Philippines Country-Level Savings Assessment CGAP Savings Initiative CGAP Savings Initiative Isabel Dauner Gardiol, consultant, Intercooperation Brigit Helms and Rani Deshpande, CGAP August 2005 Abbreviations ACPC Agricultural Credit Policy Council ATM Automatic Teller Machine BAP Bankers Association of the Philippines BSP Philippine Central Bank CDA Cooperative Development Authority CFO Commission on Filipino Overseas CTB Chamber of Thrift Banks CUES Credit Union Empowerment & Strengthening Project DCP Directed Credit Program FOCCUS Finance Organisations Achieving Certified Credit Union Standards JBIC Japan Bank for International Cooperation KfW Kreditanstalt für Wiederaufbau (German Development Bank) MABS Microenterprise Access to Banking Services MCPI Microfinance Council of the Philippines, Inc. MFI Microfinance Institution NATCCO National Confederation of Credit Cooperatives NCC National Credit Council NEDA National Economic Development Authority NSCB National Statistics Coordination Board RBAP Rural Bankers Association of the Philippines ODA Overseas Development Assistance OFW Overseas Filipino Workers ONB One Network Bank PCFC Peoples' Credit and Finance Corporation PCHC Philippine Clearing House Corporation PDIC Philippine Depository Insurance Corporation PFCCO Philippine Federation of Credit Cooperatives PhP Philippine Peso PHPF Philippines Homeless People's Federation PIDS Philippine Institute for Development Studies PNSO Philippine National Statistics Office QUEDANCOR Quedan and Rural Guarantee Corporation SEC Security and Exchange Commission SRT Self-Reliant Teams UNDP United Nations Development Program WOCCU 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 ................................................................ 5 Remittances: an important source of income for many families ..................................................... 6 Micro Level: Retail Financial Providers .................................................................................................... 7 Different types of financial institutions address different client segments ...................................... 7 Affordability is one barrier to access for poor clients...................................................................... 9 9 Proximity is key for low-income savers ..........................................................................................10 Institutions that are more accessible to the poor tend to have weaker performance .....................11 The 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 ........................................ 13 Incomplete financial infrastructure for rural banks and financial cooperatives ............................. 14 Information 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 ......................... 19 Annex 2: Sources of Information on Savings in the Philippines ................................................... 20 Annex 3: Map 1: Banking office density by provinces Map 2: Banking office density in the National Capital Region .................................... 22 iii Country-Level Savings Assessment Executive Summary This report summarizes the results of the second test of CGAP's Country Savings Assessment Toolkit, which took place in the Philippines. The purpose of the toolkit is to help government agencies, donors, and others identify opportunities and constraints in increasing poor people's access to high-quality deposit services in various 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 possible strategies 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 substantial anecdotal 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 by institutions that have made concerted efforts to reach poor clients also reinforced the idea of significant latent demand. Another potential source of savings­­remittances­­has begun to spur even mainstream banks to target low-income clients. At the micro level, a variety of institutional types serve different market niches. However, deposit products appear to be unaffordable and physically inaccessible to the poorest clients, and those institutions closest to the poor also demonstrate the weakest performance. At the meso level, plentiful donor-funded credit lines, excess liquidity in the banking system, and a lack of investment opportunities, all reduce the incentives for stronger institutions to collect small deposits. An underdeveloped financial infrastructure, such as 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 process low-value payments. At the macro level, although the government's commitment to market-led microfinance and the overall regulatory structure facilitates serving low-income clients, certain overly conservative operational restrictions may limit the outreach of regulated institutions. In the meantime, cooperatives suffer from an almost total lack of oversight. In light of these findings, the following nine areas could provide promising avenues for intervention to improve 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 the business case for small-balance savings mobilization. 2. Expand financial literacy efforts for residents, leveraging experiences with Overseas Filipino Workers and their families. 3. Institutionalize and expand successful technical assistance programs on a sustainable basis to ensure their effectiveness beyond the life of any single donor project. 4. Build on existing monitoring systems and rationalize ratings to enhance transparency and client confidence. 5. Evaluate alternative electronic banking and payment services for rural banks and cooperatives to increase poor clients' access to savings accounts and money transfers. 6. Strengthen financial cooperative supervision to better ensure the safety and soundness of poor people's money. 7. Re-evaluate the need for program loan funds, and continue phasing out directed credit programs as part of a strategy of incentives for large-scale small deposit mobilization. 8. Shift the supervisory framework for banks from operational restrictions toward risk-based supervision to better balance the twin objectives of control and access. 9. Update the national microfinance policy to more fully incorporate deposit mobilization. 1 Country-Level Savings Assessment Introduction Overview of Savings in the Philippine Economy and Financial System This report summarizes the results of CGAP's country-level savings assessment in the Philippines. The Philippines has a relatively developed financial The assessment was conducted to test a Country system and a highly monetarized economy, with a Savings Assessment Toolkit under development as ratio of savings in banks/GDP of 75 percent (see part of CGAP's Savings Initiative.1 The purpose of data in table 1). The ratio of bank loans to private the toolkit is to help government agencies, donors, sector/GDP is 50 percent, indicating excess liquidi- international networks, and technical service ty in the banking system, which pulls down market providers define potential strategies for increasing interest rates. As of May 2005, the 91-day Treasury poor people's access to high-quality deposit services. bill rate was 5.8 percent, several points less than The toolkit examines evidence on demand inflation. for deposit services among poor populations, and identifies opportunities and constraints to meeting Box 1: Economic Situation of the Philippines that demand. It examines three levels of the finan- In 2004, the Philippines' GDP grew by 6.1%, its cial system: 1) the capacity for small-deposit mobi- highest rate since 1996. This growth was attributed lization among financial service providers ("micro" to increased production in industry and services driven by growth in exports and investment, which level); 2) financial infrastructure and second-tier largely offset a slowdown in consumption spending. support for the micro-level institutions to reach scale Inflation was 8.5% in March 2005, higher than the ("meso" level) and 3) public policies and govern- BSP's 2005 target range of 5-6%, mainly due to ment entities that create an enabling environment supply factors related to rising global oil prices. At (or not) for savings mobilization ("macro" level). It the time of writing, future monetary policy was concludes by identifying promising strategies to expected to remain oriented towards reducing inflationary risk and keeping prices stable. The improve the quality and quantity of deposit services Business Expectations Survey (BES) for the first available to poor and low-income households. quarter of 2005 showed business optimism The assessment draws on 1) analysis of attributable to higher market demand in the country existing studies and information on demand levels, and abroad, a stronger peso, political and fiscal reforms and higher tourist arrivals. institutional capacity and the macro environment in the Philippines (see Annex II for sources compiled Source: BSP (May 2005) and Economist Intelligence Unit (May 2005) on savings in the Philippines); 2) interviews with some 90 informants related to small-deposit mobi- Bank liquidity can be traced partially to the lization in the Philippines during the in-country Asian financial crisis of 1997. Although the crisis assessment carried out April 24 to May 7, 2005 (see did not hit the Philippines as strongly as neighboring Annex II for the list of informants) and 3) countries, the country experienced an economic visits to financial institutions to collect information slowdown and a contraction in lending to the private on savings products.2 sector. The net loan portfolio of the banking system decreased by 20 percent between 1997 and 2003, Defining Savings: Poor people save in various reaching $35.04 billion. Meanwhile, the total forms--financial and non-financial, formal and deposit liabilities increased by 20 percent, to $48.65 informal. The focus of the assessment is on formal billion in 2003.3 financial savings, defined as non-compulsory liabilities that come from clients. As of September 2004, the total volume of savings in the Philippine banking system amounted to $46.2 billion. These savings are held in 27 million bank accounts. Assuming that depositors hold __________________________ between one and two accounts, this would result in 1 For further information on CGAP's Savings Initiative and information on savings mobilization, visit the CGAP 13.5 to 27 million persons or 16 to 32 percent of the Savings Information Resource Center (SIRC) at population with a deposit account. www.cgap.org/savings. Seventy-three percent of these accounts had 2 The assessment team was comprised of Isabel Dauner average amounts below $266 and together make up 2 Gardiol, consultant; Jenny Hoffman, consultant; Brigit percent of the savings volume. Meanwhile, only 1 Helms, Lead Microfinance Specialist at CGAP; and Rani Deshpande, Microfinance Analyst at CGAP. Visits to percent of accounts had more than $35,502 but make financial institution branches were done by Eo Masilungan up 59 percent of the savings volume (see figure 1). from AIM, who also helped organize the mission, and __________________________ Jennie de Leon from CARD. 3Source: BSP 3 Philippines Table 1: Key economic indicators on the Philippines Population (2004) 84.2 million Economically active population (2002) 50.3 million Total number of households 16.8 million Total number of accounts in financial institutions 27 million Total savings in banks (September 2004) $46.18 billion National savings rate 17.55% Savings in banks/GDP 74.8% Bank loans to private sector/GDP 50.0% M2/GDP 77% GDP 2004 $61.7 billion 91-day T-bill rate (May 2005) 5.8% Inflation (2004) 6% Average exchange rate for 2004 (PhP/$) 56.09 GNI per capita (2003) $1080 Legislated daily wage rate of non-agricultural workers $6.15 % Population on <$2 per day 46.4% % Population on <$1 per day 14.6% Total financial institution branches 7,612 Population/Financial institution branch 10,929 Financial institution branch/Million inhabitants 90.4 Source: World Bank, IMF, UNDP, BSP Figure 1: Distribution of savings in the Clients: Demand for Small-Deposit Services banking system (Sept. 2004) 80% Main finding: Despite widespread skepticism 70% about whether the poor save, available evidence 60% 50% suggests capacity to save among low-income 40% Filipinos. 30% 20% 10% Interviews revealed a widespread belief that 0% Filipinos are consumption-oriented, with little desire 0 - 266 267 - 4,438 4,439 - 35,501 35,502 - or capacity to save. Rather, Filipinos are thought to # Accounts Amount ($) use credit for daily needs. Bankers reported that Source: PDIC salary deposits are typically withdrawn immediately to repay credit or pay outstanding bills. In return for In cooperatives, the distribution of savings a cash advance, some pawnshops accept clients' account by amount has a similar shape but a ATM cards and PIN codes, which they then use much lower modal amount. Over 80 percent of the to withdraw repayments directly from clients' accounts are smaller than $90 and only 0.3 percent accounts on payday. In addition "kiting," or using have more than $4,444 (see figure 2). one source of credit to repay another, seems to have Figure 2: Distribution of savings in the become a problem in certain areas. cooperative sector (Dec. 2004) However, substantial anecdotal evidence suggests that poor and low-income Filipinos do 90% 80% save, or at least have the capacity to do so. Informal 70% savings mechanisms, like ROSCAs (called 60% paluwagan or dajong) or stashing money into 50% alcancia bamboo poles at home, seem to be wide- 40% 30% spread throughout the country. Self-help or solidar- 20% ity groups that conduct savings and credit activities 10% are also common. Other practices also demonstrate 0% 0 - 89 90 - 444 445 - 889 890 - 4,443 4,444 - savings capacity, such as the widely subscribed "numbers games" (lotteries) that raise millions of # Accounts Amount ($) pesos through 5-peso tickets. Source: CUES 4 Country-Level Savings Assessment Although rigorous research on savings (precautionary motive). The second most important behavior and patterns is scant, it suggests that poor reason for people to save is the education of their Filipinos do save. For example, an Agricultural children (see table 3). These findings show that low Credit Policy Council (ACPC) survey of 794 small income households in the Philippines need different farmer and fishing households revealed substantial types of deposit services to address different needs. savings on the part of those households who Accessible, liquid products allow withdrawals at reported saving. Fishing households saved 40 any time for emergencies, while contractual savings percent of monthly income, while farming house- products enable them to accumulate money for holds saved 28 percent of monthly income. specific expenses. Market research by financial institutions provides further evidence that low-income clients do Table 3: What do urban people save for? save. A survey by a microenterprise bank in the out- skirts of Manila, for example, revealed that 75 Percent of percent of respondents had savings in commercial What do people save for?* sample banks. Moreover, the majority of their interaction Emergencies 42.0 with banks occurred in the context of saving rather Children's education 34.0 than taking loans. Food and daily needs 6.6 Retirement, future of 5.9 In contrast, a recent survey4 in smaller cities family, marriage of the Philippines finds that nearly two-thirds of Capital to start or expand 3.4 people in urban areas keep their savings at home business, buy land (see table 2). Only 9.7 percent save in rural banks, Housing 2.3 2.2 percent in commercial/thrift banks, and 9.4 Other 5.8 percent in cooperatives. Source: Karlan et al. (2004b) *The 16 original categories were aggregated by the authors. Table 2: Where do urban low-income Filipinos save? Where respondents Percent of sample While the few studies available support the keep their savings (multiple response) notion that the poor do save, perhaps the clearest n=1285 finding on the demand side is the lack of good Home 63.5 publicly available data on client savings patterns, Rural bank 9.7 preferences, and behavior. Such studies are crucial Cooperative 9.4 for demonstrating and understanding the demand for Self-help group 6.7 small-balance savings services, as well as designing Commercial bank 2.2 appropriate products. Other 2.3 Source: Karlan et al. (2004b) Active savings promotion effectively increases deposits Some interviewees attributed the lack of When financial institutions in the Philippines have financial savings among low-income Filipinos to focused on delivering quality savings services to intimidation or unfamiliarity with financial institu- low-income customers, they have succeeded in tions. Many indicated that commercial bank staff tapping latent demand and increasing both their does not welcome poor clients, who may be more volume of deposits and number of clients. For comfortable dealing with rural banks, cooperatives, example, the Green Bank of Caraga offered a group or informal institutions for their savings needs. of 710 randomly chosen low-income clients a new The study by Karlan et al. also sheds commitment savings product (regular saving with- light on what motivates low-income Filipinos to out withdrawal for a given period), visiting clients save. Most people primarily save for emergencies door-to-door to promote the product. After 12 __________________________ months, average savings balances of clients who 4Based on a random sample of 1285 persons in major tried the product increased by 337 percent, while market places in cities of Butuan (North Eastern Mindanao), for the control group (clients not included in the Baguio (Central Cordillera region), and Bacolod (Negros experiment), this increase was 80 percent.5 Occidental). Approximately 70 percent of the sample has incomes below the median household income in the Philippines, which was $166 per month in 2000 according __________________________ to the PNSO. See Karlan et al. (2004b). 5Karlan et.al. (2004a). 5 Philippines In 2004, a merger of three rural banks Evidence shows that low-income house- created One Network Bank with the largest branch holds in the Philippines save in financial institutions network in Mindanao. By actively promoting the if they are given an opportunity that meets their image of the new bank as a large, well-managed needs. Confidence created through an image of a institution, One Network acquired 23,150 new solid financial institution, active savings promotion savings clients and increased the volume of deposits campaigns, and attractive products are sufficient to by 11 percent to $46.36 million in only three months mobilize deposits even from low-income clients in a (see figure 3). short period of time. Figure 3: Growth of savings in Remittances: An important source of income for One Network Bank many families One source of savings many institutions have been 48 300 46 paying increasing attention to is the enormous 44 280 volume of remittances that enter the Philippines 42 every year. The Philippines exports the highest 260 40 number of migrants in Asia and the second highest 38 240 worldwide; approximately 44 percent of Filipino Dec. 2004 March 2005 households are thought to have a family member abroad.7 In 2004 these migrants sent over $8.5 Deposits ($ million) Depositors ('000) billion in remittances through the banking system.8 Source: ONB This was 10 times more than the transfers from overseas development assistance and 18 times more Another example is provided by 10 savings than net inflows of foreign direct investments (see and credit cooperatives, serving mostly low-income figure 5). clients, which have obtained support from the CUES project (funded by USAID with technical assistance Figure 5: Comparision between inflows of from WOCCU) since 1997. In seven years, these donations, net FDIs and remittances cooperatives more than tripled their savings and (2004, Million $) shares and increased membership by seven times, reaching 151,314 members and mobilizing $18 million savings by February 2005 (see figure 4). Rural banks participating under the Microenterprise Access to Banking Services (MABS) Program, also supported by USAID, have shown an increase 0 1,500 3,000 4,500 6,000 7,500 9,000 as well in small deposits (under $300) with an Remittances (official channels) increase among the 80 participating banks of more Net Foreign Direct Investments* than 237,000 new small depositors since 1999.6 Donations** These positive results have been possible through enhanced financial discipline, stronger Source: BSP. administration, and effective marketing campaigns *BOP Net FDI flows refer to non-residents' of diversified savings products. placements less non-residents' withdrawals + reinvested earnings + net inter-company loans. Figure 4: Growth of savings in 10 model **Donations from governments and international cooperatives organizations to the government and to NGOs. 20 200 __________________________ 10 100 7Although no exact number exists, the CFO estimated that as of December 2001, some 7.41 million Filipinos lived overseas, of which 3.05 million were OFWs, 2.74 million 0 0 permanent residents, and the remaining 1.62 million were 1997 Feb. 2005 undocumented Filipinos residing abroad (Bagasao, 2004). savings and shares ($ ,000) Members (000) 8A survey done by the PNSO in 2001 shows that 68 percent of Filipinos who send money home use banks, Source: CUES. while 32 percent use informal delivery channels, "door to door" agencies or friends (Bagasao, 2004). The amount __________________________ sent through informal channels is not known but is thought 6MABS to be as high as 100 percent of formal flows. 6 Country-Level Savings Assessment When received through a bank, remittances Micro Level: Retail Financial Providers facilitate the opening and maintaining of deposit accounts. Remittances can also attract more low- income savers if actively bundled with deposit Main finding: Those financial institutions that cater most to low-income clients tend to demonstrate the products. However, remittances can be a disincen- weakest financial performance, while stronger tive for independent savings if they come on a institutions have few incentives to mobilize small- regular basis like a salary. In this case, they are balance savings. often withdrawn immediately to pay bills or debts.9 Offering tailored accounts that help migrants and recipients put remittances to other intended uses, Different types of financial institutions address such as children's education, could help transform different client segments these flows into stocks of savings. Some insurance Banks, cooperatives, and NGOs in the Philippines companies have been marketing pension plans to the all offer deposit services to different market migrant market, but uptake has apparently been segments. The banking system has a tiered struc- limited. The plans were originally designed for ture, with universal and commercial banks catering upper-income clients and have not been modified mostly to corporate and wealthy clients; thrift banks for the needs of lower-income migrants. serving upper-middle income and SME clients; and Remittances are an extremely attractive rural banks serving lower-income clients.10 These business for commercial banks because of the trans- institutions are all regulated and supervised by the action fees they generate and their role in customer Philippine Central Bank (BSP) and deposits are acquisition. To market themselves to these potential partially protected by the Philippine Deposit clients, many commercial banks offer training Insurance Corporation (PDIC). Savings and credit courses on financial literacy to overseas Filipino cooperatives are widespread, especially in rural workers (OFWs) before they emigrate. Some of this areas; although authorized to mobilize savings from training is conducted in conjunction with the their members, they suffer from weak supervision Overseas Workers' Welfare Association (OWWA) and have no deposit insurance. In addition, micro- as part of their pre-departure orientation for finance NGOs offer credit to poor clients. Although migrants. OWWA also conducts reintegration most NGOs require "compensating balances," they trainings for returned OFWs, which include are not legally authorized to mobilize savings. modules on financial literacy and savings. OWWA reports that whatever savings OFWs have Banks accumulated, these are often quickly depleted upon There are over 7,600 bank branches in the their return, as families attempt to maintain the Philippines. The 42 universal and commercial standard of living to which they have become banks have the highest minimum capitalization accustomed. A term, contractual, or annuity-type and widest branch network and can undertake the deposit product that encourages returnees to delay greatest variety of functions (see table 4). The 87 withdrawal of their savings might serve client, thrift banks have smaller minimum capital than institutional, and overall economic interests. commercial banks and more restricted functions. For example, unlike commercial banks, they are not allowed to do investment banking.11 Table 4: number of banks and bank offices in the Philippines (December 2004) Universal and Rural and Commercial Thrift Banks Cooperative Total banks Rural Banks Head offices 42 87 764 893 Branches 4,287 1,193 1,239 6,719 Total 4,329 1,280 2,003 7,612 Source: BSP __________________________ __________________________ 9Bagasao (2004) finds that remittances are used by recipient 10 families to pay back debts, including those incurred by Development banks are a fourth category under migration (36 percent), for household expenses (32 percent), Philippine regulations, but do not cater to the retail market. for household equipment and furniture (13 percent), for 11For an excellent summary of the various rules applying to children's education (10 percent), and others. different types of banks, see Llanto (2000b). 7 Philippines Figure 6: Number of banks and deposit liabilities 8000 60 7000 50 6000 5000 40 4000 30 3000 20 2000 1000 10 0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* # of bank offices Deposit liabilities (billion $) Source: BSP. *Deposits for 2004 as of September. Rural banks and cooperative rural banks are banks (see figures 7 and 8). In terms of number of the most numerous with the smallest minimum accounts, the rural banks play a more important role, capitalization. They are mainly located outside holding almost 20 percent of the accounts in the Metro Manila and address the needs of lower- banking system. income clients. Rural banks cannot have foreign shareholders nor engage in foreign currency opera- Figure 7: tions. They are owned by private investors and are Types of banks by volume of deposits often family-owned. Cooperative rural banks are 2% owned by primary cooperatives. 7% 91% Figure 6 shows that until the Asian finan- cial crisis in 1997, the number of bank offices increased steadily. In 1999, the BSP issued a branching moratorium prohibiting the opening of new bank branches to encourage consolidation of the sector. Since 1999 the number of banks has diminished from 976 to 893, while the number of branches has remained almost the same. Universal and commercial banks This trend indicates mergers and acquisi- Thrift banks tions; specifically, the number of commercial, thrift, Rural and cooperative banks and rural banks diminished by 19, 26, and 5 percent respectively. While the number of branches remained the same for commercial and thrift banks, Figure 8: they increased by 15 percent for rural banks. Types of banks by percentage of accounts The recent increase in rural banks and 20% 70% branches is probably due to the partial lifting of the branching moratorium in 2001 for banks engaged in microfinance activities.12 There are currently seven licensed microfinance banks, of which three are 10% thrift banks (Opportunity Microfinance Bank, Micro-enterprise Bank, Dungganon Bank) and four are rural banks (CARD Bank, Banco ng Masa, Vision Bank, Xavier Tibod Bank). By December 2003, banks had a total of Universal and commercial banks $48.65 billion in deposits, of which 90.42 percent Thrift banks were held by universal and commercial banks, 7.26 Rural and cooperative banks percent by thrift banks, and 2.32 percent by rural __________________________ Source: BSP 12BSP Circular 273. 8 Country-Level Savings Assessment Cooperatives A survey by the National Economic Development Association (NEDA) in 1996 counted a total of 600 In the Philippines, financial services are offered by NGOs involved in microfinance throughout the both dedicated and multi-purpose cooperatives that country.16 Since 2000, the Microfinance Council provide savings and credit services as a complement of the Philippines Inc. (MCPI) has tracked the to other activities. These institutions are supervised performance of its member MFIs. As of December by the Cooperative Development Authority (CDA). 2003, 21 MFIs reported 578,493 borrowers, a However, the CDA's supervisory capacity has until portfolio of $42 million, and a total savings volume now been hampered by a lack of specialized finance of $15.4 million.17 Among a total of 562,340 savers, expertise and a mixed mandate that includes both 463,463 were compulsory savers and 98,877 were regulatory and promotional roles. voluntary savers. l Because many cooperatives were formed While the incomplete data on cooperatives to channel government subsidies and then went and NGOs do not permit definitive conclusions, dormant, no exact figures on the total number available numbers indicate that they may serve active of cooperatives are available. Some say that poorer clients, and that cooperatives especially may around 4,000 dedicated cooperatives currently be well placed to offer appropriate deposit services offer financial services in the Philippines.13 to very poor and rural populations. Table 5 According to CDA's annual report, by December compares different types of banks with cooperatives 2003, some 31,191 dedicated and multipurpose and NGOs. The figures clearly show that while cooperatives mobilized a total volume of savings cooperatives and cooperative and rural banks and social capital of $140 million from 4.3 million mobilize a relatively small proportion of total members.14 savings, they have an important weight in terms of clients served. Their low average account balances NGOs (of $354 and $219, respectively) also indicate they NGO MFIs (as well as multipurpose NGOs) provide are serving poorer clients. micro-loans to low-income clients in the Philippines. Affordability is one barrier to access for poor The BSP does not authorize NGOs to mobilize clients savings from the public, but does not prohibit them Financial institutions in the Philippines offer three from collecting compensating balances (as long as main types of deposit products: current or checking these are less than the value of the portfolio).15 It is accounts, which pay little to no interest; savings currently looking at ways to address the issue more accounts, which pay some interest; and time deposits, appropriately. which offer the highest interest rates. A survey of 8 Because NGOs have to register only with financial institutions in the Philippines found that, the Security and Exchange Commission (SEC) and unlike in some countries, all these types of accounts are not subject to any regulation, the exact number were generally fee-free unless the account fell below of NGOs providing financial services is not known. the maintaining balance (see table 6). Table 5: Deposits in the Philippines financial system (December 2003) Total volume Number of accounts Average billion $ percent million percent account balance ($) Universal and Commercial Banks 43.99 90.13% 17.92 58.56% 2,451 Thrift Banks 3.53 7.23% 2.69 8.76% 1,315 Rural and Cooperative Banks 1.13 2.32% 5.14 16.77% 219 Cooperatives* 0.14 0.29% 4.31 14.07% 354 Microfinance NGOs 0.02 0.03% 0.56 1.83% 27 Total 48.81 100% 30.65 100% 1,826 Source: BSP, MFC, CDA *Savings volume includes members' social capital (on average $18 per share). The number of accounts corresponds to the number of members. __________________________ __________________________ 13Interview with CUES coordinator. 16Cited in Carpio (2004). 14CDA (2004). 17Note that among these MFIs, one is a microfinance 15BSP Act 273. See also NCC (2005). thrift bank (OMB). 9 Philippines Table 6: Characteristics of basic savings products in different types of banks and cooperatives UPLB-CDC Palanan Rural Bank Rural Bank Philippine (San Pablo, (Metro of Nagcarla of Bay Planters Postal Land Bank Banco Laguna) Manila) (San Pablo, (San Pablo, Bank Savings de Oro Laguna Laguna Bank Type of Credit Multi- Commercial Universal institution cooperative purpose Rural bank Rural bank Thrift bank Thrift bank cooperative bank bank Become a Entrance 2 valid ID member 2 valid ID requirements and birth 2 valid ID 1 valid ID 2 valid ID 2 valid ID Tax ID 2 valid ID certificate with PhP 1,000 number Minimum deposit to PhP 500 None PhP 500 PhP 500 PhP 2,000 PhP 500 PhP 500 PhP 1,000 open Minimum maintaining PhP 100 PhP 2,000 PhP 500 PhP 500 PhP 1,000 balance Average daily balance to PhP 500 PhP 100 PhP 500 PhP 500 PhP 3,000 PhP 500 PhP 500 earn interest PhP 10 PhP 50 PhP 50 PhP 100 PhP 50 Fee on per month per month per month per month per month dormant None None None after 2 if balance if balance if balance if balance account years below below below below PhP 2,000 PhP 500 PhP 500 PhP 1,000 Interest rate (annual) 3% 2% 2.4% 3% 1% 2.5% 1% 1% Source: mystery shopping. The survey also found that checking cards.19 Although both banks and cooperatives are accounts were mainly targeted at high-value or com- required by law to insist on such identification, in mercial customers, with minimum opening balances practice, cooperatives and rural banks are thought to of at least $100. Savings accounts generally had be less stringent. lower minimum opening balances, ranging from $10 Proximity is key for low-income savers to $40 in commercial banks, while rural banks and cooperatives had minimum opening balances that Another important reason that banks tend to serve generally start at less than $2. However, cooperative relatively wealthier clients is their location. The members must also buy a share to access services, maps in Annex III show important differences in usually at a cost of around $20. bank office density (population per bank branch) between rural and urban areas, and within Metro By way of comparison, in 2000 average Manila. While in Manila, one bank office serves daily household expenditure was $4.5 in rural areas 4,190 persons, in Eastern Visayas and Zamboanga and $10.1 in urban areas.18 Poor clients would thus Peninsula there is only one office for over 30,000 need to save up 2 to 10 times the cost of their daily people. Across regions, the number of persons per necessities just to open an account in a commercial bank branch is strongly positively correlated (0.68) bank­­a proposition that seems neither feasible nor to the percentage of subsistence poor and negatively attractive. correlated to the population density (-0.48). As Another obstacle to poor people opening an illustrated in figures 9 and 10, banks tend to open account is the requirement of two valid identity branches in richer and more densely populated areas. __________________________ __________________________ 18PNSO (2000). 19 See section on "macro level" for details on ID requirements. 10 Country-Level Savings Assessment Figure 9: Correlation between percent of (NPL) ratio of 11.6 percent.20 FOCCUS-rated21 subsistence poor and number of cooperatives have a portfolio at risk over 30 days of persons per bank office 8.76 percent. Before they entered the CUES project, )0002(roopecnetsisbus% this figure was 54.6 percent. As some of the most 30 promising cooperatives were chosen for the CUES 25 project, it can be inferred that the majority of coop- 20 eratives may suffer from serious financial problems. As of June 2004, the 16 institutions reporting to the 15 MCPI had an average PAR 30 of 8.1 percent.22 10 While this seems low compared to the above 5 number on rural banks and cooperatives, MCPI 0 membership includes only the bigger and more 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 financially sound microfinance providers. Number of persons per bank office (2004) One indicator of the historical instability of rural banks is the 373 institutions currently in the Source: PNSO and BSP process of being liquidated, leading to a reduction in the number of rural banks from over 1,000 in 1990 Figure 10: Correlation between population to 770 today. Although rural bank deposits are density and persons/bank office covered by deposit insurance up to PhP 250,000 ($4,563), recovery can take years (see box 2). 500 (2000) 400 Box 2: Philippine Depository Insurance 2 Corporation (PDIC) Persons/km 300 200 The PDIC was created in 1993 to protect small depositors in the Philippine banking system. The 100 insurance covers up to PhP 250,000 ($4,457) for 0 each individual saver. For this coverage, the PDIC 5,000 10,000 15,000 20,000 25,000 30,000 35,000 assesses a charge of 0.2 percent of total deposits Numberofpersonsperbankoffice(2004) on insured banks. The rural banks are the biggest concern for the PDIC given the number and geo- Source: PNSO and BSP graphical dispersion of small savers that are difficult and costly to locate and settle with in case of liqui- While this branching pattern makes eco- dation. Currently, almost 400 offices of rural banks nomic sense for banks, it leaves poorer and more are under liquidation, a process that can take up to 20 years until all claims have been settled. remote clients with less access to regulated deposit- taking institutions. Forty percent of the population lives in rural areas and can incur high transaction The mixed performance record among the costs to go to a bank, in terms of transport expenses, most accessible institutions is due in part to weaker time spent, and risk of being robbed. This is management and governance and, in the case of especially true in areas like the Autonomous Region cooperatives and NGOs, practically nonexistent of Muslim Mindanao, where the incidence of regulation and supervision. In some cases, the very violence and unrest has meant that there are only a qualities that make these institutions accessible to few commercial and rural banks. __________________________ Institutions that are more accessible to the poor 20NPLs are defined as loan accounts whose principal and/ tend to have weaker performance or interest is unpaid for 30 days or more after due date or after they have become past due in accordance with Because of their outreach into poor and rural areas, existing rules and regulations. The total outstanding balance rural banks and cooperatives are better placed to is considered nonperforming. Restructured loans are bring savings services to low-income clients. generally considered as NPLs (for details, see circular no. However, these institutions tend to be weak, poten- 202 and 351 of the BSP). It is worth noting that with NPL tially putting the deposits of the most vulnerable at ratios of 9.7 and 11.0 percent respectively, thrift and risk. commercial banks are not much better off than rural banks. 21 According to available data (as of FOCCUS corresponds roughly to the PEARLS rating system of WOCCU and has been introduced by the CUES December 2004), the asset quality of rural banks, project. cooperatives, and NGOs is worrisome. Rural banks 22Of these, 13 were MFIs, 2 were rural banks, and one was currently have an aggregated non-performing loan a thrift bank. 11 Philippines the poor­­remote locations and low cost struc- Box 3: Incentivizing small-balance savings tures­­make it difficult for them to attract the best collection trained and experienced staff. The Central Bank Banco de Oro offers an example of the factors that requires certain minimum training for new directors can motivate a strong financial institution to pursue and managers of rural banks; however, because small-balance savers. Banco de Oro is owned by cooperatives and NGOs fall outside of the BSP's the Philippines' largest retailer, ShoeMart, which purview, these requirements do not apply to them. sees one million customers walk into its shopping centers every day. Compared to opening stand- The lack of incentives for savings dampens alone branches, installing Banco de Oro outlets in innovation among rural banks ShoeMart malls gives the bank a less expensive way to put itself squarely in the path of an enormous Strong institutions lack incentives to develop number of potential customers. The resulting cost products for the low-income market, which may reduction makes servicing small-balance accounts help explain the dearth of quality deposit options more viable for the bank. available. All types of banks in the Philippines are ShoeMart's knowledge of customer behavior can currently overliquid. The ratios in table 7 indicate a also help Banco de Oro design appropriate products, widespread conservatism in lending among banks. such as the Banco de Oro Cash Card, an "account- less" prepaid debit card. Cash Cards can be used at Banks can easily meet their lending requirements by ATMs and reloaded at ShoeMart counters, turning mobilizing deposits from corporate and upper- and every cash register into a Banco de Oro service point middle-income clients­­i.e., the "low-hanging and further reducing administrative costs. Banco de fruit." They do not need to extend services among Oro earns revenue on these accounts through low-income clients to survive or grow. transaction fees paid by merchants for each Cash Card purchase. The possibility of migrating these customers to higher-value products, such as money Table 7: Gross loans over deposits (Dec. 2004) transfers, has also spurred the bank's interest in pursuing the market of small-balance savers. Commercial banks 77.5% Thrift banks 77.1% Rural banks 90.3% Meso Level: Service Providers, Financial Infrastructure, and Second-Tier Funds Cooperatives (38 CUES coops) 122.0% NGO MFIs (16 MCPI MFIs) 227.2% Main finding: Overliquidity and abundant second- Source: BSP, CUES, MCPI tier funds dampen institutional incentives for small savings mobilization, which is exacerbated by Those few banks that might need liquidity incomplete financial infrastructure. can easily obtain a credit line from one of several wholesale institutions (see table 8), which actively offer funds to the strongest rural banks and cooper- Associations and projects promote better atives. In comparison, the resources and effort performance needed to mobilize small savings seem prohibitive. In the Philippines, the meso level of the financial The direct financial cost of small savings, 1 to 3 system is populated by training centers, auditing percent, is lower than the prevailing rates on whole- companies, and various associations and federations sale credit lines, 5.9 to 12 percent. However, the that promote best practice among members and reorientation of an institution's systems and staff lobby for their interests. Each type of bank has its necessary to successfully mobilize large volumes of association: the Bankers Association of the small savings is a much more daunting task than Philippines for commercial banks, the Chamber of simply availing of one of the many sources of Thrift Banks, and the Rural Bankers Association. In wholesale credit. the cooperative sector, two federations­­NATCCO Over liquidity combined with easy-to- and PFCCO­­represent the interests of most coop- access funding alternatives add up to an almost eratives, provide capacity building and technical complete lack of economic incentives for strong assistance, and promote standardization of financial financial institutions to focus on the low-income reporting and monitoring among members. Some market for deposits. Without incentives, institutions cooperatives are members of both federations, and are not motivated to innovate, and most offer a both federations are members of the Asian fairly standard set of deposit accounts­­although Confederation of Credit Unions. They have recog- some banks, like Banco de Oro, have overcome nized the need to integrate their efforts, in particular these disincentives (see Box 3). to standardize regulation and supervision of cooper- ative members that engage in savings and credit. 12 Country-Level Savings Assessment Bilateral development agencies (most The main source of wholesale financing to notably USAID, CIDA, and GTZ) have identified retail institutions serving poor clients is the donor- the potential of cooperatives and rural banks to funded, so-called "program loans," which are provide savings services to low- and middle-income routed through government-owned institutions (see households living outside the main urban centers. table 8). The most important conduits for program Projects like MABS and CUES offer capacity build- loans are currently: ing and training to rural banks and cooperatives, - The Land Bank of the Philippines (LBP) respectively. These programs have proven that and the Development Bank of the participating institutions progress rapidly in terms Philippines (DBP), government-owned of client growth and financial performance. They banks that provide refinancing to rural emphasize savings mobilization to become less banks and cooperatives. dependent on development assistance and second- tier funds. They have introduced financial reporting - The People's Credit and Finance formats and rating systems to increase transparency Corporation (PCFC), a registered finance and create competition for results among partici- company under the Securities and pants. Example of these are CAMELS (with S for Exchange Commission. Sensitivity to market risk), used for banks; EAGLE, In 2002, the BSP opened a rediscounting facility used for rural banks participating in MABS; for microfinance-oriented banks, granting redis- ACCESS, FOCCUS, FIRM, and COOP-PESOS for counting to 15 banks, involving 33,000 micro cooperatives; and PESO for all types of institutions. borrowers. The proliferation of rating systems causes some These wholesale funds come mainly from confusion, however, among financial institutions the World Bank, Asian Development Bank, JBIC, and potential clients. and KfW. Together, these agencies have channelled The main voice of NGO MFI interests is approximately $356 million through government- the Microfinance Council of the Philippines owned financial institutions, an amount equivalent (MCPI), which promotes best practices among to 32 percent of the $1.13 billion deposits mobilized its members (currently 23). In coordination with by rural banks. the BSP, it is the focal point for increasing finan- These credit lines represent an advance cial transparency among NGO MFIs. It currently over donor practices in many countries in that most monitors members' performance using the MIX are lent at market or near-market interest rates. Market reporting format. The MCPI will transition However, it is not clear whether these credit lines to the PESO system in early 2006 and also recog- meet their stated purpose of filling a gap in nizes the need to standardize its charts of accounts. medium- and long-term financing for banks. Nor The Mix Market is now also working with MABS is it clear whether program loans actually increase and RBAP to increase financial transparency the amount of medium- and long-term lending by among rural banks. banks. In the face of widespread conservatism in "Easy money" from wholesale financial bank lending, the availability of finance does not institutions floods the market necessarily change bankers' risk/reward perception of a longer-term project. The over liquidity in Until the late 1990s, different government line the Philippine financial system calls into further agencies managed directed credit programs (DCPs) question the need for such large amounts of providing subsidized loans to retail financial institu- external refinancing. tions or directly to end clients. In 1997, the National Credit Council (NCC) published the National Recipients of these funds must meet Strategy for Microfinance (see box 5), which stated stringent minimum performance thresholds. Inter- the government's policy in favor of market-based viewees report that the conduit institutions find it delivery of financial services to the poor. As a result difficult to identify suitable partners, and so must of this policy and accompanying laws, these market- market aggressively to the few institutions strong distorting credit programs have been slowly enough to be eligible. From a savings mobilization winding down.23 The continuing effort to phase out perspective, then, precisely those institutions that DCPs is to be congratulated and encouraged, would make the safest home for poor people's especially given the periodic threat of their re- savings have the least incentive to mobilize them. emergence as convenient political tools. __________________________ 23Conroy (2003). 13 Philippines Table 8: Most important government wholesale credit funds Outstanding Interest Wholesaler Type and number of retail institutions loan rate Final clients ($ million) (annual) SMEs, small LBP 400 rural banks 355.4 farmers, fishers, 1000 cooperatives (Dec. 2004) 7.5% veterans and pensioners. 199 (107 rural and cooperative rural banks, 51.7 1.2 million PCFC 54 coops, 34 NGOs, 3 (May 2005) 12% persons, thrift banks, 1 lending for livelihood, investor) 95% women DBP Cooperatives, banks, local 0.65 government units, NGOs (Dec. 2003) 7.38% SMEs BSP microfinance rediscounting 15 microfinance oriented 0.31 5.9% 33,000 micro window thrift and rural banks (March 2005) borrowers Sources: Interviews and web site information from PCFC, LBP, DBP, BSP. Report of JBIC (2004). Incomplete financial infrastructure for rural or insufficient liquidity. This practice faces a regula- banks and financial cooperatives tory hurdle. Liquidity placements in other banks are Rural banks and cooperatives are not directly con- treated as loans and subject to the single borrower nected to the national payment system. Weaknesses limit (25 percent of unimpaired capital). This are also reflected in the quality of the services requirement increases the complexity and cost of offered. From a savings mobilization perspective, depositing funds in other banking institutions, a lack of access to the payments system impedes potentially simple and convenient liquidity manage- financial institutions' ability to serve low-income ment mechanism. clients who prefer to access their money at multiple Information and communication technology is locations, or receive remittances or other payments revolutionizing access to banking services directly. Most rural banks and all cooperatives and By the end of 2004, 33 universal and commercial NGOs cannot link directly into national payments banks and 11 thrift banks had ATMs. They had switches, but instead must transact through their 5,469 ATMs, of which 5,100 were operated by com- accounts with other banks. At this time, one rural mercial banks and 369 by thrift banks. In the last 6 bank has recently gained direct access to the months of 2004, the number of ATMs increased by Philippine Clearing House and opened its own auto- 657 units. In 2005 one rural bank has installed matic teller machines (ATMs), but the vast majority ATMs. This evolution will soon be followed by of accessible institutions cannot offer ATM services. other rural banks and should increase the areas' Rural banks' and cooperatives' inability to hold accessibility to deposit services while simulta- foreign currency deposits also disadvantages them in neously broadening the access of rural bank clients terms of receiving remittances, since many migrants to the national payment system. prefer to keep their earnings in hard currency. Another promising development for Moreover, most rural banks are limited to increasing banking outreach is mobile phone one district or region, restricting clients' ability to banking applications offered by Philippine telecom move money around the country. Until rural banks companies (see box 4). Thirty-five percent of can connect directly to the payment system, these Filipinos own a mobile phone, and Filipinos are the entities are seeking intermediate solutions like biggest users of text messaging in the world, partnering with commercial banks to open ATMs. sending more than 200 million Short Message Lack of access to the payments system also Service (SMS) messages a day. The mature SMS means that liquidity management is more difficult market has trained Filipinos to use the phone as a for rural banks and cooperatives. The cooperative data instrument, facilitating their adoption of mobile federation NATCCO has recently introduced a banking products.24 As a solution for low-value Central Liquidity Fund that gives members access to payments, the potential of mobile banking applica- refinancing facilities; however, few cooperatives are tions to increase savings mobilization is enormous. linked to it yet. Rural banks have started to lend and __________________________ borrow among each other when they have excess 24Simpson & Liew (2005). 14 Country-Level Savings Assessment Box 4: Mobile Banking in the Philippines In 2003, SMART Communications launched mobile commerce applications, including mobile banking and "Smart Money." This technology allows users to pay for purchases by transferring money from a bank account or reloading a prepaid card electronically through the user's mobile phone. The SMART service also allows users to make 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 in that Globe does not issue a debit card to accompany the mobile phone account. In five months, G-Cash acquired 320,000 users, generating between 4,000 and 5,000 transactions a day. However, G-Cash managers are targeting a potential volume of 1 million daily transactions and have been aggressive in marketing the service to financial 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. By eliminating the need to build costly bank infra- Through graduated minimum capital and structure, they can bring down the cost of mobilizing other requirements, the Philippines' tiered banking small savings, one of the main obstacles for financial structure has made it possible for banking institu- institutions. In the near future, retail bank-to-bank tions to serve low-income clients in remote areas. transactions might even be switched via the phone The rural banks, in particular, can operate in areas companies. If this happens, mobile banking opera- where potential profits may not meet the hurdle rates tions may free rural banks and cooperatives from the imposed by mainstream commercial banks. need to connect to the payment system at all. Macro Level: Legal and Regulatory Box 5: The Philippines National Strategy for Microfinance Framework for Micro Savings Mobilization The National Credit Council (NCC), at the depart- ment of finance, was established in 1994 by the government with the objective of rationalizing Main finding: Supervision of deposit-taking institu- government lending programs and developing a tions is uneven: while cooperatives and NGOs are national microfinance policy capable of addressing effectively unsupervised, overly restrictive rules on issues of poverty. In 1997, the NCC published the banks limit their ability to reach poor clients. National Strategy for Microfinance, which set the path for the development of a private-sector-led and Philippine regulatory framework encourages market-oriented microfinance sector, accompanied by a conducive legal and regulatory environment. financial service delivery to the poor by regulated, commercial institutions... This strategy sets the policy framework of micro- finance in the Philippines, based on the following The Philippine government explicitly promotes a principles: market-based microfinance policy aimed at increas- - The private sector should provide microfinance ing the outreach of financial institutions to the services. majority of the population (see box 5). It recognizes - The policy environment will facilitate the that different types of private banking institutions participation of the private sector. are required to address diverse client needs. At the - Market-oriented interest rates on loans and deposits. same time, the policy is mostly oriented toward - Non-participation of government line agencies microcredit, with very little discussion of the in the implementation of credit/guarantee implications for deposit services. The Philippines' programs. microfinance strategy defines the appropriate role The policy, among others, strengthens the of government as establishing an enabling environ- importance of: ment rather than providing services directly. The - An appropriate supervisory and regulatory phase-out of the DCPs was a particularly important framework for MFIs. demonstration of this approach and should be - The establishment of standards of performance. applauded. However, continued vigilance is - The promotion of broad-based savings required to prevent the resurrection of these mobilization, linkage banking technology, and other microfinance technology. programs and the imposition of other unfavorable - Provision of information and training to MFIs on policies, such as interest caps, that some claim is a best practices in microfinance. constant threat.25 Sources: NCC and Conroy (2003) __________________________ 25Llanto (2004a). 15 Philippines ...But supervision is uneven: too little for non- motivated some rural banks to collect deposits bank institutions, and potentially too much for through cash boxes or ambulatory deposit collectors, banks even if it means operating at the margin of legality. Cooperative and deposit-taking NGOs lack effective The BSP's concern is perhaps understandable from prudential supervision. At the same time, banks are a security and fraud point of view. However, more constrained by a supervisory framework that may openness to innovative practices would help have erred on the side of too much caution in regulated institutions capture more small deposits by the aftermath of the Asian financial crisis. This reducing transaction costs to clients and attracting tendency toward rules-based, rather than risk-based, savings from the informal to the formal system. supervision limits banks' ability to reach out to Finally, Know Your Customer (KYC) rules underserved markets and seems to encourage implemented to prevent money laundering also regulatory arbitrage and evasion. block poor customers who wish to open deposit The most frequently mentioned example accounts. As in many other countries, KYC rules in of this type of limitation is the moratorium on the Philippines require two forms of government- branching. Issued in 1999, it indefinitely suspended issued identification to open a bank account. The the opening of new branches and new banks except Philippines have no national ID system and poor in municipalities without banks. In 2001, the BSP people working in the informal sector often have lifted this moratorium for rural and thrift banks only one ID, issued by the local authority (Village engaging in microfinance activities (defined as a Clearance Card)--if that. In addition, KYC rules maximum loan of 150,000 PhP or $2,740).26 The require proof of residence. While higher-income intent of this exception is to encourage banking clients may be able to furnish utility bills and other growth in underserved areas. allowable forms of proof, these are often impractical But the exemptions themselves do nothing or impossible for the poor. to change the risk/reward ratio intrinsic to opening a branch in a poor or remote locality. In the mean- Strategies to Improve Small Deposit time, the moratorium does protect the rural bank Mobilization in the Philippines monopolies that exist in many municipalities­­ again, dampening incentives for banks to improve service to low-income customers. Single-location Assets accumulated by people who are already economically vulnerable are too valuable to entrust rural banks also complain that the moratorium to institutions that risk losing them. limits diversification of their operations, inhibiting risk management. The implementation of the moratorium and Based on background research and many interviews its exceptions has also been problematic. in the Philippines, including roundtables with repre- Ambiguous guidelines on branching for micro- sentatives of the banking system and donor agen- finance-oriented thrift and rural banks and long cies, the authors suggest some strategies for improv- waiting times to receive licenses slow down the ing the access of poor clients to savings services. creation of new branches and the entry of new These suggestions require further reflection and players in underserved markets. To circumvent elaboration, and CGAP would be pleased to work the branching moratorium, banks have apparently with stakeholders to help implement them. been setting up non-bank microfinance subsidiaries. 1. Collect more data on clients' savings patterns While these companies can offer credit, they cannot and preferences. Studies analyzing the savings legally take deposits. behavior of low-income households and their Other BSP regulations also hinder small potential demand for deposit services were savings mobilization by banks. For example, off-site extremely difficult to find. Up-to-date and accu- deposit collection was prohibited by the BSP in rate demand-side data will be crucial for both 1999.27 This rule reduces the ability of rural banks financial institutions and policy makers that wish to mobilize savings, especially in less densely to increase deposit options for poor Filipinos. The populated areas. Moreover, many customers have ACPC's Small Farmer Indebtedness Survey could come to expect this type of service because roving represent a prime opportunity for quickly increas- moneylenders have traditionally offered doorstep ing the amount of data available on small savings. repayment collection. Customer demands have ACPC staff have already expressed openness to __________________________ the possibility of adding a few questions to this 26BSP circular 273. year's survey, which is currently being finalized. 27BSP circular 118. 16 Country-Level Savings Assessment In terms of longer-term research, one 4. Build on existing monitoring systems and project of potential interest is FinMark Trust's rationalize ratings to enhance transparency FinScope survey. Currently being replicated in and client confidence. Various projects and several countries, FinScope forms a coalition of associations have introduced their own financial financial institutions to back a comprehensive reporting and rating systems (i.e., CAMEL, household survey on access to and usage of PESO, FOCCUS, FIRM, ACCESS, EAGLE) multiple financial services.28 In addition to finan- that have fostered competition among institu- cial institutions, universities and research firms tions and have increased transparency and might be tapped as partners in future research growth. However, the proliferation of rating efforts such as this. Bodies, such as the NAPC, systems reduces the power of each one. might be well-positioned to play a coordinating Rationalizing these systems into one, like PESO, or commissioning role. would increase incentives for performance by In part, data are lacking because small enabling comparison across more institutions. It savings collection is not seen as a business would also increase the value of the rating's opportunity by commercial banks. As in micro- "brand" as a mechanism to inspire the confi- credit, the challenge might be to make a business dence of consumers, for whom multiple rating case for small savings collection. systems are likely to be very confusing. 2. Expand financial literacy efforts for residents, 5. Evaluate alternatives for electronic banking leveraging experiences with Overseas Filipino and payment services for rural banks and Workers. Many Filipinos agree there is a lack cooperatives. The ability to move money from of a "savings culture" in the country. At the place to place is essential for mobilizing small same time, extensive investments have been deposits, both for capturing remittances and made to provide financial education to OFWs because clients are less likely to deposit in one when they leave and return. These efforts should location if their money is inaccessible to them be expanded and replicated more widely to elsewhere. Up until now, rural banks and coop- include people unconnected to the migration eratives have provided payment services only process. This would not necessarily require through other institutions, making this service government expenditure, as commercial banks impractical or impossible. However, with the would likely be willing to deliver the financial advent of mobile phone banking, this situation is education as a customer acquisition tool. changing. Together with rural banks and coop- However, bank representatives have expressed a eratives, the BSP should evaluate the pros and desire to coordinate more closely with govern- cons of emerging e-payment solutions (e.g., ment experts to develop an accepted "storyline" e-transfers, ATMs, mobile phones) for or curriculum for this type of training. leapfrogging traditional systems and offering payment services to more poor clients. 3. Institutionalize and expand successful techni- cal assistance programs on a sustainable 6. Strengthen financial cooperative supervision. basis. Financial analysis of rural banks and Although the exact number of depositors they cooperatives has revealed weaknesses in their serve is not known, available data indicate that performance. Certain donor-funded capacity- cooperatives may serve a poorer clientele than building projects have proven successful in banks, even rural banks. In this light, improving improving that performance. These efforts cooperative supervision is crucial, and current should be institutionalized, i.e., integrated into efforts to do so should be supported. The current existing local structures and associations to move to eliminate the CDA's promotional role in ensure their sustainability beyond the end of favor of a regulatory mandate is a necessary first the respective projects. Permanent sources of step. However, it may not be sufficient given the technical assistance are crucial given the sheer number of cooperatives in existence and the numbers of rural banks and cooperatives in current weakness of the CDA's supervisory operation and the relatively small fraction that capacity. Various models of delegated super- have benefited directly from donor projects. vision should be explored. Best practice also advises establishing a separate set of regulations and supervisors for savings and credit coopera- __________________________ tives, different from those for multipurpose 28Detailed information on FinScope is available at www.finscope.co.za. cooperatives. 17 Philippines 7. Re-evaluate the need for program loan funds, (instead of limiting banks' operational choices) and continue phasing out directed credit pro- could keep risk at an acceptable level while grams. The common rationale for program enabling banks to pursue neglected market loans is that they fill a gap in medium- and long- niches. According to the latest information, the term wholesale finance. However, more research BSP is currently thinking of adopting risk-based on the stability and tenor of deposits needs to be supervision and is in the process of instituting done before this reasoning can be accepted, the necessary reforms. The branching policies especially in light of the disincentive these loans are also under discussion. produce for institutions to mobilize savings. Perversely, this disincentive acts most power- 9. Update the national microfinance policy. fully with regard to small savings­­which are Although the 1997 strategy is still valid (espe- perceived to be higher-cost­­and on strong cially for microcredit), the NCC should draft an institutions, which are best-placed to mobilize updated version to reconfirm the government's them. Renewals of wholesale funds, apexes, commitment to a market-based approach and and/or rediscount lines should consider the offer better guidance on other financial services, crowding-out effect they seem to have on mobi- including savings. A consultative re-drafting lization of deposits, especially from small savers. process involving representatives from govern- ment, donors, financial institutions, and client 8. Shift the supervisory framework for banks groups, could trigger increased dialogue and from operational restrictions toward risk- focus on non-credit financial services for the based supervision. Current efforts to limit poor. Tapping the National Savings Council to systemic risk and encourage consolidation have spearhead efforts to draft the language on translated into operational rules that may inhibit deposit services might both help to reinvigorate regulated institutions from serving poor markets. the Council and provide a home for policy A supervisory framework that emphasizes coordination and promotion of small-balance compliance with prudential ratios or measures savings. based on an assessment of real or probable risk 18 Country-Level Savings Assessment Annex 1 Summary Matrix of Opportunities, Obstacles, and Suggested Actions Level Opportunities/Strengths Obstacles/Weaknesses Suggested actions - Evidence of savings capacity among low- - Skepticism about savings ability perpetuated by Collect more data on savings preferences of income Filipinos lack of data low-income Filipinos Clients - Institutions that have focused on delivering - Demand may be limited by intimidation or Expand financial literacy efforts for residents quality savings services have increased deposits unfamiliarity with financial institutions - Majority of depositors served by a variety of - Institutions closest to the poor are weakest in Institutionalize and expand successful technical regulated institutions terms of performance, governance, management assistance programs on a sustainable basis Micro - 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 - Numerous associations and TA projects bolster - Easy money flooding the market, partially from Continue phasing out DCPs; determine institutional capacity remaining DCPs but mainly from program whether program loans fulfill purpose and are - Payment system may be bypassed by mobile lending operations necessary Meso banking systems - Institutions serving the poor lack liquidity Evaluate alternative e-payments options management mechanisms, connection to (ATMs, cell phones, etc.) payment system Encourage consolidation of federations; build - Multiple rating systems confusing for on and rationalize rating systems to enhance institutions and clients performance and client confidence - Government's policy stance encourages - Institutions closest to clients operate in Strengthen supervision at CDA and/or commercial microfinance regulatory void delegated models - Tiered banking structure makes it more viable - Operational restrictions may limit bank outreach Shift regulatory framework from operational Macro for regulated institutions to serve poor markets and encourage regulatory arbitrage, evasion controls toward risk-based supervision - AML rules are barrier to low-income clients Update national microfinance policy to reconfirm commitment to market-based approach and offer guidance on other financial services, including savings 19 Philippines 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. 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