Microfinance to urban poor in the slums of Manila
Metro Manila
Presentation
Metropolitan Manila, the National Capital Region, is the metropolitan region encompassing the City of Manila and its surrounding areas in the Philippines. 16 cities make up Metro Manila. It is one of the most populated metropolitan areas in the world with a population of 20 million people. The King Solomon School is located in Quezon City which has a population of 2.7 million.
Nearly four million people in Metro Manila, about 20% of the city's population, live in overcrowded slums such as the one in Quezon City. Slum dwellers tend to work in informal economy, many earning below the local poverty line of $2 a day. More than 50% of these slum dwellers are first generation rural migrants who had to sell their land in desperation, and moved to city slums.
Economy of Manila
Manila's economy is diverse and multifaceted. With its deep harbor, Manila is Philippines’ main seaport. Metro Manila is the financial, commercial and industrial center of the Philippines. It accounts for 33% of the Philippines' GDP. It has a third of the country's bank offices but over two thirds of its deposits. Tourism is also a thriving industry. Being one of the major tourist destinations in the country, the city attracts over 1 million visitors from all over the world annually.
Diverse manufacturers produce industrial-related products such as chemicals, textiles, clothing, and electronic goods. Food, beverages, tobacco products also employ many residents. Local entrepreneurs process primary commodities for export, including rope, plywood, refined sugar, copra, and coconut oil. The food-processing industry is one of the most stable manufacturing sector.
Every district in the city with the exception of Port Area has its own public market, locally called the pamilihang bayan. Commerce in these public markets is lively, especially in the early morning. The city also has flea markets in the areas of Divisoria and Quiapo, where cheap buys are bought and sold at rock-bottom prices.
Nearly half of the families in Metro Manila fall under the PhP100,000-249,000 (US$2,000-$4,980) annual income class. This translates to roughly PhP20,000 (US$400) monthly household income. Recent newspaper and television broadcasts report that a family of five in Metro Manila would require at least PhP15,000 (US$300) to meet basic needs.
Metro Manila's Slums
Slums** are now scattered over 526 communities in all cities and municipalities of Metro Manila, housing 2.5 million people on vacant private or public lands, usually along rivers, near garbage dumps, along railroad tracks, under bridges and beside industrial establishments. Slums alongside mansions in affluent residential areas are also not uncommon.
On average, three-quarters of the households in Manila’s slums are long-term (more than 5 years) residents of the area. The settlements average 19.2 years in age and often are 40 years’ old, or older. The majority of the urban poor households have been living in Metro Manila for nearly two decades. Half of the population in slums are employed in the formal sector.
** The Housing and Urban Development Co-ordinating Council (HUDCC) defines slums as buildings or areas that are deteriorated, hazardous, unsanitary or lacking in standard conveniences. These are also defined as the squalid, crowded or unsanitary conditions under which people live, irrespective of the physical state of the building or area. Under such definitions, slum dwellers are identified as the urban poor: individuals or families residing in urban and urbanisable areas whose income or combined household income falls below the poverty threshold.
The Slum's Project
History of the Project
We came to know of the King Solomon Christian School (KSCS) in Manila and their very special outreach to the children from the slums of Manila through their sister school in South Australia, the Craigmore Christian School (www.ccs.sa.edu.au).
The two schools shared a common belief that education will help these children break through the poverty trap. While KSCS deploys a large proportion of its resources in this effort, some of the school administrators and teachers wanted to do more: they were looking for ways to expand the income of the slum-dwellers whose children they teach. In June 2010 Shan, our former CEO, and Peter Hunt, Chairman of the Board of GFA, met a group of KSCS administrators and teachers in Manila.
The Challenges of Reaching Urban Poor with Microfinance
Microfinance intervention has not been as successful among the urban poor as it has been among the rural poor. Reasons include:
- City slum-dwellers are not tied to land. They are squatters who can disappear overnight. The cost of tracking them down is usually prohibitive.
- Slum-dwellers are strangers to each other. They don’t want to work in a group, and be liable for each others loans.
- In urban situation a group of borrowers is likely to be a mix of men and women. In Grameen model a heterogeneous group disempowers the women.
- Urban borrowers prefer shorter term loans, such as 4 to 8 months. In classical Grameen model short term loans incur higher setup and termination costs.
- Chasing defaulters in urban setting is more costly and exhausting than in a rural village where you can seek community’s assistance in bringing the defaulter to the evening gathering of village elders.
Rotating Credit Cycle System
The model is called “Rotating Credit Cycle”. It involves staggering of loans: one new loan every week. Money for a new loan comes from weekly repayments collected from previous borrowers + the difference from GFA.
50 clients in this trial;
Loan size = 5,000 pesos ($125);
Loan term = 25 weeks (nearly 6 months);
Loan repayment = 200 pesos every week;
Interest: no interest in this trial;
2 new loans are disbursed every week.
In terms of disbursing and administering credit and collecting weekly repayments, the Rotating Credit Cycle is so simple that it does not require a paid external worker; it can be managed by the borrowers themselves. A very small “overseeing” is needed which in this case is provided by King Solomon School administrators and teachers.
Therefore some refer to this as “Do-It-Yourself Microfinance”.
Features of the Rotating Credit Cycle
- Flexible group size, 25 to 400, in increments of 25 (for a 25-week loan term).
Limitations of the Rotating Credit Cycle
- Same loan term for all borrowers (borrower-groups seem to prefer 6 month term).
King Solomon School's Trial Microfinance Project
TRAINING: On 8 June 2010, Shan and Juneth Miranda (our in-country manager in the Philippines) gave a day long training to King Solomon team. 10 other local charities also working with urban poor in Manila sat in the training as observers.
FUNDING: Loan capital for a trial among 50 borrowers (loan size = 5,000 pesos) was provided out of GFA bank account in Manila.
LOAN DISBURSEMENT: First two loans of 5,000 pesos ($ 125) were disbursed on 18 July. Since then two new loans of 5,000 pesos every week have been disbursed. To date 28 members in the trial group of 50 have received their loans. The lucky winners have the option to give their turn to someone else who is in greater and more urgent need. The abundance of this kind of solidarity among the poor has surprised the King Solomon team.
IMPACT SO FAR: King Solomon school administrator Milleth Paragas reports borrowers’ income of between 800 and 5,000 pesos per week.
IMMEDIATE EXPANSION: KSCS are planning to start a new group of 50 borrowers with a loan size of 5,000 pesos, and double the loan size of current 50 borrowers at the end of their current loan cycle and the start of the repeat loan cycle. All current borrowers want a repeat loan of 10,000 pesos.
MICROFINANCE IN MANILA: Microfinance in Manila is perceived as “very expensive”, almost as expensive as credit from the so called “5/6 money-lenders”. Many of the 50 participants of King Solomon’s trial have had the experience of taking out loans from microfinance lenders in the past and finding themselves in debt trap. In our 8 June consultation session with KSCS team they agonised over whether debt will help or hurt the poor they were trying to assist. According to KSCS team the full cost of microfinance in Manila is between 80 and 100 per cent per annum, disguised in multiple fees and charges and in “flat rates”. Demonstration of alternate, low cost (or no cost) and innovative implementations of microfinance in Metro Manila is likely to attract much attention.
Extract from email dated 14 Sep 2010 from KSCS administrator, Milleth Paragas. Email titled: ninth week update
“… So we started doing inventory of each one's last week’s profit, we were surprised to see that there were four borrowers who earned above P2000. The highest is Dhang with P5000 income. Her business is selling slimming coffee which is very fast moving. Actually, she will earn more if given a bigger capital. Her sister helps her sell the products to her friends, and she's getting big orders. Her husband is suffering from a stage 3 colon cancer, and in so much pain. But her situation didn't hinder her but instead inspired her to do more and earn more. She texted me just now, she brought her husband to the hospital and is now confined.
Second highest was Josie with P4000 income from rationing packed snacks in her husband's office twice a day for five days. Her husband is a company driver who has just returned to his work from a four-month rest due to motorcycle accident. Third highest was Liza with P2300 income from selling fruits and vegetables. She doesn't have a stall or store, but she offers her fruits to the school parents, and she gets good orders.
Fourth highest was Marivic with P2050 from selling home made peanut butter. All the rest earned P500 - 1800 last week. It's getting obvious now the potential candidates for a bigger loan. These four ladies inspired everyone in the meeting, that Grameen's ideal weekly income is possible. I think everyone left motivated. Thanks so much for your help, and for statistics.”