Benjamin E Diokno: Accounting as the language of business - some
perspectives from the Bangko Sentral ng Pilipinas
Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the First National Summit of CPAs in Commerce and Industry
(NSCCI), Manila, 30 January 2020.
* * *
The Philippine Institute of Certified Public Accountants (PICPA), hardworking accountants,
colleagues in the government, distinguished guests, ladies and gentlemen, good morning. It is
my honor to deliver the keynote address on the First National Summit of CPAs in Commerce and
Industry (NSCCI).
The inaugural theme you have chosen - "Reinforcing the Future. Together. Today" - captures
the spirit of the times. We see changes in the political and the economic landscapes, continuing
regulatory reforms, technological innovations, and more interconnected goods and financial
markets. To put things into a wider perspective, let us now try to stand on the shoulder of an
accounting giant - Mr. Washington SyCip.
Mr. SyCip once said, "Basic credentials are not enough to ensure success in any profession.
This means that learning will be, as it should be, a lifelong activity. We need to be open to
continue retooling or retraining ourselves to remain competitive. The body of accounting
knowledge is not static; it is, on the contrary, exceedingly dynamic, undergoing a rate of growth
and change which will demand the best of professional talents in the years to come. The
availability of the accounting profession to meet the increasing and changing needs of society is
inextricably tied to the strength of its educational base."
Looking at the list of technical sessions for this two-day summit, I am confident that you are in
the right direction in rising to the call of was SyCip.
But today, as an economist, I wish to impart to the country's CPAs a different kind of accounting.
That is, "growth accounting" or an overview of the macro-financial developments characterizing
the Philippines' recent rise as one of the most dynamic economies in Asia and the world.
This economic renaissance stands on many pillars, a major part of which is the banking system,
ably guided by decades of painstaking reforms largely implemented by the BSP. I will also talk
about the policy direction overlying the BSP's banking reforms intended to support a strong
domestic economy and promote a high quality of life for all Filipinos.
At the end of my talk, I will be leaving some takeaways from the BSP that you may consider as
you return to your work, plan your businesses, and execute your mandates.
The International Monetary Fund (IMF), in its October 2019 World Economic Outlook (WEO),
forewarns that the global economy is in a synchronized slowdown. Its forecast for 2019 global
growth was at 3 percent, downgraded from the April 2019 WEO forecast, and the slowest since
the global financial crisis. The IMF attributed the sluggish growth to rising trade barriers, trade
and geopolitical uncertainties, and idiosyncratic as well as structural economic factors in
individual countries.
For 2020, the IMF forecasts a precarious global growth at a similarly downgraded 3.4 percent.
Against this backdrop, our country has posted 85 quarters of uninterrupted economic growth. For
seven of the last eight years, we recorded an annual GDP growth of more than 6 percent. These
accomplishments helped us achieve our highest credit rating from the S&P Global Ratings of
BBB+, two steps above the minimum investment grade rating. The other big global raters -
Moody's and Fitch, place us a step above the minimum investment grade.
Meanwhile, government agencies are coordinating their efforts for the Philippines' road to A
rating. The higher credit ratings enable us to borrow at lower interest rates with the perception of
less credit risk as reflected in the rating.
Above all these, the Philippines remains among the fastest growing economies, not only in Asia
but also in the world. We should take pride that we are actually among the drivers to global
growth amid the IMF's gloomy projections. This economic growth streak will enable the
Philippines to achieve an upper-middle-income status by late next year according to the National
Economic Development Authority (NEDA).
Nonetheless, our economy is not immune from international uncertainties as the country is part
of the global economy. Volatility in price levels globally, including oil, impacts the BSP's mandate
to promote price stability conducive to a balanced and sustainable growth of the economy.
To achieve this mandate, the BSP has adopted inflation targeting since January 2002. It adjusts
its monetary policy instruments, primarily its policy rates, to achieve its inflation target.
The BSP's policy rate hikes in 2018, together with the passage of Law Tarrification Law,
effectively brought the inflation from its peak at 6.7 percent in September 2018 to 0.8 percent in
October 2018.
The easing inflation has enabled the BSP to reduce policy rates since May of last year.
The BSP has also reduced the reserve requirements for bank deposits and certain liabilities.
This is in line with its broad financial sector reform agenda of promoting a more efficient financial
system by lowering financial intermediation costs. The adjustment in reserve requirement ratios
is aimed to ensure sufficient domestic liquidity in support of increased economic activity.
In more practical terms, the BSP's moves to reduce interest rates and reserve requirements to
manage inflation also provide banks with more incentives to lend to borrowers - such as
households and businesses, at lower rates.
Global analysts have noted this recent decline of inflation, with Bloomberg citing the Philippines
for outperforming other markets in terms of bond yields. More specifically, the interest rates of
our bonds, minus inflation, provide greater real interest income for global investors compared to
other countries.
The relative stability of the Philippine peso likewise showcases our strong macroeconomic
fundamentals. Bloomberg data shows that the ratio of the standard deviation to the mean of the
daily closing rates of the Philippine peso to the US Dollar last year was relatively stable
compared to a sample of Asian countries.
The harsh reality is that global uncertainties are not likely to dissipate. However, we have
adequate cushions for these uncertainties.
Our gross international reserves (GIR) of USD 87.8 billion as of end-December 2019 are enough
to pay for the country's imports for 7.7 months. The GIR is primarily supported by exports, inward
foreign investments, business process outsourcing (BPO) and tourism receipts, and
remittances from overseas Filipinos (OFs).
Next, I would like to share the soundness and stability of the Philippine banking system and
bullish outlook for the next two years.
Our banking system has been growing alongside the expanding economy. Latest data as of
endNovember 2019 show that the Philippine banking system approximates the size of the economy
at 95.7 percent.
Our banks' business model is generally into the traditional banking business of deposit-taking
and lending. This explains the dominance of loans in the balance sheets of banks. In fact, loans
have generally made up more than half of the PBS assets since 2014, and comprised 58.5
percent of the banks' assets as of end-November 2019.
Investments in securities are the banks' next biggest asset class.
Together with cash and cash assets, these provide ample liquidity for their operations and serve
as cushion for market shocks while financing the needs of the growing economy.
Meanwhile, banks' lending activities are generally prudent and are spread across Philippine
industries, indicating diversification of risk exposures. The industries that are the biggest bank
borrowers include manufacturing, real estate and wholesale and retail trade.
Robust household consumption has often been credited as another driver of economic growth,
but bank loans have likewise been a significant financier to our households-mostly through
credit cards, housing loans, salary loans and motor vehicle loans. As I will discuss later, we are
further enhancing our regulations to make bank products such as loans more accessible to the
common tao who often fall victim to usurious practices such as the 5-6 and sangla-ATM
schemes.
How do our banks grow to be able to support the economy and our households? Well, they
capitalize on the public's trust in them. As households, businesses and the government expand,
their savings also grow and are entrusted to the banks mainly in the form of deposit. And as the
graph shows, deposits have always been the biggest source of funds of the Philippine banking
system, averaging more than 75 percent of the industry's assets for the periods shown. In turn,
the owners exhibit commitment to their banks by building up capital that will absorb unexpected
losses from their risk exposures.
We at the BSP ensure the safety and soundness of the banks by requiring a standard of risk
management that is at par with global norms, but at the same time considers domestic
conditions and proportionality. In applying the principle of proportionality, the BSP calibrates its
regulations in such a way that these remain sensitive to the peculiarities and conditions of
different types of financial institutions operating in the country without compromising regulatory
objectives.
Our banks maintain their ratios of capital to risk exposures, and high-quality liquid assets to
possible cash outflows in case of financial stress, at levels way beyond domestic and global
standards. This ensures the banks' ability to continue to finance the growing economy and their
resilience in times of stress.
How long will our banks' positive performance last? Majority of the leaders of the banking
industry, in their responses to the BSP's Banking Sector Outlook Survey for the first semester of
2019, forecast double-digit growth in assets, loans, deposits and net income for the next two
years. They also project capital and liquidity ratios to be maintained well beyond BSP
requirements. These, among other findings, highlight the bullishness in the growth of the
economy and the banking system despite global uncertainties.
Strategy-wise, the bankers prioritize growing their business by expanding their client base,
investing in technology, and developing new products. They also intend to optimize the use of
technology in their operations and customer relations to better serve the public and at the same
time, achieve strategic efficiencies in their operations.
Amid domestic and global uncertainties, the banks plan to reach their growth objectives by
developing new capabilities to cope with the competition and the digital revolution. They also
intend to expand market reach across geographical and digital frontiers while leveraging on
existing client relationships.
The BSP's strategic reforms in the past decades have been aimed at ensuring the safety,
soundness and resilience of the banking system.
Specifically, these reforms are being pursued to (1) strengthen risk governance within banks; (2)
leverage on technology in finance and the use of artificial intelligence, which encourages digital
innovations to flourish while ensuring effective management of risks, including protection of
consumers; (3) achieve greater and broader access to financial services to enable most
Filipinos to benefit from the growing economy and banking system; (4) uphold the integrity of
financial system and safeguard the interest of the public; and (5) accelerate capital market
reforms, including foreign exchange initiatives.
The amendment of the BSP Charter in February 2019 provided the BSP with, among others, a
strengthened mandate to promote financial stability in addition to its existing monetary stability
function. The amended Charter also strengthened BSP supervisory function over money service
and credit granting businesses and payment system operators. The amended Charter and the
National Payment Systems Act provide a solid legal mandate to the BSP over the payment
systems. These put the BSP in a strategic position to address potential risks arising from the
interconnectedness of banks and these financial entities.
Moreover, the new BSP Charter embodies a package of reforms that will further align its
operations with global best practices and enhances its capacity for crafting proactive policies
amid rising interlinkages in the financial markets and the broader economy.
The BSP envisions itself as a world-class monetary authority and primary financial system
supervisor that supports a strong economy and promotes a high quality of life for all Filipinos.
The dynamism of the economy and the strength of the banking system do not mean much if their
benefits are not felt by most Filipinos. Thus, the BSP continues to advance its financial inclusion
agenda with digital innovations as a catalyst and strategic enabler. Digital financial inclusion
refers to digital access and use of formal financial services by the unserved and underserved
population. Facilitating digital access means expanding the delivery of basic financial services
through mobile phones, cards or the Internet. Such services should be suited to the customers'
needs and delivered responsibly, at a cost affordable to customers and sustainable for providers.
Accordingly, the BSP has been gearing up for the development of a digital finance ecosystem
that facilitates diversity of players catering to the various needs of the public, particularly the
lowincome and financially unserved and underserved segments. Such an ecosystem is built on
three pillars:
The first pillar deals with democratized access to a transaction account wherein every person is
able to open an account and use digital financial services. To realize this, the BSP encourages
banks to offer basic deposit accounts (BDA) which meet the need of the unbanked for a
lowcost, no-frills account. A basic deposit account features a low opening amount capped at P100,
no maintaining balance, no dormancy charges, and simplified identification requirements.
More importantly, BSP rules for validating client identity have been eased further by allowing the
acceptance of the national ID for the client on-boarding process. The BSP has also allowed
covered institutions to implement reduced Know-Your-Customer (KYC) rules for certain low-risk
accounts and use technology for face-to-face contact requirements.
The second pillar of the digital financial ecosystem refers to the establishment of an expansive
network of low-cost touch points to serve the country's financial intermediation needs.
Notwithstanding the continuing growth of their offices nationwide, banks and other
BSPsupervised financial institutions (BSFIs) are hard-pressed to establish physical presence in every
location due to the archipelagic geography of our country. Thus, the BSP has allowed banks to
serve their clients through ubiquitous retail outlets which act as cash agents. These cash agents
accept and disburse cash for, and on behalf of, the bank. The BSP likewise allowed the
establishment of branch-lite units which can provide a wide range of products and services
depending on the market needs of a specific area or locality.
The last pillar is the efficient retail payment system architecture. This is operationalized through
the National Retail Payment System (NRPS) framework which promotes interoperability, allowing
digital financial transactions to be sent and received from an account to any account, whether
held in a bank or an e-money issuer. Circular No. 992 dated 1 Feb 2018.
Circular No. 950 dated 15 Mar 2017 and Circular No. 1022 dated 26 Nov 2018.
Circular No. 940 dated 20 January 2017.
Circular No. 987 dated 28 December 2017.
Circular No. 980 dated 6 November 2017, as amended.
Allow me to further expound on the NRPS. The slide shows a sample of transactions that can
be conducted through the NRPS. Industry players under the framework can utilize financial
technology (fintech) solutions and provide services within an organized, commercially viable, and
efficient retail payment system.
Observance of the underlying principles and standards under the NRPS is expected to result in:
(1) safety by ensuring the security of transactions and activities performed in the country's retail
payment system; (2) reliability by ensuring resiliency of operations against disruptive events; and
(3) efficiency, which is essentially about speed, convenience and affordability of transactions.
A key outcome of the NRPS is to increase the conduct of payments over electronic platforms to
20 percent by 2020, which will help achieve higher economic growth and enhance the overall
competitiveness of our economy. In turn, the Philippine government has led by example,
becoming the most digitized stakeholder in the ecosystem, with 64 percent of all government
transactions carried out digitally.
Attainment of the objective is evident in the spectacular growth in volume and value of
transactions conducted by the two automated clearing houses (ACHs) handling the clearing and
settlement of NRPS transactions, namely the Pesonet and the Instapay. Better Than Cash
Alliance, "Country Diagnostic: The Philippines," Case Study published 2 December 2019.
Going back to the BSP's financial inclusion initiatives, the BSP has identified two frontier credit
markets in this endeavor.
On one hand, the BSP recognizes that the financial system is an important stakeholder in driving
investments to activities that promote climate-resilient, green, and sustainable growth.
Therefore, it is deemed that financial regulation can be a useful tool to contribute to the
achievement of national and international environmental objectives. In this regard, the BSP has
taken a two-pronged approach to sustainable finance: first, in undertaking capacity building and
awareness campaigns; and second, in mainstreaming environmental and social governance
(ESG) through the issuance of enabling regulations.
On the other hand, Republic Act No. 11439, or "An Act Providing for the Regulation and
Organization of Islamic Banks" mandates the BSP to exercise regulatory powers and
supervision over the operations of Islamic banks. This will unlock the full potential of Islamic
financing in fostering inclusive economic growth. With a well-defined legal framework now in
place, the BSP looks forward to seeing greater participation in Islamic financing by both domestic
and foreign banks. This is expected to widen opportunities for our Muslim brothers in accessing
banking products and services.
Technological innovations in the provision of financial services have resulted in a myriad of
benefits to consumers, including faster processing of transactions, convenience, security, and
efficiency. This promotes a more inclusive financial system.
BSP data indicate that there is much to be done in the area of financial inclusion in the country.
The BSP is intensifying its efforts on digital and financial literacy as well as consumer protection,
aimed at deepening the public's knowledge of and trust in our banks and digital financial services.
Last October 2019, the BSP approved the adoption of the National Quick Response (QR) Code
Standard for payments. The QR technology has emerged as the most convenient and
costefficient means of moving funds from one account to another.
These twin initiatives on QR code standards and the E-Filing and Payments System or the
eFPS, among others, ensure the efficiency of payment systems in support of inclusive economic
development.
The BSP's current approach to financial education focuses on digital content creation and
strategic institutional partnerships to generate greater multiplier effect and promote
costefficiency and program effectiveness. Financial education is expected to benefit students with its
inclusion in the schools' K-12 curriculum; overseas Filipinos who attend the Pre-Departure
Orientation Seminar (PDOS) and Post-Arrival Orientation Seminar (PAOS); conditional and
unconditional cash transfer recipients; uniformed personnel; micro, small and medium
enterprises (MSMEs); and civil servants.
Meanwhile, the BSP's consumer assistance mechanism also allows the public to seek redress
and grievance against erring BSP-supervised financial institutions or BSFIs. The ongoing work
on our chat-bot functionality will enable financial consumers to submit complaints via SMS,
webchat and messenger apps (e.g., Facebook Messenger, Viber) for automated
acknowledgement and referral to the concerned financial institution. Circular No. 1055 dated 17
October 2019.
The BSP views responsible fintech innovation as a critical enabler in unlocking financial inclusion
barriers, transformational enhancements, and exciting opportunities for the financial services
industry. The BSP's regulatory sandbox involves launch of new solutions in a live yet controlled
environment. With this approach, the BSP is able to evaluate risks and determine appropriate
regulations, while allowing BSFIs to realize benefits arising from these innovations.
To manage threats to fintech, the BSP is promoting a culture of cyber resilience in the industry.
This involves participation in several information sharing fora in both domestic and international
fronts. We encourage BSFIs to subscribe to information sharing platforms to enhance situational
awareness and threat intelligence capabilities.
The BSP regulatory framework eases the banking system's transition to the digital economy by
enabling solutions under the regulatory sandbox. Forthcoming regulatory solutions include cloud
computing, enhanced guidelines on e-money, virtual currency, open banking and application
programming interface (API) standardization, and cybersecurity.
On the part of the BSP, we are building the competency of our bank supervisors to be able to
effectively monitor cyber threats and vulnerabilities among banks and implement supervisory
measures accordingly.
The BSP has set its strategic priorities toward a sound, stable, resilient and inclusive banking
system. A number of reforms have been undertaken and continue to be crafted by the BSP to
ensure the soundness and stability not only of the banking system, but also the financial system
as a whole.
For instance, we are officially incorporating the BSFIs' organizational conduct and risk culture in
our supervisory framework to further reinforce the public's trust and enhance the banks'
resilience and stability.
We are also intensifying collaboration with industry associations, other agencies and global
regulators to ensure that our policies are up-to-date and responsive to the evolving dynamics of
the economy and the banking system.
In closing, let me cite some key take-aways from this presentation:
Strong macroeconomic fundamentals enable the Philippine economy to continue through its
strong growth trajectory amid domestic and global uncertainties.
The Philippine banking system stayed on its growth path in line with domestic economic
expansion and positive outlook on the banking system's performance in the next two years
Financial technology and electronic payments are shaping the future landscape of the Philippine
banking system.
Finally, the BSP will continue to create a supportive and collaborative regulatory and supervisory
environment that allows innovations to flourish; ensures that risks are effectively managed;
upholds consumer welfare; and promotes financial inclusion, toward ensuring a high quality of life
for all Filipinos.
If mathematics is the language of nature, accounting is the language of business. Accounting,
therefore, has a very important social purpose because it is mainly used for linguistic
communication. It is the ultimate goal of CPAs to provide fair financial information that will serve
as basis for decisions by relevant stakeholders. Our banks fulfill their financial intermediation role
in the economy through the accounting medium. The BSP discharges its mandates concerning
money, banking and credit using the same medium. Language is empowering. As we hone our
ability to speak and be understood, as well as our ability to listen and understand the accounting
language, just as was SyCip enjoins us to do, we are promoting an efficient, sustainable and
inclusive economy.
Again, thank you very much for having me. Mabuhay ang PICPA! Mabuhay ang BSP! Mabuhay
ang Pilipinas!