Steps to boost financial inclusion in the Philippines

The Philippines’ financial services sector entered the Covid-19 pandemic on a solid footing, thanks to decades of regulatory reform to address the vulnerabilities exposed by the 1997-98 Asian financial crisis. Strong capital buffers, high levels of provisioning and near-universal public health cover insulated the country from many of the impacts that other markets continue to wrestle with. While geographic spread and socio-economic disparities remain structural barriers, increasingly tech-focused growth strategies are improving both bottom lines and financial inclusion among the population in measurable ways.

Industry Oversight

The banking sector is overseen by the central bank, Bangko Sentral ng Pilipinas (BSP), which was founded as an independent monetary authority in 1993. The BSP is headed by a governor, who directs and supervises the operations and internal administration of the bank, and is supported by four deputy governors, who oversee other administrative functions. The current BSP governor, Benjamin Diokno, was appointed in March 2019 by President Rodrigo Duterte, following the death of the previous governor, Nestor Espenilla Jr. The BSP’s Monetary Board, which consists of seven presidentially appointed members, is the primary authority for setting interest rates and other monetary policy targets. In addition to its traditional inflation-targeting monetary policy role, the BSP enforces the Financial Consumer Protection Framework, which dictates minimum requirements for the protection of client data, the fair treatment of customers, disclosure and transparency, financial education and customer complaint resolution.

The bank is organised into four overarching focus areas, or sectors: Monetary and Economics, which sets monetary policy; Financial Supervision, responsible for the banking sector, financial technology (fintech) and other non-bank financial institutions; Currency Management, which oversees the production and distribution of hard currency; and Corporate Services, which manages corporate strategy, communications and risk, as well as internal human resources and technology matters at the central bank.

The insurance sector, meanwhile, is overseen by the Insurance Commission (IC), originally founded in 1949. It is headed by a presidentially appointed commissioner, with Dennis Funa serving in the post since being appointed in December 2016. Operating under the Department of Finance, the commission supervises and regulates all insurers, reinsurers, mutual benefit associations (MBAs), micro-insurers and ratings organisations. Companies require IC authorisation to conduct insurance business in the Philippines, including agents, underwriters, brokers and adjusters.

Another central player in the insurance sector is the Philippine Health Insurance Corporation (PhilHealth), founded in 1995 to provide universal health coverage to citizens based on income-weighted contributions from employees and employers. As of 2019 PhilHealth covered nearly 98% of the population, or some 98m beneficiaries (see Health chapter).

Banking Sector Structure

The Philippines is served by a variety of lenders, broadly divided into universal and commercial banks (UCBs), thrift banks (TBs), and rural and cooperative banks (RCBs), as well as a growing number of non-bank financial institutions, some of which perform quasi-banking activities. Savings and mortgage banks, stock savings and loan associations, and private development banks are included under the TB umbrella.

As of September 2020 the BSP registered a total of 649 bank and non-bank financial institutions, spanning all types. Of these, there were 36 TBs and 146 RCBs authorised to accept demand deposits, while 24 UCBs and five TBs had trust authority. The BSP’s most recent “Factbook” for the Philippine banking system, from 2019, showed 46 registered UCBs, 50 TBs and 451 RCBs. Among the UCB cohort, which accounts for the bulk of assets, 24 were foreign bank branches, 17 were private domestic banks, three were government banks and two were foreign bank subsidiaries.

As of June 2020 BDO Unibank retained its position as the country’s largest UCB by assets, with P3.19trn ($63.4bn); followed by the state-owned Land Bank of the Philippines, with P2.20trn ($43.8bn); Metropolitan Bank and Trust (Metrobank), with P2.04trn ($40.6bn); Bank of the Philippine Islands, with P1.95trn ($38.9bn); and Philippines National Bank, with P1.06trn ($21.1bn). The big-five UCBs accounted for a combined 60.6% of the segment’s assets. The UCB segment also includes the country’s only Islamic bank, Al Almanah Islamic Investment Bank of the Philippines (AAIIBP), which had P776.5m ($15.4m) in assets as of mid-2020. Founded in 1973, the AAIIBP was one of the world’s first Islamic banks, with a mission to service regions with large Muslim populations. The bank is now a subsidiary of the Development Bank of the Philippines.

Meanwhile, the five-largest TBs by assets were Phil Savings Banks (PSB ank), with P232.1bn ($4.6bn); Philippine Business Bank, with P115.4bn ($2.3bn); China Bank Savings, with P98bn ($1.9bn); City Savings Bank, with P88.8bn ($1.8bn); and Bank of Makati, with P43bn ($855.2m). As their names suggest, a number of the TBs are the savings arms of UCBs; PSB ank, for example, is a subsidiary of Metrobank.

Insurance Sector Structure

In the insurance sector, coverage is provided by a mixture of life and non-life insurers, consolidated insurers, MBAs, micro-insurers, health maintenance organisations (HMOs) and pre-need companies. Pre-need firms provide customers with open-ended plans to finance specific future needs, such as college education, retirement and funeral costs. HMOs and pre-need firms are unique to the Philippine market, though pre-need companies have been dwindling in footprint and importance: 15 such companies were registered with the IC as of end-2019, which decreased to 10 in October 2020, down from more than 200 prior to the 1997-98 Asian financial crisis, when many became insolvent. According to the most recent consolidated financial information from the IC, dating back to the first quarter of 2016, PhilPlans First was the largest pre-need company by assets, with P41bn ($815.4m); followed by St Peter Life Plan, with P33.3bn ($662.3m); and Manulife Financial Plans, with P12.3bn ($244.6m). HMOs, for their part, are pre-paid health care providers, based on a US model that developed in the early 1900s, and operate within a network of specific hospitals and medical professionals. Contributions from members are structured on a risk-sharing basis, whereby coverage depends on the individual subscription value and can limit the type and amount of care received in a given period. As of end-2019 there were 31 licensed HMOs, the largest of which was Caritas Health Shield, with P9.8bn ($194.9m) in assets; followed by Maxicare, with P9.3bn ($185m); and Intellicare, with P8.4bn ($167.1m). Meanwhile, as of October 2020 there were 35 MBAs in the market, including professional organisations covering the police, teachers, the armed forces and other government employees. MBAs are particularly active in micro-insurance. On the conventional front, there were five composite insurers licensed as of October 2020, along with 27 life insurers, 54 non-life insurers and one professional reinsurer, the National Reinsurance Corporation of the Philippines. Philippine American Life & General Insurance was the largest life insurer by assets as of the end of 2019, with P290.2bn ($5.8bn); followed by Sun Life of Canada, with P254.5bn ($5.1bn); and Insular Life Assurance, with P133bn ($2.6bn). On the non-life side, Pioneer Insurance & Surety was the leader in 2019, with P35.2bn ($700.1m) in assets, followed by Malayan Insurance (P28.3bn, $562.9m) and Prudential Guarantee & Assurance (P17bn, $338.1m). The National Reinsurance Corporation of the Philippines, for its part, held P14.7bn ($292.4m) in assets as of the end of 2019.

Banking Performance

According to the BSP’s 2019 “Factbook” on the Philippine banking system, the total assets of the banking sector stood at P18.3trn ($364bn) at end-2019, an increase of 8.4% from P16.9trn ($336.1bn) in 2018. Sector-wide net profit, meanwhile, was up 28.4% at P231bn ($4.6bn). By August 2020 total banking sector assets had increased by 7.5% year-on-year (y-o-y) to P18.6trn ($369.9bn).

In the year to August 2020 assets held by UCBs rose from P16trn ($318.2bn) to P17.3trn ($344.1bn), representing 93% of the sector total, while TB assets were down 1.6% from P1.13trn ($22.5bn) to P1.12trn ($22.3bn). According to the most recent quarterly data for RCBs, their assets increased by 5.3% in the 12 months to June 2020, from P258.2bn ($5.1bn) to P271.9bn ($5.4bn). BSP data showed P14.3trn ($284.4bn) in sector-wide deposit liabilities in August 2020, up 10.6% y-o-y, of which P12.1trn ($240.7bn) was in pesos and P2.3trn ($45.7bn) in foreign currency. Total liabilities, meanwhile, rose by 7.5% from P15.1trn ($200.3bn) to P16.2trn ($322.1bn).

The gross total loan portfolio, for its part, increased by 4.4% from P10.3trn ($204.9bn) to P10.7trn ($212.8bn) over the same period. Consumer loans, which are reported quarterly, were up 14.3% y-o-y at P2trn ($39.8bn) as of June 2020, led by residential real estate loans (P800bn, $15.9bn), motor vehicle loans (P591.5bn, $11.8bn) and credit card receivables (P412.7bn, $8.2bn). From an asset quality perspective, the gross non-performing loan (NPL) ratio stood at 2.8% in August 2020, up from 2.2% one year earlier but below the pre-Asian financial crisis level of 3.5%. This was lower among UCBs but trending upwards, from 1.7% to 2.4% over the same period. However, the NPL coverage ratio remained above 100%, rising from 108.2% to 122.1%. Capital adequacy, as measured by capital accounts relative to total assets, held relatively steady, finishing the period at 12.7%, comfortably above the central bank’s threshold of 10% and the international standard of 8%. Return on assets, which is calculated quarterly, declined slightly, from 1.22% in June 2019 to 1.15% in June 2020, while return on equity eased from 9.9% to 9.2% over the same period. Additionally, liquidity saw similar declines over the 12 months to June 2020, with the gross loan-to-deposit ratio moderating from 78.2% to 74%.

BSP Response

As in much of the world, Philippine banks have been reluctant to lend since the onset of the financial headwinds engendered by the Covid-19 pandemic. To help calm turbulent markets and encourage the flow of domestic credit to the retail and corporate segments in particular, the BSP cut the reserve requirement ratio (RRR) for UCBs by 200 basis points (bps) on March 24, 2020, and announced that up to a maximum of 400 bps of cuts were authorised to be made throughout 2020. Furthermore, the BSP stated that it would explore additional cuts to the RRRs of other bank and non-bank financial institutions. The move followed a 50-bp cut to the central bank’s benchmark lending rate earlier that month, to 3.25% (see Economy chapter). Throughout the second quarter of the year the BSP cut its key policy rate by a combined 100 bps, bringing the overnight reverse repurchase rate to 2.25%. The central bank similarly lowered its overnight lending and deposit interest rates.

Insurance Performance

In the insurance sector, as of the end of 2019 pre-need companies held a combined P131.4bn ($2.6bn) in assets, up 3.9% on 2018, with 925,370 plans sold that year, an increase of 18.9% over 2018. The bulk of policy sales were concentrated in life plans, with smaller shares in pension and education coverage. Despite recording higher premium income for the year, the pre-need segment posted P718.6m ($14.3m) in losses in 2019, a significant reversal of its P2.2bn ($43.8m) profit in 2018, due to an increase in liabilities. HMOs, for their part, reported a combined P43.1bn ($867.2m) in assets at the close of 2019, an increase of 10.6% over the previous year. While revenue was up 13.8% on 2018, net income fell by 23.8% to P1.3bn ($25.9m). The IC attributed this to an increase in health benefits and claims paid, which represent more than three-quarters of total industry expenses. MBAs, meanwhile, increased their assets by 15% from P87.9bn ($1.7bn) to P101.1bn ($2bn) over the year, with their premium up 11.2% from P10.7bn ($212.8m) to P11.9bn ($236.7m). The non-life segment, excluding reinsurance and servicing companies, posted P242.6bn ($4.6bn) in assets at the end of 2019, up 11.5% on P217.6bn ($4.3bn) in 2018. Gross written premium increased by 8.9% from P92.3bn ($1.8bn) to P100.5bn ($2bn), although net profit eased 3% from P3.6bn ($71.6m) to P3.3bn ($65.6m). Among life insurers, assets totalled P1.4trn ($27.8bn) at year’s end, up 13.6% from P1.3trn ($25.9bn) the previous year. The segment’s premium income held relatively steady, rising by 1.7% from P230.1bn ($4.6bn) to P233.9bn ($4.7bn), whereas net profit increased by a sizeable 37.3% from P26.3bn ($523.1m) to P36.1bn ($718m).

With life insurance continuing to dominate the industry, non-life firms in the country are looking for further avenues for sector expansion. The infrastructure drive under the administration of President Duterte, and notably the $170bn Build, Build, Build infrastructure programme under way, has the potential to generate a promising line of business, according to industry stakeholders. “If Build, Build, Build takes off, it will be positive for the non-life insurance sector,” Manuel Maloles, president and CEO of Fortune General Insurance Company, told OBG. “While it is not making a large difference at the moment, infrastructure development, more vehicles on the road, higher employment and wider transport options would generate opportunities for non-life insurers, with the maritime cargo insurance business representing a particularly attractive growth opportunity.”

Penetration

According to the BSP’s most recent “Financial Inclusion Survey”, from 2019, 71.4% of the adult population – or approximately 51.2m people – was unbanked, an improvement from 77.4% in 2017. The share of those with a formal account rose from 22.6% to 28.6%, equivalent to an increase of 5.1m customers. This was a significantly larger rise than the 0.6-percentage-point growth recorded between 2015 and 2017, driven primarily by new accounts in North/Central Luzon and Visayas, and among working adults, males, those aged 40-49 and those with a low level of education. In its survey, the central bank found that the primary use case for formal bank accounts is saving, noting a strong correlation between savings and account penetration. At the same time, however, the use of accounts for payments doubled, from 18% in 2017 in 39% in 2019, with the receipt of salary payments and government benefits among the most common transactions reported. Notably, particularly in the socially distanced context of Covid-19, e-money accounts recorded the highest growth: while formal bank account penetration grew modestly, from 11.5% to 12.2% over the two-year period, e-money accounts were up more than six-fold, from 1.3% to 8%.

In another reversal of trends from the 2017 survey, rural penetration (30%) exceeded urban penetration (27%) in 2019, due to the robust presence of microfinance NGOs in rural areas of the country. Interestingly, holders of both traditional bank accounts and e-money accounts continue to rely on ATMs to conduct transactions, with relatively few interactions taking place online or via mobile. Conversely, microfinance NGO accounts registered the lowest use of ATMs, according to the survey, indicating that card payments may not be as important for these account holders. On the insurance end of the financial spectrum, the Philippines has near-universal health care through PhilHealth, with coverage of the population estimated at 98% as of 2019 (see Health chapter). This has been especially relevant in the context of Covid-19, as the Philippines had experienced one of the most severe outbreaks in South-east Asia as of November 2020.

As is the case in many health systems around the world, PhilHealth has had to balance increased medical costs with its mandate to provide universal care. Early in the pandemic, in April 2020, the organisation publicly stated it would guarantee continuing coverage for patients, in addition to free testing. Given caps in compensation for different outcomes of Covid-19, however, PhilHealth encouraged patients to tap HMOs and private insurance, where possible, to more substantially cover any Covid-19-related medical costs, underscoring the benefits of securing additional policy coverage to minimise out-of-pocket expenses. Insurance cover more broadly has registered progress in recent years, with the overall penetration rate reaching 1.69% of GDP in the third quarter of 2019, as per data from the IC. According to the same 2019 “Financial Inclusion Survey”, the share of adults with insurance policies increased from 18% in 2017 to 23% in 2019, equivalent to an additional 4.3m policyholders.

Among those with coverage, life was the most popular product (39%), followed by micro-insurance (30%) and health insurance (29%). The survey attributed the five-percentage-point growth in penetration to increased insurance ownership among the lowest socio-economic class, those residing in North and Central Luzon and Mindanao, women, working adults, and those aged 20-29 and 40-49. Indeed, women are more likely to have insurance (27%) than their male counterparts (19%), though geographic location is less of a determinant than it is for banking products, with 25% of those in rural areas holding a policy, against 21% in urban environments.

Financial Inclusion

With a large, socio-economically diverse population spread across more than 7000 islands, the Philippines faces understandable and persistent barriers to accessing financial services, ranging from the geographic to the institutional. Policymakers have long sought to bolster financial inclusion through a mixture of hard and soft infrastructure programmes (see analysis). The Duterte administration’s Philippine Development Plan 2017-22, for example, includes key objectives related to financial inclusion, such as more effective delivery of microfinance and micro-insurance products, and financial literacy education for micro-, small and medium-sized enterprises (MSMEs).

The Digital Payments Transformation Roadmap, released in October 2020, goes further in prioritising digitalisation as an avenue to financial inclusion and the creation of a cash-lite economy. At the launch of the roadmap, Diokno, the BSP’s governor, explained, “Our thrust to promote digitalisation of payments is also strategically geared towards furthering financial inclusion, as we view the two to be mutually reinforcing. They go hand in hand, with each one enabling the other.” He added, “With the launch of the Digital Payments Transformation Roadmap, we aim to hit two birds with one stone. We are securing the digitalisation of payments, and increasing the number of Filipinos with access to financial services”.

Increased availability of financial services online could help to balance out the concentration of financial infrastructure in major urban areas – particularly Metro Manila, though increasingly in Cebu and Davao as well. As of the end of 2019 Metro Manila was home to 30.4% of the country’s bank offices, well above its roughly 12% share of the national population. Among UCBs, the proportion located in the capital region was higher, at 45.6%, compared to 20.1% among TBs. Of the four RCB offices, two were located in Metro Manila and the other two in the provinces.

Looking at ATMs and e-banking facilities, as of March 2020 there were 19,719 ATMs belonging to UCBs around the country, 1824 belonging to TBs and 619 belonging to RCBs, according to BSP data. BSP-approved e-banking facilities were available at 41 UCBs, 29 TBs and 41 RCBs. The latter experienced a notable increase from 16 approved facilities as of the end of 2018. A regulatory change in 2019 opens the prospect for greater financial inclusion among the Philippines’ sizeable Muslim population, which accounts for roughly 6% of the national total. In late August 2019 President Duterte ratified a law granting the BSP additional power to regulate and organise the Islamic banking segment. Under the new law, Islamic banks will be able to carry out business in accordance with sharia principles, among them the issuance of sharia-compliant financing.

In addition to promoting financial inclusion, the new law could help to drive investment and diversification in the segment. Local media reported in April 2019 that a series of foreign Islamic banks – including Qatar Bank and Malaysian institutions CIMB Islamic and City Credit Investment Bank – had expressed an interest in setting up operations in the Philippines. “Islamic banking is an untapped market in the Philippines,” Alex Bangcola, CEO and chairman of the AAIIBP, told OBG. “All the ASEAN countries, barring Laos, are already engaging in Islamic Banking. Malaysia, for example, has five Islamic banks, while the Philippines has only one, even though the population exceeds 100m,” he added.

Fintech & Insurtech

As is the case in many modern financial services industries, fintech and insurance technology (insurtech) represent attractive routes to expanding the customer base of banks and insurers alike (see analyses). In the Philippines the fintech industry is particularly focused on data collection, which can allow firms to create a credit score system in order to gauge the level of risk of each potential borrower. According to industry stakeholders, these digital tools enable banks to create a risk-based scoring system of potential customers, which can help facilitate financial inclusion among unbanked or underbanked populations with no asset collateral.

This represents an important evolution for the sector, as a lack of collateral or insufficient financial records have historically acted as barriers to access to credit for many individuals and businesses. Such data pools can include transaction records as well as telecoms payment history and other forensic financial information.“Transaction records can act as the equivalent of collateral: they can be the database from which to create a credit score and develop a risk-based lending system,” John Januszczak, president and CEO of UBX, the fintech unit of Union Bank, told OBG.

Insurtech has many of the same benefits, in addition to improving premium collection and giving insurance companies an opportunity to extend their reach beyond the capital without investing in costly physical infrastructure. “Insurtech facilitates payments and collections, as well as increases penetration in different regions. Competition in Metro Manila is very aggressive, but it is significantly lower in the regions,” Maloles of Fortune General Insurance Company told OBG.

Outlook

With 71.4% of the population unbanked and 77% without an insurance policy as of 2019, the Philippines has significant scope to expand its financial services coverage in the years and decades to come. Recent advances in digital banking and payments, and insurtech are lowering barriers to entry across the 7000-island archipelago, bringing more Filipinos into the formal financial fold.

As in the rest of the world, the Covid-19 pandemic has underscored the fragility of health and incomes alike. If financial service providers are able to translate the population’s desire for greater security into more robust financial inclusion – whether in the form of savings products, new payment tools or affordable, targeted insurance policies – 2020 could end up marking an important turning point in awareness of the benefits of formal financial products and services.