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Contents : REACHING THE POOR WITH EFFECTIVE MICROCREDIT: EVALUATION OF A GRAMEEN BANK REPLICATION IN THE PHILIPPINES1 Mahabub Hossain and Catalina P. Diaz Social Sciences Division International Rice Research Institute (IRRI) Los Ba os Laguna Philippines Abstract The Grameen Bank in Bangladesh has developed a succesful model of reaching credit to resource poor households that are generally bypassed by Government financial institutions. This paper evaluates the experience of the replication of the model in the Philippines by the Center for Agriculture and Rural Development (CARD) an NGO which has disbursed P82 million to 8000 borrowers since 1990 and has succeeded in recovering the entire amount. Analysis of the data collected from 133 sample household borrowers suggests that for the enterprises financed with credit the productivity of labor was higher than the wage rate and the rate of return was higher than the interest charged on the loan. The credit contributed to 25 percent increase in household incomes. The institution however is not yet financially viable as the cost of operation is about 54 percent of the amount of outstanding loan. Without high rates of interest the microcredit operations will not be able to expand 1 Paper presented during the International workshop on Assessing the Impact of Agricultural Research on Poverty Alleviation September 14-16 1999 International Center for Tropical Agriculture CIAT Cali Columbia. 2 their operations on a large enough scale to have a significant impact on poverty alleviation. The authors acknowledged the support received from Maritess Tiongco Joel Rea o Nancy Palma and Josephine Narciso of the Social Sciences Division. I. Introduction Background Providing credit and organizational support to the poor who do not have assets to use as collateral to formal financial institutions have been the key elements of the non-government organization s (NGO) approach to alleviation of poverty and improving livelihood in many developing countries. Although governments realize that resource-poor rural households need affordable credit to enhance household incomes the formal financial institutions failed to reach the poor because they adhere to stringent collateral requirements and the credit disbursement and recovery procedures are not suitable for their economic environment (Baker 1968 Adams and Vogel 1986). The Grameen Bank in Bangladesh has developed a successful model of reaching credit to the resource poor households that are generally bypassed by government financial institutions (Hossain 1988 Khandaker 1996). The model is now being replicated in a large number of countries. The fundamental features of the Grameen Bank model are (Fuglesang and Chandler 1988 1993): An organizational structure that ensures that clients belong to the bottom half of the socioeconomic hierarchy. A credit system that is designed to be simple and adaptable to cater to the needs of the clients. 3 A built-in savings mobilization component that enhances self-reliance and provides cover against business risks and natural calamities. A self-empowerment mechanism that provides women an opportunity to assert themselves in the households and the society. The Center for Agriculture and Rural Development (CARD) a non-government organization has been implementing a replication of the Grameen Bank model in the Philippines known as the Landless People s Development Fund (LPDF). CARD was organized in December 1986 with its headquarters located in San Pablo City Laguna in Southern Luzon. The scope of the study The main objective of the LPDF is to extend credit facilities to resource poor households for creating opportunities for productive self-employment for the vast underutilized human resource. The credit program is thus targeted to the poor for improvement of their living conditions. So any evaluation study must investigate the extent to which the credit has reached the target group and analyze the impact of credit on employment generation and improvement in the level of living of the borrower household. The economic viability of the credit program from the borrowers side depends on the rate of return of the activities that CARD members are financing with the loan. If the rate of return of capital is not high enough to cover the cost of the loan plus a premium for the risk borne in undertaking the activities the client may not continue association with CARD and take a repeat loan even if credit is offered to them. So it would be useful to estimate the labor productivity and profitability of the major enterprises that are financed with the loan. The rate of return on investment may also be used as a criterion for selecting enterprises that have potential for growth and or judging the absorptive capacity of the member-borrowers. 4 From the lender s side the economic viability of the credit program depends on the capacity to recover the cost

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