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Line of Sight

Microfinancing the microenterprises

Wendell D. Ganhinhin Wendell D. Ganhinhin

IT IS the policy of the Philippine government to pursue a program of poverty eradication so that poor Filipino families shall be encouraged to undertake entrepreneurial activities to meet their minimum basic needs. In pursuing entrepreneurial activities, financing is needed to start, sustain and grow the business.

However, one of the challenges of small and start-up entrepreneurs and the microenterprises is the access to finance.

Without financial access, microenterprises will have difficulty in growing the business and moving up to the next level. Most of these microenterprises are willing victims of the “5-6” money lenders which charge a very high interest rate. Such growth barrier will limit the potential of these enterprises to create more jobs and help eradicate poverty, particularly in the countryside.

Other governments around the world are also looking to micro-, small- and medium-sized enterprises (MSMEs) and entrepreneurs as important sources of economic growth and social cohesion. Based on the paper recently published by the Organization for Economic Cooperation and Development (OECD) entitled “Financing SMEs and Entrepreneurs 2016”, it says that appropriate access to finance is a critical pre-requisite to enable these businesses to invest, grow and create jobs, and the issue has been climbing steadily up the policy agenda in recent years.

In the Philippines, this financing gap is partly being addressed by the government by encouraging the private sector to lend money to microenterprises. One of the strategies of the government to encourage private sector participation is to pass a law that provides tax incentives to microfinance non-government organizations (NGOs). Republic Act (RA) No. 10693 otherwise known as the “Microfinance NGOs Act” was approved by former President Benigno Aquino III on November 3, 2015.

The Microfinance NGOs Act aims to address poverty by supporting and working in partnership with qualified NGOs in promoting financially inclusive and pro-poor financial and credit services.

This law covers only microfinance NGOs and does not cover for-profit microfinance institutions.
Revenue Regulation No. 3-2017 was issued last February 22, 2017, by the Bureau of Internal Revenue (BIR) to implement the tax provisions of RA No. 10693. For clarity, the following terms are defined:

1.    “Microfinance” means a viable and sustainable provision of a broad range of financial services to poor and low-income individuals engaged in livelihood and microenterprise activities;
2.    “Microfinance loans” mean small loans granted to the basic sectors, 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;
3.    “Microfinance NGO” is defined as a non-stock, non-profit organization duly registered with the Securities and Exchange Commission (SEC), with the primary purpose of implementing a microenterprise development strategy and providing microfinance programs, products, and services, such as microcredit and microsavings, for the poor and low-income clients; and,
4.    “Microcredit” is the extension of microfinance loans by a Microfinance NGO to its poor and low-income clients.
In accordance with RR No. 3-2017, a duly registered and accredited microfinance NGO shall pay a two percent tax based on its gross receipts from microfinance operations in lieu of all national taxes. This rate shall only apply to lending activities and insurance commission of microfinance operations which are bundled and forming integral part of the qualified lending activities of the microfinance NGOs.

All other incomes by a microfinance NGO shall be subject to all applicable existing taxes.

The microfinance NGOs shall be deemed as a withholding agent for the government on payments of compensation to employees and on purchases of goods and services subject to withholding taxes.

Books of Accounts and other pertinent records of Microfinance NGOs shall be subject to periodic examination by revenue enforcement officers of the BIR.

To qualify for the incentive, the microfinance NGO should secure a Certificate of Accreditation from the Microfinance NGO Regulatory Council. The Microfinance NGO should be a non-stock non-profit corporation with a capital contribution of at least P1 million and must comply with the following requirements:

1.    The word “Microfinance” must be included in its corporate trade name;
2.    The Articles of Incorporation and By-laws shall specifically state that:

•    It is “non-stock and non-profit”;
•    Its primary purpose is to implement a microenterprise development strategy and provide microfinance programs, products, and services for the poor;
•    It shall specifically provide that upon dissolution, its net assets shall be distributed to another NGO organized for similar purposes, or to the State for public purposes or as may be determined by a competent Court of Justice;
•    No part of its property or income shall inure to the benefit of any member, officer, organizer or any individual person;
•    The trustees shall not receive any compensation or remuneration, except reasonable per diem;
•    The level of administrative expenses shall not exceed 30% of the total expenses for the taxable year; and,
•    Other requirements which the Council may deem necessary.
According to OECD, by strengthening access to both traditional banking and diverse alternative financing instruments and channels, we can unleash the ability of MSMEs to invest, innovate, and contribute to the productivity growth sorely needed for more prosperous and inclusive societies.
With the passage of the Microfinance NGOs Act to provide tax incentives to these NGOs, we hope that existing Microfinance NGOs will expand to the countryside and new Microfinance NGOs will be created all over the country.
In this way, more microenterprises will have access to microfinance to fuel their growth and contribute to the overall economy. If poverty will not be eradicated, we hope that it will be reduced significantly with the help of these revitalized microenterprises.

(Mr. Ganhinhin is a Partner and Head of P&A Grant Thornton Cebu and Davao Branches.  P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firms in the Philippines, with 21 Partners and over 800 staff members.   For comments on this article, please email or
For our services, visit  Follow us on Twitter: pagrantthornton, and FB: P&A Grant Thornton.


As published in Mindanao Times, dated on 22 March 2017.