Owing to the strategic position of the country as a trading entrepôt in East Asia – doing a brisk trans-Pacific trade with Mexico for centuries, exporting minerals and forest products to China, trading sugar with (what was then) Great Britain, and cashing in on foreign exchange earnings of Filipino expatriates – Philippine financial institutions (FI’s) have a long history. Domestic FI’s have developed in diverse forms, brought financial services to virtually every corner of the archipelago, and thrust private FI’s in the central role even as government counterparts continue to take care of largely underserved or high-risk sectors, adapted with alacrity to technological advances, endured numerous periods of consolidation, and comfortably accommodated the entry of foreign banks. Even in the current environment of a troubled financial sector in America and its spillover effects to the UK, Europe and other trading partners, protection has been afforded by the essential conservatism of private sector Philippine FI’s and the resilience of the economy has so far.
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The first bank in the country opened its doors in1852. Given the nature of the Spanish colonial government, “El Banco Español Filipino de Isabel 2” had needed a royal decree from King Ferdinand VII of Spain issued in 1828, joint approval by Governor-General Antonio de Urbiztondo y Eguia, and a board of civil and Catholic church officials (Bank of PI, 2008). Initially, the bank serviced merchants and British traders with deposit accounts and factoring of trade receivables. As a public bank, the “Banco Español Filipino” was also authorized to issue the first domestic currency. A hundred and seventeen years later, ownership passed to Ayala y Compania, closely held by a family of Filipino-Spaniards. Throughout the century, the family shepherded what had become the Bank of the Philippine Islands with a combination of conservative lending and diversified investments in insurance, commercial and high-end residential real estate, electronics, a privatised water monopoly, and telecommunications.
Prior to the current crisis of confidence brought on by recession in the United States, the last such instance sprang from weakness in the Southeast Asian region: the flight from the baht in 1997 led to draconian foreign exchange controls in Malaysia and a significant depreciation in the Philippine peso. The effect of the latter was to drive up the cost of servicing foreign debt for Philippine banks and industries. Consolidations were inevitable, even among the ten leading universal banks (also known as expanded commercial banks).
Though severe, none of these was new. Sachs and Collins (1989) report that numerous currency and debt crises have rippled through the international economy for around 193 years now. The authors point out, by way of example, how the Arab-instigated round of crude oil price increases in the aftermath of the 1983 Yom Kippur assault on Israel plunged the Philippines into a debt crises. The domestic commercial paper market went into a tailspin starting that year, triggering significant corporate and financial institution failures. Bailouts by government financial institutions were so massive they threw fiscal budgets into disarray by the following year.
The Banking Sectors
The Central Bank of the Philippines is the regulatory body, tasked principally with liquidity management, currency issue, lender of last resort (involving discounts, loans and advances to banks to maintain liquidity), supervision of banks and non-bank institutions performing quasi-banking functions, managing the country’s money supply, and setting and managing an “orderly” exchange rate market via the Monetary Board (Bangko Sentral ng Pilipinas, 2008a).
Government Financial Institutions – As a middle-income developing country, government retains a significant role in the banking sector. The Land Bank of the Philippines (LBP), for example, was established by law to finance agrarian reform. After the forced privatisation of the Phil. National Bank, LBP is now the main depository for operating funds of national and local government units. Still wholly under public ownership, the Development Bank of the Philippines (DBP) is the country’s premier development banking institution, with lending offices in each of the country’s 15 geographic regions. The Philippine Deposit Insurance Corporation (PDIC) acts exactly like the U.S. FDIC and is similarly under-funded. Two pension funds, the Government Service Insurance System and Social Security System for government employees and private-sector employees, respectively, are nominally independent and wield great clout in the capital markets. The two are not averse to taking positions in banks, utilities and blue-chip industrials, often accumulating enough shares to threaten to take over company boards. Because the heads are Presidential appointees, pension-fund clout has in the past been used for either patronage or to put pressure on political rivals. Among the specialised financial institutions, there is the Al-Amanah Islamic Investment Bank of the Philippines; this caters not to Islamic banking practices but to provide for the development banking needs of a small Muslim minority (5%). Finally, there is the Phil. Veterans Bank, long the depository for U.S. Veterans Administration pension and benefits payments, as well as those of the Armed Forces of the Philippines.
Private Banks – The sophistication of the banking sector is shown by the proliferation of a great many financial institution types in the private sector. There are today no less than 17 universal banks, 23 commercial banks, 84 thrift banks, 711 rural banks, 44 credit unions and twelve non-banks with quasi-banking functions. In addition, there are moneychanger kiosks that deal in popular foreign currencies, pawnshops that also act as agents of foreign payment remittance services, an embryonic microfinance sector chiefly modelled on the Bangladesh Grameen bank experience (Carpio, 2004), and a completely unregulated but hugely popular informal money lending sector ran by residents of Indian Sikh extraction.
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Aside from Bank of PI, perennially first or among the top three in assets, other leading commercial banks are privately held by families of Chinese extraction. Other than having to pass licensing and regulatory scrutiny, there are no laws restricting ownership by ethnicity or nationality. Reforms to strengthen the sector beginning in 1965 (Sachs and Collins, 1989) and yet again in the early 1970s effectively shut out new banks and branches and raised capital requirements to the extent that even the very largest commercial banks took in foreign partners.
Since the sector reforms of the 1990s also liberalised the banking sector, the decades-long presence of four authorized foreign banks (Bank of America, Standard Chartered, Citibank and HSBC) has been augmented by many more: Singapore’s OUB, Australia and New Zealand Banking Group (ANZ), Bangkok Bank, Bank of China, Bank of Tokyo-Mitsubishi, Deutsche Bank, Industrial and Commercial Bank of China, JPMorgan Chase & Co., Korea Exchange Bank, Mizuho Corporate Bank, ABN AMRO, Chinatrust Commercial Bank, American Express Bank, GE Money Bank (owned by GE Consumer Finance), and Maybank. HSBC, ING and Standard Chartered applied for, and received universal banking licenses. A handful of others operate thrift banking licenses.
Universal banks like Bank of PI and Banco de Oro illustrate the full scope of financial services provided. Generally, the principal activities are grouped along familiar lines from the Western model: corporate banking, consumer banking (within which is mobile cellular and Internet banking), investment banking, asset management, corporate finance, securities distribution and insurance services (“bancassurance”). Specifically, banks generate revenue from deposit taking and servicing, consumer lending such as home mortgages, auto loans and credit card finance as well as the remittance business. Via shared ATM’s and point-of-sale terminals of the ExpressNet, Megalink and BancNet networks, virtually all issuing banks can honour credit cards and debit cards. In turn, investment banking covers corporate finance, securities distribution, asset management, and trust fiduciary services while corporate banking comprises the normal range of lending, leasing, trade and cash management services (AlacraStore, 2008).
Size of the Industry
As of mid-2008, the entire public and private financial sector held assets amounting to 5,334 billion pesos (about US$ 111 billion dollars at current exchange rates), booked 297.1 billion pesos in loans (US$ 6.2 billion), carried 115.4 billion pesos of credit card receivables (US$ 2.4 billion), managed 1.16 trillion pesos of assets in trust (US$ 24.2 billion), and reported profits of 25.1 billion pesos or US$523 million (Bangko Sentral ng Pilipinas, 2008b).
The Capital and Loans Markets
Owing to the modest state of the equities market, FI’s have not expanded into derivatives trading. In fact the capital market as a whole is underdeveloped. Far too many of the stocks listed in the two local exchanges are speculative issues and prone to manipulation. Being closely-held and family-owned, the largest commercial and industrial enterprises are uncomfortable with the disclosure requirements and diminished control that are the logical consequences of public equity offerings (Wurfel, 1999).
Loans, particularly short-term, are the most significant source of business. Since the savings rate as a percentage of GDP is below 20% (in contrast to over 30% in Thailand, Malaysia, and Singapore) and even slipped during most of the 1990s (Kim, 2000), mobilizing savings can be a problem. Hence, there is widespread recourse to repurchase agreements with the Central Bank and resorting to the interbank market in order to sustain liquidity. This renders local financial institutions vulnerable to business cycles and external shocks. On the other hand, spreads are excellent given loan rates that range from 15% to 42% p.a. whereas ordinary deposits earn a puny 1% to 2%.
Weathering the Current Crisis
Thus far, the impact of the U.S. recession spawned by toxic assets like subprime mortgages has been limited to economic growth slowing somewhat, from the current 4.4% to around 3.5% by early 2009 (International Monetary Fund, 2008). The main explanation for this is that Philippine FI’s were never eager for positions with the likes of Lehman Brothers or in high risk, high yield assets; another reason is that the erosion in the balance of trade in the face of high prices for crude oil imports have been softened by robust investment and remittance inflows. However, risk premiums on sovereign assets did rise globally and domestic banks have experienced liquidity problems on their holdings of Philippine government debt paper. Hence, the Central Bank has prepared measures to ameliorate illiquidity, including expanding the rediscount window, allowing a dollar-denominated deposit facility with repurchase, reducing reserve requirements 200 basis points, and raising PDIC deposit coverage to half a million pesos.
A sustained track record in recent years of sustained economic development, rising per-capita income, a liberalised banking and forex control regime, healthy hard currency inflows from foreign direct investments and remittances, a long-established and sophisticated banking sector characterised by the complete spectrum of bank types and many large competitors strengthened by several waves of consolidation, a welcoming attitude to foreign banks, and robust ROA at market rates all make the country an attractive point of entry in East Asia.
- Alacra Inc. (2008). Thompson Financial business description. Web.
- Bangko Sentral ng Pilipinas (2008a). Overview of functions and operations.
- Bangko Sentral ng Pilipinas (2008b). Consolidated statement of condition and key rations: Philippine banking system.
- Bank of the Philippine Islands (2008). 156 years of banking leadership. .
- Carpio, M. A. (2004). The experience of financial institutions in the delivery of microcredit in the Philippines. Journal of Microfinance, 6(2) 113-135.
- Gochoco-Bautista, S. (n.d.). The past performance of the Philippine banking sector and challenges in the postcrisis period. Manila: Asian Development Bank.
- International Monetary Fund (2008) Statement of the IMF Staff Mission at the Conclusion of the 2008 Article IV Discussions with the Philippines.
- Kim, Y.H. (2000). Policy agenda for bond market development in Asia in Bond Market Development in Asia, Paris: OECD.
- Sachs, J. & Collins, S. M. (1989). Developing country debt and economic performance: Country studies–Indonesia, Korea, Philippines, Turkey. Chicago, IL: University of Chicago Press.
- Wurfel, D. (1999). Booty capitalism: The politics of banking in the Philippines. The Journal of Asian Studies, 58(3), 892-893.