Teves calls for limits to microfinance order

World Bank, ADB also raise concerns over policy shift A Palace order expanding state involvement in direct credit services has the Finance department worried, to the extent that it wants Malacañang to restrict qualified agencies if a repeal is not possible. Finance Secretary Margarito B. Teves, also the chairman of the National Credit Council, Tuesday told BusinessWorld "we want to limit it to certain agencies and to confine it initially to the DSWD (Department of Social Welfare and Development)." President Gloria Macapagal-Arroyo’s Executive Order (EO) 558, signed August 8, repealed EO 138 issued in 1999 by then President Joseph Estrada. EO 558 re-allowed government non-financial agencies (GNFAs) and government-owned and -controlled corporations (GOCCs) to undertake "directed credit" or subsidized credit programs, an undertaking the Estrada order had limited to government financial institutions (GFIs.) Mr. Teves called EO 558 "all embracive," which might negatively impact on state finances. "There are several things we are concerned about: Will the credit programs be sustainable? Will they generate revenues out of the amount lent to borrowers? What we don’t want is to give dole-outs." Another source of concern is the change in credit policy, from one that is market-based to one dependent on state subsidies. Mr. Teves said he has submitted a memo to President Gloria Macapagal-Arroyo to ask for a clarification of EO 558’s objectives. He declined to provide details, but Finance sources said contains the department’s suggestions, of which one is to confine lending to the DSWD for now. EO TO BANKROLL 2007 POLLS? Speculations have been rife that EO 558 was intended to bankroll the Arroyo administration’s election campaign next year. A senator, in fact, Tuesday said the Palace order should be scrutinized since it could be used as an election campaign tool apart from fostering other abuses. Senator Richard J. Gordon, chairman of the government corporations and public enterprise committee, said he will push for more GOCC regulation. "We have to be very careful lest it become an electoral campaign tool for [the President]," he said. "More importantly, where would they get the funds to lend?" GOCCs have become financial burdens for the government, prompting the filing of Senate bills (SB) 486, 487, and 2222, which aim to curb their operations further. "It’s necessary. So many GOCCs are losing money," Mr. Gordon said. SBs 486 and 487, authored by Senator Sergio R. Osmeña III, orders GOCCs to "clearly define the parameters and/or limits of their financial and operational capabilities" and limit the "borrowing, lending, and guaranteeing any form of financial transaction, risk and/or commitment". SB 2222, authored by Mr. Gordon, would require GOCCs to submit regular reports. The bill would also create a Congressional Oversight Committee for GOCCs. REPEAL LONG SOUGHT BY GMA Finance sources, meanwhile, claimed Mrs. Arroyo had wanted to repeal EO 138 as early as 2001 because she wanted to expand the DSWD’s Self Employment Assistance program that extends microfinance loans to poor clients. The DSWD’s microfinance program is limited by the fact that beneficiaries can borrow only once. Once they repay and want to borrow a second time, they are referred to microfinance institutions. Mr. Teves said he believes the repeal of EO 138 has nothing to do with next year’s elections. "The President was concerned over how to expand the microfinance program, given the limitations of the DSWD and the PCFC (People’s Credit and Finance Corp.)," he said. "She wants to use the network and reach of the DSWD to increase the reach of government to the poor under the microfinance program." He noted that the microfinance program is reaching only 30% of its intended beneficiaries, and suggested the PCFC be expanded to areas it presently does not cover. The PCFC is the government’s lead institution for raising resources for microfinance services. It lends wholesale to microfinance institutions (MFIs) such as NGOs, cooperatives and rural banks, which in turn, lend to their clients. Arthur C. Yap, Presidential Management Staff head and also presidential adviser on job generation, told BusinessWorld that aside from the DSWD, the Agriculture and Labor departments will also begin lending by activating "dormant" credit programs. He said these credit programs were suspended by EO 138 but could not be abolished since these were mandated by republic acts. He stressed, however, that these agencies will be active only in areas not covered by MFIs. "They are not meant to compete with MFIs, let us be clear about that." The implementing rules and regulations to EO 558 will identify which agencies can now begin extending credit, as well as these agencies’ coverage, he added. BUT FUNDING NOT ALLOCATED Budget Undersecretary Mario Relampagos, however, admitted that funds for lending by government agencies are not provided in the Executive’s 2007 budget. He also pointed it will not be easy for agencies to realign funds to lending programs. "They will need ’program activity projects’ that presuppose the realignment of funds. Since there are none related to lending in the 2007 budget, then I don’t think lending by these agencies can start anytime soon." The Budget department has also introduced budgeting by "major final outputs." Only these "outputs" will receive budgetary allocations. Lending programs are not one of these. MFIs and multilateral lending agencies supporting the government’s microfinance program are urging Mrs. Arroyo to reconsider EO 558, citing the potential damage to state finances and the current market-driven credit system. The Microfinance Council of the Philippines, Inc. (MCP), National Confederation of Cooperatives (NATCCO), Rural Bankers Association of the Philippines (RBAP), the Asian Development Bank (ADB) and the World Bank have written either Mr. Teves or Mrs. Arroyo in the last two weeks to express their objection to the repeal of EO 138. The MCP, NATCCO and RBAP represent nongovernment organizations (NGOs), cooperatives and rural banks that extend retail microfinance loans, while the two multilateral agencies extend official development assistance (ODA) in line with the government’s microfinance program. EO 138 prohibited GNFAs and GOCCs from undertaking credit programs using funds from the national budget, special funds, and loans or grants from donor agencies. These programs used subsidized rates. Instead, these agencies and state corporations were directed to turn over their credit programs to GFIs for management. These GFIs became the "main government vehicle for the delivery of credit services ... by providing wholesale funds to private financial institutions that will be engaged in retail lending." EO 138 also adopted the following policies: greater role of the private sector in the provision of financial services to basic sectors and the adoption of market-oriented financial and credit policies. Interest rates on loans and deposits were to be determined by the market rather than subsidized. In 1997, Gilbert M. Llanto, an economist at the Philippine Institute for Development Studies, counted 86 directed credit programs implemented by 42 government agencies and state corporations, which utilized as much as P40 billion in state and borrowed funds. "[T]hese programs proved to be money-losing undertakings with loan repayment estimated at an average of 82.6%. But what is even more unfortunate is the fact that only a few of the intended beneficiaries -- small farmers, fisherfolk, and microentrepreneurs -- got to enjoy the credit subsidies," he said in a research paper. MICROFINANCE PLAYERS OBJECT In his letter, Edgardo F. Garcia, MCP executive director said: "EO 138 and the National Strategy for Microfinance both formulated by the National Credit Council-Department of Finance were timely and appropriate policy instruments that encouraged the widespread participation of the private sector-led microfinance institutions in the delivery of microfinance services to the poor." With more and more NGOs, cooperatives and rural banks extending microfinance services, microfinance clients grew to around 1.7 million in June this year from 250,000 in 2000, he noted. "The performance of the microfinance sector in the past six years has shown that the private sector can deliver microfinance services on a large scale and on a sustainable basis. It is the policy of most governments that where the private sector can perform a service better than government, then society at large is better served if government allocates its resources to other priority areas," he added. Cresente C. Paez, NATCCO president and chief executive said network members were "apprehensive" the repeal of EO 138 would "pave the way for government to go into retail microfinance in direct competition and to the detriment of the many privately-led microfinance institutions, including that of cooperatives." RBAP Executive Director Emmanuel B. Guina pointed out that "EO 138 has been the cornerstone of the government policies which provided the primary enabling environment for a market-driven approach that encouraged rural banks to actively provide microfinance services." He said that of about 200 banks providing microfinance services, close to 90% are rural and cooperative banks that serve about 600,000 borrowers. "Since the issuance of EO 138, rural banks have been able to foster a positive culture of repayment thus ensuring the profitability and expansion of financial services in the countryside," he said. The ADB and the World Bank, meanwhile, warned the repeal of EO 138 may have negative repercussions on lending programs. In his letter, ADB Country Director Tom Crouch said "in view of the importance of EO 138 to the Microfinance Development Program, we are concerned that its repeal has potential for significant impact on the program, and the agreements reached between Government and ADB." The ADB has extended a $150-million loan in support of the government’s microfinance program. "In addition, there are possible implications for the Government’s broader fiscal consolidation program," Mr. Crouch added. "EO 138 gives international development partners a measure of comfort that development funds would be lent prudently and in a well targeted manner," World Bank Country Director Joachim von Amsberg said. "The World Bank has supported the principles underlying EO 138, and many of our development financing projects in the Philippines were developed under this policy framework. A change in this context would inevitably affect ongoing and future development lending programs, which would be unfortunate, especially now when progress on fiscal reforms would allow international development partners to channel more funds towards investments and programs that catalyze growth and employment," he added. - J. T. Gulane with a report from Reagan D. Tan/BusinessWorld