Philippines: Opening rural banking to foreigners

Legislative reforms opening up the rural banking segment to wider foreign investment could see an injection of funding into at least some of the almost 600 small lenders. However, it is likely that only a few will attract an overseas partner.

A bill setting out changes to legislation governing the operations of rural banks passed its third reading by the Senate of the Philippines at the end of January, paving the way for foreign investors to acquire up to a 60% stake in local banks, a move that should promote economic development in non-urban and remote regions. Formerly, overseas banks were able to buy into rural lenders, but foreign individuals or companies could not. According to senator Sergio Osmeña III, the chairman of the Senate Committee on Banks, Financial Institutions and Currencies, once ratified, the law on rural banks could encourage greater investment, making them better placed to compete.

“Rural banks need to look beyond their limited resources and take advantage of funds available elsewhere,” Osmeña said on January 28. “The opportunity to forge international equity partnerships would put rural banks on a level playing field with thrift and commercial banking counterparts that are able to take in foreign partners.”

At first glance, overseas investors might not look on the rural banks as an attractive vehicle. Between them, they have a relatively small asset base – $4.6bn out of sector’s $194.4bn – of which universal and commercial banks held $174bn, with the thrift banks segment holding the balance. Over the past year, rural banks saw their resources rise by just 0.5%, compared to the 8% increase enjoyed by the larger lenders.

But while the role of rural banks in the financial system may be small, there is the potential for growth, both in terms of assets and customer base. According to a September report by Bangko Sentral ng Pilipinas (BSP), the central bank, there are 9000 bank branches across the Philippines, though most are located in urban areas, with one-third in the greater Manila area alone.

This rural-urban divide was further underscored by figures from the World Bank released in mid-January, showing that only around one-third of Filipinos have bank accounts. With higher levels of account holders in urban regions, there is a deep pool of clients in rural areas that can be tapped, and with sustained growth forecast for the national economy, there will be a greater flow of wealth into rural areas, increasing the call for formalised financial services.

Many of the Philippines’ small banks are in need of greater equity, and increased capitalisation is becoming a pressing matter for rural-based lenders. In 2012 the BSP ordered the closure of 24 banks – most of them rural lenders – due to capitalisation issues or insolvency. According to the BSP, of the more than 560 rural banks, 80 were unable to meet the minimum capital requirements set out by the reserve bank. With the BSP having lifted capitalisation levels, in line with the Basel III requirements, due to be implemented in 2014, 15% of rural banks will need to improve their positions to achieve compliance.

Another possible prompt for investors came from Moody’s Investors Service on January 21, when the ratings agency said the sector was well-placed to resist instability in the international economy and would remain relatively insulated from the negative credit pressures impacting many Western economies.

“With the positive outlook for the Philippines, Moody’s says its banking system will remain relatively immune to global shocks and continue to benefit from steady credit growth,” Moody’s said in its annual report on the prospects for banking in the Asia Pacific region.

While this report refers more to large-scale banks, its findings do reflect on rural lenders as well. If at least some of the rural banks were better capitalised, they could be in a position to expand away from their own regional base, giving them the chance to generate higher levels of business and revenue.

Despite the potential to develop financial services in the rural areas of the Philippines, it is not clear whether the new legislation will herald a flurry of foreign investment in local lenders. With many of these banks only having one or two branches, the opportunities to expand appear limited, particularly from the vantage point of an overseas investor. More likely will be a selective approach by foreign investors, who may look at buying into the stronger and better-established rural lenders.