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Philippines: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2014
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Financial Inclusion in the Philippines1

1. Increasing access to affordable financial services for poor and remotely-located households through micro-finance, micro-entrepreneurs (MEs), and small- and medium-sized enterprises (SMEs) can reduce poverty and support inclusive growth. Various channels have been identified in the literature through which credit can improve poverty outcomes. These include increasing households’ ability to invest in education, improving the scope for consumption smoothing in response to shocks, and encouraging investment and entrepreneurship by MEs and SMEs where returns to capital are often found to be considerably higher than in larger firms. Moreover, informal financial services that develop in the absence of more formal arrangements are often associated with extremely high intermediation costs, which tends to discourage saving and investment.

2. The Philippines is found to lag many other developing and emerging economies in terms of financial access by individuals/households and MEs/SMEs, according to the World Bank’s Global Financial Inclusion database (Global Findex) and Enterprise Surveys (Tables 1 and 2):

Table 1.Financial Inclusion for Individuals and Households(In percent)
Country/RegionAccount at a

Formal Financial

Institution
Saved at a

Financial Institution

in the Past Year
Saved in an

Informal Savings

Club in the

Past Year
Loan from a

Financial Institution

in the Past Year
Philippines2715711
Developing and emerging economies, regional average
East Asia 1/552849
South Asia 2/331139
Latin America & Caribbean 3/391048
Europe and Central Asia 4/45718
Middle East & North Africa 5/18545
Sub-Saharan Africa 6/2414195
Source: World Bank, Global Financial Inclusion Database (Global Findex), 2011.

Cambodia, China, Hong Kong SAR, Indonesia, Korea, Lao PDR, Malaysia, Mongolia, Philippines, Singapore, Taiwan, Thailand, and Vietnam.

South Asia developing and emerging economies refer to Sri Lanka, Bangladesh, India, Nepal, Pakistan and Afghanistan.

Latin America & Caribbean developing and emerging economies refer to Brazil, Venezuela, Chile, Dominican Republic, Ecuador, Argentina, Colombia, Bolivia, Mexico, Guatemala, Haiti, Paraguay, Honduras, Peru, Nicaragua, and El Salvador.

Europe & Central Asia developing and emerging economies refer to Latvia, Lithuania, Serbia, Belarus, Turkey, Bosnia and Herzegovina, Bulgaria, Russian Federation, Romania, Kazakhstan, Ukraine, Georgia, Albania, Uzbekistan, Armenia, and Azerbaijan.

Middle East & North Africa developing and emerging economies refer to Israel, Kuwait, Iran, Islamic Rep., Oman, United Arab Emirates, Saudi Arabia, Morocco, Lebanon, Algeria, Tunisia, Jordan, Syrian Arab Republic, West Bank and Gaza, Iraq, Egypt, Arab Rep.,

Sub-Saharan Africa developing and emerging economies refer to Mauritius, South Africa, Kenya, Mozambique, Zimbabwe, Angola, Nigeria, Ghana, Uganda, Gabon, Mauritania, Tanzania, Cameroon, Congo, Rep., Sudan, and Senegal.

Source: World Bank, Global Financial Inclusion Database (Global Findex), 2011.

Cambodia, China, Hong Kong SAR, Indonesia, Korea, Lao PDR, Malaysia, Mongolia, Philippines, Singapore, Taiwan, Thailand, and Vietnam.

South Asia developing and emerging economies refer to Sri Lanka, Bangladesh, India, Nepal, Pakistan and Afghanistan.

Latin America & Caribbean developing and emerging economies refer to Brazil, Venezuela, Chile, Dominican Republic, Ecuador, Argentina, Colombia, Bolivia, Mexico, Guatemala, Haiti, Paraguay, Honduras, Peru, Nicaragua, and El Salvador.

Europe & Central Asia developing and emerging economies refer to Latvia, Lithuania, Serbia, Belarus, Turkey, Bosnia and Herzegovina, Bulgaria, Russian Federation, Romania, Kazakhstan, Ukraine, Georgia, Albania, Uzbekistan, Armenia, and Azerbaijan.

Middle East & North Africa developing and emerging economies refer to Israel, Kuwait, Iran, Islamic Rep., Oman, United Arab Emirates, Saudi Arabia, Morocco, Lebanon, Algeria, Tunisia, Jordan, Syrian Arab Republic, West Bank and Gaza, Iraq, Egypt, Arab Rep.,

Sub-Saharan Africa developing and emerging economies refer to Mauritius, South Africa, Kenya, Mozambique, Zimbabwe, Angola, Nigeria, Ghana, Uganda, Gabon, Mauritania, Tanzania, Cameroon, Congo, Rep., Sudan, and Senegal.

Table 2.ASEAN-4: Financing Sources for Fixed Investments According to Firm Size 1/

(In percent) 2/

Proportion of Investments
Firm SizeFinanced

Internally
Financed

by Banks
Financed by

Supplier Credit
Financed by

Equity Issuance

or Stock Sales
PhilippinesSmall85.65.22.30.6
Medium66.113.711.04.8
Large66.818.16.25.9
IndonesiaSmall86.25.71.32.4
Medium85.06.50.14.9
Large81.98.51.56.0
MalaysiaSmall34.035.97.13.9
Medium43.736.35.43.3
Large53.028.64.83.0
ThailandSmall27.549.92.312.3
Medium28.653.52.59.7
Large28.053.12.89.2
Source: World Bank, Enterprise Surveys.

The latest available survey data for the Philippines, Indonesia, Malaysia, and Thailand are from 2009, 2009, 2007, and 2006, respectively.

Firm size by number of workers: Small (5-19); Medium (20-99); and Large (100+).

Source: World Bank, Enterprise Surveys.

The latest available survey data for the Philippines, Indonesia, Malaysia, and Thailand are from 2009, 2009, 2007, and 2006, respectively.

Firm size by number of workers: Small (5-19); Medium (20-99); and Large (100+).

  • Only 27 percent of the adult population has a bank account, which is below averages in other regions, with the exception of the Middle East and North Africa, and Sub-Saharan Africa.

  • Saving in a formal financial institution (15 percent) is much lower than the average for East Asia (28 percent). On the other hand, 7 percent of the population saved in an informal savings club, which is higher than in most other regions. Relative to formal institutions, informal savings arrangements are considerably more popular in the Philippines than in most other regions.2

  • Households tend to rely on informal lenders. Some 40 percent of the population borrowed from family or friends during the previous year, 12 percent from their employer, and 13 percent from a nonbank private lender, compared with 11 percent from a formal financial institution. The high dependence on related-party and informal lenders, even after controlling for per capita income, may reflect that many households receive remittances and lend them out to other households.

  • MEs and SMEs rely more heavily on own internal funds to finance investment compared to Malaysia and Thailand (Table 2). This may reflect the higher funding cost and interest margins at banks that typically cater to these small firms.

Figure 1.Household Borrowing from Sources Other Than Formal Financial Institutions, 2011

(In percent)

Source: World Bank The Global Financial Inclusion Database (Global findex).

3. The Philippines faces some unique challenges in terms of increasing financial inclusion. The population is dispersed over 2,000 islands, and many of them have only very small communities. However, even for larger population centers, bank penetration is limited, and as of 2012, 37 percent of cities and municipalities—totaling 611—were unbanked. Moreover, 15 percent of households in rural areas receive remittances from another country (against 31 percent of households in urban areas and 23 percent nationally) according to Gallop World, and therefore need access to reliable savings vehicles.

4. The BSP has implemented several initiatives to address these challenges:

  • To tackle geographical dispersion and widen access to basic financial services, the BSP is encouraging the establishment of bank branches, micro-banking offices, and offsite ATMs. It is also encouraging alternative financial service providers, such as credit cooperatives, pawnshops, remittance agents, and e-money agents, into the market. The BSP has also promoted innovative delivery channels, such as correspondent banking by post offices, grocery stores, pharmacies, and gasoline stations, as well as mobile banking.

  • The BSP has encouraged more efficient systems for remittance repatriation, both domestically and from abroad. In this regard, the BSP has approved alternative ways of receiving remittances, such as Smart Padala, GCash, and stored-value cards. Competition among delivering channels is helping to lower transactions costs and reduce the delivery times.

  • In order to channel more funds to MEs and SMEs and into agribusiness, the BSP has established minimum lending requirements by banks, consistent with its “Magna Carta for Micro, Small and Medium Enterprises of 2008” and “The Agri-Agra Credit Reform Act of 2009.”

  • Aside from the regulatory incentives that encourage financial institutions to lend to the SME sector, the BSP has also developed the Credit Surety Fund (CSF) Program, a credit enhancement scheme that aims to increase the credit worthiness of micro, small and medium enterprises that are experiencing difficulty in obtaining loans from banks due to lack of acceptable collaterals, credit knowledge and credit track records.

  • The Agrarian Production Credit Program (APCP), a five-year credit and capacity development program for agrarian reform beneficiaries is a joint micro finance program of the Department of Agriculture, the Department of Agrarian Reform and the state-run Land Bank of the Philippines. Since the program was implemented in 2012, ₱257.43 million in loans has been released benefitted 4,668 agrarian reform beneficiaries.

  • In 2013, the BSP refined existing regulations on “low-income households” for purposes of providing micro-insurance; improved procedures in the approval of housing microfinance loans and micro-agri loans; and enhanced the reporting of microfinance loans and microdeposits in order to capture the wide range of product offerings of banks with microfinance operations.

5. Rural, cooperative, and thrift banks are more likely to meet minimum sectoral lending benchmarks, consistent with their natural business focus and closer association with community-based banking. However, large banks as a group are below their lending benchmark for micro- and small enterprises and agra-business lending. Aside from lending to MSMEs, banks are also engaged in microfinance which had been growing rapidly3 and diversified to a wide range of products. Nonetheless, given the much larger size of the group of universal and commercial banks, these banks still account for the majority of bank lending to broad agriculture sector and smaller firms. Universal and commercial banks also tend to have lower funding costs and intermediation spreads than their smaller, more specialized counterparts.

Figure 2.Philippines: Bank Lending to Micro, Small, and Medium Enterprises—Compliance with Mandated Level, 2013 1/

(In percent)

Sources: BSP, Supervisory Data Center, Supervision and Examination Sector.

1/ Financial institutions are required to allocate the following percentages of their loan portfolios: micro and small (8%); medium(2%).

Figure 3.Philippines: Bank Lending to Agriculture and Agra-Business—Compliance with Mandated Level, 2013 1/

(In percent)

Sources: BSP, Supervisory Data Center, Supervision and Examination Sector.

1/ Financial institutions are required to allocate the following percenrages of their loan portfolios: AGRI (15%), AGRA (10%).

Table 3.Philippines: Retail Microfinance Exposures
As of 30 September 2013
Number

of banks
Amount

(In millions

of pesos)
Number of

borrowers
Savings

component

(In millions

of pesos)
Microfinance oriented thrift banks3287.27218,37394.943
Microfinance oriented rural banks63,095.746366,8441,151.153
Sub-total93,383.018385,2171,246.096
Microfinance engaged rural banks1312,769.614390,1947,082.107
Microfinance engaged cooperative banks18291.50549,54479.907
Microfinance engaged thrift banks231,554.402187,166408.371
Microfinance engaged universal bank11.034360.015
Microfinance engaged regular commercial bank182.5225,19429.646
Sub-total1744,699.078632,1347,600.045
Grand total1838,082.0961,017,3518,846.141
Source: Bangko Sentral ng Pilipinas.
Source: Bangko Sentral ng Pilipinas.

Figure 4.Funding Cost and Interest Spread: Difference Across Types of Banks, December 2013

(In percent)

Sources: Bangko Sentral ng Pilipinas.

6. Increasing lending by large banks to micro and small firms and to agriculture is likely to require reforms that allow banks to better manage risk. The use of land as collateral in rural areas has been hampered by the incomplete assignment of property rights by granting collective—rather than individual—land ownership titles to small land parcels as part of agrarian reforms. Strengthening creditor rights and streamlining resolution procedures, e.g., by: (i) refining the legal framework for movable collateral by allowing out-of-court-enforcements; (ii) allowing a generic description of collateral when it applies to revolving assets, such as inventories; and (iii) maintaining a central, comprehensive and unified collateral registry. Additionally, improving credit information systems by expanding the coverage of private credit bureaus and encouraging information sharing between banks can help to reduce information asymmetry which tends to raise borrowing costs or price potential clients out from the credit market. There is also scope to expand the range of available lending instruments in the Philippines, including factoring,4 leasing to MSMEs, and warehouse-receipt financing to agri-businesses and farmers. By leveraging information in existing distribution networks and repayment histories into loan decision making, such practices could, in turn, reduce intermediation costs and channel more funds to MSMEs.

Prepared by Huaizhu Xie.

According to a BSP survey, two-thirds of saving households have a bank account, while one quarter keep their savings at home, and 11 percent place their money in cooperatives, paluwagan (an informal saving scheme with rotating beneficiaries) and other credit/loan associations, as well as in government nonfinancial institutions, such as the social security system, the Home Development Mutual Fund and PhilHealth.

The number of microfinance borrowers grew from around 390,000 in 2000 to 1,017,351 in 2013:Q3. This corresponds to an increase in the number of banks with microfinance operations from 119 in 2002 to 183 in 2013:Q3.

Factoring is a financial transaction in which a firm sells its creditworthy accounts receivable to a third party, the factor, at a discount (typically equal to interest, plus service fees) and receives immediate cash.

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