PCR: Philippines: Microfinance Development Program · October 2009 Philippines: Microfinance...

Completion Report

Project Number: 38579 Loan Number: 2199-PHI October 2009

Philippines: Microfinance Development Program

CURRENCY EQUIVALENTS

Currency Unit – peso (P)

At Appraisal At Project {or Program} Completion (30 June 2005) (26 December 2007)

P1.00 = $0.018107 $0.024201 $1.00 = P55.22 P41.32

ABBREVIATIONS

ADB – Asian Development Bank BDS – business development service BIR

BSP CDA CGAP CIB CSP DOF DSWD DTI EA EO GIS IDC IT JFPR LGU LIBOR MCPI MDG MDP MFI MORR MTDP NAPC NCC NGO NLSC PCR PMO PMU PPSB RA SCA SEC TA TOT USAID

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Bureau of Internal Revenue Bangko Sentral ng Pilipinas Cooperative Development Authority Consultative Group to Assist the Poor Central Credit Information Bureau country strategy and program Department of Finance Department of Social Welfare and Development Department of Trade and Industry Executing Agency Executive Order general information sheet interest during contribution information technology Japan Fund for Poverty Reduction local government unit London interbank offered rate Microfinance Council of the Philippines Incorporated Millennium Development Goal Microfinance Development Program microfinance institution manual of rules and regulation Medium-Term Philippine Development Plan National Anti-Poverty Commission National Credit Council nongovernment organization National Livelihood Support Corporation Project Completion Report Privatization Management Office program management unit Philippine Postal Savings Bank Republic Act standard chart of accounts Securities and Exchange Commission technical assistance Training of trainers United States Agency for International Development

NOTE

In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations Group 2 Director General A. Thapan, Southeast Asia Department (SERD) Director J. Ahmed, Director, Financial Sector, Public Management and Trade

Division, SERD Team leader E. Sasaki, Sr. Financial Sector Specialist, SERD Team member B. Nguyen, Finance Specialist (Rural and Microfinance), SERD

In accordance with ADB’s public communications policy (PCP, 2005), this completion report excludes information referred to in paragraph 126 of the PCP. In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROGRAM DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Program Outputs 2 C. Program Costs 5 D. Disbursements 6 E. Program Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Related Technical Assistance 6 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 7 K. Performance of the Borrower and the Executing Agency 7 L. Performance of the Asian Development Bank 7

III. EVALUATION OF PERFORMANCE 7

A. Relevance 7 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons 13 C. Recommendations for Future Monitoring 14

APPENDIXES

1. Design and Monitoring Framework 16

2. Policy Matrix 21

3. Status of Compliance with Loan Covenants 31

4. Technical Assistance Completion Report 39

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number

Philippines 2199 Microfinance Development Republic of the Philippines Department of Finance (Program Loan) $150 million program loan $0.5 million technical assistance grant PCR: PHI-1119

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

30 June 2005 6 September 2005 26 September 2005 14 October 2005 22 November 2005 22 November 2005 14 December 2005 14 December 2005 None 30 November 2007 26 December 2007 Asian Development Bank (ADB) London interbank offered rate (LIBOR) 15 years 5 years

8. Disbursements a. Dates Initial Disbursement

15 December 2005 (first tranche)

Final Disbursement 26 December 2007 (second tranche)

Time Interval 24.4 months

Effective Date 14 December 2005

Original Closing Date 30 November 2007

Time Interval 23.5 months

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b. Amount ($ million)

Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance 1 $150 $150

Total $150 $150

9. Local Costs (Financed) - Amount ($) None - Percent of Local Costs None - Percent of Total Cost None C. Program Data

1. Program Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost $150 $150 Local Currency Cost Total $150 $150

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower Financed ADB Financed $150 $150 Other External Financing

Total $150 $150

IDC Costs Borrower Financed ADB Financed Other External Financing

Total

ADB = Asian Development Bank, IDC = interest during construction.

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3. Cost Breakdown by Program Component ($, million})

Component Appraisal Estimate Actual

Two Tranches $150 $150

Total $150 $150

4. Program Schedule ($ million)

Item Appraisal Estimate Actual

Date of Contract with Consultantsa Completion of Engineering Designs Civil Works Contract Date of Award Completion of Work Equipment and Supplies Dates First Procurement Last Procurement Completion of Equipment Installation Start of Operations Completion of Tests and Commissioning Beginning of Start-Up

Other Milestonesb $150 $150 a If more than one, show dates for each contract. b Show key events not listed above, particularly for projects with elements not involving construction or supply of

materials and equipment. 5. Program Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 22 Nov 2005 to 30 Nov 2005 Satisfactory Satisfactory From 01 Dec 2005 to 31 Dec 2005 Satisfactory Highly Satisfactory From 01 Jan 2006 to 31 Jan 2006 Satisfactory Highly Satisfactory From 01 Feb 2006 to 28 Feb 2006 Satisfactory Highly Satisfactory From 01 Mar 2006 to 31 Mar 2006 Satisfactory Highly Satisfactory From 01 Apr 2006 to 30 Apr 2006 Satisfactory Highly Satisfactory From 01 May 2006 to 31 May 2006 Satisfactory Highly Satisfactory From 01 Jun 2006 to 30 Jun 2006 Satisfactory Highly Satisfactory From 01 Jul 2006 to 31 Jul 2006 Satisfactory Highly Satisfactory From 01 Aug 2006 to 31 Aug 2006 Satisfactory Satisfactory From 01 Sep 2006 to 31 Dec 2006 Satisfactory Satisfactory From 01 Jan 2007 to 31 Mar 2007 Satisfactory Satisfactory From 01 Apr 2007 to 30 Jun 2007 Satisfactory Satisfactory From 01 Jul 2007 to 30 Sep 2007 Satisfactory Satisfactory From 01 Oct 2007 to 31 Dec 2007 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Members

Fact-Finding

4 April– 2 June 2005

1 5 Principal Financial Sector Specialist

Appraisal

30 June– 6 Sept 2005

1 5 Principal Financial Sector Specialist

Program Loan Review

24 April– 9 May 2007

2 10 Financial Sector Specialist, Finance Specialist

Program Loan Review

1–13 August 2007

2 10 Financial Sector Specialist, Finance Specialist

Program Loan Review

25 Sept– 5 Oct 2007

2 9 Financial Sector Specialist, Sr. Counsel

Program Completion Review 25 May– 3 June 2009

2 10 Senior Financial Sector Specialist, Finance Specialist

I. PROGRAM DESCRIPTION

1. The Microfinance Development Program (MDP), approved on 22 November 2005, was designed to support the Government of the Philippines (the Government) in addressing systemic weaknesses in the microfinance sector and in achieving the Millennium Development Goals, including the eradication of extreme poverty and hunger and the promotion of gender equality and the empowerment of women.1 It aimed to promote access to sound, sustainable, competitively priced financial services for the poor and their microenterprises. It was aligned with the Group of Eight Action Plan for poverty reduction, best practices of the Consultative Group to Assist the Poor, and Microfinance Development Strategy of the Asian Development Bank (ADB). The objective of the MDP was to improve household incomes, reduce poverty, and reduce the vulnerability of the poor. To achieve this objective, the MDP undertook strategic reforms to

(i) enhance the enabling policy and regulatory environment and remove regulatory impediments and policy distortions, thereby promoting market efficiencies and the outreach of services to the poor at competitive prices;

(ii) build viable microfinance institutions (MFIs) that could provide efficient and cost-effective retail delivery of services to the poor;

(iii) strengthen regulatory and supervisory capacity and oversight for a sound microfinance sector; and

(iv) increase financial literacy and consumer protection for the poor and users of microfinance services.

2. The MDP included a program loan of $150 million accompanied by a technical assistance (TA) grant of $500,000 to support the Government in implementing the policy actions that the program loan called for. ADB also approved on 14 March 2006 a grant financed by the Japan Fund for Poverty Reduction (JFPR) amounting to $900,000 for developing financial cooperatives to help the Government implement an MDP component to build capacity in cooperatives. 3. Reducing poverty has been of the highest priority for the Government. Poverty rates have generally declined in the Philippines in the past 2 decades, but income poverty increased from 30% in 2003 to 33% in 2006, according to the Government data. The second quarter 2005 Social Weather Survey2 reported that economic conditions for the people continued to be harsh, as 57% of household heads regarded their households as poor, and 12% report that their households experienced hunger at least once in the past 3 months. Access to microfinance can improve household incomes and reduce poverty and the vulnerability of the poor. It can help the poor build viable businesses and pursue income-generating activities. Microfinance is the central strategy for poverty reduction in the Philippines under Republic Act No. 8425 (Social Reform and Poverty Alleviation Act) and is an important part of the Medium-Term Philippine Development Plan (MTDP)3, 2004–2010, and the current administration’s 10-point agenda. Although the Philippines has achieved good progress in promoting microfinance, more than two thirds of poor households, or 17 million people, still did not have access to microfinance. Action was needed to lay a sound foundation to develop microfinance further and at a substantially accelerated pace to achieve the necessary national outreach and sustainability.

1 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Republic of the Philippines for the Microfinance Development Program. Manila. 2 Social Weather Stations. 2005. 2nd Quarter 2005 Social Weather Report. Manila. 3 National Economic Development Authority. 2004. Medium-Term Philippine Development Plan 2004-2010. Manila

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The country strategy and program (CSP) of 2005–2007, which was formulated with a greater selectivity and sharper focus, listed the MDP as the program to support microfinance development, assisting the Government in its efforts to achieve the Millennium Development Goals.4 The CSP is aligned with the priorities of the Government, which were included in the MTDP for 2004–2010. Microfinance is an important part of the MTDP as a potent tool for reducing poverty. The MDP was highly relevant. ADB missions had a series of meetings and discussions with a broad range of Government agencies and other microfinance stakeholders to identify issues to further microfinance development and design the assistance components to formulate the MDP. The design and monitoring framework of the MDP is in Appendix 1. B. Program Outputs

5. Key outputs under the policy framework, and actions agreed with the Government and included in the policy matrix in Appendix 2, are summarized as follows. All the policy actions were fully completed during the program implementation period.

1. Enhance the enabling and regulatory environment by removing regulatory impediments and policy distortions to promote market efficiencies and increasing outreach of services to the poor at competitive prices

6. The MDP called for Government actions to support the development of the regulatory framework for sustainable microfinance and remove regulatory restrictions on competition and the expansion of sound MFIs. Bangko Sentral ng Pilipinas (BSP) has responded to MDP advocacy by formulating rules and regulations to promote banks' microfinance operations while recognizing the particular characteristics of microfinance, such as lending without collateral and the weekly collection of principal and interest payments. Circular No. 505 was issued on 22 December 2005, allowing microfinance-oriented banks to set up branches or microfinance-oriented branches anywhere in the country, including areas that are restricted for other types of banks, subject to meeting the criteria and standards set by BSP to ensure the quality of the loan portfolio. It has provided greater flexibility in establishing branches for financially sound and well-managed microfinance-operating banks. BSP has promoted electronic banking to facilitate electronic transactions and value transfers, including remittances to MFIs, by issuing information technology (IT) risk policies, providing baseline IT risk standards, and aligning policies with international best practices (Circular No. 511, 2006). It issued in 2006 Circular No. 542, entitled Consumer Protection for Electronic Banking, which prescribes rules and regulations for consumer protection. The expansion of e-banking, including the application of cellular phone technology to financial transactions, has lowered the cost of transfers and payments, as well as promoted savings mobilization for MFIs. Savings mobilized at rural and thrift banks increased to P2 billion in 2008 from P1.4 billion in 2006. 7. To increase transparency and disclosure in nongovernment organizations (NGOs) operating as MFIs, the Securities and Exchange Commission (SEC) issued Memorandum Circular No. 2 on 18 January 2006, which requires NGOs providing microfinance and related services to disclose this information to SEC. Within 30 days of circular issuance, NGOs were required to file a revised general information sheet (GIS) and, if necessary, amend articles of

4 ADB. 2005. Philippines: Country Strategy and Program 2005-2007. Manila

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incorporation. GISs and annual financial statements of microfinance-operating NGOs are downloadable from the SEC database. These SEC actions have increased the transparency and disclosure of MFIs and facilitated public access to information on microfinance-operating NGOs. 8. In response to the MDP call for unified taxation of different types of MFIs, Revenue Regulation No. 14, entitled Tax on Non-government Organizations (NGOs) and Cooperatives Engaged in Microfinance Activities, was issued on 11 December 2007. It clarified the Bureau of Internal Revenue (BIR) interpretation of the current tax code in relation to microfinance-operating NGOs and cooperatives by stating that they are subject to corporate income tax. The revenue regulation called for the voluntary payment of income tax by microfinance-operating NGOs and cooperatives but has not triggered any additional tax collection because NGOs insist on tax exemption, which is widely applicable to nonprofit and non-stock organizations. They initiated drafting an amendment to the tax code to ensure NGOs’ tax-exempt status, which was sent to the House of Representatives for discussion. The Cooperative Code of 2008 (see para. 11) clarified the tax-exempt status of cooperatives and invalidated the revenue regulations upon taking effect on 23 March 2009. Despite the Government’s compliance with a MDP policy action relating to the BIR clarification on MFI taxation (policy action B.5), MDP failed during the 2 years of its implementation to help level the playing field from a taxation perspective for different types of MFIs.

2. Build viable MFIs that can provide efficient and cost-effective retail delivery of services to the poor

9. Training modules on the uniform set of MFI performance standards were developed with assistance of MDP TA to support the National Credit Council (NCC)5 in promoting the adoption and implementation of MFI performance standards, which help MFIs provide efficient, cost-effectively delivered microfinance services to the poor and include credit risk management, operational efficiency, financial efficiency, and stability standards based on international best practice. To strengthen the governance of MFIs, minimum qualifications and fit-and-proper standards for board directors and key management were established for savings and credit cooperatives. Internal management systems, including requirements for mandatory committees for audit, credit, election, education and training, ethics, and mediation and conciliation, were established for savings and credit cooperatives. These requirements were stipulated in the manual of rules and regulations (MORR) formulated with inputs from MDP TA and issued in October 2007. The MORR requires savings and credit cooperatives to collect information on microfinance clients for the credit information system to avoid credit pollution and facilitate access to credit at lower cost. To promote the expansion of business development services (BDS) for the poor, the National Anti-Poverty Commission (NAPC) formulated, in cooperation with the Department of Trade and Industry (DTI) and private sector BDS providers, guidelines and model BDS manuals with MDP TA inputs, posting them on its website on 22 October 2007 for widespread dissemination to MFIs and their clients. NAPC also conducted agency and stakeholder consultations and issued Industry Advisories on 22 October 2007 to promote the adoption of sound, sustainable microfinance schemes, including microinsurance and savings, to support the development and expansion of viable MFIs with products and services in compliance with existing laws.

5 NCC is the interagency body for formulating and implementing financing policy under Administrative Order No. 86

of 1993. NCC is located in DOF and chaired by the DOF undersecretary for the Domestic Finance Group.

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10. In response to a policy action that the MDP called for, the Government’s Privatization Management Office (PMO) has formulated a privatization plan and options for the Philippine Postal Savings Bank (PPSB) with assistance from its financial advisor. PMO submitted the privatization options and action plans for PPSB, including the financial assessment and valuation, to the PPSB board of directors. The PPSB board discussed them on 9 October 2007 with a view to bringing in strategic investment to accelerate the outreach of savings and remittance services in rural and remote areas. The mobilization of savings through postal savings networks can be an effective way to expand outreach and provide essential services to the rural poor in remote areas.

3. Strengthen regulatory and supervisory capacity and oversight for a sound microfinance sector

11. Under Republic Act No. 6939, or the Cooperative Code of 1990, cooperatives providing financial services sourced from their members' savings and equity were not prudentially regulated or supervised. In view of this, members' deposits and share capital were not adequately protected. The systemic risk was increasing, as a growing number of cooperatives started and expanded financial services to their members. Against this background, the Cooperative Development Authority (CDA), tasked primarily with developing and strengthening cooperatives under Republic Act No. 6939, was required to develop and adopt proper prudential supervision. The MDP called on NCC and CDA to intensify their efforts to formulate a regulatory and supervisory framework for cooperatives engaged in savings and credit operations and to strengthen their operational capacity. With the inputs from the associated JFPR project, the MORR for credit cooperatives and multipurpose cooperatives providing financial services, including microfinance services, was formulated and issued in October 2007. Recognizing the importance of financial services provided by cooperatives, Republic Act No. 9520, or the Cooperative Code of 2008, replaced the Cooperative Code of 1990, taking effect on 23 March 2009. The new law stipulates, among other things, 18 types of cooperatives, including financial service cooperatives that are subject to more stringent prudential supervision.6 NCC and CDA are currently revising the MORR and formulating implementing rules and regulations in line with the new cooperative code. Under the new rules and regulations, CDA will collaborate with BSP to supervise financial service cooperatives. Earlier, CDA formulated a rationalization plan that it submitted to the Department of Finance (DOF) on 30 March 2006 to strengthen its regulatory and supervisory capacity, which was one of the policy actions called for by the MDP. It proposed reorganization, with redefined duties and responsibilities for job positions and qualification standards applicable to the selection of CDA officers who monitor the financial performance of savings and credit cooperatives. The MDP promoted the CDA's transformation into a financial regulator capable of prudential supervision. 12. The MDP called for BSP to conduct risk-based supervision for microfinance operations and a capacity-building program for BSP staff for effective risk-based supervision. BSP conducts risk-based supervision of microfinance operations based on Monetary Board Resolution No. 492, dated 14 April 2005. This resolution approved modifications to ratings of capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk, as well as amendments to the Manual of Examination for Banks7 to supervise banks with

6 Other salient features of the new Cooperative Code include (i) CDA being mandated to supervise financial service

cooperatives; (ii) the automatic provision of tax exemption to cooperatives, while, under the old code, tax exemption needed to be clarified by BIR case by case; and (iii) no term limits for board directors, while the previous code limited their engagement to three terms.

7 Bangko Sentral ng Pilipinas (BSP). 2005. Manual of Examination for Banks. Manila.

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microfinance operations more appropriately and adequately. BSP inspects banks with microfinance operations using risk-based supervisory procedures. It also has conducted staff training on risk-based supervision. In response to MDP advocacy for ensuring sound banking practices, BSP, in line with related circulars,8 has ensured the implementation of requirements for banks to set up audit, corporate governance, and risk management committees to ensure the safe and sound conduct of business. BSP also ensures through the issuance and implementation of relevant circulars the conduct of risk management, provision of reserves, implementation of bank controls to determine allowances for probable losses, requirements for external independent auditors, and reporting on internal control and risk management systems for safe and sound banking. 9 To effectively supervise and examine banks engaged in microfinance and small and medium-sized enterprise operations, the MicroSME Finance Specialist Group was created in BSP on 11 August 2006 through Monetary Board Resolution No. 1012.

4. Increase financial literacy and consumer protection for the Poor 13. With inputs from MDP TA and interagency consultations, the Philippine Microfinance Literacy Program was launched on 22 October 2007, followed immediately by the implementation of capacity building to improve microfinance clients’ knowledge of financial concepts, skills, and attitude, aiming to secure good financial outcomes for both providers and users of microfinance services. NAPC provides training and information to MFI trainers and other stakeholders in collaboration with other agencies, local governments, and microfinance training institutions nationwide. Seven regional sessions for the training of trainers were conducted from November 2007 to April 2008 and attended by 162 participants from 105 institutions. Further, 10 provincial training-of-trainer events have been conducted by NAPC since September 2008 and attended by 439 participants. 14. As part of the Philippine Microfinance Literacy Program, the MDP called for publishing a consumer protection guidebook. It was finalized through consultations among BSP, CDA, DOF, DTI, NAPC, SEC, and basic sector representatives for publication and launch on 22 October 2007. MDP TA facilitated the completion of the consumer protection guidebook, which includes procedures for filing consumer complaints. NAPC has widely distributed the guidebook to stakeholders and posted it on its website.

15. NAPC’s website, developed under MDP TA, started operations in March 2008 to receive public complaints concerning microfinance services and products. For lack of public awareness, however, the website failed to receive any complaint until October 2008, when the NAPC server could no long support this function because of limited capacity. The website has not been able to receive public complaints since then. NAPC plans to upgrade its computer system with a P250, 000 budget allocated for the first phase work and fully resume its website services. The capacity constraints of the NAPC information system need to be addressed to sustain the operation of its newly designed website and achieve effective consumer protection.

C. Program Costs

16. ADB provided a loan of $150 million to support the Government’s policy reforms. The loan size reflected the program’s development impact, importance of the sector, and associated adjustment costs related to the structural reforms brought about by the Government's initiatives, 8 Circular No. 434, dated 18 May 2004, and Circular No. 456, dated 4 October 2004. 9 Circular No. 442, dated 20 July 2004; Circular No. 463, dated 29 December; Circular No. 474, dated 3 February

2005; and Circular No. 409 in 2003.

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including a national financial literacy program and the enhancement of regulatory authorities’ capacity and oversight. D. Disbursements

17. The MDP loan was disbursed in two equal tranches as scheduled. The first tranche was released on 15 December 2005 upon loan effectiveness, following the Government’s completion of the first tranche policy actions. The second tranche was released on 26 December 2007, upon completion of the agreed policy actions. E. Program Schedule

18. The MDP was implemented from December 2005 to December 2007, almost as scheduled with a 1 month extension. MDP TA is completed, and the JFPR project continues until September 2010. F. Implementation Arrangements

19. DOF was the Executing Agency for the MDP and provided guidance for project implementation. The implementing agencies were BSP, BIR, CDA, NAPC, PPSB, and SEC. The NCC Secretariat was nominated by the Secretary of Finance as the program management unit (PMU) to oversee implementing the program and coordinate activities among the participating agencies. The implementation arrangements were adequate to deliver program outputs and achieve the program objectives with the coordinating role played by NCC. G. Conditions and Covenants

20. The Government completed all the first and second tranche policy actions that the MDP called for. All general and specific covenants were complied with before the two tranche releases were made. The covenants were relevant to achieving MDP objectives. The status of compliance with loan covenants is in Appendix 3. H. Related Technical Assistance

21. MDP TA was formulated to help the Government complete the policy actions called for by the MDP. TA conducted major activities under its components for (i) MFI operational capacity building and (ii) promoting financial literacy and consumer protection. TA produced microfinance training modules for banks, NGOs, and cooperatives, which were disseminated to these MFIs by the training of trainers conducted in Luzon, Visayas, and Mindanao. The training materials have been replicated, and in-house training has been conducted by the trainers who participated in the workshops, helping build viable MFIs that can provide efficient and cost-effective services to the poor. TA helped NAPC formulate the Philippine Microfinance Literacy Program on microfinance and publish guidebooks on consumer protection, good microfinance practices, and various BDS models applicable to microenterprise development. The NAPC website was developed under TA to include a standard training program, access to relevant laws, and links to microfinance associations. The TA is rated as highly successful at helping the Government comply on time with all the second tranche release conditions of the MDP. The TA completion report is in Appendix 4.

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I. Consultant Recruitment and Procurement

22. The Services Group, Inc. was selected as the consulting firm to manage MDP TA in accordance with ADB’s Guidelines on the use of Consultants (2007, as amended from time to time) and other arrangements satisfactory to ADB for the selection of domestic consultants. No significant problem was encountered in packaging contracts, preparing tender documents, or evaluating bids. J. Performance of Consultants, Contractors, and Suppliers

23. The performance of the consultants for MDP TA was satisfactory. K. Performance of the Borrower and the Executing Agency

24. In DOF, the Executing Agency, NCC played a leading role in coordinating program activities among participating agencies and ADB. NCC capacity to implement policy actions was further strengthened by experts and administrative staff employed under MDP TA and the JFPR project. The performance of NCC is rated as highly satisfactory. L. Performance of the Asian Development Bank

25. ADB discussed intensively the design and timing of the program, identifying sector development constraints and proposing how to address them in the 2 years of program implementation. ADB considered favorably the Government request for extending the grace period of the loan from 3 to 5 years due to the poverty reduction target of the MDP. ADB conducted three review missions before finalizing a progress report for the release of the second tranche of the MDP loan, which was realized in December 2007 as scheduled. ADB monitored the progress of key policy actions that the MDP called for and gave advice as necessary on the implementation of MDP TA and the JFPR project, which supported the policy actions. The performance of ADB is rated as satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

26. The MDP was highly relevant in helping the Government address the systemic weaknesses in the sector by promoting access to sound, sustainable, competitively priced financial services for the poor and their microenterprises. It was aligned with the Group of Eight Action Plan for poverty reduction, best practices of the Consultative Group to Assist the Poor, and ADB's Microfinance Development Strategy. The relevance of the MDP is assessed through the following considerations:

(i) The MDP is consistent with the country's development priorities as declared in the MTDP for 2004–2010, recognizing microfinance as a potent tool for reducing poverty, and ADB's CSP and CSP updates which align with the priorities of the Government to assist its efforts to achieve the Millennium Development Goals.

(ii) Lessons from ADB's past microfinance operations were duly considered and appropriately reflected in the MDP by focusing on (a) making the policy environment more enabling and (b) strengthening MFI institutional and operational capacity to provide diversified financial services at market prices. ADB missions identified, through a series of meetings and discussions with a broad range of Government agencies and other microfinance stakeholders,

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issues to be addressed by the MDP toward (a) encouraging sound competition, (b) strengthening regulatory capacity, and (c) launching a national financial literacy program to promote further microfinance development.

(iii) The MDP was formulated for strong stakeholder ownership. The Government's commitment to its agencies’ concerted development of microfinance, as presented in the policy development letter attached to the program report and recommendation of the President to the Board, has been steadfast through the course of program implementation. NCC, in DOF, is the focal point coordinating program activities among BSP, NAPC, SEC, CDA, and DTI.

(iv) The MDP—consisting of a program loan of $150 million, associated TA of $500,000, and a JFPR project of $900,000—was formulated for each component to complement others and deliver program objectives through advocacy of critical Government policy actions (the program loan), support the Government’s implementation the policy actions (MDP TA), and help the Government implement MDP capacity building in cooperatives, which constitute a substantial portion of MFIs (JFPR project).

(v) As learned from past ADB operations, strengthened policy and regulatory frameworks, MFI capacity building, and financial education are critical for sector development and cannot be substituted with additional credit facilities. The MDP modality—comprising a program loan to support the Government's policy actions accompanied by TA and a grant project to facilitate the Government’s taking of policy actions and building capacity—was adequate. With a number of agencies and private sector stakeholders involved in the MDP, implementation arrangements with NCC playing a coordinating role were appropriate.

(vi) The MDP complemented other donors' assistance in microfinance, especially programs funded by the United States Agency for International Developmentthe Credit Policy Improvement Program and the Credit Union Empowerment and Strengthening Program II—whose work have been further expanded by MDP TA and the JFPR project by financing NCC activities toward establishing a regulatory framework for cooperatives and strengthening regulatory capacity in CDA. A pilot study on sustainable microfinance for poverty reduction conducted by the Japan Bank for International Cooperation was referred to in formulating the MDP.

B. Effectiveness in Achieving Outcome

27. The MDP was highly effective in achieving its outcome. This rating was given after reviewing the MDP performance against the four performance targets included in the program design and monitoring framework in Appendix 1.

1. MFI outreach indicators, including an increase in the number of active microfinance clients and transactions in 2005–2007 over the 2004 baseline

28. Outreach. The MDP strengthened the foundation of Government microfinance policy on market principles and helped increase the number of active clients and new jobs. Table 1, sourced from the Microfinance Program Committee,10 shows the number of active microfinance clients more than doubled from 2.4 million in December 2006 to 5.5 million in December 2008. During the same period, newly created jobs totaled 2.6 million.

10 The Microfinance Program Committee includes Government financial institutions providing most of the wholesale

funds for microfinance lending and started to compile data on outreach and transactions in 2006.

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Table 1: Client Outreach in the Philippine Microfinance

December 2006 December 2007 December 2008 Active Clients 2,452,022 3,588,787 5,531,997 Newly Created Jobs 986,184 1,556,304 2,565,806

Source: Microfinance Program Committee. 29. Transactions. Cumulative loan release in the year from January to December 2008 more than doubled the figure in 2007 and amounted to more than the 2.5-year cumulative loan release from July 2004 to December 2006, as shown in Table 2.

Table 2: Cumulative Microfinance Loan Releases

(P billion) July 2004–

December 2006 January–December

2007 January–December

2008 Active Clients 60.94 25.95 64.89 New Jobs 28.21 13.30 35.69

Source: Microfinance Program Committee.

2. MFI sustainability indicator improvement in 2005–2007 over the 2004 baseline

30. Under the MDP, performance standards for MFIs11 have been adopted by government regulatory agencies, government finance institutions, and rural bank and MFI associations, providing a useful tool for evaluating MFI operation and identifying institutional and operational weaknesses in order to address them. This, together with (i) the MORR for microfinance-operating cooperatives, (ii) NAPC's Industry Advisory to promote sound microfinance practices in consonance with existing laws, and (iii) a model BDS manual to promote BDS in microfinance services—all of which were delivered under the MDP—helped strengthen the sustainability of MFIs. The sustainability indicators of MFI members of the Microfinance Council of the Philippines,12 as represented by operational and financial self-sufficiency ratios, show general improvement in 2005–2007, as indicated in Table 3.

Table 3: Sustainability Indicators of Sample MFIs

2004 2005 2006 2007 Number of MFIs reporting

21 28 50 50

Operational Self-Sufficiency Ratio

103.3% 107.6% 111.8% 111.3%

Financial Self-Sufficiency Ratio

94.1% 97.0% 100.9% 105.7%

MFI = microfinance institution. Source: Microfinance Council of the Philippines

11 The performance standards include portfolio quality, efficiency, sustainability, and outreach ratings and called

PESO standards. 12 The Microfinance Council of the Philippines, a national network of MFIs with relatively large operations to advocate

sustainable, innovative, and client-responsive solutions to reduce poverty reduction, comprised 44 MFIs as of December 2008.

10

3. Financial services other than credit (e.g., savings, microinsurance, and remittances)

31. Under the MDP, BSP has promoted electronic banking to facilitate electronic transactions and value transfers, including remittances to MFIs, by issuing IT risk policies including consumer protection, providing baseline IT risk standards, and aligning policies with international best practices. The expansion of e-banking, including the application of cellular phone technology to financial transactions, is expected to lower the cost of transfers and payments and promote savings mobilization for MFIs. NAPC, through the issuance of an industry advisory, has supported expanding the formal insurance services offered by MFIs. Savings collected by banks engaged in microfinance increased from P1, 503 million in 2006 to P1, 990 million in 2007. As of December 2007, there were six mutual benefit associations offering microinsurance to 518,307 policyholders. A few commercial insurance companies started offering microinsurance policies in 2007.13

4. Increase in the ratio of savings to gross domestic product and savings mobilization in MFIs

32. In response to the policy action called for by the MDP, BSP promoted microfinance in the banking sector, including savings, by allowing microfinance-oriented banks and branches to set up branches anywhere in the country, subject to meeting criteria and standards, by issuing Circular No. 505 on 22 December 2005. Currently, 220 rural and thrift banks provide microfinance, including nine microfinance-oriented banks for which microfinance accounts for over half of their operations. While the ratio of savings to gross domestic product was almost unchanged at 27.8% in 2005 and 27.9% in 2007, savings mobilization from microfinance clients in rural and thrift banks increased from P1.4 billion in 2006 to P 1.9 billion in 2007. C. Efficiency in Achieving Outcome and Outputs

33. The MDP is rated highly efficient. The program loan was fully disbursed to the Government in two tranches at an interest rate determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility, which is substantially lower than the Government's borrowing rate in the international capital market. The program loan brought about important policy actions necessary for microfinance at the Philippine stage of development. High efficiency has been maintained in the processing and management of the program by coherent actions taken by the executing and implementing agencies, as well as ADB's monitoring and administration. D. Preliminary Assessment of Sustainability

34. The MDP is most likely sustainable. The human, institutional, and financial recourses that the MDP created are sufficient to maintain and even strengthen the outcome beyond program implementation with an increasing number of trainers at MFIs, the expansion of MFI operations, a growing number of private wholesale lending institutions, and increasing savings mobilized for providing microfinance. A sound sector development path was paved with an improved policy and regulatory environment, strengthened institutions and capacity, and higher financial literacy, all of which the MDP delivered. This is likely to be sustained, given the

13 The JFPR grant project for developing microinsurance, approved by ADB in February 2008, has helped the

Government develop microinsurance regulations and strengthen operational and regulatory capacity toward sector development.

11

Government's commitment to reducing poverty and promoting a sustainable, diverse, and market-oriented microfinance sector with extended reach to offer a wide range of services to the poor at competitive prices. The concern about financing policy that emerged during program implementation (see para. 42) means vigilance should be maintained to confirm the market principles adopted by the sector operations. E. Impact

35. The MDP had significant impact on Philippine microfinance development during implementation, bringing substantial increase in MFI outreach to clients, as shown in Table 1. Increased investment in income-generating activities and microenterprises and improvement in the economic lives of poor are assumed to be reflected in the increased number of jobs created, as shown in Table 1, and the increased number of loan releases to clients and new jobs created, as shown in Table 2. 36. Contribution of Program Loan to Institutional Development. The MDP loan has contributed to institutional development in a number of ways. The policy actions that triggered two tranche releases brought the following impact:

(i) Using inputs from the associated JFPR project, the MORR was formulated and

issued to credit and multipurpose cooperatives providing financial services, including microfinance services. The MORR has strengthened the governance structure of cooperatives, enhanced predictability regarding prudential regulations, and clarified regulations and procedures. Further, the establishment of a regulatory and supervisory framework for financial cooperatives led to the adoption of important amendments to the cooperative code, Republic Act 6938, which was replaced by Republic Act No. 9520, or the Cooperative Code of 2008. The new law applies more stringent prudential supervision of financial service cooperatives as prominent MFIs. This will effectively protect cooperative members' assets and substantially reduce the fiduciary risk undertaken by financial service cooperatives.14

(ii) The SEC required through its Memorandum Circular No. 2, issued on 18 January

2006, full disclosure by MFI NGOs, which was one of the policy actions called for by the MDP. This has increased transparency in and disclosure by MFI NGOs, providing improved public access to information on microfinance-operating NGOs.

(iii) The MDP helped CDA reorganize and transform itself into a financial regulatory

agency. CDA's reorganization, with newly defined duties and responsibilities for job positions and qualification standards applicable to the selection of CDA officers monitoring the financial performance of savings and credit cooperatives, has strengthened its regulatory capacity. The JFPR project conducted basic regulatory training and advanced intensive training based on the supervision and examination manual. Currently, about 100 CDA regulators work in 16 regions nationwide. The reporting system and data-collection instruments of CDA were modernized with improved software and hardware. Through these activities, the

14 NCC and CDA are currently revising the MORR and formulating implementing rules and regulations in line with the

new cooperative code. Under the new rules and regulations, CDA will collaborate with BSP to supervise financial service cooperatives.

12

JFPR project helped the CDA build institutional and supervisory capacity toward the sound development of the cooperative sector through the prudential regulation of financial service cooperatives. Further, it assisted NCC in organizing a series of workshops for CDA management and board members to formulate a medium-term strategy toward further strengthening CDA regulatory capacity.

(iv) Under the MDP, performance standards adopting NCC requirements have been

established in government regulatory agencies, government finance institutions, and rural bank and MFI associations, providing a useful tool for evaluating MFI operation and identifying institutional and operational weaknesses in order to address them. This has helped strengthen MFI institutional and operational capacity.

(v) The Philippine Microfinance Literacy Program was launched on 22 October 2007

and has, through the provision of capacity building, improved microfinance clients’ knowledge of financial concepts, skills, and attitudes with the aim of ensuring good financial outcomes for providers and users of microfinance alike. Training conducted by NAPC and BSP is starting to benefit clients and improve the viability and sustainability of MFIs, as the program contributes to clients’ prudential use of microfinance services. The consumer protection guidebook produced under the MDP is expected to promote the rights of clients, enable them to make informed choices, and protect them from unscrupulous acts that deny them the true value and optimum benefits of microfinance services such as credit, deposits and savings, insurance, and remittances and transfers.

(vi) In response to the policy action called for by the MDP, BSP promoted

microfinance in the banking sector by allowing microfinance-oriented banks and branches to set up branches anywhere in the country, subject to meeting criteria and standards, by issuing Circular No. 505 on 22 December 2005. Currently, 220 rural and thrift banks offer microfinance, including nine microfinance-oriented banks for which microfinance accounts for over half of their operations. BSP has promoted electronic banking to facilitate electronic transactions and value transfers, including remittances to MFIs, by issuing IT risk policies including consumer protection, providing baseline IT risk standards, and aligning policies with international best practices. The expansion of e-banking, including the application of cellular phone technology to financial transactions, is expected to lower the cost of transfers and payments, and promote savings mobilization for MFIs. BSP policy for promoting microfinance and e-banking has expanded the microfinance services provided by formal institutions.

(vii) BSP conducts risk-based supervision for microfinance operations in line with

Monetary Board Resolution No. 492, dated 14 April 2005. This resolution approved the modification of rating capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk, as well as amendments to the Manual of Examination for Banks (footnote 7), to supervise banks with microfinance operations more appropriately and adequately. In 2007 and 2008, BSP inspected 58 banks with microfinance operations, using risk-based approach supervisory procedures. BSP has conducted staff training on risk-based supervision. In the same period, 15 cycles of a 6-week structured training on risk-based approaches were conducted for staff, with 361 participants in the supervision and examination sector. Additionally, supplemental courses of the

13

structured training on enterprise-wide risk management have been conducted to further enhance the knowledge of the supervision and examination pool. A separate module covers the training of supervision and examination officers. The courses are being updated to keep abreast of new policies and procedures on risk-based approaches and will be offered in the next cycles. BSP adoption of risk-based supervision and other regulations for sound microfinance operation is ensured by the MDP and expected to help increase the availability of reliable, high-quality microfinance services.

(viii) Assisted by MDP TA, NAPC issued guidelines and a model BDS manual to

promote BDS for the poor to improve their livelihood and microenterprise performance. NAPC was supported by DTI, Department of Science and Technology, Technology Resource Center, Technical Education and Skills Development Authority, NCC, and BSP. NAPC issued an industry advisory containing guidelines and best practices in providing BDS, focusing on (i) strategies undertaken by MFIs in providing BDS, (ii) client demand for BDS, and (iii) good practices employed by providers, which was widely distributed to stakeholders. The advisory was posted on the NAPC website on 22 October 2007. With TA inputs, NAPC formulated an industry advisory to promote sustainable microfinance schemes, including lending, savings, and insurance schemes, to ensure the sound expansion of microfinance services. NAPC issued the industry advisory promoting best microfinance practices, including micro-savings and microinsurance, on 22 October 2007. Business development services and best practices for providing microfinance promoted by the MDP have helped build viable MFIs that can efficiently provide cost-effective services and products.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

37. The MDP was implemented as conceived and achieved its targets and objectives. It is rated as highly successful. B. Lessons

38. Taxation of MFIs. As discussed in para. 8, in response to the policy action called for by the MDP, the revenue regulation on taxing NGOs and cooperatives engaged in microfinance activities was issued by BIR toward unified tax treatment for microfinance-operating NGOs and cooperatives. It clarified the BIR interpretation of the Philippine Tax Code applied to these organizations. While issuing the revenue regulation completed the policy action required, it has not been effectively implemented because of a different interpretation by NGOs insisting on their tax exemption, which is widely applicable to nonprofit and non-stock organizations, and the new cooperative code in effect since 23 March 2009 clarified the tax-exempt status of cooperatives. The lesson from this experience is that the clear and consistent tax treatment that the MDP aimed for cannot be achieved without considering revisions to the tax code, and this seems to be extremely difficult to do in the 2 years of program implementation, given the time required to change the law. 39. PPSB Privatization Options. The MDP called for financial assessment and valuation of the PPSB to formulate privatization options and plans, with the aim of increasing the efficiency

14

and outreach of PPSB operations in rural areas (see para. 10). PMO has undertaken an assessment with assistance from its financial advisor. PMO submitted the privatization options and action plans for PPSB, including the financial assessment and valuation, to the PPSB board of directors, which discussed them on 9 October 2007. The privatization study helped the PPSB board raise awareness of the importance of enhancing operational efficiency for future privatization. Yet, PMO has not formulated an action plan for PPSB privatization, as a variety of options remain to be considered: whether PPSB should be privatized after being separated from the Philippine Postal Corporation or the whole of the Philippine Postal Corporation should be privatized. Despite full compliance with the policy action, actual progress toward privatization has not yet been seen. This shows weak leverage in the policy action toward the expected outcome. The MDP should have sought concrete progress for PPSB privatization through more detailed policy action than seeking board consideration alone. Alternatively, if smooth progress toward PPSB privatization was not expected, this policy action should have been excluded from the MDP policy matrix. 40. NAPC Website. As discussed in para.15, NAPC’s website, developed under MDP TA in response to the policy action, could not effectively receive any complaint from the public for lack of public awareness of it and constraints on the NAPC data system. The current system-development plan for NAPC to upgrade its computer system is expected to restore the NAPC website to full functionality. The lesson from this experience is that, at the formulation stage, the MDP should have assessed the capacity of the NAPC information system to sustain the operation of its newly designed website. C. Recommendations for Future Monitoring

41. Aligning to the New Cooperative Code. The enactment of Republic Act No. 9520, or the Cooperative Code of 2008, required revising the MORR and supervisory manual to align them with the provisions of the new code (see para. 11). The ongoing JFPR project has started to harmonize these manuals and training materials with the new code provisions. Following the revisions, the draft supervisory manual will be pilot tested in the field to confirm its effectiveness. Given the need to precisely align the CDA manuals and training materials with the new code, DOF asked ADB to extend the project by 1 year to September 2010, which was approved on 17 July 2009. The work in the extended project period should be monitored from the perspective of monitoring MDP development goals. 42. Vigilance for Maintaining Market-based Principles. Executive Order No. 138, commonly regarded as a pillar of the Government’s market-based financing strategy for the sector, was repealed by Executive Order No. 588 in August 2006, during the implementation of the MDP. Executive Order No.138 predates the MDP and does not appear in the policy actions required for tranche release. However, its withdrawal led to careful staff assessment and discussions with stakeholders to determine its impact on the policy environment. ADB hosted a workshop to consider the impact of the repeal of Executive Order No. 138 on 4 October 2007. Among the 40 participants were representatives from government agencies, financial institutions, and the private sector. The workshop concluded that, despite the repeal of Executive Order No. 138 and its replacement by Executive Order No. 558, the market principles embodied in the current legislation and the Government actions based on this legislation appeared to be well anchored. The limited and targeted scope of the new executive order’s operation and the limited funding allocated to it suggest that it has not had a major impact on the sector. In the future, vigilance is required to monitor and confirm that market principles are maintained toward sound and sustainable financing operations for micro-, small, and medium-sized enterprises.

15

43. Additional Assistance. Three areas of future ADB assistance could further improve MDP performance and sustainability and are set forth below:

(i) Microinsurance. A grant financed by JFPR for developing microinsurance was approved in February 2008 to complement the then-ongoing MDP in strengthening the operational and regulatory capacity of the Philippine microinsurance sector. The huge unmet demand for microinsurance in the Philippines means further assistance may be formulated, depending on future sector development.

(ii) Credit information system. An increase in the outreach of microcredit to poor

clients in recent years has caused credit pollution in the absence of a credit information system dealing with microcredit. The MDP has successfully mandated savings and credit cooperatives to submit all microcredit information to a credit information bureau, which has not yet been established. After the enactment of Republic Act No. 9510, known as the Credit Information System Act, on 31 October 2008, a Government-owned credit information bureau was established to collect and share all categories of credit information among lending institutions. SEC is currently leading an interdepartmental committee in formulating implementing procedures. Toward sound finance market development with an effective credit information system, ADB assistance can be formulated to strengthen the capacity of SEC and the newly established credit information bureau.

(iii) Financing growing microenterprises. Growing numbers of microenterprises

have difficulty financing their businesses and thriving to evolve into formal small businesses. Neither the microfinance modality with a smaller loan amount based on future cash flow nor small business lending with a larger loan amount based on traditional collateral fits their needs. To formulate and promote model financing schemes to meet the financing needs of these "missing middle" entrepreneurs, existing regulatory requirements need to be modified to provide prudential and accessible credit to fill the gap in their financing needs. ADB assistance can be formulated and offered to the Government to help it develop new financing policies and regulations to promote microenterprise development to a new level.

44. Timing of the Program Performance Evaluation Report. The program performance evaluation report on the MDP can be prepared starting in December 2010. At the time of program formulation, ADB considered favorably the Government request for extending the grace period of the loan from 3 to 5 years in consideration of the poverty reduction target of the MDP (see page 17 of the report and recommendation of the President to the Board). This report then will evaluate the poverty reduction target of the MDP.

Appendix 1

16

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets Monitoring Mechanisms Assumptions and Risks

Impact Improved household incomes and reduced poverty and vulnerability of the poor to shocks

Increased outreach and

access of the poor to sustainable microfinance services as measured by Consultative Group to Assist the Poor (CGAP) depth of outreach tools and guidelines

Increased investment in

income-generating activities and microenterprises

Improvement in economic

lives of poor

Reports from the

National Anti-Poverty Commission (NAPC); Microfinance Council of the Philippines (MCPI), National Credit Council (NCC); Cooperative Development Authority (CDA) and other concerned agencies

National statistics and

economic and consumption surveys

Program reviews ADB post-evaluation

report

Assumptions:

Government commitment to policy and institutional reforms

Macroeconomic stability

Active participation of the private sector and the poor

Effective social mobilization of the poor and active participation

Effective and timely implementation of reforms

Satisfactory fiscal management and macroeconomic stability

Risks:

Delays in implementation of reforms

Insufficient mobilization of the poor

Outcome A sustainable and diverse, market-oriented microfinance sector with expanded outreach of services at competitive prices to the poor

Microfinance institution

(MFI) outreach indicators including increase in active number of microfinance clients; and increase in number of transactions in 2005-2007 and beyond from 2004 baseline level

MFI sustainability indicators show improvementa in 2005-2007 and beyond from 2004 baseline level

Financial services provided other than credit (e.g. savings, microinsurance services, and remittances)

Increase in savings to GDP ratio and savings mobilization in MFIs

Reports NAPC, MCPI, NCC, CDA, and other concerned agencies

Formally adopted or issued policies, regulations, and amended laws

MFI audit reports

DOF monitoring and reporting on fulfillment of policy actions

Progress reporting by ADB missions

Consultants’ reports

ADB post-evaluation report

Assumptions:

Government commitment to policy and institutional reforms

Macroeconomic stability

Active participation of the private sector and the poor


Risks:

Delays in implementation of reforms

Lack of qualified trainers or institutes for large scale capacity building and training

Outputs 1. Enabling policy, legal and regulatory framework for microfinance

Philippine Declaration on

Microfinance issued on initiatives and

Formally adopted policy and action plans of Government

Assumptions:

Sustained Government commitment to policies, strategy, and action

Appendix 1 17


collaborative action among the Government, banking community, cooperative sector, NGO sector, and donor community to promote sustainable microfinance

Adopted policy and regulatory framework for the development of sustainable and efficient microfinance

Phase-out of subsidized, directed credit programs

Regulations and guidelines issued to provide greater flexibility in bank branching for financially sound and well-managed banks

Truth-in-lending introduced to all types of MFIs

Guidelines for truth-in- lending disclosures issued by CDA in line with BSP guidelines

Implementation progress reports and reports on industry consultations

Monitoring and reporting on fulfillment of policy actions by DOF

BSP reports

BIR reports

NAPC free public access website

plan


Active participation of private sector and the poor

Risks:

Political expediency in offering subsidized, directed credit programs

Delays in adopting regulations or amendments

2. Sound prudential regulatory and supervisory regime for MFIs and risk-based supervision for microfinance to ensure protection of poor people’s money

Supervision guidelines developed and issued by BSP for risk-based supervision, and BSP conducting risk- based supervision

Prudential rules and regulations developed and issued for savings and credit cooperatives

Adopted regulations, by-laws, guidelines, chart of account, and accounting systems for MFIs

Financial statements published

BSP and CDA published regulations and instructions

BSP supervision and examination manuals for microfinance

Manual of rules and regulations for savings and credit cooperatives

MFI audit reports and financial statements


Assumptions:

Government committed to policies and regulations, and effective and timely implementation

Risks:

Delay in implementation of reforms

3. Tax regime for microfinance

Bureau of Internal Revenue (BIR) regulations issued specifying tax treatment of microfinance transactions, and clarifying the tax regime for MFIs and other entities engaged in microfinance transactions and activities.

BIR reports and revenue regulations


Assumptions:

Effective and timely implementation of policy reforms

Sustained Government commitment to policies, strategy, and action plan

Risks:

Vested interest groups resist changes in tax treatment

Appendix 1

18


4. Regulatory framework developed to facilitate low cost transfer of remittances from Overseas Filipino Workers (OFWs) to MFIs, including those in remote areas, using cell phone-based technology

Rules and regulations issued for e-banking transactions including e-payment transactions and e-value transfers made though nonbank institutions, including but not limited to, peer-to- peer transfers, remittances, small value transfers, and stored value transfers

Savings mobilization in MFIs increasing (from 2004/2005 base)

BSP, CDA, DOF and Congressional reports


Assumptions:

Effective and timely implementation of policy and legislative reforms

Sustained Government commitment to policies and reforms

Risks:

Delays in adopting regulations or amendments

Vested interests resist opening market for remittance services.

5. Regulatory and supervisory capacities and oversight strengthened for a sound financial sector

Restructure CDA into full regulatory authority

Adequate staffing and training for regulation and supervision of savings and credit cooperatives

CDA, BSP, and SEC capacity building programs in 2005-2007

BSP and CDA supervision and examination manuals for microfinance operations; guidelines; and training materials

Off-site monitoring and on-site supervision of MFIs

Establishment of SEC and CDA databases on MFIs and services

Amendments to Republic Act No. 6939 creating Cooperative Development Authority and RA 6938 Cooperative Code submitted to Congress

BSP, CDA, SEC monitoring and supervision reports

Documentary evidence of establishment of CDA microfinance division and hiring of staff

Manuals, guidelines, and training materials


Assumptions:

Effective and timely implementation

Sustained commitment of Government to policy and institutional reforms

Adequate capacity developed in CDA, SEC, and BSP

Agencies commitment to the regulatory and supervisory regime

Risks:

Delay in implementation of reforms

Delay in passage of legislation

6. Increased efficiencies of MFIs and cost-effective retail delivery of services to the poor

Uniform set of performance standards for MFIs adopted, and increasing number of MFIs using standards (from 2004/2005 base)

Standard chart of accounts adopted, and increasing number of MFIs with SCA (from 2004/2005 base)

Guidelines and model business development services (BDS) issued by NAPC for MFIs

Development of effective models of micro-insurance, savings/ microinvestment

NAPC, BSP, CDA, SEC, DOF, and MCPI reports

Consultant progress reports

Audit reports

Chart of accounts


ADB post evaluation report

Consultant and PPSB progress reports

PPSB Board resolutions; policy documents and reports

Assumptions:

Active participation of industry stakeholders

Effective implementation by MFIs

Strong demand for microfinance services

Quality consulting services

Sustained commitment of Government to privatization

Adequate investor interest

Appendix 1 19


Minimum qualifications and fit and proper standards issued and adopted by savings and credit cooperative board directors and key management

Development and implementation of sustainable systems and procedures in MFIs

PPSB privatization plan submitted to PPSB Board of Directors for approval

Valuation of PPSB completed.


Risks:

MFIs do not perceive full benefits of adopting best practice standards, practices and reporting requirements, or delay implementation

Delay in privatization

Lack of strategic investors

7. Credit Information System for efficient credit markets and access to credit at lower cost

Draft Credit Information System Act submitted to Congress to support establishment of Credit Information Bureau (CIB) including coverage of microfinance sector

Increased access to credit at lower cost to the poor

Reduced credit pollution and overborrowing

BSP, NCC and Congressional reports


NAPC, BSP, CDA, NCC data

Assumptions:

Sustained Government commitment to creating national bureau

Risks:

Delayed passage of legislation, and limited information from interim bureau.

8. National financial literacy program and consumer protection for the poor and users of microfinance

National financial literacy program developed by NAPC and concerned agencies, including gender training and education on consumer protection. Implementation started in 2006.

Number of poor participating in training program. Increased financial literacy among poor and rural communities.

NAPC Annual Report to Congress and concerned agencies reports

National Statistics Office data

Consultants’ reports


ADB post evaluation report

Assumptions:

Effective social mobilization of the poor

Commitment of the poor to participate

Training modules designed effectively for easy learning

Risks:

Lack of outreach due to geographic location and infrastructure

Free public access website established by 2006 including capacity for consumer inquiries and filing complaints

Consumer protection guidebook issued including information on Philippine procedures for filing complaints

Increased consumer protection for the poor and users of microfinance services

Activities with Milestones 1.1 Amendments to Republic Act (RA) 6939 creating Cooperative Development

Authority submitted to Congress (2004/2005) 1.2 Amendments to RA 6938 Cooperative Code submitted to Congress (2004/2005) 1.3 CDA to have effective regulatory powers and authority as cooperative sector

regulatory body (4th Quarter 2006) 2.1 Draft Credit Information System Act submitted to Congress (2005

Inputs

ADB Program Loan: $150 million

ADB Technical Assistance (piggyback):

$500,000

Appendix 1

20

Activities with Milestones Inputs

3.1 Privatization options and action plan submitted to PPSB Board of Directors (4th Quarter 2006)

3.2 Financial assessment and valuation of PPSB completed (4th Quarter 2006) 4.1 BSP draft regulation prepared to provide greater flexibility in bank branching for

financially sound and well-managed banks (4th Quarter 2005) 4.2 BSP regulation issued to provide greater flexibility in bank branching for financially

sound and well-managed banks (4th Quarter 2006) 5.1 BSP guidelines issued for pilot of risk-based supervision (4th Quarter 2005) 5.2 BSP conducting risk-based supervision (4th Quarter 2006) 6.1 Draft prudential rules and regulations for savings and credit cooperatives prepared

by CDA and DOF, and regional consultations commenced (4th Quarter 2005) 6.2 CDA to issue prudential rules an regulations for credit and savings cooperatives

(4th Quarter 2006) 7.1 Rules and regulations issued by BSP to facilitate low-cost transfer of remittances

from OFWs to MFIs, including in remote areas (e-banking transactions including e-payment transactions and e-value transfers made through nonbank institutions including, but not limited to, peer-to-peer transfers, remittances, small value transfers, and stored value transfers) (4th Quarter 2006)

8.1 Scope for national financial literacy program, including gender education and consumer protection, developed (4th Quarter 2005)

8.2 Implementation started for national financial literacy program including gender education and consumer protection (3rd Quarter 2006)

9.1 Information campaign launched for NAPC free public access website (2nd Quarter 2006)

9.2 Completion of free public access website to support consumer protection, including capacity for filing complaints for (i) failure to meet truth-in-lending disclosure requirements, (ii) non-compliance with insurance law, and (iii) other areas as designated by NAPC. NAPC to submit complaints to relevant authorities

9.3 NAPC to publish annually information on free public access website including number of complaints received in NAPC’s Annual Report to Congress (2006/ongoing)

10.1 Stakeholder consultations on consumer protection guidebook for the poor and users of microfinance services (2nd–3rd Quarter 2006)

10.2 Consumer protection guidebook for the poor and users of microfinance services issued, including information on Philippines’ procedures for filing consumer complaints (4th quarter 2006)

11.1 SEC administrative orders/regulation issued under the Corporation Code requiring nongovernment organizations that conduct microfinance activities to disclose this information to SEC (3rd Quarter 2006)

12.1 Guidelines and model BDS manuals issued by NAPC for widespread dissemination and distribution including free access on NAPC website (1st Quarter 2007)

ADB TA Support (TA 4544; TA 3847)

ADB Mission reviews

ADB monthly monitoring and dialogue with Government

Government counterpart funding

Sector reports and data from concerned agencies

Active participation of private sector and the poor in training seminars and programs.

a ADB. 2003. Selected Monitoring Indicators for Microfinance Projects. Manila.

Appe

ndix 2 21

POLICY MATRIX

Core Conditions and Related Monitorable Actions

First Tranche Second Tranchea I. Enhancing the enabling policy and regulatory environment by removing regulatory impediments and policy distortions to promote market

efficiencies and increased outreach of services at competitive prices to the poor Philippine Declaration on Microfinance towards fulfilling the United Nations’ Millennium Development Goals (MDGs) and the Philippine Medium-Term Development Plan

A.1 Philippine Declaration on Microfinanceb issued on initiatives to promote microfinance as an effective tool for reducing poverty, and commitments for cooperative and collaborative action among Government, the Banking Community, the Cooperative Sector, the NGO Sector and the Donor Community to achieve increased outreach, impact and sustainability.

B.1. Government monitoring of progress of initiatives and commitments under the Philippine Declaration on Microfinance to promote microfinance as an effective tool for reducing poverty with commitments for cooperative and collaborative action among Government, the Banking Community, the Cooperative Sector, the NGO Sector and the Donor Community to achieve increased outreach, impact and sustainability.

Remove regulatory impediments to competitive, robust microfinance sector, and open bank branching for financially sound and well-managed banks

A.2 Bangko Sentral ng Pilipinas (BSP) completed Phase I stakeholder consultations for greater flexibility in bank branching for financially sound and well-managed banks, including those catering to the micro, small and medium enterprises.

B.2.* Based upon results of exposure of draft regulation to industry, BSP to issue regulation(s) and related guidelines providing greater flexibility in bank branching for financially sound and well-managed banks, including those catering to the micro, small

A program loan of $150 million supported the Government’s implementation of the Microfinance Development Program (MDP). Impact: Improved household incomes and reduced poverty and vulnerability of the poor Outcome: A sustainable, diverse, and market-oriented microfinance sector with expanded outreach to the poor of a wider range of services at competitive prices. At a macroeconomic level, the MDP will deepen the financial sector and provide greater financial intermediation. Outputs: Program outputs include the following key components:

I. enhancing the enabling policy and regulatory environment and removing regulatory impediments and policy distortions to promote market efficiency and increasing outreach to the poor of services at competitive prices;

II. building viable microfinance institutions (MFIs) that can provide efficient and cost-effective retail delivery of sustainable financial services to the poor;

III. strengthening regulatory and supervisory capacity and oversight for a sound microfinance sector; and IV. increasing financial literacy and consumer protection for the poor.

22 Appen

dix 2

Core Conditions and Related Monitorable Actions First Tranche Second Tranchea

Draft regulation approved by Monetary Board for exposure to industry.

and medium enterprises.

Introduce Truth-in-Lending to all types of microfinance institutions (MFIs) for transparency and disclosure of costs of borrowing to the poor

A.3. Guidelines for truth-in-lending disclosures for savings and credit cooperatives prepared by Department of Finance (DOF) and Cooperative Development Authority (CDA) in line with BSP guidelines for truth-in-lending for effective disclosure of costs of borrowing to borrowers. Industry Advisory issued by the National Anti-Poverty Commission (NAPC) on requirements under the Truth-in-Lending Law and truth-in-lending disclosures to be made borrowers. Industry Advisory to be posted on NAPC’s free public access website, distributed to industry associations, local government units (LGUs), consumer and basic sector groups, and sent by direct mailings to MFIs.

B.3.* Conduct of public consultations to be completed by DOF and CDA. Guidelines for truth-in-lending disclosures issued by CDA based upon consultations for cooperative sector in line with BSP truth-in-lending guidelines. CDA to ensure effective compliance of cooperatives in truth-in-lending disclosure to borrowers. NAPC to ensure that microfinance sector stakeholders receive Industry Advisory on requirements under the Truth-in-Lending Law and truth-in-lending disclosures to borrowers. Industry Advisory to be posted on NAPC’s free public access website, and distributed to industry associations, LGUs, consumer and basic sector groups, and sent by direct mailings to MFIs.

Adopt and implement regulatory framework for the microfinance sector and increase transparency and disclosure of MFIs and public access to information

A.4. National Credit Council (NCC) regulatory framework for MFIs developed and adopted by authorities to promote financial soundness of the microfinance sector, to protect small clients, and promote the establishment of an accurate, reliable and transparent set of financial information for all types of MFIs. Microfinance sector database established by NAPC covering all types of institutions

B.4.* Securities and Exchange Commission (SEC) to issue Administrative Order/Regulation under the Corporation Code (i) requiring nongovernment organizations (NGOs) providing microfinance and other related financial services to disclose this information to SEC by filing within 30 days of issuance of Administrative Order/ Regulation a revised General Information Sheet (GIS) and if necessary, filing amended Articles of Incorporation; and (ii) authorizing a revised GIS form that includes a specific area for marking if the NGO conducts any microfinance operations. NAPC to maintain and develop sector database on institutions conducting

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conducting microfinance including banks, cooperatives and NGOs. Sector data published on NAPC’s free public access website and Annual Report. SEC to begin preparations for facilities to allow for electronic filing of annual GIS forms and annual financial statements by NGO MFIs. SEC to make available to NAPC all GIS forms that indicate microfinance operations are being conducted by an NGO.

microfinance including banks, cooperatives and NGOs, and publish data on NAPC’s free public access website and in NAPC Annual Reports. SEC facilities established to allow for electronic filing of annual GIS forms and annual financial statements by NGO MFIs. SEC to make available to NAPC all GIS forms that indicate microfinance operations are being conducted by an NGO. CDA to complete Phase I of the CDA Project to establish database for public and internal access on savings and credit cooperatives, and install advanced registration and management information systems for savings and credit cooperatives.

Establish clear tax treatment of microfinance transactions and develop fair and consistent tax regime for microfinance sector

A.5. Bureau of Internal Revenue (BIR) Directivec issued for examination of tax treatment of MFIs and other entities engaged in microfinance transactions and activities.

B.5.* Based upon examination results and BIR evaluation report, BIR to issue Revenue Regulations clarifying the tax regime for MFIs and other entities engaged in microfinance transactions and activities, and specifying definitions of a party engaged in microfinance operations and a microfinance transaction; the tax treatment of microfinance transactions; and the tax status of NGOs engaged in microfinance operations.

Develop regulatory framework to support low cost transfer of Overseas Filipino Workers (OFW) remittances to MFIs, including in remote areas, using cell phone-based technology

A.6. To facilitate remittance flows to the Philippines, BSP regulationd issued on rules and regulations for registration and operations of foreign exchange dealers/money changers and remittance agents, which are qualified persons or non-bank institutions.

B.6.* To facilitate financial transactions for small clients and the use of technological applications that lower the cost of transfers and payments, including remittances to MFIs in remote areas, BSP to issue rules and regulations for e-banking transactions including e-payment transactions and e-value transfers made through non-bank institutions including, but not limited to, peer-to-peer transfers, remittances, small value transfers,

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and stored value transfers. II. Build viable MFIs that can provide efficient and cost-effective retail delivery of services to the poor Establish performance standards for MFIs to promote efficient and cost-effective delivery of services

A.7. Memorandum of Agreement (MOA) signede among government regulatory agencies, government financial institutions (GFIs), and other stakeholders to adopt and implement NCC performance standards for MFIs, effective immediately. Standards include credit risk management; operational efficiency; financial efficiency; and stability standards based on international best practices.

B.7. Government regulatory agencies, GFIs, and other stakeholders to ensure implementation of NCC performance standards. CDA to undertake capacity building to increase oversight of compliance by savings and credit cooperatives with CDA performance standard requirements.

Establish minimum qualifications and fit and proper standards for board directors and key management and establish ongoing training requirements for officers and directors

A.8. Minimum qualifications and fit and proper standards for savings and credit cooperative board directors and key management developed by CDA and DOF including education, diligence, experience and training.

B.8.* Conduct of public consultations to be completed by DOF and CDA. CDA to issue regulations based upon consultations for minimum qualifications and fit and proper standards for savings and credit cooperative board directors and key management including requirements for education, diligence, experience and training. Ongoing training requirements to be issued by CDA for officers and directors of savings and credit cooperatives, including continuous training at an accredited organization of the BSP and/or CDA.

Develop MFI internal management systems for efficient and sound operations of savings and credit cooperatives

A.9. Requirements for mandatory committees for effective operations of savings and credit cooperatives developed by DOF and CDA including audit; credit; election; education/training and membership; and ethics, mediation and conciliation.

B.9. Conduct of public consultations to be completed by DOF and CDA. Requirements to be issued by CDA based upon consultations for mandatory committees including audit; credit; election; education/training and membership; and ethics, mediation and conciliation.

Establish credit information system for efficient credit markets and access to credit at lower cost

A.10. Credit Information System Billf drafted and submitted to Congress to support establishment of a credit information system and a central credit information bureau (CIB) for a sound, robust credit market including

B.10. CDA to issue Directive requiring savings and credit cooperatives to collect credit information on microfinance clients for credit information system for microfinance sector.

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microfinance, and to facilitate access to credit at lower cost.

Promote expansion of business development services (BDS) for the poor for improved livelihood and micro-enterprise performance and effective utilization of microfinance

A.11. To promote expansion of MFI BDS for the poor, NAPC in cooperation with the Department of Trade and Industry (DTI), livelihood agencies and other BDS providers, to begin development of guidelines and model BDS manuals for widespread dissemination and distribution. Impact assessment concluded by National Commission on the Role of Filipino Women (NCRFW) and National Anti-Poverty Commission (NAPC) Women’s Sectoral Councilg on impact of microfinance on women’s empowerment, and the need for coupling access to microfinance with provision of BDS.

B.11. NAPC in cooperation with DTI and private sector BDS providers, to issue guidelines and model BDS manuals for widespread dissemination and distribution to interested parties, including free access on NAPC website.

Adopt and develop lending models and savings and insurance schemes for sound expansion of microfinance services

A.12. NAPC to initiate assessment of lending, savings and insurance schemes in the Philippines to promote adoption and development of sound, sustainable microfinance schemes, including micro-insurance and savings/microinvestment, in consonance with existing laws, regulations and policies to ensure soundness of the microfinance sector and protection of the consumer.

B.12 Based upon assessment and stakeholder consultations, NAPC to issue Industry Advisory to promote adoption of sound, sustainable microfinance schemes, including microinsurance and savings/ microinvestment, in consonance with existing laws, regulations and policies to ensure soundness of the microfinance sector and protection of the consumer.

Privatization options for Philippine Postal Savings Bank (PPSB) to increase efficiency and outreach in rural areas

A.13. DOF Privatization and Management Office (PMO) announcement of PPSB as privatization candidate for 2006. Examination of privatization options for PPSB initiated by PMO. PMO designated as disposition or marketing entity by the Privatization Council.h

B.13.* Financial assessment and valuation of PPSB to be completed. Privatization options and action plans for PPSB, including financial assessment and valuation of PPSB, to be submitted to, and considered by, PPSB Board of Directors.

III. Strengthen regulatory and supervisory capacities and oversight authorities for a sound microfinance sector Provide effective authority and powers to CDA to ensure financial soundness and good governance of cooperative sector

A.14. Draft amendmentsi prepared for the Cooperative Development Authority Republic Act No. 6939 Law. Draft amendments

B.14. CDA to develop and submit to Authorities, for approval, reorganization plan to strengthen CDA regulatory oversight of

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submitted to Congress including: (i) authorization for restructuring of CDA; (ii) amendment of the powers and functions

of the CDA to include the power to approve and implement standards, rules and regulations, and guidelines for the various types of cooperatives under its jurisdiction; and

(iii) joint regulation of cooperative banks by CDA and BSP.

Draft amendments prepared for Republic Act No. 6938 The Cooperative Code of the Philippines. Draft amendmentsj submitted to Congress including: (i) recognition of existence of financial

services cooperatives; (ii) requirement for conduct of pre-

membership education seminar (PMES) prior to organization of a new primary cooperative;

(iii) expanded provisions for governance and transparency;

(iv) conduct of performance audits for cooperatives; and

(v) expanded coverage of cooperative banks, credit and financial service cooperatives, and housing cooperatives.

cooperatives engaged in savings and credit services, including the identification of the appropriate CDA office(s) to monitor financial performance of savings and credit cooperatives.

Strengthen framework and regulatory and oversight functions of CDA over the cooperative sector, and adopt standard chart of accounts

A.15. Presidential Executive Order issued to transfer CDA from Office of the President to DOF to strengthen regulatory and oversight functions of CDA over the cooperative sector.k Undersecretary for Domestic Finance Group designated to monitor CDA operations and act as DOF representative in CDA Board of Administrators meetings. CDA transferred to DOF as an attached agency, with DOF powers over CDA including:

B.15. DOF to oversee CDA policies and directions, and provide appropriate guidance. CDA to ensure adoption of Standard Chart of Accounts (SCA) by savings and credit cooperatives for effective regulatory oversight.

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(i) DOF representation in the governing

board; (ii) Setting of general policies through the

DOF representative in CDA Board, which shall serve as the framework for internal policies of CDA, and

(iii) DOF administrative supervision of CDA. CDA to begin implementation for adoption of Standard Chart of Accounts (SCA) by savings and credit cooperatives for effective regulatory oversight

Develop prudential rules and regulations for savings and credit cooperatives to ensure safe and sound operations and to protect the investments and savings of the poor

A.16. Draft Manual of Prudential Rules and Regulations for deposit-taking credit and savings cooperatives developed by CDA in collaboration with the NCC-DOF, BSP, other relevant government agencies, and major federations of cooperatives. Regional stakeholder consultations on rules and regulations commenced by CDA and DOF.

B.16.* Conduct of public consultations to be completed by DOF and CDA. CDA to issue Manual of Prudential Rules and Regulations based upon consultations for deposit-taking savings and credit cooperatives. Manual to provide comprehensive authority for rules and regulations to implement provisions of RA 6938 and RA 6939 and other existing laws that will govern the operations of cooperatives with savings and credit operations.l

Increase transparency and timeliness of data for effective conduct of supervision

A.17. To increase transparency and timely information for effective sector oversight, reportorial requirements prepared by DOF and CDA for savings and credit cooperatives, including quarterly reporting to authorities on financial condition and operations and internal maintenance of monthly reports.

B.17. Conduct of public consultations to be completed by DOF and CDA. Reportorial requirements to be issued by CDA based upon consultations for savings and credit cooperatives including quarterly reporting to authorities on financial condition and operations and internal maintenance of monthly reports.

Adopt risk-based supervision for microfinance to ensure effective risk management and internal controls

A.18. Risk-based supervision for microfinance adopted by BSP, and capacity building program implemented for BSP examiners. Supervision and examination manuals developed and adopted for supervising banks engaged in microfinance.

B.18.* BSP conducting risk-based supervision for microfinance operations and capacity building program for BSP staff for effective risk-based supervision.

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Supervision guidelines issued by BSP to pilot risk-based supervision.

Strengthen governance and enhance rules on audit and risk management committees for safe and sound conduct of business

A.19. BSP regulations issued on (i) duties and responsibilities of board of directors for Audit Committee, Corporate Governance Committee, and Risk Management Committee including requirements for independent directors and written charters defining committees’ duties and responsibilities; and (ii) sanctions in event of bank, quasi-bank or trust entity conducting business in an unsafe and unsound manner.m Implementation started for establishment of Audit, Corporate Governance and Risk Management Committees, and sanctions in event of conduct of business in unsafe and unsound manner.

B.19. BSP to ensure implementation of requirements for Audit, Corporate Governance and Risk Management Committees and safe and sound conduct of business.

Develop scope of examination for solvency and liquidity and independent auditors requirements

A.20. BSP regulations issued on (i) scope of examination to determine a bank’s solvency and liquidity position, risk management, and compliance with laws and regulations; (ii) bank controls to determine allowance for probable losses on loans and other assets consistent with safe and sound banking practice and (iii) requirements for external independent auditors and reporting on internal control and risk management systems.n

Implementation started for conduct of risk management and provisioning of reserves, and requirements for external independent auditors and reporting on internal control and risk management systems for safe and sound banking,

B.20. BSP to ensure conduct of risk management and provisioning of reserves, implementation of bank controls to determine allowance for probable losses, requirements for external independent auditors, and reporting on internal control and risk management systems for safe and sound banking.

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IV. Increase financial literacy and consumer protection for the poor Increase financial literacy and gender training to empower the poor and reduce vulnerability

A.21. To promote financial literacy of the poor, scope and strategy for a national financial literacy program prepared by NAPC, in consultation with concerned agencies, including gender training and consumer protection. Regional training on Gender in Microfinance conducted by NAPC.

B.21.* NAPC to implement sustainable national program for financial literacy, including gender training and consumer protection, in collaboration with concerned agencies, LGUs, and microfinance training institutions. NAPC to report annually on program implementation and publish results in NAPC Annual Report.

Strengthen consumer protection for the poor and users of microfinance services

A.22. To support consumer protection for the poor and users of microfinance services, NAPC has commenced review of relevant laws and regulations to prepare, in consultation with concerned agencies, a consumer protection guidebook for the poor and microfinance sector.

B.22.* NAPC to (a) issue, in consultation with concerned agencies, a guidebook on consumer protection for the poor and users of microfinance services, including information on Philippines’ procedures for filing consumer complaints; and (b) publish the guidebook on NAPC’s free public access website and distribute it to industry associations, LGUs, MFIs and consumer and basic sectors groups.

Establish free public access website to support consumer protection and provide consumer action channel for the poor

A.23. Improvement in NAPC website initiated to support consumer protection via free public access website. Truth in Lending Law and Insurance Law posted on NAPC website to promote awareness of laws and compliance in microfinance sector.

Industry Advisory issued by NAPC on requirements under the Insurance Law and requirements for offering insurance products. Industry Advisory posted on NAPC’s free public access website, distributed to industry associations, LGUs, consumer and basic sector groups, and sent by direct mailings to MFIs.

B.23.* Development of free public access website completed by NAPC and operating to support consumer protection, including capacity for the public to file complaints online for (i) failure to meet truth-in-lending disclosure requirements; (ii) non-compliance with insurance law; and (iii) other areas as identified by NAPC. NAPC to submit complaints to relevant authorities, and number of complaints received to be published annually in NAPC’s Annual Report. NAPC to ensure that microfinance sector stakeholders receive Industry Advisory on requirements under the Insurance Law and requirements for offering insurance products. Advisory to be posted on NAPC’s free public access website, and distributed to industry associations, LGUs, consumer and basic

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sector groups, and sent by direct mailings to MFIs.

MFIs to establish compliance officers to ensure compliance with laws and regulations and increase consumer protection

A.24. Draft regulation prepared by DOF and CDA requiring savings and credit cooperatives to designate officer as compliance officer responsible for coop compliance with applicable laws and regulations.

BSP requirements for bank officers designated as compliance officers responsible for bank compliance with applicable laws and regulations expanded to include training that encompasses additional related materials specific to microfinance activities.

B.24. Conduct of public consultations to be completed by DOF and CDA. CDA to issue regulation requiring savings and credit cooperatives to designate officer as compliance officer responsible for coop compliance with applicable laws and regulations. CDA to establish training program for compliance officers. Specified transition period for officers to complete training included in regulation to ensure effective compliance.

a Core conditions denoted with *. b Issued by the Government on 10 October 2005 at the Philippine National Summit on Microfinance. c Revenue Special Order No. 493-2005, dated 26 September 2005. d Bangko Sentral ng Pilipinas (BSP) Circular No. 471, dated 24 January 2005. e Memorandum of agreement signed by the Government on 10 October 2005 at the Philippine National Summit on Microfinance. f House Bill Number 4356, Credit Information System Act. g Impact study reported to the President of the Republic of the Philippines at the NAPC Special En Banc Meeting on 5 July 2005. h The Privatization Council is the cabinet-level body to oversee the Philippine Government’s privatization program. i Consolidation of Senate Bills Numbered 193, 276, 843, and 1043, prepared by the Committees on Cooperatives, Ways and Means, Civil Service and

Government Reorganization, and Finance. j House Bill No. 4602 is a consolidation of House Bills Numbered 699, 1074,123,1360, 1597, 1954, 2501, and 2915. k Presidential Executive Order No. 332, issued 16 July 2004. l As the manual comprehensive authority on rules and regulations, any changes to laws, circulars or issuance, shall subsequently be integrated and form part of

the manual, while repealed rules shall be deleted so that the user of the manual shall no longer refer to separate issuance but shall instead cite sections of the ,manual.

m BSP Circular No. 434, dated 18 May 2004, and BSP Circular No. 456, dated 4 October 2004 and effective January 2005. n BSP Circular No. 442, dated 20 July 2004; BSP Circular No. 463, dated 29 December 2004 and effective January 2005; and BSP Circular No. 474, dated

February 2005.

Appendix 3

31

Status of Compliance with Loan Covenants

Covenant

Reference in Loan Agreement

Status of Compliance

Core Conditions 1. Based upon the results of exposure of draft regulation to industry, BSP shall have issued regulation and related guidelines to provide greater flexibility in bank branching for financially sound and well-managed banks, including those catering to the micro, small and medium enterprises.

(LA Att.2 Sch. 3 para. 1)

Complied with BSP letter of 13 June 2006 to ADB

2. The Borrower shall have ensured that: (i) DOF and CDA have completed public consultations, CDA has issued guidelines for truth-in-lending disclosures for the cooperative sector in line with BSP truth-in-lending guidelines for effective disclosure of costs of borrowing to borrowers; and (ii) CDA is ensuring effective compliance of cooperatives in truth-in-lending disclosure to borrowers. NAPC (i) is causing microfinance sector stakeholders to receive its industry advisory on requirements under the Borrower's Truth-in-Lending Law and truth-in-lending disclosures to borrowers (the industry advisory), and (ii) has posted the industry advisory on its free public access website, and distributed to industry associations, local government units (LGUs), consumer and basic sector groups, and sent by direct mailings to MFIs.

(LA Att.2 Sch. 3 para. 2a) (LA Att. 2 Sch. 3 para. 2b)

Complied with Complied with

3. The Borrower shall have ensured that: (a) the Securities and Exchange Commission (SEC) has issued an Administrative Order/Regulation under the Borrower's Corporation Code (i) requiring non-government organizations (NGOs) which provide microfinance and other related financial services to disclose this information to SEC by filing within 30 days of issuance of the Administrative Order/ Regulation, a revised General Information Sheet (GIS) and if necessary, filing amended Articles of Incorporation; and (ii) authorizing a revised GIS form that includes a specific area for marking if the NGO conducts any microfinance operations; (b) the SEC is making available to NAPC a copy of all GIS forms that indicate microfinance operations are being conducted by an NGO.

(LA Att.2. Sch.3 para. 3a) (LA Att.2 Sch.3 para. 3b) (LA Att. 2 Sch.3

Complied with Memo Circular No. 2 on microfinance operations of NGOs was issued on 18 Jan 2006. Memo Circular No. 9 of 29 June 2006 was issued requiring all domestic non-stock corporations to use the revised GIS forms. The form includes a specific area for marking if they are engaged in microfinance business (deposits, loans, money transfer, insurance products, payment services, and others).

32 Appendix 3

Covenant



(c) NAPC is maintaining and developing a sector database of institutions conducting microfinance including banks, cooperatives and NGOs, and publish data on NAPC’s free public access website and in NAPC Annual Reports; (d) the SEC has established and is maintaining facilities to allow for electronic filing of annual GIS forms and annual financial statements by NGO MFIs; and (e) CDA has completed Phase One of the CDA Project to establish a database for public and internal access on savings and credit cooperatives, and install advanced registration and management information systems for savings and credit cooperatives.

paras. 3c) (LA Att. 2 Sch. 3 para. 3d) (LA Att. 2 Sch. 3 Para. 3e)

Completed per Memo Circulars 2 and 9. Database developed and updated and posted at the NAPC website Complied with Being implemented under JFPR 9070 (Philippine Business Registry)

4. The Borrower shall have ensured that based upon examination results and BIR evaluation report, BIR has issued Revenue Regulations clarifying the tax regime for microfinance institutions and specifying definitions of a party engaged in microfinance operations and microfinance transaction; the tax treatment of microfinance transactions; and the tax status of NGOs engaged in microfinance operations.


Complied with

5. BSP shall have issued rules and regulations for e-banking transactions including requirements for e-payment transactions and e-value transfers made through non-bank institutions including, but not limited to, peer-to-peer transfers, remittances, small value transfers to facilitate financial transactions for small clients and the use of technological applications that lower the cost of transfers and payments, including remittances to MFIs in remote areas.

(LA Att. 2 Sch 3 para. 5)

Complied with

6. The Borrower shall have ensured that (a) DOF and CDA have completed public consultations and (b) CDA has issued: (i) Regulations for minimum qualifications and fit and proper standards for savings and credit cooperative board directors and key management including requirements for education levels, diligence, experience and training; and (ii) ongoing training requirements for officers and directors of savings and credit cooperatives, including continuous training at an accredited organization of the BSP and/or CDA.


Complied with Conducted six public hearings on the manual of rules and regulations and 12 regional consultations in February 2006. The draft manual including requirements for minimum qualification and fit-and-proper training at an accredited organization of the BSP and/or CDA.

Appendix 3

33

Covenant



7. The Borrower shall have ensured that: (a) the financial assessment and valuation of PPSB has been completed, and (b) privatization options and action plans for PPSB including financial assessment and valuation of PPSB, shall have been submitted to, and considered by, the PPSB Board of Directors.


Complied with Financial assessment and valuation have been undertaken by the Privatization and Management Office financial advisor based on the latest financial statement, which was discussed by the PPSB Board on 9 October 2007.

8. The Borrower shall have ensured that: (a) DOF and CDA have completed public consultations, and (b) CDA has issued a manual of prudential rules and regulations based upon consultations for deposit-taking savings and credit cooperatives to provide comprehensive authority for rules and regulations to implement provisions of RA 6938 and RA 6939 and other existing laws of the Borrower that will govern the operations of cooperatives with savings and credit operations.


Complied with DOF and CDA conducted regional consultation workshops from August to December 2005. In February 2006, six public hearings were conducted.

9. BSP conducting risk-based supervision for microfinance operations and a capacity building program for BSP staff for effective risk-based supervision.

(LA Att. 2 Sch. 3 para. 9)

Completed. BSP conducted a 6-week structured training in February 2005 with 136 participants from the supervision and examination sector attending.

10. The Borrower shall have ensured that NAPC is (a) implementing a sustainable national program for financial literacy, including gender training and consumer protection, in collaboration with concerned agencies, local government units (LGUs), and microfinance training institutions; and (b) reporting annually on program implementation and is publishing the results in NAPC Annual Report.

(LA Att. 2 Sch. 3 para. 10)

Complied with Part of activities have been undertaken under the MDP TA.

11. The Borrower shall ensure that NAPC has (a) issue, in consultation with concerned agencies of the Borrower, a guidebook on consumer protection for the poor and users of microfinance services, including information on Philippines’ procedures for filing consumer complaints; and (b) publish the guidebook on NAPC’s free public access website and distributed it to relevant industry associations, LGUs, MFIs and consumer and basic sectors groups.

(LA Att. 2 Sch 3 para. 11)

Complied with

34 Appendix 3

Covenant



12. The Borrower shall have ensured that: (a) the free public access channel on NAPC website is operating to support consumer protection, including capacity for the public to file complaints online for (i) failure to meet truth-in-lending disclosure requirements; (ii) non-compliance with insurance law of the Borrower; and (iii) other areas as identified by NAPC. (b) (b) NAPC submitting complaints to relevant authorities of the Borrower and publishing the number of complaints received annually in NAPC’s Annual Report; and (c) NAPC is ensuring that the industry advisory on Insurance Law of the Borrower and requirements for offering insurance products (i) is being received by stakeholders in the microfinance sector, and (ii) is posted on NAPC’s free access website, and made available for distribution to industry associations, and consumer and basic sector groups and sent by direct mailings to MFIs.

(LA Att. 2 Sch. 3 paras. 12a to c)

Complied with NAPC developed the website with assistance from MDP TA. but it did not receive any complaint until October 2008, when the NAPC server could not sustain the web operation any more due to its capacity constraint. NAPC is currently enhancing its data system.

Project Implementation and other Matters Use of Counterpart Funds 1. The Borrower shall ensure that the Counterpart Funds shall be used to finance the costs relating to the implementation of the Program and other activities consistent with the objectives of the Program, as more fully described under paragraph 1 of Schedule 1 to this Loan Agreement and the Policy Letter and shall, in particular, provide necessary budget appropriations to finance the structural adjustment costs relating to the implementation of the reforms under the Program. 2. The Borrower shall, during the Program period, cause the DOF and Implementing Agencies to prepare an annual work plan for the next year and shall ensure that during each year of the Program implementation, adequate budgetary allocation of required Counterpart Funds is made and such funds are released by the relevant authorities on a timely and regular basis to facilitate Program implementation.

(LA Sch. 5 paras. 1 to 2)

Complied with

Program Implementation 3. Except as the Borrower and ADB may otherwise agree:

Appendix 3

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Covenant



(a) DOF, as the Program Executing Agency, shall be responsible for implementation of the Program including administration and disbursement of loan proceeds, maintenance of accounts, and preparation of quarterly progress reports; (b) the NCC Secretariat shall act as the Program Management Unit (PMU) and shall be responsible for the day-to-day implementation of the Program and coordinate activities among the Implementing Agencies; (c) BIR, BSP, CDA, NAPC, PPSB, and SEC shall be the Implementing Agencies and shall be responsible for the implementation of their related parts of the Program. Technical staff from the Implementing Agencies shall provide assistance to the PMU as required; and (d) an interagency committee, chaired by the DOF and comprising senior level staff from the National Economic and Development Authority of the Borrower and each of the Implementing Agencies shall be established to facilitate Program implementation and agency coordination, shall meet regularly and when appropriate, shall invite ADB to observe the meetings.

(LA Sch. 5 paras. 3a to 3d)

Complied with

4. The Borrower shall ensure that coordination between the activities under the Program and the Technical Assistance and the consultants’ work is undertaken and that recommendations provided under the Technical Assistance are taken into account in implementing the Program.

(LA Sch. 5 para. 4)

Complied with

Implementation of the Policy Letter and Policy Matrix 5. The Borrower shall: (a) ensure that the policies adopted and actions taken as described in the Policy Letter prior to the date of this Loan Agreement continue to be in effect during the Program Period; (b) adopt the other policies and take other actions included in the Program as specified in the Policy Letter and the Policy Matrix in a timely manner, and ensure that such policies and actions continue to be in effect; and (c) ensure that inclusive social planning for benefits under the Program is undertaken through (i) the NAPC and the Borrower’s KALAHI program (Kapit Bisig Laban sa Kahirapan or Joining Arms Together Against Poverty) by providing a voice to indigenous peoples and other disadvantages groups, in policy making and poverty reduction activities; and

(LA Sch. 5 para. 5)

Complied with

36 Appendix 3

Covenant



(ii) direct field research, surveys and consultations with the poor and disadvantaged. Policy and Sector Dialogue 6. The Borrower shall keep ADB informed of, and the Borrower and ADB shall, from time to time, engage in active policy dialogue on sector issues, policy reforms, and other measures during the Program Period and on additional reforms that may be considered necessary or desirable, and exchange views on, the progress made in carrying out the policies and actions set out in the Policy Letter and the Policy Matrix. 7. The Borrower shall promptly discuss with ADB problems and constraints encountered during implementation of the Program and adopt appropriate measures to overcome or mitigate such problems and constraints in a timely manner. 8. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral agencies that have implications for implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower shall take ADB's views into consideration before finalizing and implementing any such proposals.


Complied with

Reporting 9. Pursuant to Section 7.04 of the Loan Regulations and Section 4.05(b) of this Loan Agreement, the Borrower shall cause DOF to submit the semiannual reports to ADB within 20 days from the end of each semester. The reports shall, as a minimum, include descriptions of the progress made during the last six months, changes to the implementation schedule, problems and/or issues encountered and remedial actions taken, and the work to be undertaken in the following period. 10. At the end of the Program, the Borrower shall cause DOF to submit the completion report to ADB covering the Program, within three months of completion of the Program conditions pursuant to Section 7.04(d) of the Loan Regulations. 11. The Borrower shall ensure forensic accounting capability to ensure tracking of funds flow and effective identification of corruption, if any, in the implementation of the Program. ADB retains the right


Complied with

Appendix 3

37

Covenant



to (a) audit any account relating to the Program; and (b) verify the validity of the certification issued by the Borrower for each withdrawal application. Social Safeguards 12. The Borrower shall ensure that measures to promote the participation of women and ethnic minorities in the Program are undertaken and that equitable opportunities are provided to women and indigenous peoples to undertake or be involved in activities conducted under the Program, including measures to address their special needs, to encourage women and ethnic minorities to be participants in initiatives in outreach and training, to be appointed as PMU staff, and be involved in the monitoring activities, in accordance with ADB’s Policy on Gender and Development (1998) and Policy on Indigenous Peoples (2003).

(LA Sch. 5 para. 12)

Complied with

Project Performance Management and Reviews 13. The Borrower shall: (a) cause DOF and each of the relevant Implementing Agencies to (i) collect benchmark or baseline data for specific Program performance indicators, as agreed with ADB; (ii) continually assess the Program impact; and (iii) carry out monitoring and evaluation of the Program in accordance with agreements reached with ADB, including facilitating consultation with relevant agencies, civil society, and other key stakeholders as appropriate; (b) assist and support monitoring and evaluation by facilitating consultations with relevant agencies of the Borrower and key stakeholders as appropriate; and (c) ensure that benefits from inclusive social planning under the Program are monitored and evaluated through (i) the NAPC and the Borrower’s KALAHI program; and (ii) direct field research, surveys, and consultations with the poor and disadvantaged. 14. Annual PPM reports shall be prepared by DOF and each of the Implementing Agencies, consolidated by DOF and submitted to ADB in a timely manner. 15. At such time or times as the Borrower and ADB shall agree, joint reviews shall be carried out concerning the Borrower’s progress in implementing the policy reforms set out in the Policy Letter and Policy Matrix, including, in particular, the fulfillment of the Tranche conditions. To facilitate these reviews, DOF and Implementing Agencies shall provide ADB with relevant information, in addition to the reports and information. These reviews shall form the basis


Complied with

38 Appendix 3

Covenant



for discussions between the Borrower and ADB on further measures that may be considered necessary or desirable to promote the continued reforms. ADB = Asian Development Bank, BSP = Bangko Sentral ng Pilipinas, CDA = Cooperative Development Authority, DOF = Department of Finance, LGU = local government unit, MDP = Microfinance Development Program, MFI = microfinance institution, NAPC = National Anti-Poverty Commission, NCC = National Credit Council, PPSB = Philippine Postal Savings Bank, TA = technical assistance.

Appendix 4 39

TECHNICAL ASSISTANCE COMPLETION REPORT Division: SEFM

TA No., Country and Name Amount Approved: US$500,000

TA 4693-PHI: Microfinance Development Program Revised Amount:

Executing Agency: Department of Finance

Source of Funding: JSF Amount Undisbursed: $27,892.60

Amount Utilized: $472, 017.40

TA Approval Date: 21/11/05

TA Signing Date: 12/04/06

Fielding of First Consultant{s}: 03/12/06

TA Completion Date Original: 31/12/07

Actual: 30/12/08

Account Closing Date Original: 31/12/07

Actual: 17/02/09

Description The objective of the TA was to (i) promote financial literacy and help the Government develop a national financial literacy program for the poor and users of microfinance services; (ii) build viable microfinance institutions (MFIs) that can provide efficient and cost effective retail delivery of services to the poor and (iii) establish a consumer protection framework to reduce vulnerability of the poor to illegal and unsound practices. Expected Impact, Outcome and Outputs Expected impact was the increased efficiency of MFIs through the following two outputs;

(i) development of training modules on the uniform set of MFI performance standards to promote adoption by MFIs, and to provide effective tools for training regulators, MFI management, microfinance wholesalers of funds, and rating agencies; and

(ii) provision of MFI trainers training on performance standards. The expected outputs were;

(i) promoting financial literacy and assisting National Antipoverty Commission (NAPC), in collaboration with other concerned agencies and departments, local government units, and microfinance training institutions, in the development of a national financial literacy program, including gender education and consumer protection for the poor and users of microfinance services; developing model(s) for sound microinsurance and savings/ micro-investment practices in consonance with existing laws and regulation; and preparing guidelines and business development services (BDS) models for MFIs;

(ii)establishing a free public access NAPC website to support consumer protection, including a public service section to assist the poor in making inquiries and filing consumer complaints on MFIs not in compliance with Philippine law and regulation, and issuance of a consumer protection guidebook for the poor and users of microfinance; and

(iii) formulating a privatization plan and options for Philippine Postal Savings Bank (PPSB), and preparing an assessment and valuation of PPSB for Privatization and Management Office in the Department of Finance (DOF) and PPSB Board of Directors with a view to bringing in strategic investment for an accelerated outreach of savings and remittance services in rural and remote areas.

Delivery of Inputs and Conduct of Activities The TA was formulated to help the Government comply with the policy actions called for under the Microfinance Development Program (MDP) by conducting major activities under the MFI operational capacity building component and the promoting financial literacy and consumer protection component. The Services Group provided (i) six person-months of international consultants with expertise in MFI training and development, and privatization of banks; and (ii) 46 person-months of national consultants with expertise in the microfinance sectorincluding laws, regulations, practices, services, and products offered by all types of MFIs; financial literary program development and training; website design and development; consumer protection; and information services for the poor. The performance of the consultants was satisfactory. DOF as the Executing Agency (EA) took an effective leading role through National Credit Council (NCC) by coordinating TA activities with the concerned agencies including NAPC and Bangko Sentral ng Pilipinas (BSP). TA review mission was conducted concurrently with MDP loan review mission in April, August, and September 2007. Originally planned activity to formulate a privatization plan and options for PPSB was excluded from the TA scope, as it was conducted by Privatization Management Office. Instead, review of the national financing policy in the wake of the issuance of Executive Order (EO) No. 558 was conducted by an international expert. Evaluation of Outputs and Achievement of Outcome General. The TA has produced microfinance training modules for banks, NGOs and cooperatives, which were disseminated to these MFIs through training of trainers (TOTs) conducted in Luzon, Visayas and Mindanao. The training materials have been replicated and in-house training have been conducted by the trainers who participated in the workshops helping build viable MFIs that can provide efficient and cost-effective services to the poor. The TA

40 Appendix 4

has also helped NAPC formulate a National Financial Literacy Program and publish guidebooks on consumer protection, good microfinance practices, and various business development services (BDS) models applicable to microenterprise development. Under the TA, the NAPC website was developed to include standard training program, access to relevant laws, links to microfinance associations. A function for filing public complaints on MFIs not in compliance with Philippine laws and regulations was also developed but its service has been stalled due to the constraints of the NAPC's information system. These TA activities helped the Government comply with the corresponding second tranche release conditions under the MDP. NAPC’s website. NAPC’s website developed under the TA started to operate in March 2008 which was to receive public complaints concerning microfinance services/products. Due to the lack of active public awareness activities, however, the website had failed to receive any complaint until October 2008 when the NAPC server could not support this function any more due to its limited capacity. The website has not provided the service to receive public complaints since then. NAPC plans to upgrade its computer system with a P250, 000 budget allocated for the first phase work. National Financial Literacy Program. With inputs from the TA and inter-agency consultations, the Philippine National Financial Literacy Program was completed and launched on 22 October 2007, followed immediately by implementation of a series of capacity building activities to improve microfinance clients’ knowledge of financial concepts, skills and attitude, aiming for good financial outcomes for the providers and users of microfinance services. NAPC has been providing training and information to MFI trainers and other stakeholders in collaboration with concerned agencies, local governments, and microfinance training institutions nationwide. 17 regional sessions for training of trainers (TOT) conducted from November 2007 to April 2008 were attended by 162 participants. Further, 10 provincial TOT conduced since September 2008, has been attended by 439 participants so far. These developments will benefit the clients, as well as increase the viability and sustainability of MFIs since the program contributes to clients’ good behavior, such as diligent payment of loans, the right use of credit, and the motivation to save. BSP has conducted its financial literacy program based on the NAPC training module for microfinance operating banks. This BSP action has further broadened the MFI and its client coverage of the financial literacy program. Consumer protection. The consumer protection guidebook was finalized through consultations with concerned agencies and parties (BSP, CDA, DOF, DTI, NAPC, and SEC) and basic sector representatives for publication and launch on 22 October 2007. The MDP TA drafted a guidebook, including procedures for filing consumer complaints. NAPC has widely distributed the guidebook to stakeholders and posted the book on its website. BDS manual. Assisted by the TA, NAPC issued guidelines and a model BDS manual to promote BDS for the poor to improve their livelihood and microenterprise performance. NAPC was supported by the Department of Trade and Industry (DTI), Department of Science and Technology, Technology Resource Center, Technical Education and Skills Development Authority, NCC, and BSP. Focus group discussions on the provision of BDS were conducted among key officers and staff of MFIs, and among MFI clients, during February–March 2007. The discussions focused on (i) strategies undertaken by MFIs in providing BDS, (ii) client demand for BDS, and (iii) good practices employed by providers. Based on the results of these discussions, NAPC issued an industry advisory containing guidelines and best practices in providing BDS, which was widely distributed to stakeholders. The advisory was posted on the NAPC website on 22 October 2007. Executive Order (EO) No. 558. EO No. 138, commonly regarded as a pillar of the government’s market-based financing strategy for the sector, was repealed by EO No. 588 in August 2006 during the implementation period of MDP. The EO No.138 predates the MDP and does not appear in the policy actions required for tranche release. However, its withdrawal led to a careful staff assessment and discussions with stakeholders to determine the overall impact on the policy environment. With inputs from the TA, ADB hosted a workshop to consider the impact of the repeal of EO No. 138 on 4 October 2007, attended by 40 participants, including representatives from government agencies, financial institutions, and the private sector. Despite the repeal of EO 138 and its replacement by EO 558, the market principles embodied in the current legislation, and the government actions based on this legislation, appeared to be well anchored. The new credit program under EO No. 558-A, the implementing guidelines in line with EO No. 558, has been implemented on a cost recovery basis by the Department of Social Welfare and Development (DSWD) funded by the National Livelihood Support Corporation (NLSC). So far P5 million has been disbursed to self-help groups in some of the target 47 hard-to-reach municipalities where private sector MFIs have difficulty in penetrating as these municipalities are characterized by inadequate infrastructure, market services, and entrepreneurial skills. The TA study concluded that EO 558 has not had a major impact on the sector due to its limited and targeted operation, and the limited funding allocated to it.

Appendix 4 41

Overall Assessment and Rating The TA is rated as highly successful helping the Government comply with all the second tranche release conditions of the MDP loan on time.

Major Lessons The lesson learned from the fact that NAPC could not operate the web function to collect public grievances due to the capacity constraints of its system was that at the formulation stage, the MDP should have assessed the capacity of the NAPC information system to sustain the operation of its newly designed website for an effective consumer protection campaign.

Recommendations and Follow-Up Actions NAPC's system development to support its web function to collect public complaints on microfinance transactions should be monitored, and if necessary, assisted by future ADB assistance.

Prepared by: Eiichi Sasaki Designation: Senior Financial Sector Specialist

PCR: Philippines: Microfinance Development Program · October 2009 Philippines: Microfinance...

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