Chapter 8 - Money Matters

The Local Financial System | Personal Banking and Credit Arrangements
Capitalization of Business Operations

The Philippines financial sector has not evolved as rapidly as in many other Asian markets although the entry of a number of foreign banks in the early part of the last decade introduced a greater degree of competition into the system. The best of the local banks are on a par with their international competitors although the Philippines remains a victim of having too many financial institutions. Rationalization of local banking operations and mergers have been underway for some time.

In 1993 the central bank, Bangko Sentral ng Pilipinas (BSP) was reorganized and privatized and a new independent monetary board was established in order to bring greater stability and control into the system. Foreign exchange controls have been slowly easing in recent years although some controls were re-imposed in 2001 in the wake of the rapid slide in the value of the peso in that year.

The local capital market remains underdeveloped even by Asian standards. Bank charges remain high and most lending by the commercial banks tends to be collateral based - usually in the form of real property. With the recent decline of property values (which nevertheless remain artificially high) so has the growth in non-performing loans which for some banks has become alarmingly high. This rate would possibly go even higher were the true value of collateral to be reassessed.

At the time of writing a proposal is before Congress to enable the formation of one or more asset management companies that would buy and manage the debts of the banking sector. This proposal if adopted would be a step in the right direction.

Loans to small and medium enterprises are generally hard to come by and such businesses often have to resort to an informal credit market where rates of interest are absurdly high.

Factoring is not practiced in the Philippines within the formal financial sector although a number of fringe operators do buy debt. Often in such circumstances recovery is through extra legal means.

Some project financing is available through multilateral lending agencies such as the Asian Development Bank and through a number of aid agencies that operate in the Philippines. Often such financing is tied to procurement of goods and services from the lending country.

The present Philippines stock market was formed from the merger of two predecessor exchanges and in recent times has performed reasonably well as compared to other regional markets. Most investment comes from institutions and the retail market for stocks remains very small. There is thus less volatility in the market than in places such as Hong Kong and Taiwan.

There are a number of different categories of banks in the Philippines. There is no centralized banking law and the Central Bank in concert with the Monetary Board dictate what functions the different classes of banks may perform.

For practical purposes the banking system can be divided into seven broad areas. Within the domestic banking sector there are four types of institutions:

- The Central Bank which acts as the regulator of the financial system;

- Commercial Banks dominate the financial system and provide a full range of normal banking services such as deposit taking, loan and currency exchange; a number act also as "universal banks" engaging in equity financing, securities underwriting and other investment banking services.

- Rural Banks were established under the 1952 Rural Bank Act and are the most numerous type of deposit taking institution similar to agricultural cooperatives and rural credit societies elsewhere in Asia. Many operate as single units but the larger ones may establish branches within their defined geographic area.

- Thrift (Savings) Banks were established in the early seventies and perform functions to individuals similar to the savings and loan associations. Some of the larger thrift banks border on the services operated by the commercial banks. Most thrift banks are based in Manila or in one of the major regional centers of the Philippines such as Cebu City.

The Foreign Banks

A number of foreign banks operate in the Philippines although most are engaged only in corporate or trade financing operations and usually with an international focus.

Foreign Banks were severely curtailed from conducting local operations until the mid nineties at which time the Philippine Government passed new legislation authorizing the entry of foreign banks, to establish branch offices and to create majority or wholly-owned subsidiaries or acquire the stock of domestic banks.

At the present time under the law a foreign bank is permitted only a maximum of nine branch offices although a number of foreign banks are looking at the possibility of purchasing local banks in order to increase their market penetration.

HSBC as well as Citibank maintain extensive retail banking and credit card operations. Both of these banks are also moving into e-commerce by offering online payment gateways to corporate customers.

Other high profile foreign banks include Standard Chartered, the ANZ Bank and UBS. While Western Union maintains what is probably the most extensive network of remittance agencies across the Philippines and mainly for the purpose of allowing Filipinos to collect remittances from overseas friends and relatives. Remittance charges are quite high.

Offshore Banks

Offshore banks were established originally during the Marcos presidency under Presidential Decree 1034 and have very restricted limitations on what business they can conduct. These days OBUs are generally conducted within the larger commercial and foreign banks.

Development Banks

In addition to the commercial banks, there are two specialized "development banks" - the Development Bank of the Philippines and the Land Bank of the Philippines. There is also the United Coconut Planters Bank which was originally intended to use a levy paid by coconut farmers to provide credit and development assistance to that particular industry but which has since become mired in controversy.

The Development Bank finances general large-scale infrastructure development including agricultural production, energy generation and export assistance. The PDB also provides construction financing much of which is channeled through other banking institutions rather than directly.

The function of the Land Bank is to finance government purchase of land for redistribution under the various land reform programs.



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