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Digital tech to expand Philippine microfinance sector

Small banks and microfinance organisations in the Philippines are turning to digital technology to achieve operational efficiencies.

At the same time, it will allow them to offer more services to the unbanked and underserved in the country’s more than 100 million population.

According to a recent report, investments in digital technology, such as cloud-based systems, can instantly bear fruit for the microfinance sector as wider reach and higher volume of transactions will increase their revenues.

A microfinance nongovernment organisation (NGO) interconnected all of its 1,150 branches using a cloud-based system in January 2016.

In two years, it was able to achieve what it struggled to do in the first 12 years of its operations. It expanded to the remotest places in the country and quadrupled its product offerings.

Moreover, the cloud-based system, which was developed in-house for the NGO, helped diversify its products.

From offering only two kinds of loans, which are water and sanitation loans, it now has nine loan products.

The products now include educational financing, housing loans, and agriculture financing.

The most important achievement was diversifying their portfolio. Managing multiple loans would not have been possible without the cloud system.

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

Just recently, the Bank’s Board of Directors approved a US$ 300 million loan to fund reforms under the Inclusive Finance Development Program.

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.

The Bank believes this program will help break the barriers to financial access, especially for the rural poor, and allow them to take advantage of the growing economy.

At present, the microfinance sector, which is made up 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, considered to be among the lowest levels in Southeast Asia.

Digital technology offers huge financial opportunities for micro-lenders, and the Bangko Sentral ng Pilipinas (BSP), the country’s central bank, fully aware of this.

In a country where 99% of monthly payment transactions are still cash-based while businesses and individuals account for only 1% and 0.3% of electronic payments, respectively, digitising retail payments is important.

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.

The direction right now is to achieve a much-needed change in the core banking system. This is going to be a foundational enabler, aligned with regulations and business opportunities.

There are billions worth of remittance and bills transactions happening all over the country.

Everybody is now looking into that direction. No one wants to be left behind, in terms of relevance to clients and sustainability.

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