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Philippines
Country-Level Savings Assessment
CGAP Savings Initiative
CGAP Savings Initiative
Isabel Dauner Gardiol, consultant, IntercooperationBrigit Helms and Rani Deshpande, CGAP
August 2005
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Abbreviations
ACPC Agricultural Credit Policy CouncilATM Automatic Teller MachineBAP Bankers Association of the PhilippinesBSP Philippine Central BankCDA Cooperative Development AuthorityCFO Commission on Filipino OverseasCTB Chamber of Thrift BanksCUES Credit Union Empowerment & Strengthening Project DCP Directed Credit ProgramFOCCUS Finance Organisations Achieving Certified Credit Union StandardsJBIC Japan Bank for International CooperationKfW Kreditanstalt für Wiederaufbau (German Development Bank)MABS Microenterprise Access to Banking ServicesMCPI Microfinance Council of the Philippines, Inc.MFI Microfinance InstitutionNATCCO National Confederation of Credit CooperativesNCC National Credit CouncilNEDA National Economic Development AuthorityNSCB National Statistics Coordination BoardRBAP Rural Bankers Association of the PhilippinesODA Overseas Development AssistanceOFW Overseas Filipino WorkersONB One Network BankPCFC Peoples' Credit and Finance CorporationPCHC Philippine Clearing House CorporationPDIC Philippine Depository Insurance CorporationPFCCO Philippine Federation of Credit CooperativesPhP Philippine PesoPHPF Philippines Homeless People's FederationPIDS Philippine Institute for Development StudiesPNSO Philippine National Statistics OfficeQUEDANCOR Quedan and Rural Guarantee CorporationSEC Security and Exchange CommissionSRT Self-Reliant TeamsUNDP United Nations Development ProgramWOCCU World Council of Credit Unions
Table of Contents
Executive Summary....................................................................................................................................... 1
Introduction .................................................................................................................................................. 3
Overview of savings in the Philippine economy and financial system .................................................... 3
Clients: Demand for Small-Deposit Services ............................................................................................ 4
Active savings promotion effectively increases deposits ................................................................ 5Remittances: an important source of income for many families ..................................................... 6
Micro Level: Retail Financial Providers .................................................................................................... 7Different types of financial institutions address different client segments ...................................... 7Affordability is one barrier to access for poor clients...................................................................... 9 9Proximity is key for low-income savers ..........................................................................................10Institutions that are more accessible to the poor tend to have weaker performance ..................... 11The lack of incentives for savings dampens innovation among rural banks ................................. 12
Meso Level: Service Providers, Financial Infrastructure, and Second-Tier Funds .............................12
Associations and projects promote better performance .................................................................. 12“Easy money” from wholesale financial institutions floods the market ........................................ 13Incomplete financial infrastructure for rural banks and financial cooperatives ............................. 14Information and communication technology is revolutionizing access to banking services ......... 14
Macro Level: Legal and Regulatory Framework for Micro Savings Mobilization ............................. 15
Philippine regulatory framework encourages financial service delivery to the poor by regulated, commercial institutions…............................................................................................... 15…But supervision is uneven: too little for non-bank institutions, and potentially too much for banks.......................................................................................................................................... 16
Strategies to Improve Small Deposit Mobilization in the Philippines ................................................... 16
Annexes ........................................................................................................................................................ 19
Annex 1: Summary Matrix of Opportunities, Obstacles, and Suggested Actions ......................... 19Annex 2: Sources of Information on Savings in the Philippines ................................................... 20Annex 3: Map 1: Banking office density by provinces
Map 2: Banking office density in the National Capital Region .................................... 22
iii
Executive Summary
This report summarizes the results of the second test of CGAP’s Country Savings Assessment Toolkit, whichtook place in the Philippines. The purpose of the toolkit is to help government agencies, donors, and othersidentify opportunities and constraints in increasing poor people’s access to high-quality deposit services invarious countries. The methodology examines four levels of the financial system: clients, financial institutions(micro), supporting infrastructure (meso), and policy (macro). It concludes with suggestions for possiblestrategies to improve the quality and quantity of deposit services available to poor and low-income households.
Despite a widespread belief that poor Filipinos do not save, the review team found substantialanecdotal evidence that savings capacity does exist among low-income clients. Research on savings behavior(although scarce) confirmed the existence of savings practices among the poor. Rapid growth in deposits byinstitutions that have made concerted efforts to reach poor clients also reinforced the idea of significant latentdemand. Another potential source of savings––remittances––has begun to spur even mainstream banks totarget low-income clients.
At the micro level, a variety of institutional types serve different market niches. However, depositproducts appear to be unaffordable and physically inaccessible to the poorest clients, and those institutionsclosest to the poor also demonstrate the weakest performance. At the meso level, plentiful donor-fundedcredit lines, excess liquidity in the banking system, and a lack of investment opportunities, all reduce theincentives for stronger institutions to collect small deposits. An underdeveloped financial infrastructure, suchas payment and liquidity management systems, pose further obstacles for some financial institutions. However,new mobile phone banking applications offer a cost-effective, accessible way for institutions to processlow-value payments. At the macro level, although the government’s commitment to market-led microfinanceand the overall regulatory structure facilitates serving low-income clients, certain overly conservativeoperational restrictions may limit the outreach of regulated institutions. In the meantime, cooperatives sufferfrom an almost total lack of oversight.
In light of these findings, the following nine areas could provide promising avenues for intervention toimprove the mobilization of small-balance deposits in the Philippines.
1. Collect more data on clients’ savings patterns and preferences to inform policy debates and support thebusiness case for small-balance savings mobilization.
2. Expand financial literacy efforts for residents, leveraging experiences with Overseas Filipino Workersand their families.
3. Institutionalize and expand successful technical assistance programs on a sustainable basis to ensuretheir effectiveness beyond the life of any single donor project.
4. Build on existing monitoring systems and rationalize ratings to enhance transparency and clientconfidence.
5. Evaluate alternative electronic banking and payment services for rural banks and cooperatives toincrease poor clients’ access to savings accounts and money transfers.
6. Strengthen financial cooperative supervision to better ensure the safety and soundness of poorpeople’s money.
7. Re-evaluate the need for program loan funds, and continue phasing out directed credit programs aspart of a strategy of incentives for large-scale small deposit mobilization.
8. Shift the supervisory framework for banks from operational restrictions toward risk-basedsupervision to better balance the twin objectives of control and access.
9. Update the national microfinance policy to more fully incorporate deposit mobilization.
Country-Level Savings Assessment
1
Introduction
This report summarizes the results of CGAP’scountry-level savings assessment in the Philippines.The assessment was conducted to test a CountrySavings Assessment Toolkit under development aspart of CGAP’s Savings Initiative.1 The purpose ofthe toolkit is to help government agencies, donors,international networks, and technical serviceproviders define potential strategies for increasingpoor people’s access to high-quality deposit services.
The toolkit examines evidence on demandfor deposit services among poor populations, andidentifies opportunities and constraints to meetingthat demand. It examines three levels of the finan-cial system: 1) the capacity for small-deposit mobi-lization among financial service providers (“micro”level); 2) financial infrastructure and second-tiersupport for the micro-level institutions to reach scale(“meso” level) and 3) public policies and govern-ment entities that create an enabling environment(or not) for savings mobilization (“macro” level). Itconcludes by identifying promising strategies toimprove the quality and quantity of deposit servicesavailable to poor and low-income households.
The assessment draws on 1) analysis ofexisting studies and information on demand levels,institutional capacity and the macro environment inthe Philippines (see Annex II for sources compiledon savings in the Philippines); 2) interviews withsome 90 informants related to small-deposit mobi-lization in the Philippines during the in-countryassessment carried out April 24 to May 7, 2005 (seeAnnex II for the list of informants) and 3)visits to financial institutions to collect informationon savings products.2
Overview of Savings in the PhilippineEconomy and Financial System
The Philippines has a relatively developed financialsystem and a highly monetarized economy, with aratio of savings in banks/GDP of 75 percent (seedata in table 1). The ratio of bank loans to privatesector/GDP is 50 percent, indicating excess liquidi-ty in the banking system, which pulls down marketinterest rates. As of May 2005, the 91-day Treasurybill rate was 5.8 percent, several points less thaninflation.
Bank liquidity can be traced partially to theAsian financial crisis of 1997. Although the crisisdid not hit the Philippines as strongly as neighboringcountries, the country experienced an economicslowdown and a contraction in lending to the privatesector. The net loan portfolio of the banking systemdecreased by 20 percent between 1997 and 2003,reaching $35.04 billion. Meanwhile, the totaldeposit liabilities increased by 20 percent, to $48.65billion in 2003.3
As of September 2004, the total volume ofsavings in the Philippine banking system amountedto $46.2 billion. These savings are held in 27 millionbank accounts. Assuming that depositors holdbetween one and two accounts, this would result in13.5 to 27 million persons or 16 to 32 percent of thepopulation with a deposit account.
Seventy-three percent of these accounts hadaverage amounts below $266 and together make up 2percent of the savings volume. Meanwhile, only 1percent of accounts had more than $35,502 but makeup 59 percent of the savings volume (see figure 1).
Country-Level Savings Assessment
3
__________________________1 For further information on CGAP’s Savings Initiativeand information on savings mobilization, visit the CGAPSavings Information Resource Center (SIRC) atwww.cgap.org/savings.2 The assessment team was comprised of Isabel DaunerGardiol, consultant; Jenny Hoffman, consultant; BrigitHelms, Lead Microfinance Specialist at CGAP; and RaniDeshpande, Microfinance Analyst at CGAP. Visits tofinancial institution branches were done by Eo Masilunganfrom AIM, who also helped organize the mission, andJennie de Leon from CARD.
Defining Savings: Poor people save in variousforms—financial and non-financial, formal andinformal. The focus of the assessment is on formalfinancial savings, defined as non-compulsoryliabilities that come from clients.
__________________________3 Source: BSP
Box 1: Economic Situation of the Philippines
In 2004, the Philippines’ GDP grew by 6.1%, itshighest rate since 1996. This growth was attributedto increased production in industry and servicesdriven by growth in exports and investment, whichlargely offset a slowdown in consumption spending.Inflation was 8.5% in March 2005, higher than theBSP’s 2005 target range of 5-6%, mainly due tosupply factors related to rising global oil prices. Atthe time of writing, future monetary policy wasexpected to remain oriented towards reducinginflationary risk and keeping prices stable. TheBusiness Expectations Survey (BES) for the firstquarter of 2005 showed business optimismattributable to higher market demand in the countryand abroad, a stronger peso, political and fiscalreforms and higher tourist arrivals.
Source: BSP (May 2005) and Economist IntelligenceUnit (May 2005)
In cooperatives, the distribution of savingsaccount by amount has a similar shape but amuch lower modal amount. Over 80 percent of theaccounts are smaller than $90 and only 0.3 percenthave more than $4,444 (see figure 2).
Clients: Demand for Small-Deposit Services
Interviews revealed a widespread belief thatFilipinos are consumption-oriented, with little desireor capacity to save. Rather, Filipinos are thought touse credit for daily needs. Bankers reported thatsalary deposits are typically withdrawn immediatelyto repay credit or pay outstanding bills. In return fora cash advance, some pawnshops accept clients’ATM cards and PIN codes, which they then useto withdraw repayments directly from clients’accounts on payday. In addition “kiting,” or usingone source of credit to repay another, seems to havebecome a problem in certain areas.
However, substantial anecdotal evidencesuggests that poor and low-income Filipinos dosave, or at least have the capacity to do so. Informalsavings mechanisms, like ROSCAs (calledpaluwagan or dajong) or stashing money intoalcancia bamboo poles at home, seem to be wide-spread throughout the country. Self-help or solidar-ity groups that conduct savings and credit activitiesare also common. Other practices also demonstratesavings capacity, such as the widely subscribed“numbers games” (lotteries) that raise millions ofpesos through 5-peso tickets.
Philippines
4
Main finding: Despite widespread skepticismabout whether the poor save, available evidencesuggests capacity to save among low-incomeFilipinos.
Table 1: Key economic indicators on the Philippines
Population (2004) 84.2 millionEconomically active population (2002) 50.3 millionTotal number of households 16.8 millionTotal number of accounts in financial institutions 27 millionTotal savings in banks (September 2004) $46.18 billionNational savings rate 17.55%Savings in banks/GDP 74.8%Bank loans to private sector/GDP 50.0%M2/GDP 77%GDP 2004 $61.7 billion91-day T-bill rate (May 2005) 5.8%Inflation (2004) 6%Average exchange rate for 2004 (PhP/$) 56.09GNI per capita (2003) $1080Legislated daily wage rate of non-agricultural workers $6.15% Population on <$2 per day 46.4%% Population on <$1 per day 14.6%Total financial institution branches 7,612Population/Financial institution branch 10,929Financial institution branch/Million inhabitants 90.4
Source: World Bank, IMF, UNDP, BSP
Figure 1: Distribution of savings in thebanking system (Sept. 2004)
0%10%20%30%40%50%60%70%80%
0 - 266 267 - 4,438 4,439 - 35,501 35,502 -
# Accounts Amount ($)
Source: PDIC
Figure 2: Distribution of savings in the cooperative sector (Dec. 2004)
0%10%20%30%40%50%60%70%80%90%
0 - 89 90 - 444 445 - 889 890 - 4,443 4,444 -
# Accounts Amount ($)
Source: CUES
Although rigorous research on savingsbehavior and patterns is scant, it suggests that poorFilipinos do save. For example, an AgriculturalCredit Policy Council (ACPC) survey of 794 smallfarmer and fishing households revealed substantialsavings on the part of those households whoreported saving. Fishing households saved 40percent of monthly income, while farming house-holds saved 28 percent of monthly income.
Market research by financial institutionsprovides further evidence that low-income clients dosave. A survey by a microenterprise bank in the out-skirts of Manila, for example, revealed that 75percent of respondents had savings in commercialbanks. Moreover, the majority of their interactionwith banks occurred in the context of saving ratherthan taking loans.
In contrast, a recent survey4 in smaller citiesof the Philippines finds that nearly two-thirds ofpeople in urban areas keep their savings at home(see table 2). Only 9.7 percent save in rural banks,2.2 percent in commercial/thrift banks, and 9.4percent in cooperatives.
Some interviewees attributed the lack offinancial savings among low-income Filipinos tointimidation or unfamiliarity with financial institu-tions. Many indicated that commercial bank staffdoes not welcome poor clients, who may be morecomfortable dealing with rural banks, cooperatives,or informal institutions for their savings needs.
The study by Karlan et al. also shedslight on what motivates low-income Filipinos tosave. Most people primarily save for emergencies
(precautionary motive). The second most importantreason for people to save is the education of theirchildren (see table 3). These findings show that lowincome households in the Philippines need differenttypes of deposit services to address different needs.Accessible, liquid products allow withdrawals atany time for emergencies, while contractual savingsproducts enable them to accumulate money forspecific expenses.
While the few studies available support thenotion that the poor do save, perhaps the clearestfinding on the demand side is the lack of goodpublicly available data on client savings patterns,preferences, and behavior. Such studies are crucialfor demonstrating and understanding the demand forsmall-balance savings services, as well as designingappropriate products.
Active savings promotion effectively increasesdeposits
When financial institutions in the Philippines havefocused on delivering quality savings services tolow-income customers, they have succeeded intapping latent demand and increasing both theirvolume of deposits and number of clients. Forexample, the Green Bank of Caraga offered a groupof 710 randomly chosen low-income clients a newcommitment savings product (regular saving with-out withdrawal for a given period), visiting clientsdoor-to-door to promote the product. After 12months, average savings balances of clients whotried the product increased by 337 percent, whilefor the control group (clients not included in theexperiment), this increase was 80 percent.5
Country-Level Savings Assessment
5
__________________________5 Karlan et.al. (2004a).
__________________________4 Based on a random sample of 1285 persons in majormarket places in cities of Butuan (North Eastern Mindanao),Baguio (Central Cordillera region), and Bacolod (NegrosOccidental). Approximately 70 percent of the sample hasincomes below the median household income in thePhilippines, which was $166 per month in 2000 accordingto the PNSO. See Karlan et al. (2004b).
Table 2: Where do urban low-income Filipinos save?
Where respondents keep their savings
Percent of sample (multiple response)
n=1285Home 63.5Rural bank 9.7Cooperative 9.4Self-help group 6.7Commercial bank 2.2Other 2.3
Source: Karlan et al. (2004b)
Table 3: What do urban people save for?
What do people save for?* Percent of sample
Emergencies 42.0Children’s education 34.0Food and daily needs 6.6Retirement, future of
family, marriage5.9
Capital to start or expand business, buy land
3.4
Housing 2.3Other 5.8
Source: Karlan et al. (2004b)
*The 16 original categories were aggregated by the authors.
In 2004, a merger of three rural bankscreated One Network Bank with the largest branchnetwork in Mindanao. By actively promoting theimage of the new bank as a large, well-managedinstitution, One Network acquired 23,150 newsavings clients and increased the volume of depositsby 11 percent to $46.36 million in only three months(see figure 3).
Another example is provided by 10 savingsand credit cooperatives, serving mostly low-incomeclients, which have obtained support from the CUESproject (funded by USAID with technical assistancefrom WOCCU) since 1997. In seven years, thesecooperatives more than tripled their savings andshares and increased membership by seven times,reaching 151,314 members and mobilizing $18million savings by February 2005 (see figure 4).Rural banks participating under the MicroenterpriseAccess to Banking Services (MABS) Program,also supported by USAID, have shown an increaseas well in small deposits (under $300) with anincrease among the 80 participating banks of morethan 237,000 new small depositors since 1999.6
These positive results have been possiblethrough enhanced financial discipline, strongeradministration, and effective marketing campaignsof diversified savings products.
Evidence shows that low-income house-holds in the Philippines save in financial institutionsif they are given an opportunity that meets theirneeds. Confidence created through an image of asolid financial institution, active savings promotioncampaigns, and attractive products are sufficient tomobilize deposits even from low-income clients in ashort period of time.
Remittances: An important source of income formany families
One source of savings many institutions have beenpaying increasing attention to is the enormousvolume of remittances that enter the Philippinesevery year. The Philippines exports the highestnumber of migrants in Asia and the second highestworldwide; approximately 44 percent of Filipinohouseholds are thought to have a family memberabroad.7 In 2004 these migrants sent over $8.5billion in remittances through the banking system.8
This was 10 times more than the transfers fromoverseas development assistance and 18 times morethan net inflows of foreign direct investments (seefigure 5).
Philippines
6
__________________________6 MABS
__________________________7 Although no exact number exists, the CFO estimated thatas of December 2001, some 7.41 million Filipinos livedoverseas, of which 3.05 million were OFWs, 2.74 millionpermanent residents, and the remaining 1.62 million wereundocumented Filipinos residing abroad (Bagasao, 2004).8 A survey done by the PNSO in 2001 shows that 68percent of Filipinos who send money home use banks,while 32 percent use informal delivery channels, "door todoor" agencies or friends (Bagasao, 2004). The amountsent through informal channels is not known but is thoughtto be as high as 100 percent of formal flows.
384042444648
Dec. 2004 March 2005240
260
280
300
Deposits ($ million) Depositors (’000)
Source: ONB
Figure 3: Growth of savings in One Network Bank
0
10
20
1997 Feb. 20050
100
200
savings and shares ($ ,000) Members (000)
Source: CUES.
Figure 4: Growth of savings in 10 model cooperatives
0 1,500 3,000 4,500 6,000 7,500 9,000
Remittances (official channels)
Net Foreign Direct Investments*
Donations**
Source: BSP.
*BOP Net FDI flows refer to non-residents’placements less non-residents’ withdrawals + reinvested earnings + net inter-company loans.**Donations from governments and international organizations to the government and to NGOs.
Figure 5: Comparision between inflows of donations, net FDIs and remittances
(2004, Million $)
When received through a bank, remittancesfacilitate the opening and maintaining of depositaccounts. Remittances can also attract more low-income savers if actively bundled with depositproducts. However, remittances can be a disincen-tive for independent savings if they come on aregular basis like a salary. In this case, they areoften withdrawn immediately to pay bills or debts.9
Offering tailored accounts that help migrants andrecipients put remittances to other intended uses,such as children’s education, could help transformthese flows into stocks of savings. Some insurancecompanies have been marketing pension plans to themigrant market, but uptake has apparently beenlimited. The plans were originally designed forupper-income clients and have not been modifiedfor the needs of lower-income migrants.
Remittances are an extremely attractivebusiness for commercial banks because of the trans-action fees they generate and their role in customeracquisition. To market themselves to these potentialclients, many commercial banks offer trainingcourses on financial literacy to overseas Filipinoworkers (OFWs) before they emigrate. Some of thistraining is conducted in conjunction with theOverseas Workers’ Welfare Association (OWWA)as part of their pre-departure orientation formigrants. OWWA also conducts reintegrationtrainings for returned OFWs, which includemodules on financial literacy and savings.OWWA reports that whatever savings OFWs haveaccumulated, these are often quickly depleted upontheir return, as families attempt to maintain thestandard of living to which they have becomeaccustomed. A term, contractual, or annuity-typedeposit product that encourages returnees to delaywithdrawal of their savings might serve client,institutional, and overall economic interests.
Micro Level: Retail Financial Providers
Different types of financial institutions addressdifferent client segments
Banks, cooperatives, and NGOs in the Philippinesall offer deposit services to different marketsegments. The banking system has a tiered struc-ture, with universal and commercial banks cateringmostly to corporate and wealthy clients; thrift banksserving upper-middle income and SME clients; andrural banks serving lower-income clients.10 Theseinstitutions are all regulated and supervised by thePhilippine Central Bank (BSP) and deposits arepartially protected by the Philippine DepositInsurance Corporation (PDIC). Savings and creditcooperatives are widespread, especially in ruralareas; although authorized to mobilize savings fromtheir members, they suffer from weak supervisionand have no deposit insurance. In addition, micro-finance NGOs offer credit to poor clients. Althoughmost NGOs require “compensating balances,” theyare not legally authorized to mobilize savings.
Banks
There are over 7,600 bank branches in thePhilippines. The 42 universal and commercialbanks have the highest minimum capitalizationand widest branch network and can undertake thegreatest variety of functions (see table 4). The 87thrift banks have smaller minimum capital thancommercial banks and more restricted functions.For example, unlike commercial banks, they are notallowed to do investment banking.11
Country-Level Savings Assessment
7
Main finding: Those financial institutions that catermost to low-income clients tend to demonstrate theweakest financial performance, while strongerinstitutions have few incentives to mobilize small-balance savings.
__________________________9 Bagasao (2004) finds that remittances are used by recipientfamilies to pay back debts, including those incurred bymigration (36 percent), for household expenses (32 percent),for household equipment and furniture (13 percent), forchildren’s education (10 percent), and others.
__________________________10 Development banks are a fourth category underPhilippine regulations, but do not cater to the retail market.11 For an excellent summary of the various rules applying todifferent types of banks, see Llanto (2000b).
Table 4: number of banks and bank offices in the Philippines (December 2004)
Universal and Commercial
banksThrift Banks
Rural and CooperativeRural Banks
Total
Head offices 42 87 764 893Branches 4,287 1,193 1,239 6,719
Total 4,329 1,280 2,003 7,612
Source: BSP
Rural banks and cooperative rural banks arethe most numerous with the smallest minimumcapitalization. They are mainly located outsideMetro Manila and address the needs of lower-income clients. Rural banks cannot have foreignshareholders nor engage in foreign currency opera-tions. They are owned by private investors and areoften family-owned. Cooperative rural banks areowned by primary cooperatives.
Figure 6 shows that until the Asian finan-cial crisis in 1997, the number of bank officesincreased steadily. In 1999, the BSP issued abranching moratorium prohibiting the opening ofnew bank branches to encourage consolidation ofthe sector. Since 1999 the number of banks hasdiminished from 976 to 893, while the number ofbranches has remained almost the same.
This trend indicates mergers and acquisi-tions; specifically, the number of commercial, thrift,and rural banks diminished by 19, 26, and 5 percentrespectively. While the number of branchesremained the same for commercial and thrift banks,they increased by 15 percent for rural banks.
The recent increase in rural banks andbranches is probably due to the partial lifting of thebranching moratorium in 2001 for banks engaged inmicrofinance activities.12 There are currently sevenlicensed microfinance banks, of which three arethrift banks (Opportunity Microfinance Bank,Micro-enterprise Bank, Dungganon Bank) and fourare rural banks (CARD Bank, Banco ng Masa,Vision Bank, Xavier Tibod Bank).
By December 2003, banks had a total of$48.65 billion in deposits, of which 90.42 percentwere held by universal and commercial banks, 7.26percent by thrift banks, and 2.32 percent by rural
banks (see figures 7 and 8). In terms of number ofaccounts, the rural banks play a more important role,holding almost 20 percent of the accounts in thebanking system.
Philippines
8
__________________________12 BSP Circular 273.
Figure 6: Number of banks and deposit liabilities
0
1000
2000
3000
4000
5000
6000
7000
8000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*
0
10
20
30
40
50
60
# of bank offices Deposit liabilities (billion $)
Source: BSP. *Deposits for 2004 as of September.
Figure 7: Types of banks by volume of deposits
7% 2%91%
Figure 8: Types of banks by percentage of accounts
10%
20% 70%
Universal and commercial banks Thrift banks Rural and cooperative banks
Source: BSP
Universal and commercial banks Thrift banks Rural and cooperative banks
Cooperatives
In the Philippines, financial services are offered byboth dedicated and multi-purpose cooperatives thatprovide savings and credit services as a complementto other activities. These institutions are supervisedby the Cooperative Development Authority (CDA).However, the CDA’s supervisory capacity has untilnow been hampered by a lack of specialized financeexpertise and a mixed mandate that includes bothregulatory and promotional roles.
Because many cooperatives were formedto channel government subsidies and then wentdormant, no exact figures on the total numberactive of cooperatives are available. Some say thataround 4,000 dedicated cooperatives currentlyoffer financial services in the Philippines.13
According to CDA’s annual report, by December2003, some 31,191 dedicated and multipurposecooperatives mobilized a total volume of savingsand social capital of $140 million from 4.3 millionmembers.14
NGOs
NGO MFIs (as well as multipurpose NGOs) providemicro-loans to low-income clients in the Philippines.The BSP does not authorize NGOs to mobilizesavings from the public, but does not prohibit themfrom collecting compensating balances (as long asthese are less than the value of the portfolio).15 It iscurrently looking at ways to address the issue moreappropriately.
Because NGOs have to register only withthe Security and Exchange Commission (SEC) andare not subject to any regulation, the exact numberof NGOs providing financial services is not known.
A survey by the National Economic DevelopmentAssociation (NEDA) in 1996 counted a total of 600NGOs involved in microfinance throughout thecountry.16 Since 2000, the Microfinance Councilof the Philippines Inc. (MCPI) has tracked theperformance of its member MFIs. As of December2003, 21 MFIs reported 578,493 borrowers, aportfolio of $42 million, and a total savings volumeof $15.4 million.17 Among a total of 562,340 savers,463,463 were compulsory savers and 98,877 werevoluntary savers.l
While the incomplete data on cooperativesand NGOs do not permit definitive conclusions,available numbers indicate that they may servepoorer clients, and that cooperatives especially maybe well placed to offer appropriate deposit servicesto very poor and rural populations. Table 5compares different types of banks with cooperativesand NGOs. The figures clearly show that whilecooperatives and cooperative and rural banksmobilize a relatively small proportion of totalsavings, they have an important weight in terms ofclients served. Their low average account balances(of $354 and $219, respectively) also indicate theyare serving poorer clients.
Affordability is one barrier to access for poorclients
Financial institutions in the Philippines offer threemain types of deposit products: current or checkingaccounts, which pay little to no interest; savingsaccounts, which pay some interest; and time deposits,which offer the highest interest rates. A survey of 8financial institutions in the Philippines found that,unlike in some countries, all these types of accountswere generally fee-free unless the account fell belowthe maintaining balance (see table 6).
Country-Level Savings Assessment
9
__________________________13 Interview with CUES coordinator.14 CDA (2004).15 BSP Act 273. See also NCC (2005).
__________________________16 Cited in Carpio (2004).17 Note that among these MFIs, one is a microfinancethrift bank (OMB).
Table 5: Deposits in the Philippines financial system (December 2003)
Total volume Number of accountsbillion $ percent million percent
Averageaccount
balance ($)Universal and Commercial Banks 43.99 90.13% 17.92 58.56% 2,451Thrift Banks 3.53 7.23% 2.69 8.76% 1,315Rural and Cooperative Banks 1.13 2.32% 5.14 16.77% 219Cooperatives* 0.14 0.29% 4.31 14.07% 354Microfinance NGOs 0.02 0.03% 0.56 1.83% 27Total 48.81 100% 30.65 100% 1,826Source: BSP, MFC, CDA*Savings volume includes members’ social capital (on average $18 per share). The number of accounts corresponds tothe number of members.
The survey also found that checkingaccounts were mainly targeted at high-value or com-mercial customers, with minimum opening balancesof at least $100. Savings accounts generally hadlower minimum opening balances, ranging from $10to $40 in commercial banks, while rural banks andcooperatives had minimum opening balances thatgenerally start at less than $2. However, cooperativemembers must also buy a share to access services,usually at a cost of around $20.
By way of comparison, in 2000 averagedaily household expenditure was $4.5 in rural areasand $10.1 in urban areas.18 Poor clients would thusneed to save up 2 to 10 times the cost of their dailynecessities just to open an account in a commercialbank––a proposition that seems neither feasible norattractive.
Another obstacle to poor people opening anaccount is the requirement of two valid identity
cards.19 Although both banks and cooperatives arerequired by law to insist on such identification, inpractice, cooperatives and rural banks are thought tobe less stringent.
Proximity is key for low-income savers
Another important reason that banks tend to serverelatively wealthier clients is their location. Themaps in Annex III show important differences inbank office density (population per bank branch)between rural and urban areas, and within MetroManila. While in Manila, one bank office serves4,190 persons, in Eastern Visayas and ZamboangaPeninsula there is only one office for over 30,000people. Across regions, the number of persons perbank branch is strongly positively correlated (0.68)to the percentage of subsistence poor and negativelycorrelated to the population density (-0.48). Asillustrated in figures 9 and 10, banks tend to openbranches in richer and more densely populated areas.
Philippines
10
__________________________18 PNSO (2000).
__________________________19 See section on “macro level” for details on ID requirements.
Table 6: Characteristics of basic savings products in different types of banks and cooperatives
UPLB-CDC(San Pablo,Laguna)
Palanan(MetroManila)
Rural Bank of Nagcarla (San Pablo,Laguna
Rural Bank of Bay (San Pablo,Laguna
PlantersBank
PhilippinePostalSavingsBank
Land Bank Bancode Oro
Type of institution
Creditcooperative
Multi-purposecooperative
Rural bank Rural bank Thrift bank Thrift bank Commercialbank
Universalbank
Entrancerequirements
2 valid ID and birth certificate
Become a memberwithPhP 1,000
2 valid ID 1 valid ID 2 valid ID 2 valid ID2 valid ID
Tax IDnumber
2 valid ID
Minimumdeposit to open
PhP 500 None PhP 500 PhP 500 PhP 2,000 PhP 500 PhP 500 PhP 1,000
Minimummaintainingbalance
PhP 100 PhP 2,000 PhP 500 PhP 500 PhP 1,000
Average daily balance to earn interest
PhP 500 PhP 100 PhP 500 PhP 500 PhP 3,000 PhP 500 PhP 500
Fee on dormantaccount
None None None
PhP 10 per month after 2 years
PhP 50 per month if balance belowPhP 2,000
PhP 50 per month if balance belowPhP 500
PhP 100 per month if balance belowPhP 500
PhP 50 per month if balance belowPhP 1,000
Interest rate (annual) 3% 2% 2.4% 3% 1% 2.5% 1% 1%
Source: mystery shopping.
While this branching pattern makes eco-nomic sense for banks, it leaves poorer and moreremote clients with less access to regulated deposit-taking institutions. Forty percent of the populationlives in rural areas and can incur high transactioncosts to go to a bank, in terms of transport expenses,time spent, and risk of being robbed. This isespecially true in areas like the Autonomous Regionof Muslim Mindanao, where the incidence ofviolence and unrest has meant that there are only afew commercial and rural banks.
Institutions that are more accessible to the poortend to have weaker performance
Because of their outreach into poor and rural areas,rural banks and cooperatives are better placed tobring savings services to low-income clients.However, these institutions tend to be weak, poten-tially putting the deposits of the most vulnerable atrisk.
According to available data (as ofDecember 2004), the asset quality of rural banks,cooperatives, and NGOs is worrisome. Rural bankscurrently have an aggregated non-performing loan
(NPL) ratio of 11.6 percent.20 FOCCUS-rated21
cooperatives have a portfolio at risk over 30 days of8.76 percent. Before they entered the CUES project,this figure was 54.6 percent. As some of the mostpromising cooperatives were chosen for the CUESproject, it can be inferred that the majority of coop-eratives may suffer from serious financial problems.As of June 2004, the 16 institutions reporting to theMCPI had an average PAR 30 of 8.1 percent.22
While this seems low compared to the abovenumber on rural banks and cooperatives, MCPImembership includes only the bigger and morefinancially sound microfinance providers.
One indicator of the historical instability ofrural banks is the 373 institutions currently in theprocess of being liquidated, leading to a reduction inthe number of rural banks from over 1,000 in 1990to 770 today. Although rural bank deposits arecovered by deposit insurance up to PhP 250,000($4,563), recovery can take years (see box 2).
The mixed performance record among themost accessible institutions is due in part to weakermanagement and governance and, in the case ofcooperatives and NGOs, practically nonexistentregulation and supervision. In some cases, the veryqualities that make these institutions accessible to
Country-Level Savings Assessment
11
__________________________20 NPLs are defined as loan accounts whose principal and/or interest is unpaid for 30 days or more after due date orafter they have become past due in accordance withexisting rules and regulations. The total outstanding balanceis considered nonperforming. Restructured loans aregenerally considered as NPLs (for details, see circular no.202 and 351 of the BSP). It is worth noting that with NPLratios of 9.7 and 11.0 percent respectively, thrift andcommercial banks are not much better off than rural banks.21 FOCCUS corresponds roughly to the PEARLS ratingsystem of WOCCU and has been introduced by the CUESproject.22 Of these, 13 were MFIs, 2 were rural banks, and one wasa thrift bank.
Box 2: Philippine Depository Insurance Corporation (PDIC)
The PDIC was created in 1993 to protect smalldepositors in the Philippine banking system. Theinsurance covers up to PhP 250,000 ($4,457) foreach individual saver. For this coverage, the PDICassesses a charge of 0.2 percent of total depositson insured banks. The rural banks are the biggestconcern for the PDIC given the number and geo-graphical dispersion of small savers that are difficultand costly to locate and settle with in case of liqui-dation. Currently, almost 400 offices of rural banksare under liquidation, a process that can take up to20 years until all claims have been settled.
Figure 9: Correlation between percent of subsistence poor and number of
persons per bank office
0
5
10
15
20
25
30
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Source: PNSO and BSP
% s
ubsi
sten
ce p
oor (
2000
)
Number of persons per bank office (2004)
0
100
200
300
400
500
5,000 10,000 15,000 20,000 25,000 30,000 35,000
Source: PNSO and BSP
Figure 10: Correlation between population density and persons/bank office
Pers
ons/
km2
(200
0)
Number of persons per bank office (2004)
the poor––remote locations and low cost struc-tures––make it difficult for them to attract the besttrained and experienced staff. The Central Bankrequires certain minimum training for new directorsand managers of rural banks; however, becausecooperatives and NGOs fall outside of the BSP’spurview, these requirements do not apply to them.
The lack of incentives for savings dampensinnovation among rural banks
Strong institutions lack incentives to developproducts for the low-income market, which mayhelp explain the dearth of quality deposit optionsavailable. All types of banks in the Philippines arecurrently overliquid. The ratios in table 7 indicate awidespread conservatism in lending among banks.Banks can easily meet their lending requirements bymobilizing deposits from corporate and upper- andmiddle-income clients––i.e., the “low-hangingfruit.” They do not need to extend services amonglow-income clients to survive or grow.
Those few banks that might need liquiditycan easily obtain a credit line from one of severalwholesale institutions (see table 8), which activelyoffer funds to the strongest rural banks and cooper-atives. In comparison, the resources and effortneeded to mobilize small savings seem prohibitive.The direct financial cost of small savings, 1 to 3percent, is lower than the prevailing rates on whole-sale credit lines, 5.9 to 12 percent. However, thereorientation of an institution’s systems and staffnecessary to successfully mobilize large volumes ofsmall savings is a much more daunting task thansimply availing of one of the many sources ofwholesale credit.
Over liquidity combined with easy-to-access funding alternatives add up to an almostcomplete lack of economic incentives for strongfinancial institutions to focus on the low-incomemarket for deposits. Without incentives, institutionsare not motivated to innovate, and most offer afairly standard set of deposit accounts––althoughsome banks, like Banco de Oro, have overcomethese disincentives (see Box 3).
Meso Level: Service Providers, FinancialInfrastructure, and Second-Tier Funds
Associations and projects promote betterperformance
In the Philippines, the meso level of the financialsystem is populated by training centers, auditingcompanies, and various associations and federationsthat promote best practice among members andlobby for their interests. Each type of bank has itsassociation: the Bankers Association of thePhilippines for commercial banks, the Chamber ofThrift Banks, and the Rural Bankers Association. Inthe cooperative sector, two federations––NATCCOand PFCCO––represent the interests of most coop-eratives, provide capacity building and technicalassistance, and promote standardization of financialreporting and monitoring among members. Somecooperatives are members of both federations, andboth federations are members of the AsianConfederation of Credit Unions. They have recog-nized the need to integrate their efforts, in particularto standardize regulation and supervision of cooper-ative members that engage in savings and credit.
Philippines
12
Box 3: Incentivizing small-balance savings collection
Banco de Oro offers an example of the factors thatcan motivate a strong financial institution to pursuesmall-balance savers. Banco de Oro is owned bythe Philippines’ largest retailer, ShoeMart, whichsees one million customers walk into its shoppingcenters every day. Compared to opening stand-alone branches, installing Banco de Oro outlets inShoeMart malls gives the bank a less expensive wayto put itself squarely in the path of an enormousnumber of potential customers. The resulting costreduction makes servicing small-balance accountsmore viable for the bank.
ShoeMart’s knowledge of customer behavior canalso help Banco de Oro design appropriate products,such as the Banco de Oro Cash Card, an “account-less” prepaid debit card. Cash Cards can be used atATMs and reloaded at ShoeMart counters, turningevery cash register into a Banco de Oro service pointand further reducing administrative costs. Banco deOro earns revenue on these accounts throughtransaction fees paid by merchants for each CashCard purchase. The possibility of migrating thesecustomers to higher-value products, such as moneytransfers, has also spurred the bank’s interest inpursuing the market of small-balance savers.
Main finding: Overliquidity and abundant second-tier funds dampen institutional incentives for smallsavings mobilization, which is exacerbated byincomplete financial infrastructure.
Table 7: Gross loans over deposits (Dec. 2004)
Commercial banks 77.5%
Thrift banks 77.1%
Rural banks 90.3%
Cooperatives (38 CUES coops) 122.0%
NGO MFIs (16 MCPI MFIs) 227.2%Source: BSP, CUES, MCPI
Bilateral development agencies (mostnotably USAID, CIDA, and GTZ) have identifiedthe potential of cooperatives and rural banks toprovide savings services to low- and middle-incomehouseholds living outside the main urban centers.Projects like MABS and CUES offer capacity build-ing and training to rural banks and cooperatives,respectively. These programs have proven thatparticipating institutions progress rapidly in termsof client growth and financial performance. Theyemphasize savings mobilization to become lessdependent on development assistance and second-tier funds. They have introduced financial reportingformats and rating systems to increase transparencyand create competition for results among partici-pants. Example of these are CAMELS (with S forSensitivity to market risk), used for banks; EAGLE,used for rural banks participating in MABS;ACCESS, FOCCUS, FIRM, and COOP-PESOS forcooperatives; and PESO for all types of institutions.The proliferation of rating systems causes someconfusion, however, among financial institutionsand potential clients.
The main voice of NGO MFI interests isthe Microfinance Council of the Philippines(MCPI), which promotes best practices amongits members (currently 23). In coordination withthe BSP, it is the focal point for increasing finan-cial transparency among NGO MFIs. It currentlymonitors members’ performance using the MIXMarket reporting format. The MCPI will transitionto the PESO system in early 2006 and also recog-nizes the need to standardize its charts of accounts.The Mix Market is now also working with MABSand RBAP to increase financial transparencyamong rural banks.
“Easy money” from wholesale financialinstitutions floods the market
Until the late 1990s, different government lineagencies managed directed credit programs (DCPs)providing subsidized loans to retail financial institu-tions or directly to end clients. In 1997, the NationalCredit Council (NCC) published the NationalStrategy for Microfinance (see box 5), which statedthe government’s policy in favor of market-baseddelivery of financial services to the poor. As a resultof this policy and accompanying laws, these market-distorting credit programs have been slowlywinding down.23 The continuing effort to phase outDCPs is to be congratulated and encouraged,especially given the periodic threat of their re-emergence as convenient political tools.
The main source of wholesale financing toretail institutions serving poor clients is the donor-funded, so-called “program loans,” which arerouted through government-owned institutions (seetable 8). The most important conduits for programloans are currently:
- The Land Bank of the Philippines (LBP)and the Development Bank of thePhilippines (DBP), government-ownedbanks that provide refinancing to ruralbanks and cooperatives.
- The People’s Credit and FinanceCorporation (PCFC), a registered financecompany under the Securities andExchange Commission.
In 2002, the BSP opened a rediscounting facilityfor microfinance-oriented banks, granting redis-counting to 15 banks, involving 33,000 microborrowers.
These wholesale funds come mainly fromthe World Bank, Asian Development Bank, JBIC,and KfW. Together, these agencies have channelledapproximately $356 million through government-owned financial institutions, an amount equivalentto 32 percent of the $1.13 billion deposits mobilizedby rural banks.
These credit lines represent an advanceover donor practices in many countries in that mostare lent at market or near-market interest rates.However, it is not clear whether these credit linesmeet their stated purpose of filling a gap inmedium- and long-term financing for banks. Noris it clear whether program loans actually increasethe amount of medium- and long-term lending bybanks. In the face of widespread conservatism inbank lending, the availability of finance does notnecessarily change bankers’ risk/reward perceptionof a longer-term project. The over liquidity inthe Philippine financial system calls into furtherquestion the need for such large amounts ofexternal refinancing.
Recipients of these funds must meetstringent minimum performance thresholds. Inter-viewees report that the conduit institutions find itdifficult to identify suitable partners, and so mustmarket aggressively to the few institutions strongenough to be eligible. From a savings mobilizationperspective, then, precisely those institutions thatwould make the safest home for poor people’ssavings have the least incentive to mobilize them.
Country-Level Savings Assessment
13
__________________________23 Conroy (2003).
Incomplete financial infrastructure for ruralbanks and financial cooperatives
Rural banks and cooperatives are not directly con-nected to the national payment system. Weaknessesare also reflected in the quality of the servicesoffered. From a savings mobilization perspective,lack of access to the payments system impedesfinancial institutions’ ability to serve low-incomeclients who prefer to access their money at multiplelocations, or receive remittances or other paymentsdirectly. Most rural banks and all cooperatives andNGOs cannot link directly into national paymentsswitches, but instead must transact through theiraccounts with other banks. At this time, one ruralbank has recently gained direct access to thePhilippine Clearing House and opened its own auto-matic teller machines (ATMs), but the vast majorityof accessible institutions cannot offer ATM services.Rural banks’ and cooperatives’ inability to holdforeign currency deposits also disadvantages them interms of receiving remittances, since many migrantsprefer to keep their earnings in hard currency.
Moreover, most rural banks are limited toone district or region, restricting clients’ ability tomove money around the country. Until rural bankscan connect directly to the payment system, theseentities are seeking intermediate solutions likepartnering with commercial banks to open ATMs.
Lack of access to the payments system alsomeans that liquidity management is more difficultfor rural banks and cooperatives. The cooperativefederation NATCCO has recently introduced aCentral Liquidity Fund that gives members access torefinancing facilities; however, few cooperatives arelinked to it yet. Rural banks have started to lend andborrow among each other when they have excess
or insufficient liquidity. This practice faces a regula-tory hurdle. Liquidity placements in other banks aretreated as loans and subject to the single borrowerlimit (25 percent of unimpaired capital). Thisrequirement increases the complexity and cost ofdepositing funds in other banking institutions, apotentially simple and convenient liquidity manage-ment mechanism.
Information and communication technology isrevolutionizing access to banking services
By the end of 2004, 33 universal and commercialbanks and 11 thrift banks had ATMs. They had5,469 ATMs, of which 5,100 were operated by com-mercial banks and 369 by thrift banks. In the last 6months of 2004, the number of ATMs increased by657 units. In 2005 one rural bank has installedATMs. This evolution will soon be followed byother rural banks and should increase the areas’accessibility to deposit services while simulta-neously broadening the access of rural bank clientsto the national payment system.
Another promising development forincreasing banking outreach is mobile phonebanking applications offered by Philippine telecomcompanies (see box 4). Thirty-five percent ofFilipinos own a mobile phone, and Filipinos are thebiggest users of text messaging in the world,sending more than 200 million Short MessageService (SMS) messages a day. The mature SMSmarket has trained Filipinos to use the phone as adata instrument, facilitating their adoption of mobilebanking products.24 As a solution for low-valuepayments, the potential of mobile banking applica-tions to increase savings mobilization is enormous.
Philippines
14
__________________________24 Simpson & Liew (2005).
Table 8: Most important government wholesale credit funds
Wholesaler Type and number of retail institutions
Outstandingloan
($ million)
Interestrate
(annual)Final clients
LBP 400 rural banks1000 cooperatives
355.4(Dec. 2004) 7.5%
SMEs, small farmers, fishers, veterans and pensioners.
PCFC
199 (107 rural and cooperative rural banks, 54 coops, 34 NGOs, 3 thrift banks, 1 lending investor)
51.7(May 2005) 12%
1.2 million persons,for livelihood,95% women
DBP Cooperatives, banks, local government units, NGOs
0.65(Dec. 2003) 7.38% SMEs
BSP microfinance rediscountingwindow
15 microfinance oriented thrift and rural banks
0.31(March 2005) 5.9% 33,000 micro
borrowers
Sources: Interviews and web site information from PCFC, LBP, DBP, BSP. Report of JBIC (2004).
By eliminating the need to build costly bank infra-structure, they can bring down the cost of mobilizingsmall savings, one of the main obstacles for financialinstitutions. In the near future, retail bank-to-banktransactions might even be switched via the phonecompanies. If this happens, mobile banking opera-tions may free rural banks and cooperatives from theneed to connect to the payment system at all.
Macro Level: Legal and RegulatoryFramework for Micro Savings Mobilization
Philippine regulatory framework encouragesfinancial service delivery to the poor byregulated, commercial institutions…
The Philippine government explicitly promotes amarket-based microfinance policy aimed at increas-ing the outreach of financial institutions to themajority of the population (see box 5). It recognizesthat different types of private banking institutionsare required to address diverse client needs. At thesame time, the policy is mostly oriented towardmicrocredit, with very little discussion of theimplications for deposit services. The Philippines’microfinance strategy defines the appropriate roleof government as establishing an enabling environ-ment rather than providing services directly. Thephase-out of the DCPs was a particularly importantdemonstration of this approach and should beapplauded. However, continued vigilance isrequired to prevent the resurrection of theseprograms and the imposition of other unfavorablepolicies, such as interest caps, that some claim is aconstant threat.25
Through graduated minimum capital andother requirements, the Philippines’ tiered bankingstructure has made it possible for banking institu-tions to serve low-income clients in remote areas.The rural banks, in particular, can operate in areaswhere potential profits may not meet the hurdle ratesimposed by mainstream commercial banks.
Country-Level Savings Assessment
15
Box 4: Mobile Banking in the Philippines
In 2003, SMART Communications launched mobile commerce applications, including mobile banking and “SmartMoney.” This technology allows users to pay for purchases by transferring money from a bank account orreloading a prepaid card electronically through the user’s mobile phone. The SMART service also allows users tomake and receive domestic payments and to receive international remittances into their mobile phone account.The recipient can then withdraw cash from the phone account at either an ATM or one of 50,000 SMART encash-ment centers, including retail stores, gasoline stations, pawnshops, and McDonalds. SMART is currently process-ing approximately 2 million mobile banking transactions per day.
In 2004, Globe Telecom launched G-cash, another mobile banking service that differs from Smart Money mainly inthat Globe does not issue a debit card to accompany the mobile phone account. In five months, G-Cash acquired320,000 users, generating between 4,000 and 5,000 transactions a day. However, G-Cash managers aretargeting a potential volume of 1 million daily transactions and have been aggressive in marketing the service tofinancial institutions. Through a partnership with the Rural Bankers’ Association, with the support of MABS,several rural banks are currently piloting G-cash for the repayment of loans and the receipt of remittances.
Main finding: Supervision of deposit-taking institu-tions is uneven: while cooperatives and NGOs areeffectively unsupervised, overly restrictive rules onbanks limit their ability to reach poor clients.
Box 5: The Philippines National Strategy for Microfinance
The National Credit Council (NCC), at the depart-ment of finance, was established in 1994 by thegovernment with the objective of rationalizinggovernment lending programs and developing anational microfinance policy capable of addressingissues of poverty. In 1997, the NCC published theNational Strategy for Microfinance, which set thepath for the development of a private-sector-led andmarket-oriented microfinance sector, accompaniedby a conducive legal and regulatory environment.
This strategy sets the policy framework of micro-finance in the Philippines, based on the followingprinciples:- The private sector should provide microfinance
services.- The policy environment will facilitate the
participation of the private sector.- Market-oriented interest rates on loans and
deposits.- Non-participation of government line agencies
in the implementation of credit/guaranteeprograms.
The policy, among others, strengthens theimportance of:- An appropriate supervisory and regulatory
framework for MFIs.- The establishment of standards of performance.- The promotion of broad-based savings
mobilization, linkage banking technology, andother microfinance technology.
- Provision of information and training to MFIs onbest practices in microfinance.
Sources: NCC and Conroy (2003)__________________________25 Llanto (2004a).
Philippines
…But supervision is uneven: too little for non-bank institutions, and potentially too much forbanks
Cooperative and deposit-taking NGOs lack effectiveprudential supervision. At the same time, banks areconstrained by a supervisory framework that mayhave erred on the side of too much caution inthe aftermath of the Asian financial crisis. Thistendency toward rules-based, rather than risk-based,supervision limits banks’ ability to reach out tounderserved markets and seems to encourageregulatory arbitrage and evasion.
The most frequently mentioned exampleof this type of limitation is the moratorium onbranching. Issued in 1999, it indefinitely suspendedthe opening of new branches and new banks exceptin municipalities without banks. In 2001, the BSPlifted this moratorium for rural and thrift banksengaging in microfinance activities (defined as amaximum loan of 150,000 PhP or $2,740).26 Theintent of this exception is to encourage bankinggrowth in underserved areas.
But the exemptions themselves do nothingto change the risk/reward ratio intrinsic to opening abranch in a poor or remote locality. In the mean-time, the moratorium does protect the rural bankmonopolies that exist in many municipalities––again, dampening incentives for banks to improveservice to low-income customers. Single-locationrural banks also complain that the moratoriumlimits diversification of their operations, inhibitingrisk management.
The implementation of the moratorium andits exceptions has also been problematic.Ambiguous guidelines on branching for micro-finance-oriented thrift and rural banks and longwaiting times to receive licenses slow down thecreation of new branches and the entry of newplayers in underserved markets. To circumventthe branching moratorium, banks have apparentlybeen setting up non-bank microfinance subsidiaries.While these companies can offer credit, they cannotlegally take deposits.
Other BSP regulations also hinder smallsavings mobilization by banks. For example, off-sitedeposit collection was prohibited by the BSP in1999.27 This rule reduces the ability of rural banksto mobilize savings, especially in less denselypopulated areas. Moreover, many customers havecome to expect this type of service because rovingmoneylenders have traditionally offered doorsteprepayment collection. Customer demands have
motivated some rural banks to collect depositsthrough cash boxes or ambulatory deposit collectors,even if it means operating at the margin of legality.The BSP’s concern is perhaps understandable froma security and fraud point of view. However, moreopenness to innovative practices would helpregulated institutions capture more small deposits byreducing transaction costs to clients and attractingsavings from the informal to the formal system.
Finally, Know Your Customer (KYC) rulesimplemented to prevent money laundering alsoblock poor customers who wish to open depositaccounts. As in many other countries, KYC rules inthe Philippines require two forms of government-issued identification to open a bank account. ThePhilippines have no national ID system and poorpeople working in the informal sector often haveonly one ID, issued by the local authority (VillageClearance Card)—if that. In addition, KYC rulesrequire proof of residence. While higher-incomeclients may be able to furnish utility bills and otherallowable forms of proof, these are often impracticalor impossible for the poor.
Strategies to Improve Small DepositMobilization in the Philippines
Based on background research and many interviewsin the Philippines, including roundtables with repre-sentatives of the banking system and donor agen-cies, the authors suggest some strategies for improv-ing the access of poor clients to savings services.These suggestions require further reflection andelaboration, and CGAP would be pleased to workwith stakeholders to help implement them.1. Collect more data on clients’ savings patterns
and preferences. Studies analyzing the savingsbehavior of low-income households and theirpotential demand for deposit services wereextremely difficult to find. Up-to-date and accu-rate demand-side data will be crucial for bothfinancial institutions and policy makers that wishto increase deposit options for poor Filipinos. TheACPC’s Small Farmer Indebtedness Survey couldrepresent a prime opportunity for quickly increas-ing the amount of data available on small savings.ACPC staff have already expressed openness tothe possibility of adding a few questions to thisyear’s survey, which is currently being finalized.
16
__________________________26 BSP circular 273.27 BSP circular 118.
Assets accumulated by people who are alreadyeconomically vulnerable are too valuable to entrustto institutions that risk losing them.
Country-Level Savings Assessment
In terms of longer-term research, oneproject of potential interest is FinMark Trust’sFinScope survey. Currently being replicated inseveral countries, FinScope forms a coalition offinancial institutions to back a comprehensivehousehold survey on access to and usage ofmultiple financial services.28 In addition to finan-cial institutions, universities and research firmsmight be tapped as partners in future researchefforts such as this. Bodies, such as the NAPC,might be well-positioned to play a coordinatingor commissioning role.
In part, data are lacking because smallsavings collection is not seen as a businessopportunity by commercial banks. As in micro-credit, the challenge might be to make a businesscase for small savings collection.
2. Expand financial literacy efforts for residents,leveraging experiences with Overseas FilipinoWorkers. Many Filipinos agree there is a lackof a “savings culture” in the country. At thesame time, extensive investments have beenmade to provide financial education to OFWswhen they leave and return. These efforts shouldbe expanded and replicated more widely toinclude people unconnected to the migrationprocess. This would not necessarily requiregovernment expenditure, as commercial bankswould likely be willing to deliver the financialeducation as a customer acquisition tool.However, bank representatives have expressed adesire to coordinate more closely with govern-ment experts to develop an accepted “storyline”or curriculum for this type of training.
3. Institutionalize and expand successful techni-cal assistance programs on a sustainablebasis. Financial analysis of rural banks andcooperatives has revealed weaknesses in theirperformance. Certain donor-funded capacity-building projects have proven successful inimproving that performance. These effortsshould be institutionalized, i.e., integrated intoexisting local structures and associations toensure their sustainability beyond the end ofthe respective projects. Permanent sources oftechnical assistance are crucial given the sheernumbers of rural banks and cooperatives inoperation and the relatively small fraction thathave benefited directly from donor projects.
4. Build on existing monitoring systems andrationalize ratings to enhance transparencyand client confidence. Various projects andassociations have introduced their own financialreporting and rating systems (i.e., CAMEL,PESO, FOCCUS, FIRM, ACCESS, EAGLE)that have fostered competition among institu-tions and have increased transparency andgrowth. However, the proliferation of ratingsystems reduces the power of each one.Rationalizing these systems into one, like PESO,would increase incentives for performance byenabling comparison across more institutions. Itwould also increase the value of the rating’s“brand” as a mechanism to inspire the confi-dence of consumers, for whom multiple ratingsystems are likely to be very confusing.
5. Evaluate alternatives for electronic bankingand payment services for rural banks andcooperatives. The ability to move money fromplace to place is essential for mobilizing smalldeposits, both for capturing remittances andbecause clients are less likely to deposit in onelocation if their money is inaccessible to themelsewhere. Up until now, rural banks and coop-eratives have provided payment services onlythrough other institutions, making this serviceimpractical or impossible. However, with theadvent of mobile phone banking, this situation ischanging. Together with rural banks and coop-eratives, the BSP should evaluate the pros andcons of emerging e-payment solutions (e.g.,e-transfers, ATMs, mobile phones) forleapfrogging traditional systems and offeringpayment services to more poor clients.
6. Strengthen financial cooperative supervision.Although the exact number of depositors theyserve is not known, available data indicate thatcooperatives may serve a poorer clientele thanbanks, even rural banks. In this light, improvingcooperative supervision is crucial, and currentefforts to do so should be supported. The currentmove to eliminate the CDA’s promotional role infavor of a regulatory mandate is a necessary firststep. However, it may not be sufficient given thenumber of cooperatives in existence and thecurrent weakness of the CDA’s supervisorycapacity. Various models of delegated super-vision should be explored. Best practice alsoadvises establishing a separate set of regulationsand supervisors for savings and credit coopera-tives, different from those for multipurposecooperatives.
17
__________________________28 Detailed information on FinScope is available at www.finscope.co.za.
Philippines
18
7. Re-evaluate the need for program loan funds,and continue phasing out directed credit pro-grams. The common rationale for programloans is that they fill a gap in medium- and long-term wholesale finance. However, more researchon the stability and tenor of deposits needs to bedone before this reasoning can be accepted,especially in light of the disincentive these loansproduce for institutions to mobilize savings.Perversely, this disincentive acts most power-fully with regard to small savings––which areperceived to be higher-cost––and on stronginstitutions, which are best-placed to mobilizethem. Renewals of wholesale funds, apexes,and/or rediscount lines should consider thecrowding-out effect they seem to have on mobi-lization of deposits, especially from small savers.
8. Shift the supervisory framework for banksfrom operational restrictions toward risk-based supervision. Current efforts to limitsystemic risk and encourage consolidation havetranslated into operational rules that may inhibitregulated institutions from serving poor markets.A supervisory framework that emphasizescompliance with prudential ratios or measuresbased on an assessment of real or probable risk
(instead of limiting banks’ operational choices)could keep risk at an acceptable level whileenabling banks to pursue neglected marketniches. According to the latest information, theBSP is currently thinking of adopting risk-basedsupervision and is in the process of institutingthe necessary reforms. The branching policiesare also under discussion.
9. Update the national microfinance policy.Although the 1997 strategy is still valid (espe-cially for microcredit), the NCC should draft anupdated version to reconfirm the government’scommitment to a market-based approach andoffer better guidance on other financial services,including savings. A consultative re-draftingprocess involving representatives from govern-ment, donors, financial institutions, and clientgroups, could trigger increased dialogue andfocus on non-credit financial services for thepoor. Tapping the National Savings Council tospearhead efforts to draft the language ondeposit services might both help to reinvigoratethe Council and provide a home for policycoordination and promotion of small-balancesavings.
Country-Level Savings Assessment
19
Annex 1 Summary Matrix of Opportunities, Obstacles, and Suggested Actions
Level Opportunities/Strengths Obstacles/Weaknesses Suggested actions
Clients
- Evidence of savings capacity among low-income Filipinos- Institutions that have focused on deliveringquality savings services have increased deposits
- Skepticism about savings ability perpetuated by lack of data- Demand may be limited by intimidation or unfamiliarity with financial institutions
Collect more data on savings preferences of low-income Filipinos Expand financial literacy efforts for residents
Micro
- Majority of depositors served by a variety of regulated institutions
- Institutions closest to the poor are weakest in terms of performance, governance, management- Institutions caught in a liquidity trap- Perceive cost of small savings to be high- Foregoing 2 factors dampen incentives for institutions to mobilize small savings
Institutionalize and expand successful technical assistance programs on a sustainable basis
Meso
- Numerous associations and TA projects bolster institutional capacity- Payment system may be bypassed by mobile banking systems
- Easy money flooding the market, partially from remaining DCPs but mainly from program lending operations- Institutions serving the poor lack liquidity management mechanisms, connection to payment system- Multiple rating systems confusing forinstitutions and clients
Continue phasing out DCPs; determine whether program loans fulfill purpose and are necessary Evaluate alternative e-payments options (ATMs, cell phones, etc.) Encourage consolidation of federations; build on and rationalize rating systems to enhance performance and client confidence
Macro
- Government’s policy stance encourages commercial microfinance - Tiered banking structure makes it more viable for regulated institutions to serve poor markets
- Institutions closest to clients operate in regulatory void- Operational restrictions may limit bank outreach and encourage regulatory arbitrage, evasion- AML rules are barrier to low-income clients
Strengthen supervision at CDA and/or delegated models Shift regulatory framework from operational controls toward risk-based supervision Update national microfinance policy to reconfirm commitment to market-based approachand offer guidance on other financial services, including savings
Annex 2
Sources of Information on Savings in the Philippines
Statistics and Web Sites
Central Bank of the Philippines: www.bsp.gov.ph
Philippine Depository Insurance Corporation: www.pdic.gov.ph
Microfinance Council of the Philippines: www.microfinancecouncil.org
National Credit Council: www.dof.gov.ph/htm/microfinance_reg.asp
Philippines Homeless People’s Federation: www.achr.net/philippines1.htm
Penn World Table Version 6.1. Alan Heston, Robert Summers and Bettina Aten. Centre for InternationalComparisons at the University of Pennsylvania (CICUP), October 2002.http://pwt.econ.upenn.edu/php_site/pwt_index.php
Publications
ACPC (2002), Small farmers and fisher folk credit accessibility survey 2002. Manila.
Bagasao, I. (2004), “Migration and development: the Philippine experience.” Small Enterprise Development.Vol. 15 No. 1, March 2004.
BSP (2005), Inflation report – 1st quarter 2005. April 2005. Manila.
Carpio, M. A. (2004), “The experience of financial institutions in the delivery of microcredit in thePhilippines”. Journal of Microfinance. Vol. 6 No. 2. Winter 2004. Utah, Hawaï.
CDA (2004), Annual Report 2003. Manila.
Charitenenko S. (2004), Commercialisation of microfinance: The Philippines. Asian Development Bank,Manila.
Conti, R. M., ed. (2004), Reengineering livelihood development in the 21st century. Hanns SeidelFoundation, Manila.
Conroy, J. D. (2003), The Challenges of microfinancing in Southeast Asia. The Foundation for DevelopmentCooperation, Australia, Mimeo.
Gallardo, J. (2002), A framework for regulating microfinance institutions: How does a country’s legal andregulatory framework affect the sustainability of microfinance? Policy Research Working Paper 2755.The World Bank, Washington D.C.
IIMA – Institute for International Monetary Affairs (2004), Settlement systems of East Asian economies.Ministry of Finance of Japan (http://www.mof.go.jp/english/if/SSEAE2004.htm).
Japan Bank for International Cooperation (2004). Pilot study on sustainable microfinance for povertyreduction in the Philippines. Final report, Mimeo.
Karlan, D. S., N. Ahraf, and Y. Wesley (2004a), Tying Odysseus to the mast: Evidence from a commitmentsavings product in the Philippines. Universities of Princeton and Harvard. Mimeo.
Karlan, D. S., N. Ahraf, and Y. Wesley (2004b), Market survey report. Universities of Princeton and Harvard.Mimeo.
Lamberte, M. B. (2001), The Philippine payment system: Efficiency and implications for the conduct ofmonetary policy. PIDS, Manila.
Philippines
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Llanto, G. M. (2004a), Is the promise being fulfilled?... Microfinance in the Philippines: Status, issues andchallenges. PIDS Policy Notes, no. 2004-10, Manila
Llanto, G. M. (2004b), Micro finance and rural finance options in the Philippines. World Bank Report, partsI and II, Draft, October 2004.
Llanto, G. M. (2000a), Protecting deposits in savings and credit cooperatives. PIDS Policy Notes, no.2000-08. Manila.
Llanto, G. M. (2000b), The Role of central banks in microfinance in Asia and the Pacific. The Philippines,Mimeo.
Llanto, G. M., P. Geron, and M. G. Tang (1999), Directed credit programs: Sigues and framework for reform.CPIP. Department of Finance, National Credit Council, Manila.
NAPC (2004), Thrusts of NAPC for 2004-2010, Manila.
National Statistics Office (2004), Philippine statistical yearbook, Manila.
NCC (2005), Regulatory framework for microfinance in the Philippines. Manila(www.dof.gov.ph/htm/microfinance_reg.asp).
QUEDANCOR (2005), Willingness to serve: The SRT story, Manila.
Simpson, R., E. Liew (2005), Globe Telecom’s G-Cash a mobile commerce success story, Gartner.
Smart Communications Inc. (2004), Connect, Issue no. 2.
Country-Level Savings Assessment
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Annex 3
Map 1: Banking office density by province
Map 2: Banking office density in the National Capital Region
Philippines
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