48 Small-scale Enterprise for Neo-literates through CLCs 7 Capital and Its Sources This session started with gallery presentations. All fifteen participating countries prepared their presentations based on the following guidelines for micro-financial services at the community level: Procedures for generating financial resources at the grassroots level Micro-financial service providers Criteria for obtaining loans Loan procedures Average loan size Maximum loan amount Duration of loan Rate of interest Mode of repayment During the gallery presentations each country visited other countries 9 galleries to get an idea of existing micro-financial services at the community level now available in different countries. The following are summaries of the country presentations: B a n g l a d e s h Procedures for generating financial resources: " savings " loans from relatives " profit from other income-generating activities Micro-financial service providers " NGOs " banks " government agencies, e.g., - rural development board - directorate of youth development - directorate of women 9s development Criteria for obtaining loans " rural women 15-49 years of age " household income level not more than TK 1,500 per month " working class background and willingness to be a group member and participate in a savings and credit scheme ... more. less.
" previous knowledge and experience in income generation activities " mental and physical fitness to handle savings and credit Capital and Its Sources 49 Loan procedures " each member needs to submit application recommended by any two of the following officers of the group (group leader, sub-group leader, treasurer) Average loan size " TK 3,000 to 6,000 Maximum loan amount " TK 20,000 Duration of loan " 52 weeks Rate of interest " 12.5 per cent (simple interest) Mode of repayment " weekly installment (50 weeks) B h u t a n In Bhutan, we have just completed basic and post-literacy programmes.to provide continuing education, with 4 CLCs established so far.<br><br> We plan to start IGPs soon. However, micro-financial services at the community level exist already. Micro-financial service providers: " BDFC " Bank of Bhutan " RICB (Royal Insurance Corporation of Bhutan) " BNB (Bhutan National Bank) Criteria for obtaining loans: " plan " submit the proposal " obtain approval from the Government " apply for loan Average loan size: Nu.<br><br> 5,000-50,000 (for farmers to engage in small-scale home industries, farming and improving livestock) or 75 per cent of the proposed total investment Maximum loan amount : 75 per cent of the total investment Duration of loan: 3 to 15 years Rate of interest: 13 to 16 per cent Mode of repayment: monthly, quarterly, half yearly and annually 50 Small-scale Enterprise for Neo-literates through CLCs C a m b o d i a In Cambodia, we have completed the second basic literacy programme in 3 CLCs and are providing continuing education through libraries. Micro-financial service providers " HI, ACELIDA, banks " Amount of maximum loan = 1,200,000 riel (US$350) Loan procedures " Lending 3 savings 3 recovering Average loan size 3 80 per cent Duration of loan 3 2-4 years Rate of interest 3 3-4 per cent Mode of repayment 3 yearly Criteria for obtaining loans - project proposal C h i n a Bank of Agriculture Women who start small enterprises Apply to Bank of Agriculture with sponsorship of local women 9s federation Pilot project in some counties 2,000 yan (US$200) One or two years Bank loan without interest (only for this project) Repay by installments Capital and Its Sources 51 I n d o n e s i a 52 Small-scale Enterprise for Neo-literates through CLCs L a o P D R Case: revolving fund: Micro-financial service providers: " UNESCO PROAP, UNICEF " ESCAP " NGO (ESF) Criteria for obtaining loans: " applicant has some facility/potential (money, equipment, materials, skills) Loan procedures participation in literacy or post-literacy programmes " trained in basic skills " trained in managing and planning of revolving fund " micro activities plan proposal " has organized interest groups/professional groups (weaving, sewing, food processing, animal raising, agriculture, etc.) " contract between receiver and CLC " leading CLC committee selected M a l a y s i a Micro-financial service provider " AMANAH/KHTIAR Malaysia (AIM) (The Endeavor Trust of Malaysia, established on 17 th September 1987) Criteria for obtaining loans " poor household " monthly income not exceeding - RM 285 (RM 57 per capita) 3 Peninsula Malaysia - RM 344 (RM 69 per capita) 3 Sarawak - RM 401 (RM 80 per capita) 3 Sabah Loan procedures " Loans are given without collateral/guarantor " Eligible members identified by AIM field asst. and branch manager will: - form a group of 5 persons (not related), living in the same neighbourhood, same sex - undergo compulsory group training 3 7 days (1 hour/day) - pass oral group recognition test Capital and Its Sources 53 Loan scheme 3 2 types " Economic loan - IKHTIAR loan scheme 1 (SPI 1) - IKHTIAR loan scheme 2 (SPI 2) - IKHTIAR loan scheme 3 (SPI 3) Special loan (SPP) " educational loan " housing loan (SPR) New types under economic loan: " SPIN 3 economic loan for fisheries activities " SKIT 3 economic loan for single mothers in urban areas Group fund " all members save at least RM 1/week (depending on their loan size) " donate 5 per cent of their economic loan to the group fund Scheme Amount Repayment Period (weekly) Terms and Conditions 1.<br><br> IKHTIAR loan Scheme 1 (SPI 1) " RM 1,000 " RM 2,000 " RM 3,000 " RM 4,000 " RM 4,000 50 weeks 50 weeks 50.75.100 weeks 50.75.100 weeks 50.75.100 weeks Monthly household income not exceeding RM 285 or per capita RM, for Pen. Malaysia, RM 344 or per capita RM 69RM401 or per capita RM 80 for Sasawakal 2. IKHTIAR loan Scheme 2 (SPI 2) RM 5,000 RM 9,900 Option 188.8.131.52 and 150 weeks Monthly income exceeding Rm 600 perfect repayment record for the previous two loans 3.<br><br> IKHTIAR loan Scheme 3 (SPI 3) RM 10,000 (US$ 2,600) Option 50-150 weeks Monthly income exceeding 1,000 perfect repayment record for at least 2 times (SPI 1) or (SPI 2) over at least 25 per cent asset value/saving from previous project 4. Educational Loan (SPP) RM 1,000 50 weeks Perfect repayment record for the first economic loan 5. Housing loan (SPR) RM 5,000 50-100 weeks Perfect repayment for the first three economic loans, the centre should consist of at least six groups 54 Small-scale Enterprise for Neo-literates through CLCs M o n g o l i a Company supported by UNDP.<br><br> The shareholders are NGOs and private companies " individuals and small business units " business plan required Business plan based on decision by company " required local government recommendation " average loan size (cash): $100 - $2,000 " maximum loan amount: $3,000 " duration of loan: 1- to 10 months " rate of interest: 3- to 5 per cent per month " mode of repayment (cash) 3 according to the agreed-upon schedule M y a n m a r Government " Agricultural and Rural Development Bank " Giving seasonal loans to farmers (who have their own land) " Industrial Development Bank (semi-government bank) " Myama Economic Bank " Annual short-term loans to private business/enterprise (with collateral) Cooperative Credit Society (under the Myanmar Cooperative Law) " Credit Society - in department - at township level - at village level UN Agencies/NGOs " Micro Finance Project 3 (UNDP/UNOPS) under HDI (Human Development Initiative Programme) 3 models in Myanmar for 11 townships " Grameen Trust: in Delta Zone (3 townships) " PACT (USA): in Dry Zone (3 townships) " GRET (France): in Shan State (5 townships) (loans to poor communities without collateral) Micro-financial services at the community level: " 3 NGOs (implementing partners) subcontracted by UNOPS " Criteria for obtaining loans Capital and Its Sources 55 - beneficiaries must be poor women - poor (identified by UNDP/PACT/Village elder authorities) - landless/casual labourers - household heads - with good character " Loan procedures Sensitization Group Formation Training/Saving Collection of Loan (P + In) Implementation Business Loan Disbursement Weekly or bi-weekly Monitoring/Evaluation Additional Loan Seasonal Loan Next Cycle Loan " Average Loan Size (different size) " Maximum Loan First Loan 5000K-6,000K (15-20 US$) Seasonal Loan (family business) Max: 10,000-15,000 (40-50 US$) Next Cycle Loan 30,000 (75-100 US$) " Duration of Loan - one year (for normal loan); six months (for seasonal loan) " Rate of interest - 20 per cent-30 per cent " Mode of repayment - Weekly - Bi-weekly 56 Small-scale Enterprise for Neo-literates through CLCs N e p a l Micro-financial providers: CLC savings and credit groups, NGOs Criteria for obtaining loans rotation loan system priorities for disadvantaged groups Loan procedures groups submit application with scheme for income generation group meetings Average loan size 50 per cent of total amount Maximum loan amount 80 per cent of total amount Duration of loan normal loan one year seasonal loan six months rate of interest 15 per cent to17 per cent (long-term) (short-term) mode of repayment 3 months x 4 times Capital and Its Sources 57 Adult groups (saving/credit) Women group CLC Children groups Farmer groups Income generating activities: - Raising buffalo - Raising chickens - Raising pig - Raising goats - Growing vegetables - Bee keeping P a k i s t a n Procedures for generating financial resources " equity financing only Micro-financial service providers NRSP PRSP SUDHAR BUNYAD D.L.N.F.E. BRSP AKRSP S.W.D (UNICEF) (GOB) (GOB) Criteria for obtaining loans " rural women 9s savings groups (five members each) " N.F.E (compulsory) Loan procedures " personal guarantee of CLC facilitator/head of the committee " application form - promissory note Average loan size " Rs 3,000 to 15,000 Maximum loan size " Rs 3,000 to Rs 25,000 58 Small-scale Enterprise for Neo-literates through CLCs Duration of loans " Rs 3,000 (1 year) " Rs 15,000 (1 year) " Rs 15,000 and above (2 years) Rate of interest " 15-18 per cent Mode of repayment " Monthly installment after 2/3 months grace period P h i l i p p i n e s Criteria " must be duly registered with proper government agency " must be endorsed by the church and community leader or institutional linkage " must have a small office to conduct official business and at least one collector and a bookkeeper " must have the capability to put up the required 10 per cent equity " must have experience in any economic activity, preferably relending " must be willing to conform to the KAKAYAHAN operating system Loan procedure/purpose " relending to individual beneficiaries Average loan size " minimum (P20,000) " maximum (P500,000) Duration of loan/repayment terms " maximum of 5 years inclusive of 1-2 years grace period on principal; interest paid quarterly based on diminishing balance, quarterly amortization of principal and interest after the grace period Interest rate 3 12 per cent per annum Maximum pass-on rate to beneficiaries " For NGOs 3 16 per cent per annum " For cooperatives 3 24 per cent per annum Capital and Its Sources 59 T h a i l a n d Micro-financial service provider: " community cooperative fund managed by the Department of Community Development Criteria for obtaining loans: " Member " Savings account 3 monthly, at least 6 months " Proposed income-generating project " Project approved by fund committee Loan procedures " Propose the project to the committee " Committee reviews and approves the project " Release funds, repay funds Average loan size: 20,000 Baht (US$500) Maximum loan amount: 30,000 Baht (US$750) Duration of loan: 2-3 years Rate of interest: 2 per cent per month Mode of repayment: " Repay after one year " Interest begins at the first month " Amount of repayment depends on the benefit, larger amounts borrowed must be repaid sooner than smaller amounts U z b e k i s t a n Micro-financial services at the community level: Micro-financial service providers " local banks " business fund " foreign aid organization Criteria for obtaining loans: " intention to start business " permission for enterprise activity " business plan " materials, equipment, skills, building " account in local bank " seal/stamp 60 Small-scale Enterprise for Neo-literates through CLCs Loan procedures " approval of local authority " filling out loan application " presentation of business plan Average loan size " short-term loan " average-term loan " long-term loan Maximum loan amount " 10 million sum (Uzbekistan currency) Duration of loan " 3 to 6 months " 1 to 1.5 months " 2 to 5 years Rate of loan " 3 per cent " 7 per cent " 15 per cent " 20 per cent Mode of repayment " half-monthly " monthly " half year " year V i e t N a m Service provider " Women 9s union in community Criteria " Illiterate, poor women Loan procedures " Submit application (situation, reasons, how much, how to use) Loan size: 400,000 VND 50 USD Maximum: 60 USD Capital and Its Sources 61 Duration: 2 years Rate: 1 per cent Mode of repayment: " original loan + interest after 2 years Commnity Learning Centres TE-RA-KO-VA in northern Viet Nam Literacy Agriculture skill training Book reading Forum CLC Sport activities Family planning Cultural activities After the gallery presentations, workshop participants watched a video about the Grameen Bank in order to understand and appreciate the micro-financial services provided by this institution. The video was followed by a discussion of the procedures and criteria for different micro-financial institutions in Bangladesh.<br><br> Participants also had an opportunity to learn about and discuss the various micro-financial institutions in the Philippines and the services they offer. The session concluded with a presentation on credit assistance provided to small-scale businesses and income-generating programmes in the Philippines. 62 Small-scale Enterprise for Neo-literates through CLCs Table 1.<br><br> Summary of rules of mandatory savings Indicators ASA BRAC BAROI-Tangail Grameen Bank Proshika Minimum weekly savings Taka 10; equal for all members of the group Taka 2 Taka 5 Taka 2, equal throughout the bank (the bank has increased the rate to Taka 5) Taka 5 Ceiling of savings No ceiling Taka 20 No ceiling Taka 5 (a member may open separate savings account) Taka 20 Withdrawal of savings Allowed; minimum balance of 10 per cent of loan must be maintained Allowed only in the events of resignation or cancellation of membership or retirement from BRAC Allowed; Taka 10 only as minimum balance Allowed after 10 years Allowed only for medical treatment and emergency purposes Rate of interest on savings 8% 6% 7.5% 8.5% 5% Net amount of savings mobilized (Taka in million) 816.36 1,484.66 27.01 4,320 Not available Savings as per cent of loan outstanding 36.8% (December 1998) 28.58% (December 1998) 15.65% (December 1998) 35.74% (December 1998) Not available Source: Respective MFIs, 1999. Table 2. Comparison of outreach and terms and conditions of basic microcredit of Grameen Bank and large MFIs/Ngos in Bangladesh Indicators ASA BRAC Grameen Bank Proshika Members 833,119 (general) 2,760,051 2,368,347 1,124,560 Borrowers 734,684 2,027,720 739,118 Cumulative Disbursement (Taka in million) 11,967.43 (up to Dec 998) 25,601** (up to June 9 98) 100,899.8 (up to Dec 9 98) 6,674** (up to June 98) Disbursement in 1998 (Taka in million) 4,862.88 (general members) 8,340.15 19,119.4 2,774 Outstanding loan (Dec.<br><br> 1998) (Taka in million) 2,101.14 (general members) 5,194.33 12,088.6 2,679 Average loan size (Taka)* 5,720 3,972 8,400 7,249 Duration of loan One year One year One year One year # Installments 45 45 46 12 Rate of interest 25% 30% 20% 18% Maximum loan amount (Taka) 9,000 N.A. 15,000 N.A. Source: Respective organizations * estimated by the author ** CDF, 1998 Capital and Its Sources 63 Table 3.<br><br> Sector-wise distribution of loans of 369 NGOs including ASA, BRAC, and Proshika Sector Percentage of disbursement (up to June 1998) Agriculture 12.19 Fisheries 4.33 Food processing 10.17 Small business 42.13 Cottage industries 2.83 Transpot 3.39 Housing 1.49 Health 0.51 Education 0.04 Livestock 17.94 Others 4.81 Total 100.00 Source: CDF, 1998. Table 4. Activities financed by first and present loan of 6,057 borrowers First loan Present loan No.<br><br> Activities Number (#) Per cent Number (#) Per cent 1. Agriculture/vegetables and fruit growing/nursery 554 9.14 542 9.11 2. Poultry, duck, goat and livestock rearing 857 14.15 364 6.12 3.<br><br> Milch cow rearing 867 14.31 1,098 18.45 4. Fish farming 132 2.18 221 3.71 5. Weaving 69 1.14 87 1.46 6.<br><br> Rice husking 279 4.61 200 3.36 7. Petty trade/shops 2,047 33.80 2,126 35.73 8. Tailoring/nakshi katha sewing/ purchase of sewing machine 87 1.44 131 2.20 9.<br><br> Handicrafts/bamboo, cane and jute products making 306 5.05 193 3.24 10. Carpentry/plumbing/mechanic/ barber/washing 103 1.70 180 3.02 11. Rickshaw/van purchase 325 5.37 396 6.66 12.<br><br> Puffed and fried rice 31 0.51 34 0.57 13. Maintenance works 68 1.12 71 1.19 14. Lease of land.<br><br> Ghat etc. 205 3.38 137 2.30 15. Others 138 2.27 170 2.86 Total 6,057 100 5,950 100 Source: Survey of 20 MFIs (Alamgir, 1998a).<br><br> 64 Small-scale Enterprise for Neo-literates through CLCs Table 5. Terms and conditions of loan under MIDI Description Terms and conditions Legal status of borrower Proprietorship Partnership Private Limited Company Loan size Taka 50,000 3 Taka 500,000 Total project cost Taka 15 million (maximum) Debt-equity ratio 80:20 (maximum) Interest rate 14% per annum (simple) Rebate on interest @ 10% of interest for timely repayment of loan Loan repayment period 1 to 3 years Security of loan - Personal guarantee of the sponsor - Personal Guarantee in favour of the sponsor from an acceptable person - Equitable mortgage and hypothecation of project assets Project implementation period 3 months (maximum) Source: MIDAS, 1998 Table 6. Terms and conditions of MELA loans Ownership pattern Single ownership 3 no partnership Loan size Taka 20,000 to Taka 200,000 Use of loan Fixed assets or working capital Maximum debt 3 Equity ratio 80:20 (closer to 50:50 preferred) Rate of interest 15% (flat) Maximum repayment period 2 years (12 months, 18 months and 24 months) Mode of repayment Equal monthly installments Implementation (grace) period 3 months (maximum) Legal security of loan - Personal Gurantee Bond to borrower - Personal Gurantee of another person in favour of the borrower - Memorandum of deposite of title deeds (equitable mortgage) - Hypothecation of project assets Collateral requirement Specific collateral of property on loans exceeding Taka 50,000 for past BRAC village organization members and on all loans for new borrowers.<br><br> Loan application fee Taka 2 Loan application servicing fee Taka 100 Appraisal fee 1% of loan amount Source: BRAC, 1998. Capital and Its Sources 65 Credit Assistance to Small-scale Business and Income-generating Programmes: Some Lending Patterns in the Philippines * A. Introduction: The Need for Credit Assistance to Small Business Credit assistance is an important component in livelihood and income-generating programmes.<br><br> In the Philippines, businessmen and entrepreneurs need to familiarize themselves with a number of information on credit assistance so that they can make a wise decision on credit availment. Useful information on credit assistance include: getting acquainted with the credit institutions, groups and individuals; the types of credit assistance they provide to small businessmen; and, the lending patterns they adopt in providing credit to various clients. B.<br><br> Types of Lending Institutions 1. Formal Banking and Non-Banking Sector The formal sector consists of institutions, banking and non-banking, which are under the supervision of the Bangko Sentral ng Pilipinas and the insurance companies which are under the supervision of the Insurance Commission. The Philippine banking and non-banking financial system has grown in size from 5,858 in 1984 to 12,266 in 1995.<br><br> This reflects an improved efficiency in the utilization of capital investments as well as branching out of financial institutions. From 1981 to 1990, banking institutions outnumbered non-bank financial and thrift institutions but in 1991 to 1995, non-bank institutions exceeded banking institutions. a) Banks are further classified into four (4) types i.e., commercial banks, thrift banks, rural banks, and specialized government banks.<br><br> Commercial Banks . The major function of a commercial bank is its being a depository and a safekeeping institution. Aside from the Bangko Sentral ng Pilipinas, commercial banks are the only institutions which have demand deposit function, i.e., they can create money by means of issuing a new demand deposit in the process of granting loans.<br><br> Thrift Banks . The thrift banking system is composed of Savings and Mortgage Banks (SMBs), Stock Savings and Loan Associations (SSLAs), and private development banks (PDBs). SMBs or savings and mortgage banks are organized for the purpose of accumulating the savings of depositors and investing them in marketable bonds and securities, commercial papers, and accounts receivables, drafts of exchange, acceptances of notes arising from loans, whether secured or unsecured, mortgages on real estate, financing for housing loans and other investments and loans authorized by the Monetary Board.<br><br> SSLAs are involved in similar activities but are limited to their members and stockholders only. _______________________________ * From Department of Trade and Industry, Bureau of Small and Medium Business Development, Lending and Borrowing Patterns of Micro, Small and Medium Enterprises (A Research Study), July 1998. 66 Small-scale Enterprise for Neo-literates through CLCs PDBs or private development banks cater to the capital needs and demand for investment credit or medium to long term loans for the promotion and growth of industry and agriculture at reasonable costs.<br><br> These banks are also authorized to generate deposits from public and other government institutions as the source of funds for the loans and financing services they provide. Rural Banks . Rural banks are community-oriented banks organized as a stock corporation with five to 15 incorporators residing within the area of operation of the bank.<br><br> They also have savings and credit function and may also open current or checking accounts or NOW accounts upon the approval of the Monetary Board. It may also act as the official depository of municipal, city, and provincial funds in the locality where it is operating. Specialized Banks .<br><br> At present there are three specialized government banks operating, these are Land Bank of the Philippines, the Development Bank of the Philippines, and the Al-Amanah Islamic Investment Bank of the Philippines. b) Non-Banking Institutions. Nonbank Financial Institutions (NBFIs) are non-monetary financial institutions, classified into private and government, with or without quasibanking functions.<br><br> They are primarily engaged in long-term financing short-term placements in other financial institutions. The three major classification of NBFIs are private nonblank financial intermediaries, non- bank thrift institutions and government non-bank institutions. Investment houses, financing companies, securities dealers/ brokers, investment companies, venture capital corporations, pawnshops, fund managers, and lending investors comprise the private nonbank financial intermediaries while private nonbank thrift institutions are composed of mutual building and loan associations and the non-stick savings and loan associations.<br><br> 2. Semi-Formal Sector Cooperatives, credit unions, and NGOs form part of the semi-formal segment of the financial market. They are considered as such since they are registered and in the case of cooperatives, regulated by the Cooperative Development Authority.<br><br> As of March 1997, there were a total of 37,699 registered cooperatives but the number of operating cooperatives was only 4,516. 3. Informal Sector Borrowing from informal lenders is more prevalent in the rural areas, however, in Metro Manila and other urban areas, about 60% of the total borrowers rely on informal lenders.<br><br> The following are some of the more prominent forms of non-formal financial intermediaries: Paluwagan or rotating savings and credit associations (ROSCAS) friends/relatives self-help groups/solidarity groups landlord-lenders traders/input suppliers trader/miller lenders farmer-lenders professional money lenders Capital and Its Sources 67 C. Formal Sources of Credit for MSMEs There are three types of special lending schemes for MSMEs in the Philippines according to the Institute for Small Scale Industries (IISI), University of the Philippines. 1.<br><br> Direct Loans . These are short-term and long-term credit provided directly by the financial institution to small enterprises to meet their fixed and working capital requirements. This can be availed for as well as expansion and sometimes, start-up purposes.<br><br> a) Government Non-Financial Institutions. There are various government non-financial institutions that provide loans to small entrepreneurs for their working capital requirements and sometimes to finance the acquisition of machinery and equipment. Most of the loans offered by these special programmes are interest-bearing, but at rates usually below those prevailing in the commercial market.<br><br> Likewise, most of the loans need to be secured. b) Banks. Banks have their own direct lending programmes.<br><br> They vary according to the particular market segment they cater to. Larger banks have separate departments specializing in different types of loans. Smaller banks are likely to reflect the nature of business in the areas where they operate.<br><br> c) Non-Bank Financial Institutions. There are also non-bank financial institutions that provide credit to small entrepreneurs. The loan could be used for acquisition of machinery and equipments and working capital.<br><br> The eligible borrowers are non-government organizations (NGOs). d) Private Sector/Non-Government Organizations. There are also non-government organizations that provide direct loans to SMEs.<br><br> As an example, the Kabuhayan Programme targets the ultra poor. It has adopted the essential features of the Grameen Bank credit delivery approach. The interest rate TSPI charges for this programme is 30 per cent per annum although there is no collateral requirement.<br><br> The ILAP programme targets what they call as cnon-bankable d entrepreneurs. The loanable amount is from P400,000 to 500,000 with an interest rate of 18-25 per cent p.a. Collateral is required.<br><br> 2. Indirect Loans . These are short and long-term credit which financial institutions provide to small enterprises not directly but through other institutions like banks, cooperatives, non- government organizations and industry associations.<br><br> The institutions through which the fund is channeled are called cfinancial intermediaries. d Some lending programmes call these intermediaries cparticipating financial institutions (PFI). d Institutions which extend loans in this manner are said to be engaged in cwholesale lending d while those which lend directly are said to be engaged in cretail lending. d 3. Credit Guarantees . A credit guarantee is a promise by an institution to another to make good on the failure of a borrower to repay a loan.<br><br> Through credit guarantee programmes, small enterprises with no or inadequate collateral can borrow from banks and other financial institutions who might otherwise refuse to take the risk of lending without sufficient security. Three (3) types of guarantee arrangements are available: clear loan guarantee for loans completely unsecured by any hard collateral; collateral-short guarantee for loans partially secured by collateral; and straight credit risk guarantee for start-up projects of those without sufficient tract record. The following would be indicators of the extent to which they are able to provide access to small entrepreneurs: 68 Small-scale Enterprise for Neo-literates through CLCs Loans which are small in size; Simplified loan procedures; Rapidity of loan approval and release; Maturity and loan purpose which is flexible, and able to meet divergent needs; Collection systems that are in tune with the earnings flow of its clientele; and Interest rates sufficient to cover their transaction cost, the risk related to their particular clientele, and their cost of funds.<br><br> D. Some Present Lending Patterns in the Philippines 1. Majority of the Lending Schemes for small and medium enterprises (those with assets of Pl.5 to 60 million) course their funds through banks.<br><br> Guarantee institutions, which cover SMEs also course their guarantee coverage through banks. Lending Schemes for Micro-enterprises (those with assets of less than P1.5 million) usually course their funds through Rural Banks, Cooperatives and NGOs. 2.<br><br> To intermediary financial institutions, the main incentive for acting as conduits of the various lending programmes is that they are able to provide a wider range of services thus strengthening their image of accessibility. The financial incentive to conduits for lending is perceived by some institutions to be insufficient. 3.<br><br> Loans are more accessible to: a) registered enterprises, b) single proprietorships, partnerships and corporations, c) small and medium industries, d) those with majority Filipino ownership, and e) enterprises with DE ratios of 80:20 and below. 4. An enterprise usually has to submit many documents in order to get loan approval or guarantee coverage from the different programmes and institutions studies.<br><br> 5. There are many lending schemes that offer loans with interest rates that are below commercial rates. 6.<br><br> Most loans need to be secured with collateral. 7. The most common reason for the disapproval of loans is the insufficiency of acceptable collateral.<br><br> 8. In the past, more loans have been granted to enterprises in urban areas, and those based in the NCR, and regions III, IV and VII. This was due to greater accessibility and relatively lower processing costs.<br><br> 9. The repayment rates of the different loans programmes are relatively high. The effect of default may be more pronounced on small banks.<br><br> 10. There appears to be a lack of information dissemination on the different credit programmes. E.<br><br> Some Present Borrowing Patterns in the Philippines 1. NGOs/Cooperatives had the highest perception rating on all attributes on which they were rated. Banks had high ratings as far as attributes of honesty, trustworthiness, and stability are concerned but got low ratings in the areas of number of requirements and leniency.<br><br> Lending investors were perceived to charge higher interest rates than the two institutions. Likewise, lending investors were rated the lowest in almost all areas. 2.<br><br> Five major factors were identified by respondents in choosing where to borrow, namely: low interest rate, sufficient loanable amount, quick processing, friendly service, and familiarity. Capital and Its Sources 69 3. Based on the survey, what matters most is the low interest rate being provided on loans.<br><br> It does not matter whether the institution requires a long process, has so many requirements, or that it requires collateral, as long as it provides a low interest rate. 4. There are more entrepreneurs who were able to borrow from the formal sector 3 banks, lending investors, and government financial institutions 3 than those who were able to borrow from the semi-formal and informal sectors.<br><br> 5. As for borrowing from banks, the important consideration in selecting the bank are low interest rate, fast processing, few requirements, and sufficient loanable amount. 6.<br><br> Collateral and capacity to pay are preserved as the most important considerations of the bank in approving loans. The common reasons for disapproval are no or lack of collateral and insufficiency of capital. 7.<br><br> A number of factors influence the perception of entrepreneurs with regard to banks, NGOs/Cooperatives, and lending investors. These are: a) Experience in borrowing. Entrepreneurs who have had experience in borrowing are more likely to give a high rating to banks while those who have not had any experience are more likely to give a high rating to NGOs/Cooperatives.<br><br> This is shown in the relationship between the number of times an entrepreneur has availed of loans and their perception of banks and NGOs/Cooperatives. Also, those who have availed of loans recently are more likely to give a high rating to banks while those who have not availed of loans recently are more like to give a high rating to NGOs/Cooperatives. The perception of banks seem to change as one gets to avail of loans from them.<br><br> While banks may not be able to provide a low interest rate, they are able to provide a sufficient loanable amount that entrepreneurs need. The professional and legal transactions with banks are viewed positively. b) Socio-economic class.<br><br> Those who rated themselves as belonging to the middle class are more likely to rate the banks high. This factor has to do with access to loans. Those belonging to the upper class have sources other than banks (because of connections) and they are more stable while those belonging to the lower class would have a hard time accessing loans from banks and convincing them that they are capable of paying their loans.<br><br> Those in the middle class can very well be able to access loans from banks. c) New businessmen and entrepreneurs (aged 30 and below) have the tendency to borrow from lending investors. The lending investors seem to attract the riskier (as manifested by the age) type of entrepreneurs.<br><br> d) Financial stability. Those who belong to a family with three or more income earners are more likely to rate lending investors high. The high interest rate imposed by lending investors would not be too difficult for the family to bear.<br><br> This indicates that those who access loans from lending investors have other sources of income aside from the business. e) Business stability. Those who have a high revolving capital need are more likely to give a high rating to NGO/s/Cooperatives.<br><br> Also, those who have indicated a negative grown in income for the past two years have the tendency to give a high rating to NGOs/Cooperatives. Because of their business situation, entrepreneurs are attracted to the low interest rates being imposed by NGOs/Cooperatives. 70 Small-scale Enterprise for Neo-literates through CLCs Small Scale Enterprises in the Philippines * It is generally observed that micro, small and medium enterprises are the backbone of economic development in the Philippines.<br><br> Collectively, they constitute 99 per cent of all business establishments and employ 55 per cent of the country 9s total labour force. The national government puts high premium on this sector and sees the importance of the networking between government institutions, non-government organizations and other stakeholders in the community the undertaking productive enterprise activities in the country. This paper presents emerging profiles, trends and practices in the planning and operations of small- scale enterprises in the Philippines.<br><br> The data presented are based mainly on a 1998 study on lending and borrowing patterns of micro, small and medium enterprises carried out by the Department of Trade and Industry. A. Context of Small-scale Enterprises in the Philippines 1.<br><br> Some Definitions The 1997 Republic Act 8289 of the Philippines defines micro, small and medium enterprises as business activities covering industry, agribusiness or services whether they are single proprietorships, partnerships, cooperatives or corporations whose asset sizes correspond to the following: Micro : Less than PhP1,500,001 Smal : PhP1,500,001 to Ph15,000,000 Medium : PhP15,000,000 to PhP60,000,000 The assets of these enterprises do not include the land where the firm 9s office, plant and equipment are situated. The foregoing definition undergoes continuing review and assessment in the light of socio-economic developments of the country. A 1991 Philippine Institute of Development Studies paper describes micro-enterprises as unincorated income-generating activities undertaken by individuals, households and small operations in the urban and rural areas.<br><br> These activities include: manufacturing, commerce and services. A distinguishing feature of micro-enterprises is that they are often family-based and sometimes with very small resource base or assets and are not registered with any government institution. In sum, they are generally very small enterprises owned and managed by families or individuals which employ very few people, if any, and from which they derive their livelihood.<br><br> 2. Significant Role of Small-scale Enterprises in the Country Small firms can be productive outlets for the talents and energies of enterprising independent people; Small enterprises provide a seedbed for entrepreunerial talent and a testing ground for new industries; They catalyze innovations and dynamism and enhance competition within the economy. They can also promote community stability; Capital and Its Sources 71 They do less harm to the physical environment than some large corporations; They stimulate personal savings; They promote agro-industrial linkages; and They improve rural welfare and generally raise the level of popular participation in the economy.<br><br> 3. Policies and Guidelines on Small-Scale Enterprises The following principles guide the policy directions on small-scale enterprises in the country: Enhance the the global competitiveness of Philippine products and services; Raise and sustain productivity in the economy; Improve and increase infrastructure and other facilities necessary for the speedy movements of goods and services; and Alleviate poverty particularly in the countryside. 4.<br><br> General Considerations in the National Planning on Small-scale Enterprises Viability and competitiveness Private-sector led initiatives Market-driven responses 5. Present-day Needs of Small-Scale Enterprises in the country Access to information and sourcing of appropriate technologies; Training on the optimal use of technologies; Technology dissemination; Technology evaluation and assessment services; Technical skills upgrading; common service facilities; Ample supply of good quality raw materials; and Availability of basic support industries such as machineries, components, parts repair and fabrication. B.<br><br> Patterns and Processes in Small-scale Enterprises in the Country 1. Looking at the Over-all Enterprise Environment Small-scale entrepreneurs in the Philippines generally look at the prevailing enterprise environment which covers: technological advancements, economics and industrial policies, business laws and regulations, commerciable technologies and business ventures, investment plans of the country, assistance programs for small firms and other incentive packages. In the Philippines, the investment priorities plan of the country is prepared by the Department of Trade and Industry (DTI) and it covers a description of the array of agricultural ventures such as food crops that receive priority attention by the government.<br><br> Also identified are other business activities that entrepreneurs may consider in planning what business they may want to focus on. Some of these are: 72 Small-scale Enterprise for Neo-literates through CLCs Agribusiness: seaweeds, processed food, shrimps, prawns Industry: electronics, components and electrical products, metal components Services: construction seminar, compture software, hotel and restaurant seminar Consumer products: ceramics, furniture, garments, gifts and houseware At present, there are numerous government agencies and non-government organizations from which entrepreneurs may source information about the possible small-scale enterprises, including: The Department of Trade and Industry (DTI) The Department of Science and Technology (DOST) National Livelihood Support Fund (NLSF) Social Security System (SSS) People 9s Credit and Finance Corporation (PCFC) Development Bank of the Philippines (DBP) Land Bank of the Philippines (LBP) Philippine Business for Social Progress (PBSP) Small Business Guarantee and Finance Corporation (SBGFC) Trade and Investment Development Corporation of the Philippines (TIDCORP), Formerly Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee) NGOs involved in small business development Cooperatives These government agencies, private groups, and non-government organizations use various means in disseminating information on their programs and projects, including: Television (TLRC) Radio (TLRC, Planters Bank) Press releases (SBGFC) Fora and conferences (TLRC, DTI, DBP, PBSP, SBGFC) Briefing sessions for banks and for exporters (TIDCORP) Marketing efforts and advertisements of the conduit institutions (TIDCORP, PBSP, SBGFC) such as posters in the bank premises (Banco Davao) Personal marketing efforts of the field staff (DTI) or account officers (Planters Bank) Personally informing regular borrowers about special programs (CAVALCO) Visits to prospective clients by the marketing department (FEBTC) Meetings with various industry borrowers (Planters Bank) Most new businesses are not started on the basis of totally new products or ideas. Most of them sprang from old ideas that have been updated or from current ideas that have been repackaged to meet new markets.<br><br> And it does not take a genius to come up with a suitable business or product idea. Here are some sources of ideas: Capital and Its Sources 73 Job environment Successful entrepreneurs Trade associations Trade shows and publications Research reports Published market statistics/surveys Business newspapers Management consultants Idea brokers and patent brokers Venture capital firms Business and credit services Technology transfer agencies Small business bureaus Patent office As an example, ecological entrepreneuring (Ecopreneuring) was born out of ecological awareness and the need for livelihood. In the Philippines, scrap buying and recycling have become a major industry.<br><br> Junkshops are almost everywhere. The sight of junkbuyers with their carts is part of the common street life. The scrap materials they buy from houses are being sold to different junkshops which is turn will be sold in big volumes to recycling companies.<br><br> Wastes have become a source of livelihood for thousands. Ecopreneuring is a noble business with bright prospects ahead. Although the business may look cdirty d it is actually a goldmine or waste materials.<br><br> In this business, the entrepreneur does not need an attractive site to put up his shop. The shop usually looks like a warehouse of sorts. Appliances and equipment are not necessary.<br><br> A single weighing scale is sufficient if you want to start small. Entrepreneurs can even buy the scraps from scavengers. But the most important thing is human relation.<br><br> They have to know how to deal with people. The business will prosper as soon as they familiarize yourself with the cins and outs d of the business. From there, the entrepreneur will start to build contacts whom he can depend on for supply and who will buy the scraps in bulk.<br><br> Unknown to many, most of the paper used every day are recycled paper. Even bottles, metals, plastics, styrofoam, polystyrene, tetrapacks, batteries, cans, glasses, newspapers and other materials are recycled products. Recycled paper and cartons which are made into beautiful handicrafts are selling like hotcakes in the market.<br><br> Stationeries, fans, intricate and artistic boxes, bags, and other cute little things like display articles have made the likes of PAPEMELROTI famous and profitable. 2. Fund Sourcing There are three general types of funding for small-scale business: formal, semi-formal and informal sources.<br><br> Formal banking and non-banking sector: banking institutions and non-bank finance institutions Semi-formal sector: cooperatives, credit unions and NGOs Informal sector: friends/relatives, self-help groups and professional money lenders 74 Small-scale Enterprise for Neo-literates through CLCs Loans are generally extended for the acquisition or construction of capital assets including land, building, machinery and equipment; expansion of existing businesses; or working capital financing. The amount of loans depends upon the needs of the business, paying capacity of the borrower and loan value of collateral offered. 3.<br><br> Availing of Incentive Packages The Board of Investments (BOI) of the Philippines has several incentives to small-scale business, such as: Exemption from income taxes for six years from commercial operation for pioneer firms and four years for non-pioneer firms. Additional deduction from taxable income of 50 per cent of wages corresponding to direct labour. Tax and duty-free importation of machinery, equipment and accompanying spare parts.<br><br> Tax credit on domestic capital equipment. Exemption from contractor 9s tax, whether national or local. Exemption from all taxes and duties on the importation of breeding stocks and genetic materials with 10 years from registration.<br><br> Tax credit on domestic breeding stocks and genetic materials. Tax credit for taxes and duties on raw materials used in the manufacture, processing and production of export products. 4.<br><br> Training Small-scale business believes that training programs improve the competence of small business entrepreneurs, managers, supervisors and technicians. They also develop consultants and industrial extension workers who can formulate as well as manage innovative responses to problems of small industries. Skills training provides complementary competencies to entrepreneurs and managers.<br><br> It enhances both the entrepreneurial and managerial capability of the small businessman. Training likewise facilitates the transfer of technology and improvement of productivity among workers. At the same time, it is one of the most efficient schemes to increase the supply of skilled manpower and competent entrepreneurs in the countryside.<br><br> There are several training institutions for training small industry entrepreneurs, managers and technicians as well as trainers, consultants and extension officers. In the provinces, there are small business institutes attached to the schools of business of various universities which offer small enterprises training. C.<br><br> Other Business Concerns as One 9s Business Venture Improves 1. Registering the Small Business Enterprise There are basically three legal forms which a business venture can take. Depending on the size and scope of the business, they will decide on the most applicable to your needs.<br><br> Sole Proprietorship . A single proprietorship is a business unit owned and managed by only one person. It is the simplest and most common form.<br><br> Most small businesses start as sole proprietorships. Capital and Its Sources 75 Partnership. When two or more people own the business, it is called a partnership.<br><br> Partnerships are formed for several reasons. The most common is to pool funds. Another would be to share responsibilities where the business owned is more than one person can handle.<br><br> Equal partners share the initial investment equally and each has the same amount of control over the business as the other. Corporation. A corporation is a clegal person d as opposed to a natural person.<br><br> It is called a legal person because it can do most business acts that a natural person can do. As a separate legal person, the corporation may enter into contracts, may sue and be sued and buy shares in other corporations. Other Registration requirements include: Registering with the Department of Trade and Industry The Department of Trade and Industry (DTI), through its Bureau of Trade Regulation and Consumer Protection (BTRCP) administers the registration of business names.<br><br> Registering with the Securities ad Exchange Commission (SEC) The SEC is the government agency that cgives birth d to the legal or juridical person that is the business enterprise 3 which has many of the attributes of a natural person. This is the essence of registering with the SEC. Only partnerships and corporations need to register with the SEC.<br><br> Single proprietorships are not required to register. Registering with the Local Government All businesses, whatever the legal form, are required to secure a mayor 9s permit or municipal license from the municipality or city where they will operate. Different cities and municipalities vary in registration procedures.<br><br> Registering with the Bureau of Internal Revenue Every business enterprise has to register with the Bureau of Internation Revenue (BIR) for taxation purposes. Registering with the Social Security System Employees of private firms are covered by social security benefits in the event of sickness, disability, retirement or death. Thus it is the duty of the employer to register his workers with the Social Security System (SSS).<br><br> Other Registering Agencies There are firms, depending on the type of products they manufacture or handle and on their market orientation, which are required by law to register with other government agencies, aside from the ones mentioned above. Generally speaking, these agencies exercise regulatory and control functions on industry sectors under their jurisdiction. The following is a partial list of these regulatory bodies and the industries/businesses they regulate: The Food and Drug Administration, for those engaged in the manufacture of drugs, cosmetics and food products.<br><br> The Philippine Coconut Administration, for those engaged in the export of coconuts and coconut by-products. The Central Bank, for export-oriented firms. 76 Small-scale Enterprise for Neo-literates through CLCs The Garment Trade Exports Board, for all manufacturers of garment and textile for exports.<br><br> The National Food Authority, for rice, corn and flour dealers. The Fiber Development Authority, for processors and traders of fiber and fiber products. The Bureau of Fisheries and Aquatic Resources, for those engaged in the export of fish and fish products and other aquatic products.<br><br> The Bureau of Animal Industry, for exporters of animals and animal products and by- products. They Bureau of Plant Industry, for those engaged in the export of plant and plant products. The Bureau of Forest Development, for exporters of forest products (e.g., logs, lumber products, plywood, etc.) The Philippine Virginia Tobacco Administration, for those engaged in the production or export of flue-cured Virginia-type tobacco, Burley tobacco and Turkish/Oriental tobacco products.<br><br> Bureau of Food and Drugs, for exporters of food, drugs and cosmetics. The Product Standards Agency, for commodity clearance for producers, manufacturers or exporters, whose product quality 3 after due inspection, sampling and testing 3 is found to meet established standard. Philippine Patent Office, for firms who want to register their patents and trademarks.<br><br> National Subcontractors Exchange, Department of Trade and Industry which registers business interested to tie up with export-oriented firms as sub-contractors/suppliers, under any of the following sectors: garments and handwoven fabrics, gifts and housewares, furniture and fixtures, footwear and leather goods, fresh and processed foods and jewelry. Trade and Regulation Division, Department of Trade and Industry, which accredits enterprises engaged directly or indirectly in the service, repair and/or maintenance of vehicles, engines and engineering works, electrical, electronics, airconditioning and refrigeration, office machines and data processing equipment, medical and dental equipment, including the technical personnel like mechanics or technicians employed by such firms. 2.<br><br> Accounting and Bookkeeping Matters A part from registration papers and permits, the businessman must also deal with internal accounting and bookkeeping documents. He must establish a filing and record-keeping system so all documents made by him or for his company are in proper order. For very small businesses where the rate of production and sales are easily traced, the owner can record the figures himself without much trouble.<br><br> 3. Paying Taxes Taxes come in various forms. In a given year, the businessman must pay any number of the following taxes: National taxes are those imposed under the National Internal Code and other laws particularly the Tariff and Customs Code.<br><br> They include income tax, estate and donor 9s tax, excise taxes on certain articles, taxes on business, documentary stamp taxes, mining taxes, miscellaneous taxes, fees and charges imposed by the Tax Code (tax Capital and Its Sources 77 on banks, finance and insurance companies; franchise tax; amusement tax; charges on forest products; tobacco inspection fees; overseas communications tax; miscellaneous taxes imposed and collected by the BIR). They also cover taxes imposed by special laws, such as, customs duties, residence tax, sugar adjustment tax, tax on narcotic drugs, special education fund taxes, science fund tax, travel tax and energy taxes. Local taxes are those imposed by local governments to meet particular needs such as the taxes under the Local Tax Code and those which refer to the local governments 9 share from national taxes collected locally from residence taxes imposed under the Local Tax Code and property taxes imposed under the Real Property Tax Code and the Special Education Fund Act.<br><br> The power to levy and collect occupation tax, amusement tax on admission, and fees for sealing and licensing weights and measures have also been transferred to the provinces and cities under the Local Tax Code. The tax a businessman is required to pay depends on many factors, including the kind of business he is in. Single proprietorships, for example, pay a yearly fee for the municipal license (payable every January).<br><br> They are also expected to pay a quarterly percentage tax, either under the VAT (for businesses with quarterly gross sales exceeding P200,000) or non-VAT system (for businesses with quarterly gross sales of P200,000) or less). A business registered as non-VAT pays a 2% tax rate on income. 4.<br><br> Insuring One 9s Business Insurance, traditionally defined as ca device to handle risk, d is a natural consequence of man 9s desire to protect himself from economic losses arising from events that are beyond his control. It aims to substitute certainty for uncertainty. Business needs insurance.<br><br> cInsurance has something to do with the financial well-being of the individual and his livelihood, d What are the small businessman 9s options? First, he can be selective and pick only those policies that he really needs. If he is left with only one choice, he should opt for fire insurance which, in its most basic form, covers destruction of or damage to property by fire or lightning.<br><br> Then he chooses his insurer. It should not be a difficult task, once he knows what he is looking for. Motus reckons that one of the more than 100 non-life insurance companies on the market, only a handful, certainly less than 20 are really financially stable.<br><br> But despite such odds, picking one reliable company is not impossible. The bottom line is he must insure only with companies that are financially sound and can show an excellent track record in claims payment. <br><br>