Policy Lending for LGUs: An Innovative Financing Instrument for Local Governments

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Since the passage of the Local Government Code in 1991, what has constituted as a major source of loan financing for local governments is the Municipal Development Fund (MDF). Through the years, the loan repayments made by local governments have accumulated into a "second generation fund." Said "second generation fund" has recently been proposed to be used for program or policy loans to local governments. What is this local program or policy loan? How different is it from the regular type of loans to local governments? What is its objective? Is it likely to succeed? This Policy Notes provides answers to these.