“Analysis of Funding Procedure of Microfinance to the Selected Small and Medium

Enterprises in Concepcion Uno, Marikina City: Basis for Improved Profitability”

A Thesis Presented to

The College of Management and Technology

Department of Business Administration

Pamantasan ng Lungsod ng Marikina

In Partial Fulfillment of the Requirements for the Degree of

Bachelor of Science in Business Administration

Major in Financial Management

Submitted by:

Arcenas, Andre Phillip G.

Badrina, Jovimil R.

Francisco Jr, Rolly H.

Hinahon Jr, Nonelon C.

Porlit, Jhecyl C.
 CHAPTER I

INTRODUCTION

The rising population and decreasing job opportunities has contributed to the rising

numbers of retail enterprises in the rural as well as the urban areas in the country. The absence of

enough job opportunities is the main reason why people are forced to look for alternatives modes

of earning their livelihood. According to Milton Friedman, a Noble Prize winner, “the poor stay

poor, not because they are lazy but because they have no access to capital”. This statement is

really true in most cases. As we observe every day, there are lots of different kinds of vendors we

can see in the streets. Those vendors work really hard to improve their living, but still

hardworking is not enough to support all their needs. Vending is a strategy for those who cannot

find formal employment, and as an alternative earnings. They prefer to put up small scale

business independently. In fact, they can be considered as micro entrepreneurs.

As primary sources, borrowing has become one of the alternative choices people use to

provide for their capital. Since, capital is limited to poor people who want to invest or start a

business, credit takes place. In the Philippines, microfinance is an institution which helps poor

people to start or grow a business. It helps in the growth of small or micro enterprises, in a way it

lends small amount to small or micro entrepreneurs.

Every successful company starts from small one before it prospers. Every business passes

through from a small capital that commonly came from a credit to be able to run their business.

Most of people who have not enough capabilities to establish their own business rely on credit,

especially for those micro and small business. Micro and small enterprise defined as small

business that are privately owned either by sole proprietorship or partnership that have fewer

employees and less annual revenue than regular sized business.

 An important way to grow a business is to use leverage properly. “Bangko Sentral ng

Pilipinas (BSP) coordinates with the Security and Exchange Commission (SEC) and other

relevant government agencies to craft the implementing rules and regulation. For micro credit,

this initiatives hopes to increase the access to credit by micro , small and medium enterprises as

well as answer problems of credit pollution and multiple borrowings. On a large scale, the

sharing and dissemination of information through such a credit information system will lead to a

sound, healthy and vibrant credit market”. This was according to signed into law on September

1, 2008 as Republic Act 9510. This support from BSP helps small business nowadays to have a

source in borrowing to support cash flow needs.

Micro Finance Institution (MFIs) has proved to have very important role in the society.

MFI contributes to the economy’s development by providing financial services to the poor

section of the society. MFIs also contribute to Philippine economy by bringing growth and

employment creation and innovation to the community.

The main purpose of this thesis is to understand the funding procedure of microfinance as

basis for improved profitability of the SMEs. If funding can be of great help to the SMEs in

terms of improving income and consequently alleviate poverty.

Background of the study

Microfinance as a provision of financial services such as loans to low income earners

usually a business which has limited access to formal banks. It therefore targets the informal

sector that comprise of Small and Medium enterprises (SMEs). Small businesses and enterprises

play significant role in advancement of economy, however many small businesses are unable to

grow due to lack of financial access from because of the collateral requirements given by formal

banking.

Microfinance programs have been raised in different countries such as India, Bangladesh

and of recent have been introduced in Philippines. The Philippine government has recognized the

effectiveness of microfinance and increased promoting the development practice. It has also

prioritized the need to stimulate the use of microfinance and expand its reach across the country.

As stated by Economist Intelligence Unit, the Economist (EIU) Ltd.(2017) the Philippines'

microfinance industry ranked as first in the world. The EIU also included the Philippines as

among the top 10 countries in terms of overall business environment for microfinance. The

country’s microfinance industry has consistently showed growth every year. According to the

Microfinance Council of the Philippines Inc. (MCPI), microfinance non-governmental

organizations (MNGOs) recorded two years ago a total of 3.034 million active borrowers. Of this

figure, banks listed 1.23 million, while cooperatives had 2.459 million borrowers. Microfinance

recognized as an influential method of directly improving the lives of those most in need. This

microfinance’s funding services can be used to build small businesses and develop other income-

generating activities that have a long-lasting impact.

 Small and medium enterprises (SMEs) are the important factors of employment and

national growth, but a regional study shows that funding opportunities in the sector are quite

limited. The majority of SMEs in the Philippines have limited access to finance, according to a

joint study by Deloitte and Visa, titled "Digital banking for small and medium-sized enterprises:

Improving access of finance for the underserved."(2015).

There are prior studies gathered such complaints from the business community that lack

of acceptable collateral, a very short term nature of bank loans, high interest rates that makes

bank unsuited in funding SMEs. That’s why microfinance institution play a major role to the

growth of SMEs, with the help of funding services of microfinance SMEs could raise their

income and expand their business.

While microfinance institutions expanded over the years, so did the study about the

contribution and effectiveness of microfinance to the growth of SMEs and reduction of poverty.

Some studies concluded the relation of microfinance to certain successes in SMEs growth and

profitability.
Review of Related Literature

Microfinance also known as “microcredit” offers financial services such as loans, savings

and insurance to entrepreneurs and small business owners who are lacking access to traditional

sources of capital like banks or investors. According to Yuliva Tarsava(2018), co-founder and

COO of CNote, “Microfinance focuses on meeting the financial needs of populations that are

financially undeserved. These are individuals who usually lack of credit or resources to secure

loan and are unlikely to get approval from traditional banks. Typically, these consumers are

seeking small denominations of loans to finance the purchase of specific equipment or capital to

start a small business”. Yuliva Tarsava also said that “the end goal of microfinance is to have its

users to outgrow these smaller loans and become ready for a traditional bank loan”.

According to Economist Intelligence Unit, the Economist (EIU) Ltd.(2017) the

Philippines' microfinance industry ranked as first in the world. The EIU also included the

Philippines as among the top 10 countries in terms of overall business environment for

microfinance. The country’s microfinance industry has consistently showed growth every year.

According to the Microfinance Council of the Philippines Inc. (MCPI), microfinance non-

governmental organizations (MNGOs) recorded two years ago a total of 3.034 million active

borrowers. Of this figure, banks listed 1.23 million, while cooperatives had 2.459 million

borrowers. The MPCI executive director Robert Allan Sicat said in a forum that cooperative

sector is quite tricky. According to him, they don’t have the exact number of borrowers and total

loans outstanding of cooperatives engaged in microfinance, because they don’t monitor their

microfinance portfolio. But many of our cooperatives have small savings and loans that we may

consider as microfinance.
 As stated by William Gahinhin (2017) One of the challenges of small and new

entrepreneurs and the microenterprises is the access to finance without financial access,

microenterprise and small businesses will have difficulty in growing business. With the help of

microfinance loan SMEs could raise their income and expand their busineness. Microfinance

loan as defined in RA No. 8425, otherwise known as the “Social Reform and Poverty Alleviation

Act”, and other loans: these loans are granted to the poor and low income individuals for their

microenterprises and small businesses so as to enable them to raise their income levels and

improve their living standards

According to Monetary Board Resolution No. 40 (2009)Microfinancing loans are small

and unsecured loans with no need for collateral. The amounts are normally Php 2,000 to Php

P5,000 and could be more but not higher than Php 150,000. The loan can be paid daily, weekly,

bimonthly or monthly. The interest cannot be lower than market rate and should be fair. The

microfinance loan can be used as the start-up capital for different businesses. It can be used as

equity for sari-sari stores, different “buy and sell” businesses, handicrafts or small manufacturing

(rug-making, basket-making, etc.); services like tricycle operation, barber/parlor shop, repair

shop; or food production/processing like meat processing, candy-making, bakery and any other

types of small business.

According to the Asian Development Bank(2016), small and medium enterprises (SMEs)

are the backbone of Asian Economies, making up of 98% of all enterprises and 66% of the

national labor force from 2007-2012. In the Philippines, 99.1% of the businesses are Small and

Medium Enterprises (SMEs) and only 0.99% are large enterprises. Small and Medium

Enterprises can be categorized by its value of assets and employment size. According to

Department of Trade and Industry, they defined Small and Medium Enterprises (SMEs) as
provided under the Magna Carta of SMEs Republic Act 6977 Section 3 as any business activity

or enterprise engaged in industry, agribusiness and/or services, whether single proprietorship,

cooperative, partnership or corporation whose total assets, inclusive of those arising from loans

but exclusive of the land on which the particular business entity’s office, plant and equipment are

situated, small enterprises ranging from more than 3,000,000 to 15,000,000 and medium

enterprises ranging from 15,000,000-100,000,000 .

The Filipino SMEs’ market is a big help for our country's economic growth. They

perform economic activity, generate employment, prompt innovation, heighten competition and

contribute largely to the country’s progress. However, Philippine SMEs continue to face serious

difficulties and challenges in relation to their existence, development and competitiveness .One

of its major reasons is they have limited access to financing according to a joint study by Deloitte

and Visa, titled "Digital banking for small and medium-sized enterprises: Improving access to

finance for the underserved." (2015)

Understanding Profitability

According to Hofstrand(2009) profitability is the primary goal of all business ventures. Without

profitability the business will not survive in the long run. So measuring current and past

profitability and projecting future profitability is very important. Profitability is measured with

income and expenses. Income is money generated from the activities of the business. For

example, if crops and livestock are produced and sold, income is generated. However, money

coming into the business from activities like borrowing money do not create income. This is

simply a cash transaction between the business and the lender to generate cash for operating the

business or buying assets.

 Expenses are the cost of resources used up or consumed by the activities of the business.

For example, seed corn is an expense of a farm business because it is used up in the production

process. Resources such as a machine whose useful life is more than one year is used up over a

period of years. Repayment of a loan is not an expense, it is merely a cash transfer between the

business and the lender.

Profitability is measured with an “income statement”. This is essentially a listing of

income and expenses during a period of time (usually a year) for the entire business. Information

File Your Net Worth Statement includes - a simple income statement analysis. An Income

Statement is traditionally used to measure profitability of the business for the past accounting

period. However, a “pro forma income statement” measures projected profitability of the

business for the upcoming accounting period. A budget may be used when you want to project

profitability for a particular project or a portion of a business.

Measuring profitability is the most important measure of the success of the business. A

business that is not profitable cannot survive. Conversely, a business that is highly profitable has

the ability to reward its owners with a large return on their investment. In the theory of

profitability modified by (Myers and Majluf 1984), firms follow a hierarchy to choose sources of

finance. The hierarchy gives first preference to internal financing. If internal financing is not

enough, then managers would have to shift to external sources. They will issue debt to generate

funds. After a point when it is no longer practical to issue more debt, equity is issued as a last

option.
 The Advantage and Disadvantages of Credit. According to Abellon and San Agustin, the

advantages of credit are:

1. Credit in its nature, plays a vital and major part in any economy. It speeds up the transfer of

goods from producers to consumers. Imagine if one has always to have cash to be able to buy

goods and services. Through credit, one has only to pay a small amount as a down payment and

the balance through installments.

2. Credit also makes capital more productive. Excess or unused capital may be deposited in a

bank earnings for the depositor interest as compensation for the transfer of capital. These

deposits are then combined together and in turn lent to merchants or manufacturers who can use

the money productively. Thus, credit makes capital more productive.

3. Credit does not only benefit the consumer but the entire business industry as well. The retailer

gets his goods from the manufacturer on credit which in turn gets the raw materials from their

suppliers also on credit. These suppliers borrow their capital from banks, whose money comes

from the creditors or depositors.

4. A great advantage of credit in business is convenience. It becomes a simple matter to transfer

huge amounts of money through credit instruments, even overseas.

5. Credit may be secured to establish an enterprise and finance its various transactions, adding to

its growth. When done across sectors, this process accelerates capital formation, employment

generation, and therefore, contributes not only to the overall economic development but also to

the enhancement of social responsibility.

While credit has advantages, it also has disadvantages:

1. Massive defaults across sectors trigger credit controls, making it harder to secure the needed

liquidity to continue business operation.

2. Credit encourages over-zealous and aggressive entrepreneurs to over- expand unreasonably.

Failure to generate the expected resources can only cause reverses in business in which affect the

nation’s economy. Some businessmen abuse the credit extension privileges afforded them by

banks which sometimes end to the disadvantage of the entrepreneur. Often this is caused by

failure to make an adequate study of a contemplated project.

3. Credit likewise contributes to the extravagance and carelessness on the part of the borrowers.

Many borrowers become “trigger-happy” upon extension of credit, or upon receipt of loan

proceeds. Sometimes they fail to use the credit extended for the purpose for which it was

originally intended.

4. In marketing-oriented company, the desire to push sales might lead to extension of credit to

unworthy or risky parties who might end up to be bad debtors after all who will cause the

collapse of the company.

5. Over-extension of credit could create an imbalance in the financial system. It could cause

liquidity problems, especially if credit is extended to favored individual who have more C’s

inclined towards connections than any of the C’s of credit.

Microfinance involves extending small loans, savings and other basic financial services to

people that don’t currently have access to capital. It’s a key strategy in helping people living in

poverty to become financially independent, which helps them become more resilient and better

able to provide for their families in times of economic difficulty. Considering nearly half the

world survives on less than $2 a day, microfinance is a vital solution. According to Plan

International Canada Here are six benefits of microfinance:

1. Access Banks simply won’t extend loans to those with little or no assets, and generally

don’t engage in the small size of loans typically associated with microfinancing.
 Microfinancing is based on the philosophy that even small amounts of credit can help end

the cycle of poverty.

2. Better loan repayment rates Microfinance tends to target women borrowers, who are

statistically less likely to default on their loans than men. So these loans help empower

women, and they are often safer investments for those loaning the funds.

3. Extending education Families receiving microfinancing are less likely to pull their

children out of school for economic reasons.

4. Improved health and welfare Microfinancing can lead to improved access to clean

water and better sanitation while also providing better access to health care.

5. Sustainability Even a small working capital loan of $100 can be enough to launch a

small business in a developing country that could help the benefactor pull themselves and

their family out of poverty. 

6. Job creation Microfinancing can help create new employment opportunities, which has

a beneficial impact on the local economy.

Microfinance Institution (MFI) Due Diligence Process

Our microfinance institutions (MFIs) partners are an integral part of our operations.

They are responsible for vetting potential borrowers, for posting loans onto the MicroWorld

website, for disbursing the money, and for collecting repayments. For this reason, we take the

selection of MFIs very seriously.

The objective of the due diligence process is to evaluate the risks existing in an MFI in

order to make an informed investment proposal. The process, therefore, is mandatory for each

MFI with which we consider signing a partnership agreement. Different kind of partnerships will
 be established according to the selection process stage and to the credit risk of the MFI

evaluated by the risk committee.

Our Operation team proceed to all due diligence, using the expertise of PlaNet Finance,

and the particular analysis experience of Planet Rating.

There are several stages to the MFI selection process:

1. On Desk Analysis- MicroWorld requests relevant data from the MFI. A strong analysis of

the documents collected about the MFI and the country will be made by the operations

department of MicroWorld with the assistance of Planet Rating (the specialized microfinance

rating agency of PlaNet Finance Group) in order to write a Pre-Investment Memorandum with a

recommendation to the Investment Committee, based on the analysis of specific criteria.

2. First Investment and Risk Committee - will validate (or reject) the partnership

application. Loans from validated MFIs will start to be published on the website. According to

the credit risk evaluated, different status of partnership will be established with limitations on

the amount of funding. The lender will be also clearly informed on the loan page with specific

warning messages.

3. On-site Due Diligence - To confirm the status of each MFI, a due diligence on-site will be

conducted for most of them. It consists in 2 or 3 days analysis conducting interviews and

investigating all pre-identified topics plus any additional issues identified by the investment and

risk committee. They use a set book of procedures to analyze risk areas. Following the on-site

due diligence, the MicroWorld operation team produces an investment memorandum that

summarizes the on-site Due Diligence.

4. Supervision by PlaNet Rating Notation Committee - Planet Rating is bringing its

expertise in the new due diligence process of MicroWorld. Each report and grade will be

submitted to a Notation Committee involving expert and senior analysts from PlaNet Rating.

The aim of the Notation Committee is to give its opinion on MicroWorld’s analysis. The

Notation committee introduces an iterative process in which MicroWorld may pursue the data

collection and analysis until the notation committee agrees with MicroWorld’s conclusions.

5. Final Partnership decision - After conducting the due diligence, the Investment

Committee is requested to decide upon the establishment of a final partnership and define the

final “risk profile” of the MFI.

6. Quarterly Investment Committee meeting - A quarterly Investment Committee will be

organized by MicroWorld to update on-going MFI partnerships and current statuses with

potential future partners. These Quarterly Investment Committee should involve a meeting and

physical presence of all Committee members as much as possible.

MFI Integration

Once an MFI has been selected and contracts agreed between MicroWorld and the MFI,

the operations department is responsible for making it possible for the MFI to post loans on the

website. A member of the operations department visits the MFI for an extended period in order

to conduct detailed training of the MFI team. Back at MicroWorld headquarters, the operations

team begins setting up the MFI on the internal MicroWorld systems, ready to post their loans.

MicroWorld believes in minimizing its impact on the MFIs, therefore it tries to be as

flexible as possible when implementing its processes to the MFI.

Characteristics of Microfinance

According to (Murray, U and Boros, R, 2002), there are many activities and characteristics

are included in microfinance. Some are:

 Small amounts of loans and savings.

 Short- terms loan (usually up to the term of one year).

 Payment schedules attribute frequent installments (or frequent deposits).

 Installments made up of both principal and interest, which is amortized over the course

of time.

 Higher interest rates on credit (higher than commercial bank rates but lower than loan-

shark rates), which reflect the labor-intensive work associated with making small loans

and allowing the microfinance intermediary to become sustainable over time.

 Easy entrance to the microfinance intermediary saves the time and money of the client

and permits the intermediary to have a better idea about the clients’ financial and social

status.

According to Essay Uk(2016) Application of microfinance procedures are simple.

Short processing periods (between the completion of the application and the disbursements of

the loan).

The clients who pay on time become eligible for repeat loans with higher amounts.
The use of tapered interest rates (decreasing interest rates over several loan cycles) as an

incentive to repay on time. Larger loans are less costly to the MFI, so some lenders provide

large size loans on relatively lower rates.

No collateral is required contrary to formal banking practices. Instead of collateral,

microfinance intermediaries use alternative methods, such as the assessments of clients’

repayment potential by running cash flow analyses, which is based on the stream of cash flows,

generated by the activities for which loans are taken.

According to Asian Development Bank(2007) Impact of Microfinance on Rural Households in

the Philippines : reducing poverty, creating employment opportunities, and enhancing the

income of the poorest of the rural poor in the Philippines.

1. Majority of the existing clients, new clients and non-participating households which are

deemed qualified for the program are not really poor by official definition. This is in

sharp contrast to other studies which indicated that majority of the microfinance program

clients are poor.

2. Microfinance has a positive and significant effect on income and expenditure. However,

the effect is regressive which implies that poorer households do not feel as much the

effects of the intervention as compared to the richer households. This further indicates

that among poorer borrowers, the cost of and availability of the loans appears to be

insufficient to prod them to select more productive activities to pay for the cost of

borrowing and to earn some revenues.

3. The project has enabled participants to reduce dependence on presumably higher priced

non-Grameen loans. It has increased the proportion of those having savings accounts in
 program and other microfinance insitutions. Increased savings in those accounts implies

better consumption potential.

4. The project has made beneficiaries engaged with their enterprises. This likewise results in

employment in these enterprises.

5. The project has no significant impact on household assets as well as on human capital

investments such as health and education. It appears that the mild impacts on income and

expenditures were insufficient to change either accumulation of household assets or

human capital investments.

Figure 1 Theoretical Framework

Hierarchy of Pecking Order Theory by Stewart Myers and Nicolas Majluf

internal financing

external financing:
debt

external financing: equity

In the Figure 1 Pecking order theory was initially proposed by Donaldson. In 1984 Stewart C.

Myers and Nicolas Majluf rework and popularized the theory. According to Myers that the

financial needs of small and medium enterprises are met in order of hierarchy. When it comes to

raising funds in business, pecking order theory explains that when assessing whether to use

internal funds, debt, or new equity. According to the pecking order theory internal financing is

used first. It is easiest to obtain and has low risk. However, running a business on mere internal

financing or money that has been saved up is usually insufficient to sustain the business for a

long period. When the SMEs obtain the first set of funds internally and as the financial needs

increases, they obtain more funds through the use of debt capital. As far businesses are

concerned, debts are the next safer sources regarding financing. After a point when it is no longer

practical to issue more debt, equity is issued as a last option.

 Figure 2. Conceptual framework

INPUT OUTPUT
PROCESS

1. Respondents Profile 1. Distribution of

1.1 Name of Business Survey
1.2 Age Questionnaire
2. Collection/
1.3 Gender
Gathering of Data
1.4 Years of business operation 3. Analyzing Data

1.5 Capitalization

2. Level of Effectiveness
2.1 Length of approval

2.2 Charges imposes

2.3 Collateral required

2.4 Terms of loans

2.5 Frequency of payment

3. Is there any significant

relationship in the opinion of

respondents between funding

services of micro finance and

profitability?

1.

Feedback
The figure 2 show the flow of study to be taken and the different variables needed in the study.

This conceptual framework use system approaches wherein all important variables gather to establish
the flow of conceptual framework.

The researcher aim to conduct a study in a traditional input-process-output (IPO) framework.

The discussion of this paper is based on the analysis of funding procedure of the microfinance to the
selected small-medium-enterprises (SME) in Concepcion Uno, Marikina city towards their profitability.

Under the input section, it represents the independent variables that could analyse the funding
procedure of microfinance to the selected small-medium-enterprises (SME) towards their business
profitability. The process section, represent as the intervening variables. The researcher will use survey
questioners to analyze the data collected and to come up with dependent variables which is the output
section.
Statement of the Problem

This study aims to determine the funding procedure of Microfinance towards profitability of

Small and Medium Enterprises’ (SMEs).

This will answer to the following questions.

1. What is the Demographic Profile of the respondents in terms of the following:

1.1 Name of business

1.2 Age

1.3 Gender

1.4 Years of business operation

1.5 Capitalization

2. What is the perception of the respondents to the financing service of microfinance to their

profitability in terms of the following:

2.1 Length of approval

2.2 Charges imposes

2.3 Collateral required (if there’s any)

2.4 Terms of loans

2.5 Frequency of payment

3. What are the procedures Microfinance Institutions used to provide credit services to

Small and Medium Enterprises (SMEs)?

3.1 Length of approval

3.2 Charges imposes

3.3 Collateral required (if there’s any)

3.4 Terms of loans

 3.5 Frequency of payment

4. Is there any significant relationship in the opinion of respondents between funding

services of micro finance and profitability?

Definition of Terms

Microfinance, also called microcredit, is a type of banking service that is provided to

unemployed or low-income individuals or groups who otherwise would have no other access to

financial services. 

Profitability is ability of a company to use its resources to generate revenues in excess of its

expenses. In other words, this is a company’s capability of generating profits from its operations.

Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which

employ fewer than a given number of employees. Depending on the country, the size of

the enterprise can be categorized based on the number of employees, annual sales, assets, or any

combination of these.

Internal Financing. This happens when a company uses its own profits as a source of capital for

a new investment rather than getting the money from outside sources.

External Financing. Money obtained from outside investors and lenders and not from a firm's

internal reserves.

Debt financing. Occurs when a firm raises money for working capital or capital expenditures by

selling debt instruments to individuals and or institutional investors.

Enterprise is a company or business, often a small one.

Funding. Providing financial resources to finance a need, program, or project. In general, this

term is used when a firm fills the need for cash from its own internal reserves.
Financing is the process of providing funds for business activities, making purchases or

investing. Used when the need is filled from external or borrowed money.

Credit is a contractual agreement in which a borrower receives something of value now and

agrees to repay the lender at some later date with consideration, generally with interest.

Capital is a term for financial assets (such as funds held in deposit accounts), as well as for

tangible factors of production such as manufacturing equipment.

Collateral is a property or other asset that a borrower offers as a way for a lender to secure the

loan. If the borrower stops making the promised loan payments, the lender can seize the

collateral to recoup its losses.