In the Philippines, the formal credit system consists of banks, non-bank financial institutions and cooperatives, while the informal sources include friends, relatives, neighbours, private moneylenders, traders, millers, input suppliers, and other informal groups (Tolentino, 1988).
2.6.2.1 Evolution of Credit Policies
Over the years, the Philippine Government has adopted policy measures to enhance the access of small farmers to credit (Corpuz & Kraft, 2005). Prior to the reforms in 1986, the rural credit policy in the Philippines took the supply-led approach with emphasis on directed credit2 and interest rate subsidies that dominated the 1970s until mid-1980s (Corpuz & Kraft, 2005; Esguerra, 1998). The government’s financing approach was supply-led wherein there were mandatory credit allocation, loan targeting, below-market interest rates, and credit subsidies to clients. The intention of such an approach was to provide loans to small farmers, small fisherfolk and generally small-scale borrowers who could not borrow from banks (Llanto, 2003). But various studies showed that many rural banks that participated in the government’s subsidised credit programmes collapsed because of high arrearages and poor loan recovery. Also the credit went to unintended beneficiaries, such as rich farmers and those with political affiliation (Castillo & Casuga, 1999; Esguerra, 1981, 1998; Esguerra, 1993; Neri & Llanto, 1985).
Masagana 99 (M99) was a prime example of the implementation of rural credit policy prior to the reforms, which exemplified the government’s rice self-
2
Directed credit is the preferential allocation of credit to specific sectors based on a priority scheme determined by the government.
sufficiency programme through the provision of no-collateral loans at subsidised rates for the purchase of farm inputs (Esguerra, 1981). M99 was the centrepiece of the government’s agricultural credit policy in the 1970s and served as a prototype for the succeeding supervised credit programmes (SCPs) in the country. In this programme, small banks were given 65-90% of the credit subsidies from the government that made them dependent on cheap sources of funds and discouraged mobilisation. Loan screening and collection were lax, which led to poor repayment rates (Lim & Esguerra, 1996). Other SCPs for corn, vegetables, fish, cattle, cotton and tobacco were patterned after Masagana 99 (Esguerra, 1981).
Another approach is the supervised credit3 approach which sought to provide a subsidy for risk-taking through production loans with below-market interest rates. This approach was rationalised as institutional support for farmers opting to change their tenurial status from sharecropping to leasehold or owner- cultivatorship under the Marcos regime (Esguerra, 1981). It arose from the popular perception that farmer-borrowers are exploited by private moneylenders through usurious interest rates. Various assessments concluded that the supervised credit programmes in the Philippines were not successful for reasons such as the lack of effective supervision and control over loan utilisation, reluctance of financial institutions to continue financing because of increasing defaults, reluctance of farmers to borrow because of the fear of prosecution in case of delinquency, and the lack of banks and project management (Esguerra, 1998).
The reform of rural credit policy continued with the eventual change of government in 1986. Executive Order 113 (EO 113) terminated the direct lending programmes of non-financial government agencies and consolidated some 20 agricultural credit programmes into the Comprehensive Agricultural Loan Fund (CALF). There was pooling of funds for agriculture through the CALF wherein separate, commodity-specific lending funds were consolidated and managed by a single entity. The CALF was also used to fund pioneering
3
A system of lending which combines adequate and timely provision of credit with farm and home management guidance under a trained production or farm management technician.
ventures and experimental credit schemes in the search for cost-effective ways of delivering credit to small farmers (Castillo & Casuga, 1999).
Another reform of government rural credit policy was a change in the approach to rural lending (Corpuz & Kraft, 2005). The new credit programmes provided a comprehensive range of activities instead of being commodity-specific and activity-specific as before (Castillo & Casuga, 1999). An example is the Integrated Rural Financing (IRF) programme which supports multiple and diversified farming systems (Llanto, 2003). There was an emphasis on group lending rather than individual lending, and on the strengthening of the savings mobilisation component of rural credit (Castillo & Casuga, 1999).
Still another reform was the participation of non-bank financial institutions in rural credit, including the cooperatives, credit unions, farmers’ associations and Non-Government Organisations (NGOs). The involvement of these organisations aimed at improving small borrowers’ access to credit, reducing transaction costs, promoting savings and alleviating poverty (Castillo & Casuga, 1999). The group focus improves the chances of getting a loan and group membership substitutes for collateral, without which an asset-less borrower may not have access to formal credit. Some of the rural credit programmes involving groups include: Grameen Bank Replication Program (GBR), Development Assistance for Cooperatives and People’s Organizations (DAPCOCO), Integrated Pump Acquisition Program (IPAP), Livelihood Enhancement for Agricultural Development (LEAD), among others (Llanto, 2003).
2.6.2.2 Current Policies and Programs
The Agriculture and Fisheries Modernization Act (AFMA), or RA 8435, was passed in 1997 to help transform agriculture into a highly productive and competitive sector in order to enable farmers and fisherfolk to meet the challenges of globalisation. The Law covers the many elements critical to agriculture modernisation, such as research and development, infrastructure, training, marketing and credit, among others (1998). It can be noted that one of AFMA’s current imperatives is the proper management and utilisation of credit
funds. It initiated the Agro-Industry Modernization Credit and Financing Program (AMCFP), which is the current agriculture, fisheries and agrarian reform credit and financing system of the country.
The AMCFP is designed to make credit more accessible to small farmers by including rural banks, cooperative rural banks, cooperatives, self-help groups, farmers’ organisations, and non-government organisations as retailers of the AMCFP fund (1998). Its objective is to make credit delivery more efficient and effective through financial institutions that have adequate experience, expertise and resources, and are less costly by removing the lending task from non- financial agencies of the government (Corpuz & Kraft, 2005). Policymakers continue to be concerned as to how farmers can be mainstreamed into the formal credit market (Castillo & Casuga, 1999).
2.6.2.3 Other Policy Initiatives
The Agricultural Credit Policy Council (ACPC) designs innovative financing schemes to address the particular requirements of marginalised farmers and fisherfolk who cannot put up the collateral required by banks. The objective of designing such innovative financing schemes is to give the farmers and fisherfolk the opportunity to be productive and acquire the necessary tools so that they can be mainstreamed into the credit arena (Corpuz & Kraft, 2005). Likewise, the ACPC provides grant funds to farmer organisations for institution capacity building activities in cooperation with both government and private training institutions. The programme enhances the delivery of credit to small farmers by providing funding assistance for relevant institution capacity building projects/activities such as: capital and savings mobilisation; development of management information systems; social preparation for small farmers and fisherfolk; management training; credit risk management; and organisation, establishment and strengthening of cooperative banks and other farmer-owned financial institutions (Corpuz & Kraft, 2005).