Foreign funds in aid of SMEs shrinking

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08:41 AM July 24th, 2013

By: Paolo G. Montecillo, July 24th, 2013 08:41 AM

Lourdes Pineda: Professionalize. PHOTO FROM RCBC.COM

MANILA, Philippines—The global financial crisis put the squeeze on the microfinance sector in the last four years, resulting in a drop in the flow of foreign donor money that allowed lenders to provide cheap financing to small borrowers.

According to Lourdes Pineda, president of Rizal Microbank (a unit of RCBC), the scarcity of these interest-free funds means microfinance institutions have no choice but to professionalize their operations to ensure the availability of cheap credit for borrowers at the “base” of the pyramid.

The microfinance industry remains the most viable replacement to informal sources of funds that charge usurious interest rates on borrowers with no other financing options, she said.

“Donor funds have shrunk because of the crisis,” Pineda told reporters at a recent press conference. “That’s why the industry’s portfolio has shrunk.”

Pineda was commenting on central bank data that showed that outstanding loans of microfinance institutions dipped from P8.4 billion as of the end of 2012 to P8 billion as of March this year.

She said donor funds, usually from charitable organizations overseas, had been instrumental in supporting the growth of the microfinance sector over the last decade. As of 2002, microfinance loans were only about P2.6 billion, Bangko Sentral ng Pilipinas (BSP) data showed.

The luxury of having cheap funds—instead of deposits from clients who need to be paid interest—allowed microfinance lenders to extend credit at low rates while still earning profits despite rising administrative costs.

“For the microfinance firms to survive without donor funds, they need to professionalize their operations,” Pineda said, citing the need to keep administrative costs at a minimum.

She said microfinance lenders also needed to adjust their interest rates to be able to compensate for the high costs.

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