Arowana Impact Capital

Financial Inclusion in the Philippines:
Beyond the Impressive Ranking,
A Work in Progress

Social development is about creating access to different resources, including financial resources. Money is, after all, an instrument that can open doors to many opportunities for growth and development.

Creating access to financial resources means creating programs that promote financial inclusion, which the World Bank defines as “a situation where people and businesses have access to useful and affordable financial products and services that meet their needs.” These products and services include payments, savings, credit, and insurance.

Financial inclusion is vital to development because, as the World Bank points out, it is “a key enabler to reducing poverty and boosting prosperity.” Giving poor households or small businesses access to financial products and services means giving them a chance to, for example, earn for themselves or provide security for themselves during uncertain times; and on a larger scale, it gives them an opportunity to join the formal economy, which will allow them to contribute to the country’s long-term sustainable growth.

Financial Inclusion in the Philippines
In the move towards financial inclusion, the Philippines is still a work in progress. The country ranked fairly well in the 2018 Global Microscope; a study released by The Economist Intelligence Unit of the Economist Group. The report assessed the enabling environment for financial inclusion in 55 countries, using the following five key domains, namely: (1) government and policy support; (2) stability and integrity; (3) products and outlets; (4) consumer protection; and (5) infrastructure. 

Based on the said report, the Philippines placed first in Asia and fourth in the world for establishing an enabling environment for financial inclusion. The Philippines tied with India for fourth place, while Colombia, Peru, and Uruguay ranked first to third, respectively. 

While this ranking is good news for the Philippines, the country must keep in mind that creating an enabling environment is different from actually implementing financial inclusion practices. According to a discussion paper published by the Philippine Institute for Development Studies (PIDS) in 2017, financial inclusion is still a pressing issue in the Philippines up until now, as “access to financial products and services remains a big challenge in the Philippines.” PIDS used the following criteria in its study on financial inclusion, namely: (1) access; (2) usage; (3) quality; and (4) welfare. 

 Photo from the Asian Development Bank

Access to Financial Products and Services
The World Bank says that having access to a formal financial account is the first step to broader financial inclusion, as it is the key to other financial services. As such, the organization launched its Universal Financial Access 2020 initiative, which envisions that by 2020, “adults globally will be able to have access to a transaction account or electronic instrument to store money, and send and receive payments.”

In the Philippines, ownership of formal financial account improved modestly – from 31.3% in 2014, it went up to 34.5% in 2017. However, these numbers are still low compared to some of its ASEAN neighbours, namely Singapore (97.9%), Malaysia (85.3%), Thailand (81.6%), and Indonesia (48.9%).

Usage of Financial Products and Services
While account ownership improved, the incidence of borrowing in the country actually decreased. Borrowing from financial institutions decreased from 11.8% in 2014 to 9.7% in 2017, while borrowing from family, friends, and other informal lenders also went down from 48.7% 2014 to 41.2% in 2017.

One reason for this, according to the Bangko Sentral ng Pilipinas (BSP), is that adults think it is difficult to obtain a loan from financial institutions. Documentary requirements, lack of collateral, lack of necessary IDs, and level of salary all hinder them from applying for a formal loan; unfortunately, this situation also exposes them to loan sharks, who charge exorbitant interest rates.

The difficulty in obtaining a loan from financial institutions also affects micro, small, and medium enterprises (MSMEs). While there is a law (Republic Act No. 9501) that prescribes banks to set aside 8% of their total loan portfolio for micro and small enterprises (MSEs) and 2% for medium enterprises (MEs), data from the BSP shows that banks failed to meet the required MSME lending stipulated by law.

The percentage of compliance for MSEs is only at 3.2% in the second quarter of 2018, down from 3.4% in the same quarter of 2017. Meanwhile, the percentage of compliance for MEs is at 4.8% in the second quarter of 2018, also down from 5.1% the year before.

Presence of Financial Institutions
Another factor affecting financial inclusion in the Philippines is the distribution of financial institutions in the country which, according to the Philippine Statistics Authority (PSA) and the BSP, are highly skewed toward populous and urbanised areas.

For example, there are four financial institutions for 10,000 Filipino adults in the National Capital Region (NCR), which is the centre of culture, economy, education, and government in the country. Compare this number to that of one financial institution for 100,000 Filipino adults in the Autonomous Region of Muslim Mindanao (ARMM) – a provincial region located south of the Philippines – and one gets a better picture of why financial access and inclusion are still big challenges in the country.

 Photo from Mark Demayo, ABS-CBN News

The Private Sector, Impact Investors, and Financial Inclusion
Faced with these challenges, there has been growing recognition of the private sector’s role in supporting the government’s efforts toward financial inclusion. Initiatives include improving access to affordable financial services for vulnerable Filipinos, as well as increasing the number of individuals and MSMEs with access to credit. To help boost their endeavours, the private sector is also seeking impact investors who can join them in the push for greater financial inclusion in the country.

Lessons can be gleaned from existing private sector-impact investment partnerships, with the following case studies serving as starting points for those interested in this area.

Bridge. A financial services company that aims to strengthen provincial banking with a commitment to social impact, its vision is to build a network of innovative, dynamic, and dedicated rural banks that will support two million rural Filipinos by 2020.

With funding from investors Accion, Bamboo Finance, DEG of Germany, and FMO of the Netherlands, the company has already invested in 1st Valley Bank, a large provincial bank and one of the fastest-growing financial institutions in the Philippines. Bridge has likewise invested in Sugbuanon Rural Bank, a provincial bank with branches in Cebu.

1st Valley Bank currently manage 34 branches, while Sugbuanon Rural Bank has seven branches. Both offer loans to teachers, SMEs, and farmers.

BlueOrchard Microfinance Fund (BOMF). A pioneering impact investor, BOMF is the first private and fully commercial microfinance manager in the world. Founded in 2001, its vision is to foster financial inclusion and shared prosperity worldwide and has done so by investing US$6 billion in over 80 emerging and frontier markets across Asia, Eastern Europe, Latin America, and Africa.

Its investments are focused on institutions that provide loan capital – and increasingly, savings, insurance, and related products – to low-income groups, thereby enabling their recipients to create and grow income-generating activities and eventually break out of poverty.

Encourage Capital. An investment firm in New York, Encourage Capital describes itself as “a new kind of investment firm that seeks to change the way investment capital is used to solve critical environmental and social problems.”

Encourage Capital invests in companies that generate commercial financial returns and foster the development of an equitable and inclusive financial system. It also seeks to develop investment solutions that promote financial inclusion.

It established a US$250-million private equity fund that made realized investments in five financial institutions, namely: Meritum Bank in Poland; Banco Daycoval in Brazil; and DCB Bank, Repco Home Finance, and Ujjivan, all of which are located in India.

The Way Forward
While the Philippine Government’s primary goal of promoting financial inclusion – which is to increase the number of bank accounts held by citizens – is a commendable aspiration, more support from the private sector is needed. And as can be seen in the above examples of Bridge, BOMF, and Encourage Capital, it is possible to promote inclusivity without sacrificing commercial returns.

Members of the private sector interested in joining such efforts can take into consideration the World Bank’s list of key areas that drive financial inclusion in other countries:  

  • Allowing mobile financial services to thrive;
  • Welcoming new business models; and
  • Paying attention to consumer protection and financial capability.

Focusing on the above areas will bring together diverse stakeholders – including financial regulators, telecommunications, competition and education ministries – who can support the move towards more financial inclusion. Likewise, it will promote responsible and sustainable financial services for those who need it, eventually bringing the Philippines closer to its goal of greater financial inclusion for its people.    

Arowana Impact Capital