Authors: Bea Charmelyn Lambitco, James Clifford Santos, and Raymond Vincent Baritua
Date Published: 11 October 2014 (Ateneo De Manila University, Philippines)
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One of the greatest challenges that the Philippines is still facing today is poverty reduction. In fact, data from the National Statistical Coordination Board show that the country’s latest poverty incidence has barely improved from that of almost a decade ago. From 28.8% in 2006, the percentage of Filipinos living below the poverty line only decreased by less than one percentage point to 27.9% in 2012.[1] This is in spite of the rapid growth that the economy has experienced for the past years, mainly driven by growth in government consumption and increased capital formation by the private sector. Concerning this issue, the World Bank blames a multitude of factors, notably the country’s lack of investment in physical and human capital (resulting to low quality of jobs) and lack of technological improvements, which all hinder the country from realizing rapid economic growth.[2]
To address the problem of poverty, several programs have already been conceptualized and implemented in the country. Among these initiatives is microcredit. First introduced by the Grameen Bank of Bangladesh in the 1970s, the microcredit program aims to provide loans to the poor who have little or no access at all to capital from financial institutions.[3] Not surprisingly, its vision reflects what Jeffrey Sachs refers to as the key to poverty reduction – that is, provision of minimum capital to the poor that will enable them to start their own livelihood businesses. Moreover, the usage of microfinance as an anti-poverty tool, as studies have shown, have had significant impact on poor households, most especially through increased savings, smoothened consumption and increased economic activity by engaging them in businesses.[4]
Microfinance in the Philippines started significantly in 2005 when the government, in partnership with the Asian Development Bank, began the Microfinance Development Program which sought to assist the country achieve the Millennium Development Goals, particularly in the areas of eradication of extreme hunger and poverty and the empowerment of women.[5] In connection to this, over the decade, microfinance institutions have been established in the country to help the poor secure small loans or microcredit. Indeed, it can be said that it has already been quite a long period of time since microfinance has been established in the country. However, it is quite intriguing that despite this fact, it seems that microfinance has not been able to really contribute much in reducing the overall poverty incidence of the country. This might be attributed to the fact that just like any other program, conflicts have also been associated with the use and implementation of microcredit in general.
According to Aminur Rahman, a member of the Canadian International Development Agency (CIDA), credits are provided to the poor under the assumption that they are creditworthy and bankable, and that the microfinance institutions are applying fair lending practices (i.e. not charging unreasonable amount of penalty fees to gain higher profit).[6] In an evaluation report published by the Asian Development Bank, it has actually been found that (1) many of the clients of microfinance institutions are not part of the poor population; (2) in spite of increased savings and involvement in entrepreneurial activities, the loans that are provided are not sufficient to encourage them to do more productive activities; and (3) microcredit has insignificant impact on the clients’ health and education.[7] These findings suggest that the microfinance institutions are facing a conflict between fulfilling its purpose of addressing the needs of the poor by the provision of capital and securing high profits by selecting clients that are not less likely to default on their loans (if they are to be seen as businesses as well). Furthermore, there is a dilemma amongst the poor between engaging in economic activities to lift themselves out of poverty in response to the opportunity given by the microfinance industry and choosing to be dependent on the aid of the institutions (including the government). The latter is not an irrational action, as their belief could have possibly been shaped by their experience of witnessing failed anti-poverty programs several times, resulting them to see that financial loans are not sufficient to raise their long-run economic well-being.
In a game-theoretic lens, this conflict between the poor and the microfinance institutions can be considered as an extensive form game. For simplicity, we assume perfect information and finite time horizon, considering the possibility that microfinance institutions would be deemed unnecessary and be pulled out of the industry. The following are the details of the game (in strategic form) which is suited to the Philippine context:
Players:
Filipino Microfinance Institutions designated as (Microfinance Institution)
Poor Filipinos designated as (Poor)
Strategies:
Microfinance Institution:
(G) provide generous capital to the poor
(S) be selective in choosing clients
Poor:
(L) use loan to lift self from poverty
(R) rely only on assistance from microfinance institutions and/or the government
Payoffs:
please refer to the illustration
Timing of the Dynamic Game:
Logically, the microfinance institution has to play first since it will be the one to choose whether to help the poor or not. It is followed by the poor’s decision on how they will act upon the action of the institution. Depending on the choice of the second player, the institution will then decide whether it is worth its while to help the poor or not.
Illustration:
More formally,
Players: I = {1, 2}
Nodes: N = {1, 2, 3, 4, 5}
Players active at each node (Ii):
I1 = {1}, I2 = {2}, I3 = {2}, I4 = {1}, I5 = {1}
Strategies of player i active at node n (Ain):
A11= {G, S}, A22= {L, R}, A23= {L, R}, A14= {G, S}, A15= {G, S}
Player 1’s Strategy Set:
{(G,G,G), (G,G,S) ,(G,S,G), (G,S,S), (S, G,G), (S,G,S), (S, S,G), (S, S,S)}
Player 2’s Strategy Set:
{(L, R), (L, L), (R, L), (R, R)}
It is important to note that the payoffs are not chosen in random. The first payoff (5,5), the highest among all the payoffs, is attained if the local microfinance institutions sincerely help the poor and if the poor Filipinos decide to lift themselves out of poverty. Both players attain the highest pay-offs in this scenario since this case can be characterized by a decrease in the level of poverty incidence thereby resulting to progress in the Philippines which is beneficial to both players.
For the payoffs consisting of 0 and 4 (i.e. (0,4) and (4,0)), the utility of (0,4) is derived if the local institutions become too generous to their clients while the poor take advantage of such generosity and consume all of their (the firms’) possible profits, hence a 0 pay-off for the local microfinance institutions while a high pay-off (4) for the poor Filipinos. The pay-off (4,0) meanwhile is achieved when the poor Filipinos choose to lift themselves out of poverty while the institutions are either taking advantage of them by charging high penalty fees or charges or worse, even ignoring their loan petitions. In this case, the local poor gets 0 pay-off because no matter how hard they try, they still would not be able to get out of their miserable situation. On the other hand, the local microfinance firms get a utility of (4) since they are able to outsmart their clients.
For pay-offs involving utilities (2) and (3) meanwhile, payoff (2,3) is derived when the local microfinance firms choose to be generous while the poor Filipinos choose to be reliant. In this context, the microfinance institutions obtain a lower utility relative to the poor because somehow, they are negatively affected by the latter’s decision to take advantage of their generosity even if they (the firms) opt to be selective at node 4. The poor receive a higher pay-off because apart from adopting a reliant attitude towards the government, they are able to somewhat outsmart the local firms. Pay-off (3,2) is meanwhile attained when the local microfinance firms choose to be selective (at the first node) while the poor attempt to lift themselves out of poverty. The poor this time receives the lower pay-off because they would most likely experience lowered hopes or disappointment first before the local microfinance institutions become generous towards them at node 5.
Finally, (1,1), the lowest of all the payoffs, is achieved when the local microfinance institutions become selective and the poor Filipinos on the other hand become reliant. The two groups receive low pay-offs because their actions are conflicting negative behaviors that will never result to a progress to both of them and to the Philippine society in general. Nonetheless, it is interesting to point out that the utility of the two are still greater than 0 because aside from not outsmarting each other, they can still get something beneficial from their decisions. In the part of the local microfinance firms, by being selective in the loan-granting process, they could still expect the support of well-off customers. Meanwhile, by choosing to be reliant on government aid, the poor could still attain a positive pay-off.
To easily solve this game, backward induction can be applied. Such method can be used since aside from the perfect information and finite time horizon assumptions, the game has only one player per node- the Microfinance Institution which represents all Philippine-based microfinance lending firms, and the Poor which represents all Filipinos living in poverty. In the figure below, the method suggests that the subgame perfect equilibrium in this dynamic game is the strategy [(G,S,S),(L,R)]. That is, the microfinance institution chooses to be generous while the poor chooses to lift itself out of poverty.
A similar result is obtained (which should be the case) if the game is solved by finding the Nash equilibrium of its strategic form. The table below shows the game in its strategic form representation.
Concerning the above results, it is important to note that there are eight Nash Equilibria namely: {[(G,G,G),(L,R)], [(G,G,G),(L,L)], [(G,G,S),(L,R)], [(G,G,S),(L,L)], [(G,S,G),(L,R)], [(G,S,G),(L,L)], [(G,S,S),(L,R)], and [(G,S,S),(L,L)]}. Of the eight, it seems that [(G,S,S),(L,R)] is the most reasonable since suppose the game reached node 4 or even node 5 and the local microfinance firms must choose either to be generous or selective, it would be more rational for them to be selective at both cases since such would yield higher pay-offs than choosing to be generous (2 vs. 0 for node 4 and 4 vs. 3 for node 5).
The game-theoretic prediction of this game is very intuitive. Assuming rationality, each of the players, which happen to be all Filipinos, would want to help each other to combat poverty, hence the choice of the Philippine-based microfinance institutions to be generous in granting loans to the poor and the choice of the poor Filipinos to use such loans to lift themselves out of poverty. However, the question remains as to why some microfinance institutions are still taking advantage of the poor and the level of poverty incidence has not been significantly reduced over time. One of the possible explanations for this is the desire of the institutions for profit. Instead of helping their poor countrymen through generous loan grants, the microfinance firms may choose to serve well-off Filipinos instead thereby preventing the poor access from capital which, as what Sachs says, they could use to step on the ladder out of poverty. Referring to the game tree above, any combination of actions in the third and fifth node will not yield both players a payoff that is higher than (5,5) unless they choose the strategies generous and lift.
Another possible explanation for the question that has been posed is the short-run perspective of the poor which leads them to consume their loans for current consumption and benefits with little consideration for their future. Nonetheless, this choice is usually unavoidable in the part of the poor in real life because they need to provide themselves with the basic necessities in order for them to survive.
Moving on, at the end of the day, it must be considered that the government also has an impact and role to play in the country to reduce poverty and not just the microfinance institutions nor the poor. By investing in soft and hard infrastructures, supporting technological innovation and strengthening public institutions among others, the government could genuinely lead the country towards economic progress in which both the microfinance lending institutions and the Filipino people, especially the poor, are important stakeholders.
Endnotes
[1] Torres, Ted. “Poverty level in PH unchanged since ’06.” Philippine Star 24 Apr. 2013. Web. 9 Oct. 2014.
[2] Philippine Economic Update. Pasig City: World Bank, Aug. 2014. PDF.
[3] Lont, Hotze B., and Otto Hospes. Livelihood and Microfinance: Anthropological and Sociological Perspectives on Savings and Debt. Delft: Eburon, 2004. Print.
[4] Kondo, Tosho, Aniceto Orbeta, Jr., Clarence Dingcong, and Christine Infantado.Impact of Microfinance on Rural Households in the Philippines. Makati City: Philippine Institute for Development Studies, February 2008. PDF.
[5] Asian Development Bank. “Microfinance in the Philippines: A Report Card.” Asian Development Bank Website. 10 July 2013. Web. 10 Oct. 2014.
[6] Lont, Hotze B., and Otto Hospes. Livelihood and Microfinance: Anthropological and Sociological Perspectives on Savings and Debt. Delft: Eburon, 2004. Print.
[7] Kondo, Toshio. Impact of Microfinance on Rural Households in the Philippines. Mandaluyong City: Asian Development Bank, Sept. 2007. PDF.
THE CATHOLIC ECONOMIST 