The Philippines is a vast tropical archipelago in southeast Asia with more than 7,000 islands, of which 880 are inhabited. It faces many challenges in its development efforts, including temperamental weather, volcanoes, rural poverty and armed insurgencies.

One of the areas of support that is contributing to the improvement of living conditions for ordinary Filipinos is microfinance. The microfinance industry continues to grow in the Philippines, but much remains undone. The policy and regulatory environment is generally supportive of the sector and there are numerous funds for lending. However, according to the Mid-Term Philippine Development Plan 2001-2004, only 22.8 percent of families “with entrepreneurial activities” in the two lowest income quintiles in the Philippines accessed credit in 1999. After 20 years of development, the key problem in the Philippines continues to be the lack of capacity to provide services at a reasonable price to the poorest population, without sacrificing the sustainability of existing programmes.

Given the Government’s commitment to use microfinance as a cornerstone against poverty, UNDP and UNCDF, through the MicroStart programme, has begun to address this situation by supporting the development of microfinance institutions that have the potential of rapidly scaling-up their operations. The main objective of the Microfinance Support Project (MSP), which is part of the global UNDP MicroStart programme, is to build the capacity of MFIs participating in the programme and set in place a permanent mechanism for transfer of technology in to the sector. For this reason, the Association of Social Advancement (ASA), which has developed a prominent best practice-lending model with cost effectiveness at its core, was hired as the International Technical Service Provider at the inception of the project in 1999.

Through ASA’s interventions, Phase I of the MicroStart programme has been successful thus far, with major project inroads made in the areas of building the sustainability and outreach of sixteen different types of partner institutions, including NGOs, cooperatives and banks. The results speak for themselves. The average baseline data of the 16 MFIs for portfolio at risk (> 1 day) which was above 20% in June 1999 decreased to 7.7 % by April 2002. The MFIs increased operational self-sufficiency rates from an average baseline range that was below 80% in June1999 to an average range of 114% by the end of 2001. In terms of outreach, the aggregate number of active clients in the 16 participating organizations increased from a baseline of 12,500 in June 1999 to 40,500 by April 2002. However, the experience has been a mixed one for several of the participating MFI partners, as they remained dependent on external technical assistance and were not able to expand their operations. As indicated in the MicroStart Mid-Term Evaluation of November 1999, “Most of the outstanding performance came from a few MFIs that had, among other things, a high level of technical ability, rapid growth and a regional or national vision”(6). In accordance with this observation, the strategy for Phase II of the MicroStart, which began in 2003, differs from Phase I in that the main focus will be on investing selectively in a few organizations with the greatest governance and management potential and on those that use the ASA methods to make crucial institutional and operational improvements. By adapting the ASA approach, which emphasizes working with small loans and lowering operational costs, the selected MFIs would be in a position to provide cheaper services and increase outreach to the low-income population, while maintaining financial sustainability.