CLARITA is a single parent who lives in an informal settlement in Quezon City. She lives with her two children in a shanty not more than 10 square meters. She works as a waitress in a restaurant and earns P120 a day, plus tips on a good day. When she’s at work, she sends her two young children to her mother who takes care of them. It’s a difficult life. She is just a statistic in the poverty surveys.
One day an idea struck her—can she set up an eatery business catering to young working families in the area of residence? She borrowed P12,000 from the local informal lender (the bumbay) to purchase a stove, kitchen utensils and other eatery needs. She used the rest of the money as working capital. She sought the help of her mother in running the carinderia microenterprise. The business allows her to stay at home and, at the same time, care for her kids. In addition, because it’s a food business, she’s able to provide three meals a day for her two children and her mother.
In the next 12 months, after working long hours daily from 4 in the morning to nearly midnight, her eatery business grew, making her earn enough money to expand it and finally pay off her debts. She also hired a service crew to assist her in serving and cleaning the utensils. While she’s still not out of poverty, she’s now able to ensure food is available on the table and send her two children to a nearby public school.
The story of Clarita is an example of how microfinancing microentrepreneurs can help alleviate, but not eradicate, poverty. The source of financing is the informal financiers we aptly call “5-6.” Unfortunately, even microfinance non-governmental organizations have limited reach. The question is: Will this microfinancing arrangement really spur sustainable economic development?
More than a quarter of Filipinos in the first semester Annual Poverty Indicators Survey conducted by the Philippine Statistics Authority (PSA) are poor. And not much has changed since 2006. In its report posted in March 2015, it reports, “Poverty incidence among Filipinos in the first semester of 2014 was estimated at 25.8 percent.” This is up from the same period in 2013 at 24.6 percent. When you factor in the annual increase in population, we’re talking huge numbers. The report further states “subsistence incidence among Filipinos, or the proportion of Filipinos whose incomes fall below the food threshold, was estimated at 10.5 percent for the first semester of 2014.” About the same level during the same period in 2013. Subsistence incidence refers to the proportion of Filipinos in extreme poverty, and 10.5 percent is a big number.
In another report by the PSA posted in July 2014, it states that “fishermen, farmers and children consistently posted the highest poverty incidences among the nine basic sectors in the Philippines in 2012 [latest data available] at 39.3 percent, 38.3 percent and 35.2 percent, respectively.” Interestingly, these are also the most unbanked sectors.
With the failure of so many programs put in place, including the controversial Conditional Cash Transfer Progam, to alleviate poverty in the rural and urban areas, microfinance is increasingly seen as the solution to poverty eradication.
The Philippines is by far the most active in microfinace, starting the program in the eigthties. In the 2005 report, entitled “Microfinance in Action: The Philippine Experience” by the Mercatus Center George Mason University, it states that the decades of experience in microfinance by the Philippines offers many lessons that could help policy-makers, as well as other developing countries, venturing in microfinance. Interestingly, the lessons drawn in 2005 are still very much relevant today.
The lessons mentioned in the report states: “Microfinance has become a viable option only because of a poorly functioning institutional environment; microfinance is remarkably working well as a Band-Aid solution to poverty, i.e., it puts food on the table and microfinance is not providing a bridge to sustainable development because it fails to address the root causes of poverty. As such, microfinance borrowers fall short of graduating [i.e., entering the formal economy], which should be the ultimate goal of microfinance.”
So the story of Clarita continues. She continues to borrow, to bridge her financing needs, from the informal sector who charges her an arm and a leg. The formal banking sector offers better terms. Clarita knows this but she also knows it will be almost impossible for her to get a loan without any collateral or a formal business registration. When we think that 99 percent of all establishments in the Philippines are micro, small and medium enterprises contributing to 61 percent of total employment, the more we see the need to put in place a strong and healthy microfinance environment that will serve as the foundation for a robust institutional environment. The Bangko Sentral ng Pilipinas and other government agencies have taken concrete steps to institute financial-inclusion programs. My hope is that they fast-track the reforms so that the Philippines’s current economic growth we are so proud of trickles down to those who work the hardest to achieve it. Will microfinance lay the foundation for sustainable poverty eradication? The answer is the usual “it depends.” It depends on making structural reforms, a topic I will dwell on in my next article. E-mail: rbo811@yahoo.com.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Finex. Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines appearing every Wednesday and Friday.