strengthening regional forum and network among MFIs. 34. PCFC has supported a modified GBA in response to market needs. Modifications to the GBA were necessary because of the Philippine context, and regional and demographic characteristics of clients. The main features of the modified GBA are as follows: (i) Limited group liability. Whereas the original GBA was based on the group liability applied to the entire loan period, the modified model limits it to the three past due loan repayments and transfers collection duty to MFI after that point. This relieves group members from an excessive burden of loan repayment in lieu of nonrepayers and helps sustainability of group lending. (ii) Revised induction training schedule. The original GBA includes 7-day induction training with a 1-hour class each day. The modified model offers 3-day training with a three-hour class each day, which suits clients’ needs. (vi) Introduction of an oral test. An oral test at the end of induction training ensures rules and disciplines of group lending are kept. (vii) Simultaneous disbursement to all five members. Instead of staggered disbursement (known as 2 o -2-1), disbursement is made simultaneously t all members. This nurtures a sense of equity among group members and strengthens group solidarity. (viii) Flexibility in the repayment period. The standard 1-year (52-week) loan repayment period was modified to an optional 3-month or 6-month period, depending on the borrower’s capacities and funding needs. (ix) Flexibility in repayment schedule. A modified repayment schedule in response to a seasonal cash flow pattern suits a micorenterprise activity, e.g. higher levels of repayment are scheduled for the dry season when the rural economy expands. L. Performance of the Asian Development Bank 35. ADB conducted four loan review missions (excluding the PCR mission) in September 1998, May 2000 (mid-term review), August 2001 and March 2002. ADB also launched a loan 11 disbursement mission in August 2001. The first loan review mission responded to the slow implementation at the early stage of the Project, which stemmed from low recognition of microfinance among banking institutions, the restrictive features of the Project (i.e. the fact that it supported only MFIs that adopted GBA), the multi-step structure of credit facilities, the premature institution of PCFC (it was established in 1995), and the time needed to assess demand for investment and institutional credit of MFIs. The mid-term review mission found and verified the improved overall progress of the Project, confirming Project outreach to the target beneficiaries and provided an action plan for further expansion of GBA to end-borrowers and savings mobilization of MFIs. The last two missions especially recognized the need to accelerate the attached TA activity for installation of developed MIS modules to MFIs and proposed future ADB assistance to further strengthen capacities of MFIs and end-borrowers, and to develop financial products other than GBA. 36. The overall performance of ADB is rated as highly satisfactory, for the adequate monitoring of the progress of the Project and for its response to market needs. ADB workshops and forums on microfinance funded by the attached TA helped disseminate microfinance best practices and sector issues to a broad range of stakeholders.9 III. EVALUATION OF PERFORMANCE A. Relevance 37. RMFP was highly relevant in helping microfinance intuitions strengthen their capacities to meet the credit needs of the landless poor based on market lending and best operational practices. The inclusion of regulated financial institutions in addition to NGOs and cooperatives and the support for a modified GBA made a positive impact on the project outputs, and contributed to the overall development of the industry by helping banking institutions to become increasingly important players in the microfinance market.10 Participating MFIs have provided microcredit to and mobilized savings from more than the targeted number of microenterprises in all 79 provinces, helping the targeted poor clients sustain self-employment and expand their operations. This has had a positive impact on income generation and employment creation. RMFP promoted the economic interests of women by supporting their livelihood activities. B. Efficacy in Achievement of Purpose 38. Outreach. Participating MFIs benefited 618,906 microenterprises in all 79 provinces during the implementation period. The impact study conducted under the attached TA estimated that 20% of member-respondents were non-poor when they became members, if the sizes of houses and value of assets as of 1998 were used as proxy indicators. 80% was well over the target for poor members. Moreover, a portion of the end-borrowers have successfully expanded their businesses to become eligible for larger livelihood credit or even small enterprise loans. As of 30 June 2002, 68% of the NGOs that accessed RMFP had reached more than 1,000 clients. 45% of the cooperatives, 83% of the cooperative banks and 61% of the rural banks also served 9 From 1998 to 2002, a total of 24 workshops, trainings and conference were conducted, attended by 1,174 MFI executives, managers and staff. In December 2001, the “GBA Replicator Managers’ Conference” was held at ADB, attended by over 200 participants from 112 MFIs, the Government, donors, universities, cooperative and microfinance federations and other organizations. 10 Under the Microenterprise Access to Banking Services (MABS) program of USAID, 81 rural banks are participating using individual microfinance lending approach, with the following features: repayment are adjusted to a client’s cash flow; customization of loan size; terms and repayment schedule based on client’s needs; flexible loan size; and the use of movable assets and other collateral substitutes. MABS targets a larger client segment than RMFP. 12 more than 1,000 clients. The coverage of PCFC has expanded further since the end of the project implementation period (Table 3). Table 3. Overview of the Microfinance Sector (as of April 2004) Item Figures Number of clients served by MFIs 1,400,000–1,600,000 Number of clients served by PCFC 1,134,098 Total loan portfolio (P million) 5,000 PCFC loan portfolio (P million) 2,482 Average loan size P4,000 Share against per capita GDP (2003) 7.5% GDP = gross domestic product, MFI = microfinance institutions, PCFC = People’s Credit Finance Corporation. Source: Microfinance Council of the Philippines, Inc., PCFC. 39. Employment Creation. RMFP helped sustain end-borrowers’ self-employment and expand their operations, which had a limited impact on employment creation. While the need for livelihood activities to employ workers other than household members is small, the survey conducted as part of the impact study showed that 8.2% of the end-borrowers employed an average of 2.8 workers who are not their household members. The number of new jobs created by the Project can be estimated at 142,100. 40. Income Generation. The average income generated by the end-borrowers accounted for 60% of total annual household income according to the impact study survey. The income generated by the microenterprise activities financed by RMFP was mostly spent on the food security of the families, better health and education of children, and major house repairs. 41. Strengthening Microfinance Institutions. RMFP has strengthened the institutional capacity of MFIs to provide cost-efficient microfinance services to the target group by offering investment and institutional credit. MFI staff were trained on GBA best practices through the PCFC training network. As an example of this greater capacity, Card NGO increased its outstanding loans by 27 times and savings by 17 times between 1995 and 2003. During the same period, NWTF expanded its coverage by 5 times; Ahon sa Hirap (ASHI) increased its savings balance by 66 times. Both Producers Rural Bank (with a microcredit portfolio representing 15% of the total loan portfolio) and Cooperative Bank of Bulacan (with a microcredit portfolio representing 25% of the total loan portfolio) have expanded microfinance operations and made them the driving force for their growth. Highlights of selected MFIs accessing RMFP credit facilities are in Table 4. 42. Assisting the Development of a Self-Sustaining Financial System for the Poor. The Project also assisted in the development of a self-sustaining financial system for the rural poor by establishing a nationwide network of GBA Replicators and helping them to become self- sufficient. The financial self-sufficiency of CARD NGO improved from 101.2% in 1998 to 115.0% in 2003, and NWTF from 80.2% to 99.7%. The majority of the MFI respondents to a survey during the impact study demonstrated that microfinance services for the poor could be viable and could become major profit centers. Table 5 gives the overall financial ratios of 25 MFIs assessed to RMFP for 2001. 13 Table 4. Highlights of selected MFIs (as of December 2003) No. of Active Outstanding Past Due/ Savings/ Item Microfinance Loans Outstanding Loans Outstanding Clients (P million) (%) Loans (%) CARD NGO 79,745 339.30 3.89 28.20 CARD Bank 33,491 341.90 1.00 72.90 NWTF 48,152 201.60 1.73 43.30 Producers Rural 45,944 149.80 2.45 25.40 Bank* Cooperative Bank of 31,775 101.50 0.50 39.20 Bulacan* Opportunity 24,037 58.90 19.00 80.40 Microfinance Bank* ASHI 11,338 43.05 5.30 68.80 TSKI 107,820 289.44 1.18 48.00 Lamac Cooperative* 1,565 5.10 7.40 76.50 KASAGANA-KA 5,500 14.11 5.50 43.50 ASHI = Ahon sa Hirap, CARD = Center for Agriculture and Rural Development, KASAGANA-KA = Alternative Socio- Economic Program (microcredit), MFI = microfinance institutions, NGO = nongovernemnt organization, NWTF = Negros Women for Tomorrow Foundation, TSKI = Taytay sa Kauswagan, Inc. * Only microfinance operations are indicated as part of their entire operations. Source: PCR mission interviews, PCFC. 43. Improving the Policy Environment for Microfinance Program. RMFP contributed to an improved policy environment for microfinance programs. In response to the policy reform called for by the Project, a President's Executive Order (No. 138, 1999) either terminated or consolidated 78% of microcredit programs by the end of project implementation and directed market-based microenterprise lending. Table 5: Overall Financial Ratios of 25a MFIs that assessed RMFP (2001) Financial Indicators NGO Cooperative Cooperative Bank Rural Bank Return on Investment 4.5% 5.4% 13.0% 5.4% Operating Cost Ratio 37.8% 23.8% 23.0% 23.8% Operating Self-Sufficiency 109.3% 111.9% 101.0% 111.9% Equity to Total Assets Ratio 41.3% 37.3% 14.0% 37.3% Current Ratio 6.5 2.5 1.15 1.1 MFI = microfinance institutions, NGO = nongovernment organization, RMFP = Rural Microenterprise Finance Project. a The 25 MFIs are composed of 6 NGOs, 3 cooperatives, 10 corporate banks, and 6 rural banks. 23 MFIs provided financial data for their overall performances. Two rural banks provided financial data specific to their microfinance operations with RMFP funding. Source: Impact Study under TA2588. 44. Promoting Women in Development. RMFP created opportunities for women subborrowers to enhance their self-worth and dignity. More than 90% of the member respondents of the survey felt able to manage livelihood activities with loans and savings. As major contributors to household income, they feel at par with their husbands. RMFP empowered women, not only in an economic sense, but also psychosocially. Interviews with end-borrowers at group meetings and views expressed at workshops revealed that female entrepreneurs had a positive attitude to conducting their business activities. 45. RMFP is rated as highly efficacious. 14 C. Efficiency in Achievement of Outputs and Purpose 46. The requirement that SOE-2 forms should be submitted from the onset of Project implementation until May 2000 was one of the reasons for the early delay. Together with the Government’s internal processes to transfer the loan proceeds to the imprest account, the SOE- 2 requirement increased the annual operational costs of RMFP by P14 million (as estimated by PCFC). Recognizing the impact that the requirement was having, ADB changed the requirement from an SOE-2 to a certificate of subloan release in May 2001. Despite this, the efficiency of RMFP is demonstrated by the fact that it exceeded the targeted number of end- borrowers. RMFP is rated efficient. D. Preliminary Assessment of Sustainability 47. RMFP to participating MFIs considerably strengthened microfinance institutions as a whole, and improved the likelihood of their sustainability in the future. The size of the total loan portfolio under PCFC wholesale lending is estimated to be 50% of the entire microfinance loan portfolio in the Philippines. All 201 participating MFIs have benefited from the long-term investment loan provided by RMFP, which enabled them to conduct profitable microcredit operations, generate savings, and lay the foundation for sustainable operations. The RMFP’s institutional loan helped 125 MFIs strengthen their capacity to conduct successful and sustainable microfinance operations. PCFC also continues to conduct training programs for MFIs in cooperation with its accredited training centers. Such training programs are organized by PCFC and conducted on a commercial basis to promote new MFIs and strengthen institutional and operational capacities of existing MFIs. 48. Meanwhile, RMFP loan repayment from PCFC to LBP, which started in 2002, is already a significant part of PCFC operations, since the loan accounted for 78% of its total liabilities and the loan portfolio accounted for 85% of its total assets as of 31 December 2003. Additional funding is necessary for PCFC to fully realize its potential as the leading microfinance wholesaler. A President's Executive Order (No. 362, September 2004) paved the way for PCFC to have access to the NLSF financial resources. Several donors are investigating the possibility of rendering financial assistance to PCFC. Meanwhile, LBP will start full-scale wholesale microlending operations in 2005 by increasing the number of partner MFIs from the current total of 12. The Development Bank of the Philippines and Small Business Guarantee and Finance Corporation, both of which are G overnment-owned wholesale lending institutions for SMEs, started to increase microfinance loan portfolios in response to the Barangay Microenterprise and Business Enterprises (BMBE) Act of 2002 (RA 9178). 11 With three other government financial institutions entering the microfinance wholesale market, PCFC urgently needs to secure funding resources to retain its competitive and comparative advantage and expand its 11 On 11 February 2003, EO 176 was announced in line with BMBE Act for involvement of Government Financial Institutions (GFIs) in microcredit operations, which mandated GFIs to set up a special credit window for microenterprises and the promotion of microfinance programs for the poor. 15 operations for sustainable sector development. 12 The foundation laid by RMFP for successful microfinance wholesale lending operations will contribute to the sustainability of mirofinance institutions, especially if new financial resources to support PCFC operations as the lead wholesale microfinance institution are forthcoming. The Project’s sustainability is rated as likely. E. Institutional Development and Other Impacts 49. RMFP strengthened Philippine microfinance institutions by providing institutional and investment credit loans and by undertaking the activities under the attached TA. The p olicy component contributed to the Government taking action to reduce market distortions for sound sector development. It also empowered women nationwide to conduct livelihood activities. F. Environmental, Sociocultural, and Other Impacts 50. As the micorenterprises financed by RMFP operate mainly in the areas of vending, trading, agriculture, food processing, and light manufacturing, no significant adverse environmental impact was identified through project monitoring. RMFP had a positive sociocultural impact on women by financing their livelihood activities. The institutional development and other impacts of RMFP are rated as substantial. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 51. RMFP had a major impact on the institutional structure of the microfinance industry. It brought formal, regulated small-scale financial institutions into the industry and made it more diverse. Many banking institutions that started microfiannce operations by participating in the Project are expanding their financial services to the poor, which are becoming strategically more important to them. RMFP in a sense broke a barrier to entry into microfinance for many rural banks and other regulated financial institutions. 52. RMF exceeded its goals: (i) 618,906 microenterprises were reached, 106% more than the target, (ii) 97% of the end-borrowers were women, 8% more than the target, (iii) savings mobilized accounted for 36% of total loan proceeds disbursed, 260% more than the target, (iv) the start-up and expansion of 505 MFI branches were supported, 66% more than the target, and (v) 2,505 branch managers were trained, about the same level as the target. Three of the four policy reform outputs were delivered: (i) consolidation of 50% of the nonagriculturally-based micro credit program (78% was consolidated), (ii) regulation of deposit-taking activities of microfinance institutions, and (iii) removal of the interest rate ceiling for nonagriculturally-based microcredit programs. Privatization of PCFC did not materialize, but this output is no longer relevant (para. 15) and the failure to achieve it has not had any impact on project implementation. The attached TA did not achieve part of its target, but it helped to strengthen MFIs’ capacity to conduct successful microfinance operations through training programs and produced a project impact study which gave a comprehensive view of the project impact on the target beneficiaries. RMFP is rated highly successful. 12 While LBP and DBP have extensive networks and wide experience working with countryside financial institutions, they have little experience in microfinance loans. PCFC’s strengths are established network with over 200 MFIs nationwide and wide experience in operating wholesale lending, while the current constraints to additional funding is the largest operational issue. SBGFC’s strength lies in wide experience in assisting smaller legal businesses to grow, with very little experience in microfinance. 16 B. Lessons Learned 53. The major lessons learned from RMFP are as follows. (i) Close coordination with a reliable EA and implementing agencies and quick responses to any required changes in loans conditions and MFI accreditation are keys to success. ADB’s interaction with PCFC to modify the loan conditions in response to market needs significantly enhanced project implementation. (ii) A simple loan structure and minimum reporting requirements would minimize operational costs. In future, ADB loans could be lent directly to LDP (as for the World Bank Countryside Loan Facility, which provides funding for onlending over the limit of RMFP, channeled through PCFC). The early delays in implementation could have been eased if the SOE-2 form were not required. A large amount of end-borrowers’ information does not help in effective project monitoring, which largely relies on field verification conducted by PCFC and ADB missions. (iii) RMFP offered a uniform lending rate of 12% per annum to any accredited MFI. However, a more flexible means of setting interest rates to reflect the credit standing of individual MFIs may have to be considered. This would keep the RMFP investment credit facility attractive to those MFIs that have a higher credit status and access to alternative funding sources. (iv) MIS development should take a tailor-made approach to the needs of individual MFIs, rather than providing a generic model which does not reflect the diversity of types of operations, the size of the institution, its operational focus, its geographic location and the local market demand. C. Recommendations 54. Project-specific and general recommendations that may affect microfinance projects or programs are as follows. 1. Project-Related 55. Future Monitoring. Rigorous mission reviews and timely impact studies on sample cases are more effective at assessing project impacts than monitoring every subloan through detailed reporting requirements which provide a huge amount of data on end-borrowers but cannot be verified without field missions. 56. Covenants. The clause for PCFC privatization was not relevant. Under the current Philippine conditions, in order to provide commercial funding resources at the retail level, a concessionary loan is still needed at the wholesale level, given that less than 100% of the industry is financially self-sufficient and 30-40% of savings mobilization. Privatization would substantially limit the opportunity for wholesale funding institutions to have access to concessionary loans, and may make such access impossible. 57. Design of the Project. The diversity of participating institutions and the different types of products need to be considered in future microfinance projects in order to meet client needs and expand outreach. 17 58. Additional Assistance. Following a successful outcome of RMFP, possible areas of future ADB assistance are set forth below. (i) Strengthening the Regulatory Framework for Microfinance Institutions. Despite the fiduciary duty involved in de facto savings mobilization, NGOs and cooperatives are not properly regulated. SEC and the Cooperative Development Agency (CDA) would benefit from assistance to strengthen their supervisory capacity. An NCC performance standard applicable to MFIs could be applied to savings mobilization by NGOs and cooperatives. Despite the fact that they conduct the same microfinance operations, banks are subject to gross receipt tax and corporate income tax, but NGOs and cooperatives are not. This needs to be addressed, and incentives to marginalized local operations to compensate them for higher operational costs need to be considered. (ii) Institutional building of MFIs. MFIs’ capacity to reach the unserved poor can be strengthened, perhaps in collaboration with the People’s Development Trust Fund (PDTF), which is mandated to build institutional capacities of microfinance institutions. Support may be given for some of the larger NGOs to upgrade themselves to become banks so they can mobilize more savings and offer a wider variety of financial products. Products such as the Association of Social Advancement (ASA) model (a standardized lending model based on individual liability), and financing of larger microenterprises with larger loans can be supported. (iii) Addressing credit pollution. In some areas where there is a high competition, MFIs increasingly suffer from duplication of end-borrowers. Credit pollution can be minimized through support for a mutual credit information sharing system, perhaps with credit bureaus, provided the costs do not reduce the efficiency of MFIs. (iv) Meeting unmet demand for microfinance. The current coverage of microfinance services is estimated to be from 1.4 million to 1.6 million. Given that the total number of poor households is estimated to be 5.2 million, further conces sionary funding resources from donors to microfinance wholesalers will be needed because the overall financial self-sufficiency of the industry falls short of 100%. Furthermore, microsavings are still at low levels (30-40% of outstanding loans). Assistance to equity and/or second-tier capital to augment the bank capital base can leverage financial resources in expanding microfinance operations. Investment in equities or subordinated loans of microfinance banks through ADB private sector operations can be considered. 59. Timing of the Project Performance Audit Report (PPAR). In order to effectively capture the impact of the Project, the PPAR can be prepared later than 2006 with an assessment to guide the future development of the microfinance industry. 2. General 60. Future microenterprise credit facilities should be simplified as much as possible in order to minimize operational costs and help MFIs to move towards full financial self-sufficiency. It would be helpful if PCFC could borrow directly from donor institutions, with the sovereign guarantee, which is currently being discussed. Monitoring requirements should also be 18 restricted to securing basic data, as the status of project implementation and its impact on beneficiaries can be obtained more efficiently by field verification. Appendix 1 19 PROJECT FRAMEWORK Design Summary Measurable Indicators Means of Important and Targets Verification Assumptions Project Classification Poverty Reduction (primary)/Gender and Development (secondary) Sectoral Objectives To create employment About 300,000 jobs Benefit monitoring and reduce poverty in created for direct and evaluation rural areas with an employment in reports emphasis on the 20 microenterprises poorest priority financed for the ultra provinces poor; women are expected to fill over 90% of all jobs created. Average family income increases of 40% Immediate Objective To facilitate the About 300,000 ultra Loan administration Adequate local development of a poor clients will have documentation, marketing and other nationwide self- access to financial review mission support services sustaining financial services, and will have reports; project provided. system for the rural poor established a financial monitoring and Microenterprise history with a Grameen evaluation reports of opportunities are not Bank approach (GBA) People’s Credit and limited. branch Finance Corporation (PCFC), GBA Replicators’ management information systems (MIS) Outputs Provision of loans, Creation or expansion Loan administration Interest rates are set at savings services, and of about 300,000 documentation, profitable levels, social development microenterprises. review mission repayment rates are training to about 300,000 Savings generated reports; project high, program and ultra poor equivalent to at least monitoring and group discipline are 10% of cumulative GBA evaluation reports of maintained branch loans People’s Credit and Finance Corporation (PCFC), GBA Replicators and individual branch management information systems (MIS) GBA branches About 270 branches Savings mobilization established and established and 35 efforts are rigorously expanded branches expanded, implemented, group 20 Appendix 1 Design Summary Measurable Indicators Means of Important and Targets Verification Assumptions reaching an average and staff drop out rates client level of 1,500 per are low branch Expansion of three Improvement and Group formation and regional training centers expansion of training institutional support is and establishment of facilities and materials, vigorously implemented about 25 on-the-job expansion in the by branch staff (OJT) training branches number of trainers at three training centers, evaluation and classification of about 25 qualified GBA branches as training branches Field and managerial 2,500 field staff trained staff for GBA branch for 3-6 months each in operations trained GBA concepts and skills. International exposure of at least 30 managerial staff to other GBA type programs Policy Reform Program Consolidation of 50% of Reports of the implemented non-agriculturally based National Credit microcredit programs, Council, Bangko regulation of deposit Sentral ng Pilipinas taking activities of (BSP), Department of microfinance Finance, Presidential institutions, removal of Memorandum interest rate ceilings for Orders, and draft nonagriculturally-based legislation microcredit programs, and privatization of PCFC Activities Implement credit Disbursement of $34.1 Loan administration Funding available. program for the ultra million within 6 years documentation Means test to identify poor ultra poor is strictly monitored Implement credit Disbursement of $7.4 NGO financial Timely budget releases program for institutional million within 6 years statements strengthening of new and existing GBA Replicators Establish GBA training About 25 training GBA branch financial Funding available branches branches will become statements, SHG operational record keeping, NGO Appendix 1 21 Design Summary Measurable Indicators Means of Important and Targets Verification Assumptions MIS system Training of NGO and Staff receive theoretical Changes in BSP GBA replicator staff and and OJT training on regulations which will management Grameen principles facilitate deposit taking activities of GBA Replicators Organize and train self- About 50,000 SHGs Consultants recruited help groups (SHGs) organized and trained will perform in social development satisfactorily and Bank and microenterprise staff will provide close management supervision. Implement advisory $0.6 million – about 50 TA administration technical assistance for person-months of and consultants’ institutional locally recruited reports. strengthening of GBA consulting services replicators. 22 Appendix 2 FIGURE A2: FLOW OF FUNDS AND LENDING TERMS BANK IFAD Maturity/Grace Interest rate Maturity/Grace Interest rate Period Period 35 years/10 years 1% 40 years/10 years 0.75% Government The Borrower For Incremental Investment Credit Loans For Incremental Investment Credit Loans 20 years/6 years 4.50% 20 years/6 years 4.25% For Institutional Development Loans For Institutional Development Loans 20 years/6 years 1% 20 years/6 years 0.75% LBP Official Depository and Trustee Bank For Incremental Investment Credit Loans For Incremental Investment Credit Loans 20 years/6 years 5.25% 20 years/6 years 5% For Institutional Development Loans For Institutional Development Loans 20 years/6 years 1% 20 yeats/6 years 0.75% PCFC Executing Agency For Incremental Investment Credit Loans 7 years/3 years 12% For Institutional Development Loans 7 years/3 years 3% NGOs/Coops GBA Replicators For Microenterprise Loans 50 weeks/ weekly repayments @ not less than 2% per month SHG Members Project Beneficiaries Coops = Cooperatives, LBP = Landbank of the Philippines, NGOs = nongovernment organizations, PCFC = People’s Credit Finance Corporation, SHG = self-help groups. Appendix 3 23 PROJECT ACHIEVEMENTS as of 31 December 2002 Indicator Target Achievement Difference/ Remarks Credit program for the ultra Disbursement of Fully disbursed PCFC has advanced money poor implemented $16.280 million within six for disbursement to conduits. years (ADB share) To date $0.657 million (P34.836 million) remains unreplenished Disbursement of $11.01 Fully disbursed PCFC has advanced money million within six years for disbursement to conduits. (IFAD share) To date $0.726 million (P37.108 million) remains unreplenished Credit program for Disbursement of $3.720 Fully disbursed PCFC has advanced money institutional strengthening of million within six years for disbursement to conduits. new and existing GMA To date $2.174 million Replicators implemented (P115.882 million) remains unreplenished Disbursement of $3.720 Fully disbursed PCFC has advanced money million within six years. for disbursement to conduits. To date $2.259 million (P115.449million) remains unreplenished Number of provinces Nationwide, with priority 79 out of 79 provinces covered given to 20 poorest in 16 regions a priority Provinces Number of microenterprises 300,000 618,906 Categories of projects trade, created or expanded microenterprises microenterprises services, handicrafts, food created or expanded created or expanded production and/or processing, manufacturing Savings generated 10% percent of Savings generated are cumulative GBA branch 50.60 % of total loans amount disbursed to conduits No. of ultra poor clients with 300,000 poor clients 618,906 clients access to financial services and a financial history with a GBA branch Percentage of women 90%of all clients 97% The project specifically participation states that the target clients are preferably women. It is believed that women can improve the economic status of the family Incremental family income 40% 50% Based on the impact study conducted by various agencies No. of NGOs to become 100 to 150 26 NGOs Contrary to the initial GBA Replicators 55 cooperatives perception 30 coop banks during appraisal, 41.24% of 84 rural banks PCFC’s 194 RMFP conduits 24 Appendix 3 Indicator Target Achievement Difference/ Remarks 2 lending investor are private financial 3 thrift bank institutions 1 development bank No. of branches (or viable 305 branches 505 (including 57 village level financial branches of the institutions) inactive conduits) established/expanded Average number of clients 1,500 clients per branch 1,750 clients per served per branch branch (350 clients per PO x 5 PO in an average branch) No. of self-help groups 50,000 SHG organized 128,790 SHG organized and trained and trained organized and trained Regional training centers 3 4 identified training The criteria for the selection expanded centers (Negros of qualified training centers Women for Tomorrow and the minimum training Foundation and requirement for RMFP Center for Agriculture were defined by the Project’s and Rural Dev’t and Training Coordinating Mallig Plains Rural Committee (TCC); the TCC Bank, Inc., Enterprise is composed of mature Bank, Inc., People’s GBA Replicators Bank of Caraga) Additional TCC training centers are being considered No. of managers and field 2,500 15. 2,505 staff of participating Replicators trained at a TCC-accredited training center No. of managerial staff sent 30 8 Appropriation for the for international exposure to exposure trips was other GBA-type programs reallocated for Microcredit World Summit Policy reform program Reflected in the loan and Complied with Appendix “b.2” provides implemented, including the project covenants details of status of consolidation of non- compliance with loan and agriculturally based project covenants microcredit programs. Implementation of $600,000 $477.500 Technical Assistance for 60 pm 60 pm institutional strengthening of GBA Replicators by a group of locally-recruited consultants ADB = Asian Development Bank, GBA= Grameen Bank Approach, IFAD = International Fund for Agricultural Development, PCFC = People’s Credit Finance Corporation, Rural Microenterprise Finance Project, TCC = Training Coordinating Committee a Identified by the Government’s Social Reform Agenda for accelerated countryside development. Source: PCFC Appendix 4 25 PROJECTED VERSUAS ACTUAL DISBURSEMENT 700 600 500 P (in millions) 400 300 200 100 0 1996 1997 1998 1999 2000 2001 2002 Years Projected Disbursement Actual Disbursement 26 Appendix 5 STATUS OF COMPLIANCE WITH MAJOR LOAN COVENANTS A. Loan Agreement Covenant Reference in Status of Compliance Loan Agreement The Borrower shall furnish to ADB reports and Art IV, Section Complied with. information as ADB reasonably requests concerning 4.01(a) the Loan and the Project. Request for data on RMFP by ADB (from PCFC and its RMFP conduits) had been responded to accordingly The Borrower shall enable ADB’s representatives to Art IV, Section 4.03 Complied with. inspect any Qualified Borrower, any Qualified Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents maintained by LBP and PCFC. The Borrower shall promptly take action necessary to Art IV, Section 4.04 Complied with. enable PCFC to perform the obligations under the Project Agreement, and shall not take or permit any The Project was signed in May 1996 but was action which would interfere with the performance of declared effective only on 18 April 1997. The delay such obligations. was caused by the Official Development Assistance (ODA) Law or R.A. No. 8182, which requires prior congressional approval of official development assistance and preferential treatment of Filipino consultants, contractors and suppliers. PCFC will ensure that the procurement procedures Schedule 3, Complied with. adopted by the Qualified Borrowers and Replicators para 2 are appropriate in the circumstances and in accordance with established commercial practices. PCFC will ensure that goods and services to be financed under the Loan are purchased from ADB’s member countries at reasonable prices, account being taken of factors such as economy and efficiency, their suitability and reliability, and the availability of maintenance facilities and spare parts, and, in the case of services, of their quality and competence of the parties rendering them. The Borrower shall cause PCFC to ensure that (i) the Schedule 3, Complied with. Imprest accounts and the expenditures liquidated para 3(d) under the SOE procedures are audited, and (ii) the opinion of the auditors relating thereto are included separately in the auditors’ reports. PCFC shall be responsible for coordinating and Schedule 4, Complied with. overseeing Project implementation. PCFC’s para 1 responsibility shall include: (i) selection and accreditation of Replicators for participation under the Project; (ii) processing, approval, and supervision of loans to Replicators; (iii) collection of loans from participating Replicators, and (iv) overall monitoring and evaluation of the physical and financial progress of the Project in relation to participating Replicators and Qualified Borrowers. PCFC, in cooperation with a national umbrella Schedule 4, Complied with. The TCC was established in organization of Replicators, shall establish a Training para 2 October 1997 and is now operational, The TCC is Coordination Committee (TCC) for all training composed of representatives of PCFC’s RMFP programs for Replicators. Such TCC shall have conduits (e.g. NWTFI, CARD, CRBBI, Enterprise adequate full-time staff from PCFC and the national Bank and Mallig Plains Rural Bank). Appendix 5 27 Covenant Reference in Status of Compliance Loan Agreement adequate full-time staff from PCFC and the national Bank and Mallig Plains Rural Bank). umbrella organization of Replicators and shall be responsible for the following: (i) accreditation of GBA The TCC composed of mature GBA replicators training centers and branches; (ii) identification and such as NWTFI and CARD has identified the design of training programs; (iii) setting standards for criteria for accrediting and monitoring GBA training training; (iv) resource mobilization for training centers. The TCC also established the minimum programs; (v) evaluation and monitoring of training training requirement for the Project. programs to ensure conformity to identified standards; (vi) arranging international exchanges and exposure In its effort to enhance the training of RMFP visits among Replicators; and (vii) organizing conduits, the TCC agreed to re-assess evaluation dialogues to assess ongoing local as well performance of its accredited members and agreed as international Replicators. to process additional training centers. To date, the TCC has accredited six training centers. The Borrower shall ensure that LBP serves as the Schedule 4, Complied with. official depository and trustee bank for Project funds para 3 under the custodianship of PCFC. The Borrower shall PCFC has established an audit unit intended to further ensure that LBP is responsible for the following provide audit services to PCFC’s RMFP conduits. functions, subject to the coordination of PCFC: (i) acting as the fund manager for PCFC and investing the funds in accordance with guidelines determined by PCFC; (ii) assisting PCFC in the establishment of an auditing unit to provide auditing services to participating Replicators; (iii) providing cashiering and remittance services for the Project (such as loan disbursement, acceptance of collection and remittances of Project funds to participating Replicators); and (iv) assisting in credit investigation and monitoring of participating Replicators. PCFC shall establish a Project Coordinating Schedule 4, Complied with. The Project Coordinating Committee (PCC), chaired by the President of PCFC, para 4(a) Committee (PCC) was established in July 1997. within three months after the effective date. The responsibilities of the PCC include (i) formulating The PCC was consulted in the formulation of the policies and overall guidelines for the Project; (ii) project policies and guidelines. establishing additional accreditation standards for participating Replicators; and (iii) serving as a forum for resolution of problems and bottlenecks that could not be resolved at the local level. BME: PCFC shall undertake Project monitoring Schedule 4, Complied with. activities in accordance with ADB’s “Guidelines on para 6 Benefit Monitoring and Evaluation” and detailed Means tests are being administered by the arrangements agreed with ADB. To the extent qualified Replicators to determine the possible, PCFC shall adapt the BME system subborrowers’ socioeconomic situations before and introduced under ADB-financed Small Farmers Credit after the implementation of the qualified Project (Loan No. 1216-PHI). With the assistance from subprojects. The BME consultant engaged under the BME consultant engaged under the TA, PCFC the attached TA assists in the installation and shall submit a detailed plan for installing and maintenance of a BME program for the Project. maintaining a BME program to ADB for its approval by 30 December 1996. The data and information necessary to undertake a BME were incorporated in the RMG-MIS developed by ARMDEV for the RMFP. Midterm Review: ADB and IFAD shall undertake a Schedule 4, The midterm review was undertaken by ADB in thorough midterm review of the Project to evaluate the para 7 May 2000. efficacy of the Project design, scope, lending criteria, and implementation arrangements in achieving the objectives of the Project, and to make appropriate adjustments as required. 28 Appendix 5 Covenant Reference in Status of Compliance Loan Agreement Policy Reform: The Borrower shall undertake the Schedule 4, following: para 9 1. Conduct a study to identify which of the 1. Complied with. Borrower’s non-agriculturally-based microcredit programs may be consolidated pursuant to an administrative or executive order by 30 June 1997; 2. Based on the result of the study, initiate the 2. Complied with consolidation of the identified nonagriculturally- based microcredit programs, with a view to consolidate a minimum of 25 percent by 30 June 1998 and 50 percent by 30 June 1999 (measured by the number of programs or 50 percent of the total resources of the identified programs); 3. If required, draft legislation to consolidate those nonagriculturally-based microcredit programs 3. Complied with. created by special laws shall have been submitted to Congress by 30 June 1998; 4. By 30 June 1997, the GBA microcredit programs assisted by the Borrower shall be consolidated 4. Complied with. under the coordination of PCFC and shall be governed by uniform operating standards and guidelines established by PCFC in consultation with ADB; 5. In consultation with ADB, a policy review of the existing rules and regulations concerning fund 5. Complied with. mobilization and use of funds, in relation to their effect on Replicators, shall have been completed by 30 June 1997; 6. Based on findings of the policy review, a time 6. Complied with. bound plan to improve the regulatory environment for fund mobilization and use of funds, and draft legislation therefor (if necessary), shall have been prepared and initiated by 31 December 1997; 7. Prohibit the imposition of interest rate ceilings to 7. Complied with. end-borrowers on new nonagriculturally-based microcredit programs financed by the Borrower which use banks, non-government organizations, cooperatives, foundations, and other people’s organizations as intermediaries (emergency programs declared by the Borrower shall be exempt); 8. Discourage and oppose the imposition of interest 8. Complied with. rate ceilings to end-sub borrowers on new foreign- assisted nonagriculturally-based microcredit programs as a necessary sustainability of such programs. 9. Undertake by 30 June 1997 a policy review of the 9. Complied with. interest rate structure of all nonagriculturally- based microcredit programs. Appendix 5 29 Covenant Reference in Status of Compliance Loan Agreement 10. Prepare and initiate by 30 June 1998 a time 10. Complied with. RA No. 8425 provides for bound plan to remove interest rate ceilings to end- capacity building of microfinance institutions borrowers on all nonagriculturally-based through the People’s Development And Trust Fund, microcredit programs (existing foreign-assisted representing a departure from the traditional nonagriculturally-based microcredit programs government approach of providing funds to credit which provide for fixed interest rate ceilings shall conduits at nonmarket interest rates for be exempt, on a best effort basis, to amend onlending to the government’s target clientele. relevant interest rate covenants); and 11. Prepare a Privatization Plan for PCFC by 30 June 11. While activities has been undertaken with 1997, including a timetable and the mechanics for regard to PCFC’s privatization (such as engaging the transition to a majority-owned private sector the services of Land Bank’s Institutional Banking corporation by 31 December 1999. Sector as the Committee on Privatization’s Financial Advisor), the conditions and assumptions for requiring the privatization of the PCFC are being re-evaluated. The results of the evaluation will be discussed by the privatization committee and will further be presented for discussion by the PCFC’s Board of Directors. For information, the following activities were undertaken to comply with the covenant to privatize PCFC: 1. Preparation of the privatization plan was held up by the delayed passage of Republic Act 8425, which legally provided for PCFC’s privatization. The plan was submitted to and commented on by ADB in July 1999. The plan was intended to result in about 70% private ownership. 2. The plan to privatize PCFC was conceived at a time when the capital base of PCFC was small and its functions were limited to wholesaling of microcredit. With the infusion of substantial additional capital (P900 million in preferred shares) at the onset of President Estrada’s administration, PCFC’s microfinance role took on a new role of developing the microfinance sector. 3. The committee on privatization (COP) approved on 1 September 2000 PCFC’s proposed privatization plan to sell its outstanding shares of stocks, both common and preferred, through a bidding process. PCFC did not, however, receive enough bids for an 10 October 2000 bid date. In its 28 December 2000 letter, the COP designated the Land Bank of the Philippines in lieu of PCFC, as the disposition entity for the entire Government’s exposure (common and preferred in) in PCFC 4. In its 30 August 2001 Special Board Meeting, PCFC’s Board of Directors reaffirmed the commitment to privatize. The Board agreed to sell at least 51% of the shares during phase I of the privatization period. Flexibility with 30 Appendix 5 Covenant Reference in Status of Compliance Loan Agreement of the privatization period. Flexibility with respect to configurations and conditions would be allowed during phase II to encourage bidders from the private sector. 5. The Government is committed to privatize PCFC. Through the Committee on Privatization (COP), the government has assigned the Land Bank of the Philippines (LBP) as the disposition entity of the PCFC. The LBP shall submit soonest to the government’s COP the milestones, major activities, and strategies related to PCFC’s intended privatization Appendix 5 31 B. Project Agreement Covenant Reference in Loan Status of Compliance Agreement PCFC shall not make an Investment Loan or Art II, Section Complied with. Institutional Loan to a Replicator in an amount 2.02(a) exceeding $200,000 equivalent without prior approval by ADB. Except as ADB may otherwise agree, PCFC shall not Art II, Section Complied with. make an Investment Loan to any one branch of a 2.02(b) Replicator in an amount exceeding (I) P3.5 million per year, or (ii) P10.0 million over the course of the Project. Except as ADB may otherwise agree, PCFC shall not Art II, Section Complied with. make an Institutional Loan to any one branch of a 2.02(c ) Replicator in an amount exceeding P1.0 million over the course of the Project. PCFC shall make each Investment Loan with interest Art II, Section Complied with. at the rate of 12 percent per annum and on terms 2.03(a) adequate to protect the interests of the Borrower, LBP, PCFC, and ADB. Except as ADB may otherwise agree, the amortization Art II, Section Complied with. schedule applicable to each investment loan (i) shall 2.03(b) not exceed beyond seven (7) years, including a grace period not exceeding three (3) years, from the date when such investment loan is disbursed; and (ii) shall provide for approximately equal semiannual or quarterly aggregate payments of principal plus interest. PCFC shall make each institutional loan with interest Art II, Section Complied with. at the rate of 3% per annum on terms adequate to 2.04(a) protect the interests of the Borrower, LBP, PCFC, and ADB. Except as ADB may otherwise agree, the amortization Art II, Section Complied with. schedule applicable to each institutional loan (i) shall 2.04(b) not extend beyond seven (7) years, including a grace period not exceeding three (3) years, from the date when such institutional loan is disbursed; and (iii) shall provide for approximately equal semi-annual or quarterly aggregate payments of principal plus interest. The rate of interest charged by PCFC on each Art II, Section Complied with. investment loan and institutional loan, as well as the 2.05(a) maximum size of each Loan that PCFC may make, shall be reviewed each year (not later than the anniversary of Loan effectiveness) and adjusted as necessary with the agreement of the Borrower, LBP, IFAD, and ADB. PCFC shall cause each Replicator to promptly and Art II, section Complied with. effectively exercise its rights in relation to its respective 2.05(b) subloans in accordance with the standards of a prudent lender and in such a manner as to protect the interests of the Borrower, LBP, PCFC, and ADB. 32 Appendix 5 Covenant Reference in Loan Status of Compliance Agreement PCFC shall caus e each sub loan agreement to include Art II, Section provisions to the effect that: 2.06 1. The Qualified Borrower shall carry out and 1. Complied with. operate the Qualified Project with due diligence and efficiency and in accordance with sound business and environmental practices, including maintenance of appropriate accounts and records; 2. The proceeds of the Loan shall be used only for 2. Complied with. Procurement, however, under procurement in eligible source countries as the Project relates mainly to locally available specified by ADB, in accordance with procedures and low-priced goods. acceptable to ADB, of goods produced in, and services supplied from, such countries. 3. The goods and services financed out of the 3. Complied with. proceeds of the Loan shall be used exclusively in the carrying out of the Qualified Project; 4. The goods and services financed out of the 4. Complied with. proceeds of the Loan shall be used exclusively in the carrying out of the Qualified Project; 5. ADB and PCFC shall each have the right to 5. Complied with. ins pect such goods, the Qualified Borrower, the Qualified Project and any relevant records and documents; 6. Complied with 6. The Qualified Borrower shall take out and maintain with reasonable insurers insurance against such risks and in such amounts as shall be consistent with sound business practice. Such insurance shall cover hazards incident to the acquisition, transportation and delivery of goods financed out of the proceeds of the Loan to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such goods; 7. Complied with. 7. ADB and PCFC shall each be entitled to obtain all such information as each shall reasonably request relating to the sub loan, the goods and services financed out of the proceeds of the Loan, the Qualified Project, the Qualified Borrower, and other related matters; and The Replicator shall be entitled to suspend or terminate further access by Qualified Borrower to the use of the proceeds of the Loan upon failure by such Qualified Borrower to perform its obligations under the Sub loan Agreement. PCFC shall maintain records and accounts adequate Art III, Section Complied with. to record the progress of the Project and of each 3.02 Qualified Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of PCFC. PCFC shall furnish to ADB all such reports and Art III, Section Complied with. information as ADB shall reasonably request 3.04(a) concerning (i) the Loan and the expenditure of the Appendix 5 33 Covenant Reference in Loan Status of Compliance Agreement concerning (i) the Loan and the expenditure of the proceeds thereof; (ii) the Project and any Qualified Project; (iii) the projected annual disbursement schedule of investment loans and institutional loans; (iv) an updated two-year financial projection (including financial statements) of its operations by 31 March each year; and (v) any other matters relating to the purposes of the Loan. PCFC shall furnish to ADB quarterly reports on the Art III, Section Complied with. execution of the Project and on the operation and 3.04(b) management of PCFC. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter. Promptly after the closing date for withdrawals from Art III, Section Complied with. the Loan Account, but in any event not later than six 3.04(c ) months of such closing date, PCFC shall prepare and furnish to ADB a report, in such form and detail as ADB may reasonably request, on the utilization of the Loan, the execution of the Qualified Projects, their costs, the performance by PCFC of its obligations under the Project Agreement and the accomplishment of the purposes of the Loan. PCFC shall have its accounts and financial statements Art III, Section Complied with. (balance sheet, statement of income and expenses, 3.05 and related statements) audited annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB, and shall promptly after their preparation but in any event not later than nine (9) months after the close of the fiscal year to which they relate, furnish to ADB (i) certified copies of such audited accounts and financial statements and (ii) the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with covenants of the Project Agreement), all in English Language. PCFC shall retain all records relating to the making of investment loans and institutional loans, for ADB’s review, for at least one year after ADB shall have received the audited accounts and financial statements for the fiscal year in which the last withdrawal from the Loan account was made. PCFC shall permit ADB’s repres entatives to inspect Art III, Section Complied with. any Replicator, any Qualified Borrower, any Qualified 3.06 Project, the goods financed out of the proceeds of the Loan, and any records and documents. PCFC shall also ensure that the lending programs of Schedule, all Replicators participating in the Project shall include Para 5 the following features: 34 Appendix 5 Covenant Reference in Loan Status of Compliance Agreement 1. Strict targeting and an exclusive focus on the ultra 1. Complied with. Some inconsistencies, poor ensured through the use of an approved however, have been observed in the means test; Replicators’ adoption of income, asset, and household indices, resulting in poor targeting and lending’s to subborrowers who do not belong to the target group. 2. Forming the poor into small SHGs of 2. Complied with. homogeneous borrowers whose composition is determined by the members themselves, and the federation of SHGs into Group Centers; 3. Adequate training of SHGs on the principles, rules 3. Complied with. and procedures of the GBA credit scheme, as well as value formation, microenterprise management and livelihood skills; 4. Individual loans with the acceptance of joint and 4. Complied with. several liability of SHGs (peer pressure on rule breakers and willful defaulters, but peer support for SHG members in need); discontinue lending to the SHG if any member’s loan is not repaid; 5. Credit and savings programs taken directly to the 5. Complied with. poor in accordance with simple and easy to understand procedures; 6. Emphasis on both voluntary and multiple involuntary savings to build up collateral for 6. Complied with. eventual access to the formal credit system, to guarantee payment of loans, and to provide a source of emergency loans for members; 7. Small initial loans and frequent repayments; 7. Complied with. 8. Staggered loan releases to members of the SHG, 8. Complied with. Some Replicators, however, with the release of loans to other members have started to implement one-time release dependent on the repayment performance of the of subloans to all members within a center. first borrowers; 9. A lending system which allows SHG members to 9. Complied with. avail of subsequent, and larger loans as a further incentive to repayment; 10. Weekly staff meetings with each Group Center; 10. Complied with. 11. Adequate on-the-job training of GBA Replicator 11. Training of Replicator staff is one of the major staff; and concerns of the Projects’ training coordinating committee (TCC). 12. Appropriate but simple financial management and information monitoring systems and procedures. 12. Computerization is expected to facilitate financial management and information monitoring. Appendix 5 35 Covenant Reference in Loan Status of Compliance Agreement Financial Standards of PCFC: PCFC shall take all steps necessary to maintain all financial ratios and standards stipulated by Bangko Sentral ng Pilipinas which are applicable to non-bank financial institutions performing non-bank quasi-banking functions. In addition, PCFC shall undertake the following: 1. Carry out annual reviews of its past and projected Schedule, Complied with. program targets, including but not limited to loan Para 6 releases, collection and recovery rates, income and profit generating capacity; on the basis of each review, develop proposals to achieve the profitability required to fund reserves in consultation with ADB and IFAD by 31 March after the year under evaluation; 1. Complied with. An assessment of PCFC’s programs is undertaken yearly prior to its 2. Take all measures necessary to achieve and regular annual planning. maintain a minimum recovery ratio (defined as all amounts collected against all amounts due for collection) for the GBA Replication Program of at least 90 percent, after rescheduling, and an average of 90 percent overall on its total loan portfolio, after rescheduling; 2. Complied with. 3. Undertake an annual detailed analysis of delinquent accounts with outstanding balances in excess of P2.5 million, identify and initiate appropriate remedial measures. 4. Maintain adequate provision for probable loan 3. Complied with. losses at least equivalent to the minimum level prescribed by most current prudential regulations of Bangko Sentral ng Pilipinas; and 5. Ensure that guidelines for restructuring of loans to 4. Complied with. Replicators are established which (a) limit restructuring to conditions created by natural calamities that are officially recognized by the Borrower, or such other situations as may be agreed with ADB on a case-by-case basis, and (b) 5. Complied with. require the prior approval of the Head Office of PCFC in all cases. Revolving Funds: Schedule, (a) Subject to making the required payments of Para 7 (a) Complied with. principal and interest under the Subsidiary Loan Agreement, PCFC shall use funds received from the repayment of principal of investment loans and institutional loans as revolving funds to make additional loans to Replicators. (b) Complied with. (b) PCFC shall ensure that Replicators use the funds received from the repayment of principal of subloans as revolving funds to make additional subloans to Qualified Borrowers. ADB = Asian Development Bank, COP = Committee on Privatization, DOF = Department of Finance, GBA= Grameen Bank Approach, IFAD = International Fund for Agricultural Development, LBP = Landbank of the Philippines, NAPC = National Anti-Poverty Commission, NWTF = Negros Women for Tomorrow Foundation ODA = Official Development Assistance, PCC = Project Coordinating Committee, PCFC = People’s Credit Finance Corporation, RBAP = Rural Bankers Association of the Philippines, RMFP = Rural Microenterprise Finance Project, SBA= Subsidiary Loan Agreement, SOE = statement of expenditures, TCC = Training Coordinating Committee Souce: PCFC. 36 Appendix 6 TECHNICAL ASSISTANCE COMPLETION REPORT Division: SEGF TA No. and Name Amount Approved: $600,000 TA PHI-2558: Strengthening Rural Microenterprise Finance Revised Amount: $504,973 Executing Agency: People’s Source of Funding: TA Amount Undisbursed TA Amount Utilized Credit and Finance Corporation JSF 0 $503,276 (PCFC) Date Completion Date Approval Signing Fielding of Consultants Original Actual 31 December 2001 30 September 2003 23 April 1996 29 April 1997 1 October 1998 Closing Date Original Actual 31 December 2001 15 July 2004 Description As an integral part of LOAN PHI-1435: Rural Microenterprise Finance Project (RMFP), this attached grant advisory TA aimed at strengthening the financial and institutional management and monitoring capabilities of PCFC and participating MFIs and their ability to organize ultra-poor self-help groups (SHGs) and implement Grameen Bank approach (GBA) programs. Objectives and Scope The TA was designed to (i) enhance the financial and management capabilities of MFIs participating in RMFP through the development of an appropriate accounting, financial monitoring, reporting, and management system; (ii) assist MFIs in developing an appropriate management system and the accompanying management information service; and (iii) assist PCFC and MFIs in establishing, installing, and initially supervising an appropriate benefit monitoring and evaluation (BME) system. The TA design was relevant as a lack of institutional capacity prevented MFIs from becoming self-sustaining financial institutions for the target clients. The TA activities were (i) organizing and conducting training courses and workshops on: GBA implementation and organizational management, GBA orientation for managers and officers, training of trainers, BME, and financial management; (ii) development of three MIS modules: a loan and financial tracking system, financial management and control system, BME system, and the operations manuals for these systems; (iii) installation of the systems to target MFIs, training on the systems operation to the MFIs, and trouble-shooting services. The TA would also finance attendance of selected MFI representatives to overseas workshops on other GBA programs in Asia. Evaluation of Inputs A total of about 60 person-months of locally recruited consulting services comprising 30 person-months of a financial training specialist (FTS), 18 person-months of an institutional development/MIS specialist (IDMISS), and 12 person- months of a BSE specialist (BMES) would be required. Associated Resources for Management and Development, Inc. provided a total of 58.5 person-months of domestic consulting services. Evaluation of Outputs From 1998 to 2002, 24 workshops, training sessions and conferences, participated in by 1,174 MFI executives, managers and staff were conducted. Over 70% of survey respondents found the “GBA Implementation and Organizational Management” course very beneficial to their operations. Nearly 70% of survey respondents found ‘GBA Orientation for Managers and Officers” and “Training of Trainers” very helpful to their management. 53% of the respondents identified “BME” very beneficial to them. 40% of the respondents rated “financial management” as very useful. Following the success of the GBA Replicator managers’ conference held at ADB in December 2001, attended by 215 participants from 112 MFIs, PCFC started to hold regular regional partners’ meetings, adopting this TA-funded conference format. This is a PCFC forum developed by the TA to discuss operational issues with MFIs, strengthening PCFC role as an efficient microfinance wholesaler and prominent knowledge center on GBA operations. Three MIS modules were developed: (i) a loan and financial tracking system, designed for use in MFI branches, (ii) a financial management and control system, for headquarters to monitor overall financial performance of their microfinance operations, and (iii) a BME system, designed for the record and collection of information on the profile of subborrowers and results of the means and re-means test. Out of the selected 77 MFIs that received the software for these systems, 33 MFIs partially installed these systems: the loan and financial tracking system was made operational at 82% of MFIs, and the financial management and control system at 24%. The BME system had not been installed at all because of the excessive personnel cost required for data input and maintenance. The limited success of the system installation was due to (i) the MFIs’ continuing use of existing systems, (ii) disintegration of the three systems into a whole system, (iii) limited support and internal resources to customize the systems to meet individual MFI needs, (iv) the difficulty in integrating the offered systems to the existing MIS of other types of loans, and (v) lack of information Appendix 6 37 (iv) the difficulty in integrating the offered systems to the existing MIS of other types of loans, and (v) lack of information such as penalties to interests and principles in areas and data needed for compliance with the Bangko Sentral ng Pilipinas (BSP) report. Despite the limited success in the installation of the developed MIS modules, the TA heightened the MFIs’ recognition of the need to develop MIS to support and monitor their operations through trainings and consultations. The TA is rated as efficacious. The TA also financed an impact study of RMFP. Overall Assessment and Rating The TA is rated as partly successful. The training component of the TA helped a wide range of MFIs under RMFP strengthen their institutional and management capacities in conducting successful microfinance operations. The installation of MIS modules developed under the TA to MFIs was not in line with expectations. The impact study of RMFP gave a comprehensive view of the project impact on the target beneficiaries. The TA helped the microfinance industry take a sustainable development path. Major Lessons Learned The limited success of the MIS modules installation presented several lessons learnt: (i) each MFI has its own needs for system development, depending on operational focus, size of operation, type of institution and so forth, thus, there is no generic model which can fit all, (ii) recognizing this, assistance in system development should be flexible enough to meet each beneficiary’s needs for customized system, (iii) a thorough diagnosis of target MFIs’ operations management and monitoring should be conducted, taking into account current technological progress and application, before a new system is developed and offered, (iv) alternatively, “solution-type” assis tance would be more appropriate, rather than providing a “one-fits-all” system in order to support MFIs efforts to develop their MIS. Recommendations and Follow-Up Actions It is recommended that the ADB operational division closely monitor future development of institution-building of MFIs in different categories: NGOs, banking institutions, and cooperatives. Future movement towards regulating unregulated organizations, and new regulatory requirements in line with the overall prudential development, should also be monitored to identify the areas for future ADB assistance in strengthening microfinance institutions. Prepared by Eiichi Sasaki Designation Financial Sector Specialist 38 Appendix 7 PCFC ACCREDITATION CRITERIA 1. Eligible borrowers are NGOs, Cooperatives, and Financing Institutions duly organized, with either a track record of lending operations or with proven capabilities in implementing microfinance programs for the poor. 2. To qualify for accreditation, the organization must pass the following institutional, financial and lending performance criteria: (i) Institutional Criteria: (a) Duly registered with either Securities and Exchange Commission (for NGO), Cooperative Development Authority (for Cooperatives), or Bangko Sentral ng Pilipinas (for Rural, Thrift and Coop Banks); (b) Track record of at least 3 years in lending operation of the institution or at least 2 of its key officers/board members have microfinance experience; (c) Credible and competent Board of Directors; (d) Presence of full time core management team; (e) Presence of a separate unit for the program with full time staff with basic background on credit and financial management; (f) Presence of a savings mobilization program; (g) Presence of an MIS, accounting and internal control systems; and (h) No major exceptions per most recent audit nor adverse credit information/findings. (ii) Financial Criteria: (a) Total resources of at least P5 million, net worth of at least P2 million; and (b) For Banks: Not less 10% capital-to-risk assets ratio after PCFC and other creditors.