The Philippines: Focusing on rural banking

The central bank, Bangko Sentral ng Pilipinas (BSP), has moved to boost banking services in rural regions by lifting restrictions on the number of branches small lenders are allowed to operate, while trying to convince rural banks to merge to strengthen their capital base.

The Philippines is well supplied with banks: data from the BSP show there were 40 commercial and universal lenders in the market, the latter of which are also authorised to engage in underwriting and other functions of investment houses, which together account for more than 4700 branches throughout the country. The nation is home to 72 small-scale thrift banks with around 1300 branches; 40 cooperative banks, with an average of three branches each; and almost 600 rural banks, with just over 2000 branches.

However, there are still many regions where banks have little presence; indeed, approximately one-third of all branches are located in the greater Manila area, with a further 25% in the Calabarzon and Luzon regions. Many of the Philippines’ rural and non-urban regions have little access to banking services, though this may soon change.

At the end of May, the BSP announced it was lifting long-standing restrictions that limited the number of branches a bank could open. Under the new rule, a bank may apply to establish as many branches as its management believes its capital can support, so long as it continues to meet the existing capital adequacy requirements of the central bank. The BSP had previously set limits on the numbers of branches a bank could operate, particularly in large urban centres, as it believed that such areas were already well served for banking outlets.

According to Amando Tetangco Jr, the governor of the BSP, liberalising the banking sector and the regulations on branches was a response to the rapidly expanding economy and the need for greater access to banking services.

While the changed regulatory regime will allow major lenders to boost their activities in urban areas, the BSP’s decision may have an even greater impact on smaller banks in the populous but under-serviced rural regions.

The BSP also announcing it was willing to forego licensing fees from strong rural banks planning to open new branches on the condition they take over weaker banks in need of additional capital. According to Nestor Espenilla Jr, the deputy governor of the BSP, the measure, which is part of the Strengthening Programme for Rural Banks, was another incentive to improve banking services in rural areas by consolidating the sector and allowing for a more structured expansion. The BSP will also allow larger commercial lenders and thrift banks to buy into rural banks, though it is unclear if these lenders will benefit from the same incentives as offered to stronger rural banks.

“What should be clear is that the BSP and the Philippine Deposit Insurance Corporation have now put on the table all the incentives it can think of and legally provide to decisively enlarge the solid core of a sound rural banking system,” Espenilla told a conference on rural banking on May 31.

Ian Pama, the president of the Rural Bankers Association of the Philippines, welcomed the moves by the BSP, saying the decision would serve to support expansion of the industry.

“For rural banks, it is a way of further creating growth and progress in far-flung areas by providing much-needed financial services, such as loans for farmers and micro-entrepreneurs,” Pama said. “It is a step towards better services for our depositors and helping the banking industry grow.”

Such steps should help strengthen the country’s small-scale rural banks, which formed the majority of the 41 lenders that folded in the past 18 months. More than 30 rural banks were taken over by the Philippine Deposit Insurance Corporation in the past year and a half, adding to the 30 that were closed in 2010.

The high level of closures prompted Arnel Ty, a member of the House of Representatives and a member of the House Committee on Banks, to call for an investigation into whether existing banking regulations were adequate, particularly in regard to rural lenders.

“We have to ascertain whether existing laws are adequate to discourage unsafe, unsound and fraudulent banking practices, protect depositors, promote savings, support responsible credit, and reinforce public confidence in the industry,” Ty said on June 20.

By consolidating the rural banking sector, and by allowing stronger banks to expand into new markets, the BSP is moving towards reducing these risks. These reforms will serve to restore public faith in the industry as a whole, while at the same time promoting better services across the country.

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