On March 2 we attended a workshop on competition and competition reforms in key sectors of the Philippine economy. It was coorganized by the Philippine Institute for Development Studies, Consumer Unity and Trust International, and Action for Economic Reforms under a project called CREW, or “Competition Reforms in Key Markets for Enhancing Social and Economic Welfare in Developing Countries”, which seeks to promote healthy competition in various sectors of the economy.
Among the sectors considered was the banking industry. Our colleague, Dr. Alvin Ang, provided general observations on how competition exists in the industry. In general, he presented various measures of competition as applied to the financial industry. The results were inconclusive, as they seemed to be countering each other. Observable data show that competition among banks is not reflected in interest rates but in terms of services. It is important to note that banking is not similar to other products and services primarily because of the need to balance between national financial stability and efficiency of financial services.
In line with this, the Bangko Sentral ng Pilipinas (BSP), as the supervisor and regulator of the industry, aims to: 1) ensure that banks are solvent and stable, and are able to provide a fair return to their investors and 2) ensure the stability, solvency and safety of the whole financial system toward economic development.
Thus, financial stability and economic development (with the latter presumably happening via financial inclusion) are not meant to be conflicting goals. The World Bank Global Financial Development Report 2013 made a similar assertion: “Competition in the banking sector promotes efficiency and financial inclusion, without necessarily undermining financial stability.”
Moreover, external factors, such as the regional financial integration under Asean 2015, have compelled central banks in the region to work toward building a well-integrated and smooth-functioning regional financial system under a liberalized capital account regime and interlinked capital markets. This development implies that Philippine banks are being shaped up to compete in the Asean region, and such an intention is made evident by bank consolidation (i.e., merger and acquisition) statistics provided by the BSP showed.
Indeed, there is a need to consolidate the resources of domestic banks so that they will be able to hold their own against foreign banks, which have been allowed full entry by Republic Act 10641 (“An Act Allowing the Full Entry of Foreign Banks in the Philippines”). Ang notes that Philippine banks are among the smallest in Asean in terms of assets. In fact, the Development Bank of Singapore is bigger than the entire Philippine banking system in terms of assets, although only three foreign banks, namely, Maybank, Bangkok Bank and United Overseas Bank, are internationally active.
Within the country, there still are a number of local government units (LGUs) without banks. Out of 1,634 LGUs, 595, or 36 percent of the total, still do not have bank offices as of end-June 2015. In terms of the value of savings and time deposits, there is an observable large amount available in banks, but loans granted have largely been in the real estate and trading sectors (about 40 percent), while microenterprises/small and medium enterprises and agriculture only got 7.2 percent and 6.5 percent, respectively. This reveals that there is still a lot of work to be done to be financially inclusive and, at the same time, to use savings for productive economic growth.
Finally, in terms of comparable measures of financial inclusion, the Philippines lags behind its Asean neighbors. Notably, for population aged 15 years and above, 13.49 percent of Filipinos borrow from private informal lenders, as compared to the 1.05 percent, 0.81 percent, 9.15 percent and 2.94 percent for Singapore, Malaysia, Thailand and Indonesia, respectively.
As Ang points out, the financial system is highly liquid, but such liquidity is not necessarily being translated to loans that can grow the economy in a more broad-based manner. Also, working to make domestic banks “bigger and stronger” does not necessarily mean decreasing competition for the sake of financial soundness or stability. The World Bank notes that the state can actually shape bank competition through its actions as a regulator and an enabler of a market-friendly and information-rich environment. Recently, regulations have allowed banks to compete more in terms of service (as facilitated by technological advancements) rather than traditional sources of income (interest and fees).
Surely, banks are aware of these trends, and they know that they are free to act accordingly. Thus, working toward greater financial inclusion and providing more competitive rates should increasingly come from their own volition rather than from central bank mandate. We want strong banks that can channel and distribute economic growth. They need not be mutually exclusive outcomes.
This article was written by Ser Percival K. Peña-Reyes, who teaches Economics of Money and Banking at the Department of Economics of the School of Social Sciences of Ateneo de Manila University. Comments are welcome at spena-reyes@ateneo.edu.
Among the sectors considered was the banking industry. Our colleague, Dr. Alvin Ang, provided general observations on how competition exists in the industry. In general, he presented various measures of competition as applied to the financial industry. The results were inconclusive, as they seemed to be countering each other. Observable data show that competition among banks is not reflected in interest rates but in terms of services. It is important to note that banking is not similar to other products and services primarily because of the need to balance between national financial stability and efficiency of financial services.
In line with this, the Bangko Sentral ng Pilipinas (BSP), as the supervisor and regulator of the industry, aims to: 1) ensure that banks are solvent and stable, and are able to provide a fair return to their investors and 2) ensure the stability, solvency and safety of the whole financial system toward economic development.
Thus, financial stability and economic development (with the latter presumably happening via financial inclusion) are not meant to be conflicting goals. The World Bank Global Financial Development Report 2013 made a similar assertion: “Competition in the banking sector promotes efficiency and financial inclusion, without necessarily undermining financial stability.”
Moreover, external factors, such as the regional financial integration under Asean 2015, have compelled central banks in the region to work toward building a well-integrated and smooth-functioning regional financial system under a liberalized capital account regime and interlinked capital markets. This development implies that Philippine banks are being shaped up to compete in the Asean region, and such an intention is made evident by bank consolidation (i.e., merger and acquisition) statistics provided by the BSP showed.
Indeed, there is a need to consolidate the resources of domestic banks so that they will be able to hold their own against foreign banks, which have been allowed full entry by Republic Act 10641 (“An Act Allowing the Full Entry of Foreign Banks in the Philippines”). Ang notes that Philippine banks are among the smallest in Asean in terms of assets. In fact, the Development Bank of Singapore is bigger than the entire Philippine banking system in terms of assets, although only three foreign banks, namely, Maybank, Bangkok Bank and United Overseas Bank, are internationally active.
Within the country, there still are a number of local government units (LGUs) without banks. Out of 1,634 LGUs, 595, or 36 percent of the total, still do not have bank offices as of end-June 2015. In terms of the value of savings and time deposits, there is an observable large amount available in banks, but loans granted have largely been in the real estate and trading sectors (about 40 percent), while microenterprises/small and medium enterprises and agriculture only got 7.2 percent and 6.5 percent, respectively. This reveals that there is still a lot of work to be done to be financially inclusive and, at the same time, to use savings for productive economic growth.
Finally, in terms of comparable measures of financial inclusion, the Philippines lags behind its Asean neighbors. Notably, for population aged 15 years and above, 13.49 percent of Filipinos borrow from private informal lenders, as compared to the 1.05 percent, 0.81 percent, 9.15 percent and 2.94 percent for Singapore, Malaysia, Thailand and Indonesia, respectively.
As Ang points out, the financial system is highly liquid, but such liquidity is not necessarily being translated to loans that can grow the economy in a more broad-based manner. Also, working to make domestic banks “bigger and stronger” does not necessarily mean decreasing competition for the sake of financial soundness or stability. The World Bank notes that the state can actually shape bank competition through its actions as a regulator and an enabler of a market-friendly and information-rich environment. Recently, regulations have allowed banks to compete more in terms of service (as facilitated by technological advancements) rather than traditional sources of income (interest and fees).
Surely, banks are aware of these trends, and they know that they are free to act accordingly. Thus, working toward greater financial inclusion and providing more competitive rates should increasingly come from their own volition rather than from central bank mandate. We want strong banks that can channel and distribute economic growth. They need not be mutually exclusive outcomes.
This article was written by Ser Percival K. Peña-Reyes, who teaches Economics of Money and Banking at the Department of Economics of the School of Social Sciences of Ateneo de Manila University. Comments are welcome at spena-reyes@ateneo.edu.
