Assessing Microfinance and the USAID MABS Program in the Philippines

Overall security of property and freedom of contract are crucial ingredients of an institutional setting that promotes access to capital and enables a risk-taking environment. In the absence of secure property and the freedom of contract, or in situations where these ‘basic institutions’ are weak, as they are in the Philippines, MF practices have evolved to provide the capital for small-scale enterprises. These practices rely upon personal mechanisms of exchange to serve as proxies for collateral. And while these practices provide access to capital to the previously ‘unbankable’, providing real opportunities for substantial improvements in their standard of living, they cannot be the source of sustainable long-run development. Moving from institutions that promote personal exchange to those that promote market-based, impersonal exchange requires changes in the basic institutions of property and contract. MF is having a real impact on the lives of individuals. But if mismeasured, the true benefits and value of MF may not be fully recognized and policy decisions may, with the best intentions, upset what is currently a delicate balance. Pouring cheap money into more and more MFIs may result in a significantly increased outreach, but it risks dampening the incentives and increasing the costs associated with building institutions that move individuals from personal to market relations and ultimately, a social system that is able to capture, to a much larger extent, the gains from exchange.