Interview: Amando M Tetangco Jr
How can the BSP accelerate the financial inclusion of the country’s Muslim minority?
AMANDO M TETANGCO JR: The BSP is committed to encouraging Islamic banking and finance (IBF) as part of the overall agenda of enhancing financial inclusion in the country. Financial inclusion can be truly achieved if appropriate financial products and services are accessible to a great majority of the population, regardless of income class, geographic location and even religion. To accelerate financial inclusion, particularly for the Muslim minority in the country, foremost on the BSP’s agenda is to work towards a clear legal/regulatory framework for IBF. In this light, the BSP has three initiatives.
First, in the proposed amendments to its own charter, the BSP has included two provisions on IBF, specifically on the: (a) establishment of financial facilities that cater to the requirements of – and take into account the peculiar characteristics of – Islamic banks. Such facilities will enhance the ability of the BSP to help boost IBF activities while at the same time help ensure stability and soundness of operations of IBF institutions; and (b) issuance of regulations catering to IBF that will help the BSP create an environment where Islamic banking can operate alongside conventional banking. In this kind of environment, inter-bank markets and other linkages will be accessible to IBF institutions, and conventional banks can operate Islamic banking windows. Moreover, innovative products addressing the distinctive needs of the Muslim community will be available.
Second, the BSP is supporting initiatives to amend the charter of Al-Amanah Bank, currently the only Islamic bank in the country. Proposed amendments are provisions that will: (a) authorise the government to apply certain stipulations in the Al-Amanah charter to other Islamic banks that will operate in the country in the future; and (b) further enhance the ability of AlAmanah to offer Islamic bank products and services.
Third, the BSP is also supporting the proposal to have a general law on IBF. Back in 1997, the BSP submitted to Congress a proposed bill on Islamic banking. This bill, however, has been archived, but the BSP supports calls to revive this proposal in Congress. Meanwhile, besides the push for a legal/regulatory framework in the future that is geared toward the promotion of IBF, the BSP, under its existing capacity, has implemented various initiatives aimed at accelerating financial inclusion.
First is a regulation allowing banks to establish microbanking offices (MBOs) in areas where it may not be economically feasible to set up full-blown branches, such as in some remote locations in Mindanao. By the end of 2014, there were 80 MBOs operating in Mindanao.
Second is a regulation allowing non-bank agents to perform electronic money (e-money) transactions, such as remittances and payments. These non-bank agents – such as pawnshops, grocery stores, drug stores – have wide distribution networks, and so their authority to facilitate fund transfers significantly helps further the goal of financial inclusion. As of 2013, there were more than 945 e-money agents in Mindanao.
Third is putting in place an enabling policy and regulatory framework for microfinance, which has resulted in the growth of institutions offering microfinance services and effective access to financial services for those that need them. As of end-September 2014, there were 179 banks in the Philippines with microfinance operations serving more than 1m clients, with loans outstanding amounting to P9.4bn ($211.5m).
What changes to the regulatory environment would better enable the broadening of financial products to non-traditional customer segments?
TETANGCO: To serve non-traditional customers with a broad range of financial products, the regulatory environment must allow market innovations in product development, business models, delivery channels and partnerships. Conventional products and delivery channels are often too costly, inaccessible and unsuitable for their market.
In this light, the BSP, over the past decade, has issued a number of regulations aimed at expanding the list of financial products that can be accessed by non-traditional customers. These regulations have earned international recognition for the Philippines for having one of the best enabling regulatory environment for financial inclusion. Some of the most recent regulations toward this end are the following:
- Waiving of the processing fees for banks that will put up branches in unbanked areas.
- Expansion of the: (a) list of approved activities for MBOs. Previously, MBOs can extend only microfinance loans, but now they are allowed to offer other types of loans, such as health and emergency loans, among others; (b) definition of “low-income households” and “micro deposits” so that banks can offer microfinance products to a wider segment of the population; (c) list of identification cards considered valid for making bank transactions to now include those issued by private institutions registered with or supervised by the BSP, Securities and Exchange Commission, and Insurance Commission, among others.
- Enhancement of the procedures that banks should observe in approving microfinance loans, with the aim of increasing accessibility of this type of loans.
- Establishment of regulatory framework for the use of electronic money (e-money). The BSP is promoting the use of technology, such as mobile banking and use of e-money, to more easily expand the reach of financial institutions to unserved and underserved areas. These are just some of the regulations that the BSP already has issued to enhance financial inclusion. Moving forward, the BSP will continue to review the regulatory environment to identify further measures that can help enhance access to financial products and services. Meanwhile, as the BSP pursues this goal, it also understands that unrestricted innovation can pose risks that may affect the public’s trust in formal financial services. Therefore, side by side with BSP regulations that promote financial inclusion are regulations aimed at safeguarding customer protection and the overall stability of the financial system.
How much room is there for microfinance to grow in the Philippines?
TETANGCO: In the Philippines, microfinance has great potential to grow. Micro-enterprises account for about 91% of businesses in the country, but only 5.7% of micro and small enterprises source funding from banks. The BSP, therefore, has been encouraging financial institutions to create products and services tailor-made for micro-enterprises and for the unbanked.
To expand the reach of microfinance, the design and manner of delivery of financial products should match the profile and needs of the target market. For instance, microfinance loans are small in size and payable over the short term, allowing frequent amortisation and imposing minimal documentary requirements. These features are ideal for the cash flow of low-income households, and micro and small businesses.
Also, the extensive reach of mobile technology, through which some microfinance products and services are delivered, provides the opportunity for these products and services to easily reach the unbanked households and micro-enterprises. The SIM card penetration rate in the Philippines stands at 110%. At the same time, 60% of the unbanked population with mobile phones keep some form of savings through informal means and 13% borrow through informal channels.
While significant gains in the area of financial inclusion have been achieved over the years following refinements to the regulatory environment, the challenge is to further scale up the reach of financial services to cover an even greater number of people. Given the wide disparity in economic conditions across the country, the traditional brick and mortar approach to banking may no longer be viable. As such, the BSP will continue to promote financial inclusion through appropriate regulations and initiatives that encourage financial institutions to embrace the same goal.
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