Last week I tried to pay my credit card bill online. Using a different computer, the site wanted to verify my identity with a security question – “what is the name of your elementary school?” After three failed attempts, the system locked my account, forcing me to call to re-activate. When I called Capital One, the girl on the other end of the line spoke perfect English, though she had a slight, almost unnoticeable accent that has become very familiar to me over the last three months. I asked where she was located, and she said Manila.
In order to get into the Philippines, you need a flight out of the country. Back in November I booked a refundable ticket from Manila to San Francisco on United Airlines. The other day I called up to cancel the flight and collect my cash. The girl picked up the line and same song, second verse. I asked if she was calling from Manila, and she confirmed – Makati, to be more specific. “I was just in Makati for a conference,” I said. “Yes, this is the business center of Manila, sir,” she responded. I felt better knowing that I was dealing with a Filipino on the other end of the line. Continue reading →
A microfinance institution is a business. Like any business, MFIs are competitive with one another. While MFIs currently serve only a portion of the poverty pie, they compete for existing clients. It is important to create a product that appeals to the client and offer high levels of service in order to keep your clients. This is particularly true in the Philippines, where things are relationship-driven and the people are emotional. For example, NWTF has an issue with client attrition because it sometimes has difficulty distributing new loans immediately after the old one has termed out. The women feel hurt and slighted when this happens, and drop out of the program as a result. In turn, they will join another MFI. That was a tangential anecdote to emphasize the competitive nature of this business. Yet this past week I attended a conference in Manila on “Operationalizing Social Performance Monitoring,” which highlighted the cooperative nature of microfinance institutions. It was hosted by the Microfinance Council of the Philippines and attended by MFIs from all across the country. Continue reading →
This is the second post in a three-part series on SMEs.
In an earlier post, I discussed another area of development – SMEs – that is both important for creating sustained growth, and has recently attracted interest from investors. The Philippines is also placing a lot of emphasis on this area of development.
The Philippines is actually in good shape regarding SMEs, as it has an abundant labor pool. The country has 800,000 registered businesses, of which ~7% are classified as either small (10-99 employees, $60K to $300K in assets) or medium (100-199 employees, $300K to $2M in assets). Only 0.4% of the business earn above the $2M mark. The remaining 92% are microenterprises, which have between 1 and 9 employees and earn less than $60K in assets. These MSMEs (including microenterprises) account for 70% of the labor force and 30% of the output of the country.
The other day I talked about how an MFI figures out the potential market for their services in an area. A simple calculation using statistics provided by the government offers a high-level estimate of the number of women in the target profile. But it is also important to understand the situation on the ground – who is there already and what are they doing? On a recent market research trip with some NWTF staff, I learned how to get the answers to those questions. The team included the director of the research department, a research officer, the regional manager of the NWTF branches in Cebu, and four prospective loan officers from Kalibo (henceforth referred to as “the girls”). To get the answers to these questions, we employed two strategies – individual interviews and focus groups – and split up.
The director and the girls look for women to interview.
The girls were responsible for walking around the villages we’d visit and interviewing women about their businesses. Using a PPI form to screen for women below the poverty line and a questionnaire, the girls gathered statistics that later would be aggregated and analyzed back at the office. The questionnaire asks their household income, whether it is regular or seasonal/contractual, whether or not they own a business. The girls ask the interviewees to estimate the amount of capital needed for their business, and, if given a loan, what they would purchase (with a corresponding cost estimate). Lastly, they ask what they would do with 5,000 pesos – the minimum loan for a first-time client – how much amortization they can afford, and what mode of payment would be suitable (daily, weekly, monthly, etc.). Continue reading →
One misconception about microfinance institutions is that, because they are NGOs with a core social mission, they do not compete in the same way as traditional for-profit companies. This is, of course, not the case. Just like any other business, MFIs must strive to offer the best product, best service, and, ideally, serve communities with a sizable demand for microfinance. This gives you a competitive edge over other MFIs in the area. When considering expansion, an MFI needs to consider the conditions of the region and understand the economic profile of the people in the community. I just got back from spending four days on another island, tagging along on a market research trip to evaluate and assess the potential for expansion in the province. First, how big is the market? Continue reading →
Here in the Philippines, the most common use for a microloan is a sari-sari store – otherwise known as a general or convenience store. There are an estimated 700,000 of them here, and you can find one on just about every block in the country. In 2007, an organization called Microventures Incorporated introduced its Hapinoy program, which is a coop of sari sari stores across the country. By joining together, these stores can get leverage economies of scale to get volume discounts, competitive pricing, and more favorable terms for microloans. The organization purchases products in bulk from Procter & Gamble and other large manufacturers, and distributes them to each Hapinoy store via a community store. It is a hub-and-spoke model with a wholesale store serving different regions. Here is a program that operates within the existing framework of the country, improving what exists, rather than trying to change it altogether. Continue reading →
The following was written for the Kiva Fellows blog. See the original here.
I spent all last week touring a province in the Philippines with a 7-person team in an effort to gather market intelligence about the region. The purpose is to determine whether or not NWTF should open a branch here. Much of our day is spent driving around a town (one in the morning and one in the afternoon) looking for the poorest neighborhoods. The Dilapidated Housing Index is a means of making a snap judgment about whether a community is sufficiently poor for microfinance to be beneficial. If most of the houses on the street are made of bamboo, corrugated aluminum, and bamboo leaves, we know we are looking in the right place.
A fishing village in the Philippines
On Thursday morning, we were driving through a coastal town when the paved road turned to dirt. According to the driver and director of the research department at NWTF, when the road turns to dirt, you know you are headed in the right direction. Sure enough, within a few minutes we reached a squatter community bustling with people. (In the Philippines, the government protects squatters, and large communities spring up on other peoples’ lands.) The road was just wide enough to fit the van and lined with nipa huts and sari sari stores. We passed by two makeshift basketball courts before coming to the end of the road. We parked the van and split up to walk around and talk to the people. Unfortunately, the interviews are all in Illonggo, so I chose to follow the director down to the shore. He began talking to a group of women on the beach holding their infant children. If they could have a loan to spend on anything in their community, what would it be? Their response: diesel fuel or an icemaker. I’ll explain why this is important, but first some background. Continue reading →
The Philippines is called the “texting capitol of the world.” Everyone has a phone, mostly because they are a) inexpensive (starting at $20 USD), b) offer flexible plans (everything is prepaid), and c) texting makes life easier. SMS messaging is the predominant mode of communication not only here, but in other parts of Southeast Asia. Even business inquiries and scheduling a meeting might be done via text. The mobile infrastructure of the Philippines is far more robust and pervasive than landlines or Internet. In the context of development, the mobile landscape offers great opportunities. Like anything, it is better to improve and leverage the existing system than to try to create a new one altogether. The question becomes, how do you harness this existing infrastructure to improve delivery of microfinance services? The answer is mobile banking. Continue reading →
This is the first in a three-part series about small- and medium-sized enterprises
The wikipedia picture for the "Small and Medium Enterprise" entry.
In March of 2008, James Surowiecki wrote an article for the New Yorker, titled “What Microloans Miss,” that suggests that the disproportionate amount of attention given to microfinance has steered funding away from other avenues for development. A year and a half later, the Boston Globe included a piece on two recent studies on microfinance questioning its efficacy, titled “Small Change.” Both articles revolve around the same central premise: microfinance, while effective at relieving some of the burdens of day-to-day living, does not create jobs. It is rare that a microbusiness receiving a loan has paid employees. In other words, microloans allow women to start a business, but more independent businesses do not help to alleviate poverty on a macro (national) scale. Small- and medium-sized enterprises (SMEs), according to Surowiecki, are the engines of development. Here he discusses what considers to be the problem of the cult of microfinance:
Both socially and economically, microloans do a lot of good, working what Boudreaux and Cowen call “Micromagic.” But the overselling of their promise has made us neglect the enterprises that could be real engines of macromagic. The cult of the entrepreneur that the microfinance boom has helped foster is understandably appealing. But thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide. To be sure, for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck.
The benefits of increasing support for SMEs in a country are real and quantifiable. Consolidation into the formal sector provides more people with steady jobs and offers workers better health and wage benefits, disability, pensions, etc. These businesses help to reduce the size of black markets and generate taxable income. What’s more, a majority of microentrepreneurs would prefer a steady paycheck with job security to their current situation. I don’t disagree with the idea that vehicles of mass production – a factory, or a plant, or a farm – create strong upward momentum for poorer people without employment. But every country has a different profile, and the success of the development approach depends on the different strategies of development.
I spent the last three days in “the field,” a term used to describe the front lines of microfinance where the money is distributed to the clients of the banks. Beginning early Tuesday morning, I set out for the town of Valladolid, a rural municipality about 50 km from Bacolod City. The road snakes along the coast through increasingly less urban communities, until reaching Pontevedra, where the NWTF (Negros Women for Tomorrow Foundation) Valladolid branch is located. Linda, the branch manager and former loan officer, took me to see the first of 15 borrowers we would try to track down over the course of the three-day trip (with a 67% success rate). Riding in the metal grates on the back of a tricycle, where I’d spend most of my trip, we rode to small village called a barangay to interview several women about their business and loan. The community here is small, and stopping for directions usually produced a guide that brought us directly to the home of the borrower. Home constructions vary from 2-3 room bamboo nipa huts, to shanties with roofs of corrugated aluminum and floors of dirt, to cement frames with electricity, running water, and decorations on the walls. Over the course of the week, I’d see all types represented. Housing loans are popular among borrowers, and many homes have been built with loans from NWTF.