Completion Report. Project Number: Loan Number: 2199-PHI October Philippines: Microfinance Development Program

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1 Completion Report Project Number: Loan Number: 2199-PHI October 2009 Philippines: Microfinance Development Program

2 CURRENCY EQUIVALENTS Currency Unit peso (P) At Appraisal At Project {or Program} Completion (30 June 2005) (26 December 2007) P1.00 = $ $ $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

3 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 Team member E. Sasaki, Sr. Financial Sector Specialist, SERD 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.

4 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 Policy Matrix Status of Compliance with Loan Covenants Technical Assistance Completion Report 39

5 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 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) 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 June September September October November November December December 2005 None 30 November 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) Effective Date 14 December 2005 Final Disbursement 26 December 2007 (second tranche) Original Closing Date 30 November 2007 Time Interval 24.4 months Time Interval 23.5 months

6 iii b. Amount ($ million) Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed 1 $150 $150 Undisbursed Balance Total $150 $ 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 $ 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.

7 iv 3. Cost Breakdown by Program Component ($, million}) Component Appraisal Estimate Actual Two Tranches $150 $150 Total $150 $ Program Schedule ($ million) Item Appraisal Estimate Actual Date of Contract with Consultants a 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 Milestones b $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 Implementation Period Development Objectives Ratings 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

8 v D. Data on Asian Development Bank Missions Name of Mission Fact-Finding Date 4 April 2 June 2005 No. of Persons No. of Person-Days Specialization of Members 1 5 Principal Financial Sector Specialist Appraisal Program Loan Review Program Loan Review Program Loan Review Program Completion Review 30 June 6 Sept April 9 May August Sept 5 Oct May 3 June Principal Financial Sector Specialist 2 10 Financial Sector Specialist, Finance Specialist 2 10 Financial Sector Specialist, Finance Specialist 2 9 Financial Sector Specialist, Sr. Counsel 2 10 Senior Financial Sector Specialist, Finance Specialist

9 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) (ii) (iii) (iv) 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; build viable microfinance institutions (MFIs) that could provide efficient and costeffective retail delivery of services to the poor; strengthen regulatory and supervisory capacity and oversight for a sound microfinance sector; and 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 Survey 2 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 (Social Reform and Poverty Alleviation Act) and is an important part of the Medium-Term Philippine Development Plan (MTDP) 3, , 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 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 nd Quarter 2005 Social Weather Report. Manila. 3 National Economic Development Authority Medium-Term Philippine Development Plan Manila

10 2 II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. The country strategy and program (CSP) of , 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 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 microfinanceoriented 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 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 Philippines: Country Strategy and Program Manila

11 3 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 It clarified the Bureau of Internal Revenue (BIR) interpretation of the current tax code in relation to microfinanceoperating 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 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, costeffectively 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 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 NCC is located in DOF and chaired by the DOF undersecretary for the Domestic Finance Group.

12 4 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 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 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 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 Banks 7 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) Manual of Examination for Banks. Manila.

13 5 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 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 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 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.

14 6 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 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 costeffective 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.

15 7 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 , 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,

16 8 (iii) (iv) (v) (vi) 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. 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. 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). 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. The MDP complemented other donors' assistance in microfinance, especially programs funded by the United States Agency for International Development the 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 MFI outreach indicators, including an increase in the number of active microfinance clients and transactions in 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 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.

17 9 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 JanuaryDecember 2007 JanuaryDecember 2008 Active Clients New Jobs Source: Microfinance Program Committee. 2. MFI sustainability indicator improvement in over the 2004 baseline 30. Under the MDP, performance standards for MFIs 11 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 microfinanceoperating 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 , as indicated in Table 3. Table 3: Sustainability Indicators of Sample MFIs Number of MFIs reporting Operational Self % 107.6% 111.8% 111.3% Sufficiency Ratio 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.

18 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 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 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 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 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.

19 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 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) (ii) (iii) 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 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 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. 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.

20 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) (vii) 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 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. BSP conducts risk-based supervision for microfinance operations in line with Monetary Board Resolution No. 492, dated 14 April 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 riskbased 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

21 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 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 microsavings and microinsurance, on 22 October 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