Testing the Portfolio Risk in Philippine Microfinance Institutions

The study assesses the portfolio risk of microfinance institutions (MFIs) operating in the Philippines, evaluates and determines the challenges and issues affecting portfolio risk of MFIs, explains the microfinance programs and policy environment in the country, and examines the impact of institutional variables, borrowers’ gender, and macroeconomic indicators from 1998 to 2014. Based on the Philippine MFI data of 119 institutions which are providing microfinance services at present, the study found that institutional variables, including number of active borrowers, gross loan portfolio, operating expense over loan portfolio, borrowers per staff member, return on equity, percent of women borrowers, regulation, and macroeconomic indicators including lending interest rate, GDP growth, and inflation were the factors that highly affected the portfolio risk in MFIs. Overall, outreach, cost efficiency, productivity, profitability, percent of women borrowers, and regulation alongside macroeconomic indicators appear to be more important features affecting portfolio risk of MFIs. The interest of the study is also to examine the impact of MFI lending to more women on portfolio quality. Further, we evaluate the relationship of MFI lending to more women on cost efficiency and financial sustainability. The study found that lending to women increases portfolio risk, is costly, and not financially sustainable. Although serving women has potential advantages in terms of reputation for better repayment, reliability, and greater ability to use the loan proceeds for economic development, the result is suggestive that the success of MFIs depends on the women borrowers’ access to capital and interest rates matched to gender differences. Increasing women’s access to basic financial services would better cope up with portfolio risk. The microfinance services are less efficient from its portfolio at risk point of view, thus, portfolio quality suffers. Certainly, it would be expected that microfinance industry in the Philippines not properly managed would incur losses in the long run. Overall, viability and long-term financial sustainability are important for the success of the MFIs. Unless microfinance operations become viable and sustainable, MFIs can never fully materialize their objective of reaching a greater number of active poor people and sustain the effort over the long term.