ASIAN DEVELOPMENT BANK Operations Evaluation Department PROJECT PERFORMANCE EVALUATION REPORT ON RURAL MICROENTERPRISE FINANCE PROJECT IN THE PHILIPPINES July 2006 In this electronic file, the report is followed by the Management response. Performance Evaluation Report Project Number: PHI 25351 Loan Number: 1435-PHI July 2006 Philippines: Rural Microenterprise Finance Project Operations Evaluation Department CURRENCY EQUIVALENTS (as of 31 May 2006) Currency Unit – Peso (P) P1.00 = $0.0191 $1.00 = P52.42 ABBREVIATIONS ACPC – Agricultural Credit Policy Council ADB – Asian Development Bank ARMDEV – Associated Resources for Management and Development, Inc. BME – benefit monitoring and evaluation BSP – Bangko Sentral ng Pilipinas CDA – Cooperative Development Authority EO – executive order FGD – focus group discussion FIRR – financial internal rate of return FSS – financial self-sufficiency GBA – Grameen Bank approach GBAR – Grameen Bank approach replicator GFI – government financial institution IFAD – International Fund for Agricultural Development LBP – Land Bank of the Philippines MDP – Microfinance Development Program MDS – Microfinance Development Strategy MFI – microfinance institution MIS – management information system MTPDP – Medium-Term Philippine Development Plan NCC – National Credit Council NGO – nongovernment organization NWTF – Negros Women for Tomorrow Foundation OEM – operations evaluation mission PCFC – People’s Credit and Finance Corporation PCR – project completion report SEC – Securities and Exchange Commission SHG – self-help groups SOE2 – statements of expenditures SRPAA – Social Reform and Poverty Alleviation Act TA – technical assistance TSKI – Taytay sa Kauswagan, Inc. 2SLS – two-stage east squares NOTES (i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars. Director General B. Murray, Operations Evaluation Department (OED) Director R.K. Leonard, Operations Evaluation Division 1, OED Team leader T. Kondo, Senior Evaluation Specialist, Operations Evaluation Division 1, OED Team members C. Infantado, Portfolio Evaluation Officer, Operations Evaluation Division 1, OED A. Alba, Operations Evaluation Assistant, Operations Evaluation Division 1, OED Operations Evaluation Department, PE-686 CONTENTS Page BASIC DATA iii EXECUTIVE SUMMARY v MAP vii I. INTRODUCTION 1 A. Evaluation Purpose and Process 1 B. Expected Results 2 II. DESIGN AND IMPLEMENTATION 2 A. Formulation 2 B. Rationale 3 C. Cost, Financing, and Executing Arrangements 3 D. Procurement, Construction, and Scheduling 4 E. Design Changes 4 F. Outputs 5 G. Consultants 6 H. Loan Covenants 6 I. Policy Framework 6 III. PERFORMANCE ASSESSMENT 7 A. Overall Assessment 7 B. Relevance 7 C. Effectiveness 8 D. Efficiency 11 E. Sustainability 12 IV. OTHER ASSESSMENTS 13 A. Impact 13 B. Asian Development Bank Performance and Borrower Performance 15 C. Technical Assistance 16 V. ISSUES, LESSONS, RECOMMENDATIONS, AND FOLLOW-UP ACTIONS 17 A. Issues 17 B. Lessons 18 C. Recommendations 18 D. Follow-Up Actions 20 The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Clarence Dingcong and Gerard Sison were the consultants. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. APPENDIXES 1. Project Framework vs. Actual Performance 21 2. Updated Status of Compliance With Major Loan Covenants 23 3. Circulars Issued by Bangko Sentral ng Pilipinas to Support Microfinance 32 4. Selected Results of Impact Studies 33 5. Client Case Studies 35 6. Financial Performance of People’s Credit and Finance Corporation 61 7. People’s Credit and Finance Corporation Performance Highlights 71 8. Performance Highlights of Selected Microfinance Institutions 73 Attachment: Management Response on the Project Performance Evaluation Report for the Rural Microenterprise Finance Project in the Philippines BASIC DATA Rural Microenterprise Finance Project (Loan 1435-PHI[SF]) PROJECT PREPARATION AND/OR INSTITUTIONAL STRENGTHENING TA TA Project Name Type Person- Amount Approval Date No. Months ($’000) 1617 Rural Credit Study PPTA 24 640 28 Nov 1991 2558 Strengthening Rural ADTA 60 600 23 Apr 1996 Microenterprise Finance Per ADB Loan KEY PROGRAM DATA ($ million) Documents Actual Total Project Cost 64.8 163.7 KEY DATES Expected Actual Fact Finding 28 Mar–21 Apr 1995 Appraisal 15 Aug–7 Sep 1995 Loan Negotiations 8 Mar 1996 Board Approval 23 Apr 1996 Loan Agreement 8 May 1996 Loan Effectiveness 30 Sep 1996 18 Apr 1997 Loan Closing 1 Jul 2002 26 Sep 2003 Project Completion 31 Aug 2002 31 Dec 2002 Months (effectiveness to completion) 72 69 BORROWER Republic of the Philippines EXECUTING AGENCY People’s Credit and Finance Corporation MISSION DATA Type of Mission No. of Missions Person-Days Fact Finding 1 18 Appraisal 1 54 Inception 1 79 Loan Disbursement 1 2 Project Administration Review 4 87 Project Completion 1 10 Operations Evaluation1 1 92 ADB = Asian Development Bank, ADTA = advisory technical assistance, PPTA = project preparatory technical assistance, TA = technical assistance. 1 The Operations Evaluation Mission comprised Toshio Kondo, Senior Evaluation Specialist (Mission Leader); Clarence Dingcong (international consultant); and Gerardo Sison (domestic consultant). EXECUTIVE SUMMARY The Asian Development Bank (ADB) approved the Rural Microenterprise Finance Project (the Project) in April 1996. The Project aimed to support the Government of the Philippines’ efforts to strengthen rural financial institutions by assisting organizations that employed the Grameen Bank approach (GBA) in providing credit to the poor. The objective of the Project was to reduce poverty, create jobs, and enhance incomes of the poorest of the rural poor (the ultra poor). The urgent need to reduce poverty in the rural areas of the country was the primary rationale of the Project. The second specific rationale was to channel resources to the ultra poor through the GBA. A nationwide expansion of the GBA, therefore, was envisioned to meet the ultra poor’s need for financial services, and to support the training needs of GBA replicators (GBAR). Overall, the Project is rated as successful, because the investment and institutional components met their goals. Since the Project started in 1997, the GBA has been replicated rapidly, allowing microfinance to become part of the formal financial system. The “demonstration effect” of the Project encouraged previously risk-averse banks to venture into microfinance. Operations of microfinance institutions (MFI) expanded significantly, including their outreach to the poor through the investment and institutional support provided by the Project. The Project essentially catalyzed the expansion of microfinance services, brought poor women into the formal financial system, and enabled them to access credit and accumulate savings. The Project also was assessed as relevant, effective, efficient, and likely sustainable beyond its project life. ADB’s performance, which involved adequate monitoring of project progress and responding to changing market needs during implementation, was assessed as highly satisfactory. The Government responded positively to the policy reforms identified by the Project. The performance of the People’s Credit and Finance Corporation (PCFC) as the Executing Agency was highly satisfactory. The Project exceeded its target for the number of clients and women participants. However, the fundamental objective of reaching the ultra poor was not realized fully. Due to demands for sustainability and cost-efficiency, most MFIs targeted the “enterprising poor” who are most capable of repayment. MFIs viewed lending to the ultra poor as very risky, as loan proceeds easily could be diverted to address pressing basic needs, which could result in high default rates. Further, the welfare needs of the ultra poor and destitute were viewed as more fundamental than their microfinance needs, and other forms of social development inputs can address such welfare issues more effectively. Therefore, the target of reaching exclusively the poor was somewhat unrealistic and impractical, given the sustainability and cost-efficiency objectives of MFIs. Nonetheless, the evidence strongly suggests that the financial services provided by the Project benefited the socioeconomic welfare of “enterprising” poor member borrowers. The Project was to use a means test to monitor the impacts on clients periodically. As the Project showed, the filing and encoding of individual forms with such large outreach could be cumbersome and costly. Additional personnel need to be hired to manage, encode, and analyze the gathered data. As a result, the costs involved for data maintenance and analysis precluded the use of a means test for benefit monitoring and evaluation. vi The Government undertook the policy reforms identified by the Project, except for the privatization of PCFC. Due to legal and policy developments in the subsector, the covenant to privatize PCFC is no longer relevant. The emerging view is that a Government financial institution (GFI), such as the Land Bank of the Philippines, should buy and take full control of PCFC. Short of privatization, this appears to be the optimal solution. As a GFI subsidiary, which would come under the regulatory authority of the Bangko Sentral Ng Pilipinas, PCFC would have stronger supervision. As the Executing