Rural banks, microfinance go digital for expansion

SMALL banks and microfinance organizations in the Philippines are slowly moving into digital technology as they pursue operational efficiencies while seeking to offer more services to the unbanked and underserved portion of the country’s over 100 million population.

Investments in digital technology, such as cloud-based systems, can instantly bear fruit for the microfinance sector as their revenues increase with wider reach and higher volume of transactions.

Such was the case for ASA Philippines, a microfinance nongovernment organization (NGO), which offers collateral-free loans as little as Php5,000 ($93) to nearly 1.7 million women entrepreneurs all over the country. After interconnecting all its 1,150 branches using a cloud-based system in January 2016, it achieved in two years what it struggled to do in the first 12 years of its operations—expand to the remotest places in the country and quadruple its product offerings.

“We used to be known as a company with only paper and pencil, but now we have an automated system,” said ASA Philippines President and CEO Mr. Kamrul Hasan Tarafder, referring to how the company’s microfinance officers and agents handled transactions in the field.

“Now I can check our financial standing any moment, anytime. Previously, I had to wait almost until the end of the month to understand the performance, audited status of the institution, profitability, portfolio quality, etc.,” he said.

“That gave us the courage, both the management and the board, for greater expansion. Our system helped us to get even to remote places, we are in Itbayat and in Sitangkai,” Mr. Tarafder said. Itbayat is a town in the northern Philippine province of Batanes, while Sitangkai is the southernmost municipality of the Philippines.

WIDER REACH, BIGGER REVENUE

After introducing its cloudbased platform, ASA’s net income jumped more than 150% in 2016 from a year earlier, while its loan portfolio climbed 57% in the same period. Its loan portfolio further increased by an annual 52% in 2017.

The cloud-based system, developed in-house for ASA, also helped diversify its products. From just two kinds of loans— business loan as well as water and sanitation loan—it now of-

fers nine loan products, including educational financing, housing loans, and agriculture financing.

“The most important achievement was diversifying our portfolio. We could not have managed multiple loans without the cloud system,” Mr. Tarafder said.

Since 2000, the Asian Development Bank (ADB) has been working closely with the government and other development partners to support the Philippines’ goal of increasing the poor’s access to finance and addressing high income inequality in the country.

On Thursday, the ADB Board of Directors approved a $300 million loan to fund reforms under the Inclusive Finance Development Program. The program builds on ADB’s work since the 1990s in helping the government create a vibrant microfinance industry.

Under the Inclusive Finance Development Program, ADB has worked with the government to identify priority reforms to increase financial inclusion. These reforms include strengthening agriculture finance; improving financial literacy; expanding microinsurance, crop insurance, and Islamic finance; as well as encouraging digital innovation in the banking sector.

“Expanding financial services across the country, especially in regions with high poverty levels, is critical to achieving the government’s agenda of promoting inclusive growth. ADB believes this program will help break the barriers to access to finance, especially for the rural poor, and allow them to take advantage of the growing economy,” said ADB Senior Financial Sector Specialist Ms. Kelly Hattel.

At present, the microfinance sector, composed of microfinance NGOs, rural banks, thrift banks, and cooperatives, have limited capacity to reach out to a wider market especially in rural areas, and can only offer few financial products and services. In 2017, only 10% of the adult population borrowed from and only 12% held savings at a formal financial institution, among the lowest levels in Southeast Asia.

Digital technology offers huge financial opportunities for microlenders, and the Bangko Sentral ng Pilipinas (BSP)—the country’s central bank—is fully aware of this. In 2015, the BSP launched the National Retail Payment System, which aimed to create a safe, affordable, efficient, and reliable electronic retail payment system in the country that is interconnected and interoperable. In April 2018, the BSP launched InstaPay, a real-time electronic fund transfer service that can be used for retail or bill payments.

SHIFTING TO DIGITAL

Digitizing retail payments is important in the Philippines, where 99% of monthly payment transactions are still cash-based, and businesses and individuals accounting for only 1% and 0.3% of electronic payments, respectively, according to a study done by the Better Than Cash Alliance.

The Rural Bankers Association of the Philippines (RBAP) and its 454 member banks are currently preparing for the digital shift, including a move to cloud-based core banking technology. Last year, Cantilan Bank in Surigao del Sur province became the first rural bank in the country to use cloudbased core banking technology to better manage its daily operations and serve clients more efficiently.

“The direction right now is to achieve a much-needed change in the core banking system. This is going to be a foundational enabler for them, aligned with regulations and business opportunities,” said RBAP Executive Director Ms. Milcah Capundag regarding RBAP member banks.

“There are billions worth of remittance and bills transactions happening all over the country,” she said. “Everybody now is looking into that direction, they don’t want to be left behind, in terms of relevance to clients and sustainability.”O

Digitizing retail payments is important in the Philippines, where 99% of monthly payment transactions are still cash-based, and businesses and individuals accounting for only 1% and 0.3% of electronic payments, respectively, according to a study.