Amando M Tetangco, Jr: Financial stability and financial inclusion - two
facets of the same policy objective
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (the central
bank of the Philippines), to the Financial Sector Forum at the Asian Development Bank,
Manila, 7 February 2012.
* * *
Officials of the Asian Development Bank, resource persons, forum participants, my
colleagues in government and in the financial market, ladies and gentlemen, good afternoon.
I am happy to join you this afternoon and have this opportunity to discuss two policy issues
which command prime attention today. For this reason, this session is a timely intervention,
providing us a venue to further our appreciation of the dynamics between inclusion and
stability.
Let me start with financial inclusion.
Our foray into this policy objective has been driven by our socio-economic profile. Spread
over 17administrative regions, the Philippine archipelago is prone to physical fragmentation.
With the population typically drawn along ethnocentric lines, we have as much diversity as
distinction.
The economics of this divide is evident in our income distribution. Data from our Family
Income and Expenditure Surveys (FIES) will show that on average only 20 percent of family
saving is generated by 80 percent of families. This disparity was the case in the 1997 FIES
and it still is the case in the latest (2009) FIES.
In the banking market, limited family saving is validated by the metric of having 3 deposit
accounts per 5 Filipinos nationwide. This is quite low in absolute terms specially when
compared with the rest of the region.
What is worse though is that only 26% of the adult population use banking services. This
suggests that the 3 deposit accounts likely belong to repeat customers.
To compound matters, about 37% of municipalities still do not have banking offices. Quite
expectedly, the majority of banking offices are in the cities and first and second class
municipalities. These information are significant because they reflect the basic gap in the
footprint strategy of the banking community vis-à-vis the population.
Left as they are, the numbers do give us strong reasons to intervene with a formal policy on
financial inclusion.
This call for intervention is premised on socio-economic diversity. This is again another
important consideration because it is a reminder that it is diversity which financial inclusion
must precisely address.
From this perspective, financial inclusion is about tailor-fitting a response for a defined
problem. It is about advancing the financial, social and economic well-being of those who are
otherwise "excluded". The same supervisory principles as those in the mainstream market
continue to apply but the execution allows for the proportionate application of regulatory
requirements. In this way, we provide for flexibilities in policy aspects where rigidities would
deter the creation of markets.
This is precisely what we have done in the Philippines. To-date, we have crafted
20 regulatory issuances specific to the financial inclusion framework. These 20 fall under
5 key aspects:
1. Wider range of products;
2. Expanded physical network;
3. Extended virtual reach;
4. Enhanced transparency and disclosure;
5. Lower barriers to customer acquisition1
We believe these ensure effective implementation of financial inclusion.
In providing for a wider range of products, for example, we recognize that the financial
service needs are quite varied. Toward this end, the BSP has recognized credit facilities of
up to Php300,000 for such instruments as micro-enterprise loans, micro-agri loans and,
housing microfinance loans. To make this micro ecosystem thriving, we complement the
credit facilities with needed auxiliary products such as micro-deposits and micro-insurance
product lines. The combination of all these product lines allows for a free flow of funds within
an environment that is specifically structured for small-ticket item transactions.
We recognize that access is a major concern, particularly with 37% of municipalities not
having a banking office. To address this, we introduced the concept of microfinance banking
office (MBO). MBOs are operationally attached to a full-service branch but can be
established in hard-to-reach areas. On their own, they serve as a launch pad for a range of
product lines from loans, to savings, remittances, to e-money conversion, bills payment, pay
out services and even foreign exchange purchases on a limited basis.
MBOs are separate from the electronic money ecosystem which we introduced a couple of
years ago. Using technology that is readily accessible by the retail market, we are able to
bridge the physical gaps in banking with a technology-driven network. This covers several
facets including fund transfer facilities, retail payments and even partnerships with
merchants.
Pricing is certainly another key element. Contrary to some perception, financial inclusion
operates on market terms and does not require any special pricing concession.
To make this effective, we believe it to be important that the financial consumer is provided
with accurate information on pricing. By expanding the provisions of the Truth in Lending Act,
the pricing approach has been standardized to avoid possible misrepresentation. Beyond
pricing, we are also of the belief that the consumer would be better protected if he is
informed of the different investment options available to him as well the macro and
microeconomic factors that are likely to impact on the value of his chosen investments2.
None of the above would be possible, however, if specific regulatory barriers are not
addressed. Through the recent issuance of updated Anti Money Laundering rules and
regulations, we are able to strike a balance between prudential requirements and realistically
not having direct knowledge of those in under-served areas. To address this difficulty, our
new rules rely on 3rd parties already embedded in the communities to fulfil the face to face
requirements of the Know-Your-Customer threshold3.
The net effect is an enabled environment. Today,188 banks provide microfinance services.
We estimate that one million households are serviced with an outstanding portfolio of about
Php 7 billion as of September 2011.
When compared with the Php 7.17 trillion total resources of the banking system as of
November 2011, the portfolio for financial inclusion is modest. However, this same portfolio
was not formally in existence only a decade ago and it is in that context that we measure the
strides taken, which then reflect greater significance.
With all of the above initiatives and changes, a natural question to ask is whether financial
inclusion impinges upon financial stability. After all, inclusion requires specialized rules for a
specialized market constituency.
However, the link between inclusion and stability - or more appropriately, between reducing
exclusion and increasing instability - may not be unique. This makes it difficult to be precise.
Nonetheless, two possibilities may be considered.
First, financial market failures are often premised on information asymmetries. Incorporating
new agents into the formal market will likely increase information asymmetries. This is more
so the case with stakeholders whose access to and use of information is not the same as
those in the mainstream market.
Second, there is regulatory arbitrage. The "tailor fitting" of guidelines that is inherent to
financial inclusion may create an unintended imbalance in incentives. This becomes a point
of arbitrage, if not market pressure.
These two scenarios are certainly possible. As we evaluate these possibilities, it bears
repeating that the tailor-fitting of regulations observed for the inclusion framework is not
meant to compromise governance standards.
What it simply does is introduce flexibilities so that we can impose proportionate oversight
where and in the manner that this is needed.
Beyond this, it does become an empirical issue. At the most basic level, the risks in financial
inclusion are transactional, of smaller value and often specific to a target constituent.
For the Philippines, the concern is the extent to which the financial inclusion portfolio can
affect the banking system which is currently 100x its own size.
The answer lies in the concept of contagion. This is largely idiosyncratic to a jurisdiction and
empirical in nature more than anything else. Different jurisdictions will face different
parameters and different pressures due to contagion.
Where then do all of these take us? Should we not pursue inclusion when the numbers say
so? Should stability be the primordial concern around which all other policy objectives must
subsist?
If we go back to first principles, markets are made when two parties with opposing views and
different needs come together to agree to transact with each other. It is for this fundamental
reason that markets thrive on servicing the needs of savers versus borrowers and those of
depositors versus investors. However, when the markets are too fragmented and their
constituents are effectively segmented, instead of offering a venue for disinterested
counterparties to come together, market failures could arise.
Moving forward then, it would stand to reason that financial stability would thrive when the
market framework allows for the different stakeholders to participate. Financial stability can
thrive when different needs are recognized, but addressed as appropriate and governed
under the same overarching core principles of market governance and prudential oversight.
This is nothing more than financial inclusion. Stripped to its core, inclusion is a participatory
framework to work toward a holistic market and break down barriers between bankable and
unbanked, serviced and under-served. Once such a holistic market is upon us, we would
have created the environment where stability can more likely be sustained.
More than nice words, the Philippines stands by this framework.
First, on inclusion, we are proud of our humble achievements and the recent
pronouncements from external institutions give us reason to move further and forward. For
three years in a row (2009-2011), the Economist Intelligence Unit's global survey on
microfinance has ranked the Philippines as number one in the world in terms of policy and
regulatory framework for microfinance. The World Economic Forum and other international
bodies have also recognized our strides in using innovation to increase access to financial
services.
Second, on stability, we believe that our financial system has performed well under the most
difficult global conditions in recent memory. Beyond the positive review from our recent
FSAP and the analyses from various other external agencies, including credit rating bodies,
the fact remains that the Philippine financial system has been consistently expanding through
the past decade.
It is our view that the strength and stability of the financial system and the expansion and
development of our financial inclusion program are not merely co-incidental but rather
complementary. They do not just run in silent parallel, but they run as a shared purpose.
From only Php 2.6 billion in December 2002 serving around 390,000 borrowers, the financial
inclusion portfolio as of September 2011 is over Php 7 billion with nearly a million borrowers.
What makes this impressive is not its nominal amount. Rather, it is the fact that the portfolio
growth translates to an annualized expansion of 12% per annum. In contrast, banking
system resources over the same exact period have grown by 8.4% per annum [from Php
3.48 trillion in December 2002 to Php 7.04 trillion in September 2011].
Though much remains to be done, we have moved forward to make economic activity much
more participatory through inclusion. In the process, we have broadened the coverage of the
financial net by not limiting it to those who are already naturally bankable.
The process does not end here. Financial inclusion and financial stability can and do
complement each other and we will continue to stand by this framework.
Well beyond the numbers, we believe that the Filipino public is definitely better for it.
Thank you very much and good day.