Photo and text by Monsi A. Serrano
The pandemic pushes everyone and all businesses to embrace digitalization in order to be resilient and responsive in the changing consumer behavior and the demand for an efficient, seamless and safe transactions.
In the report last 2019 given by the Bangko Sentral ng Pilipinas, it was revealed that 77 percent of Filipinos are still “unbanked” while only 15.8 million Filipinos have access to banks. Among the 60 percent of the “unbanked”, the reason for not banking is they don’t have enough money to open a bank account.
While there are other surveys conducted about the unbanked and underbanked Filipinos, the advent of financial technology would pave the way for reducing the number of unbanked in the country. Financial inclusion is the key to inclusive development in the country, especially in the countryside.
Interestingly, experts pointed out that our Government Financial Institutions (GFIs) are not properly addressing financing gaps and should be reorganized to better fulfill their mandates to cater to the underserved markets, particularly agriculture and small enterprises.
This was revealed by Dr. Mario Lamberte in a recent online talk said studies show that, first, there is a need for GFIs to address market financing gaps, as he focused in particular on the roles of the Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP).
Lamberte, team leader of UPPAF Regulatory Reform Support Program for National Development, noted that a large portion of DBP’s loan portfolio is allocated to financial and insurance activities, which weakens its development role.
“Data also indicated that the agricultural sector, which LBP should be catering to, has a smaller share in its loan portfolio compared to other sectors”, Lamberte said.
“Both DBP and Land Bank’s loan portfolios also do not seem to put more emphasis on lending to micro, small and medium enterprises (MSMEs)”, he continued.
“A second observation is that in times of crisis, including the global financial crisis and the COVID-19 pandemic, GFIs in the country generally behave like private banks rather than performing a countercyclical role to help out struggling entities”, Lamberte said.
A countercyclical fiscal policy refers to the steps taken that go against the direction of the economic or business cycle.
“So you have a GFI that is behaving like private banks during crisis episodes when in fact they are very much needed during those crises. In other jurisdictions, the GFIs play a big role. In fact, in Japan, GFIs have so-called crisis response plans built into the portfolio of the GFIs so in case there’s a crisis they can respond quickly,” Lamberte said.
Meanwhile, a third observation is that in terms of competitive neutrality, Lamberte said findings bear out that regulations and practices “confer undue advantages to GFIs over PFIs [private financial institutions].”
Competitive neutrality is the recognition that significant government business activities which are in competition with the private sector should not have a competitive advantage or disadvantage simply by virtue of government ownership and control.
Lamberte noted that GFIs are designated depository banks of all government agencies under Department of Finance Circular No. 01-2017. In addition, the national government’s implicit guarantee of a “Safe Haven” status to GFIs confers a competitive advantage to them. Implicit government guarantee refers to the probability that the government will bail out an entity or institution in case of a default.
He recommended that “we should reorganize both GFIs” by clarifying their identities. “Our proposal is to make DBP as an infrastructure bank and Land Bank as bank for agriculture and MSMEs,” noting that these niches have been overlooked by the private sector.
Lamberte explained that DBP should provide structured financing and other services for infrastructure projects falling under key sectors such as energy, ICT, construction, transportation, urban development and industrial sectors.
Land Bank should then be focused on supporting agriculture and MSMEs, including startups.
Lamberte also said there is a need to de-politicize GFIs, adding that there should be no ex-officio or government officials on the board. The board of directors should also have a fixed term of at least three years, and the board should have a free hand in hiring top management and employees.
He further suggested that GFIs assume a countercyclical role in times of economic crisis, and such a role must be explicitly included in their mandate. There should also be a trigger mechanism and exit strategy for using the countercyclical funds.
Finally, he emphasized the importance of implementing the competitive neutrality policy. The Governance Commission for GOCCs and Philippine Competition Commission should draft a joint memorandum circular outlining competitive neutrality principles, indicators, evaluation and actions. DOF Circular 01-2017 should at the same time be amended to adhere to the policy, he said.