Microfinance in Action: The Philippine Experience
Mercatus Policy Comment No. 1
23 Pages Posted: 8 Sep 2008
Date Written: February 2005
International efforts to alleviate poverty in the poorest of nations are increasingly turning to microfinance for solutions. The United Nations's recent declaration that 2005 is the International Year of Micro Credit means that there will be more pressure than ever on development agencies to increase financial commitments to microfinance organizations.
For the past 20 years, the Philippines has served as a natural experiment for microfinance. As one of the oldest and most active microfinance environments in the world, the Philippines has much to teach about the potential for microfinance to alleviate poverty, and to serve as a stepping stone to prosperity.
However, one must not lose sight of the fact that microfinance has become a viable option only because the institutional environment in many developing countries is unworkable. Microfinance is a band aid - a necessary band aid at times, but a band aid nevertheless.
While microfinance has proven its ability to combat poverty in the short-term, deeper institutional reforms are required if development efforts are going to put the poorest of the poor on the path to prosperity.
The Philippines and other countries in similar situations need to address fundamental institutional concerns such as:
* Discriminatory laws; * Excessive regulation; * Endemic corruption; and, * The lack of formalized property rights.
Microfinance will only be successful when combined with efforts to enhance the institutional environment in which exchanges take place. Entrepreneurs prosper and microfinance organizations are profitable by relying on the savings market, not subsidies, to meet the needs of their borrowers.
Keywords: Economic Development, Microfinance, Grameen Bank, Microcredit, Philippines
JEL Classification: O1
Suggested Citation: Suggested Citation