The need to restructure the financial system

Second of three parts

The previous article dealt with the imperative of increasing the capitalization of the central bank as well as the need to amend section 117 of the charter of the BSP in order to make it more effective and efficient in intervening in and supporting the financing requirements of the government and the people.

Foremost in our advocacy is the necessity to increase the local money supply as the present level is sorely inadequate to address the needs for the country’s development, let alone the basic needs of our people for food, clothing and shelter.

We emphasized that the BSP must be allowed to lend to the government by buying long-term bonds through the issuance of new money that shall be paid later on through taxes generated that are in any case a certainty and an eventuality. We thus strongly advocate the lending of new local money by the central bank to the government, both national and local, through the securitization of future taxes.

Today’s article will delve on the equal imperative of establishing, re-organizing and re-capitalizing the other banks that comprise the financial system of the country. Particularly, we strongly espouse, the creation of two new specialized banks, that is, the Philippine Industrial Bank and the Philippine Export Bank.

In order to uplift the Philippine economy and effectively arrest the ever deteriorating poverty situation of the vast portion of our masses, Filipino companies, entrepreneurs and businessmen must be fully supported by the government and the local financial system. The growth, success and expansion of our local companies spells the corresponding increase in employment opportunities of the people, their chance of earning bigger and better wages, and their dream of improving their quality of life and that of their families. The failure, on the other hand, of the Filipino enterprise spells doomsday as well to our desperate countrymen who are ever languishing in poverty.

The most concrete way, of course, of supporting our businessmen and local companies is for government and the financial institutions to be able to extend to them access to long-term, low-interest credit facilities in local currency. This way they shall have the adequate wherewithal to sustain and expand their operations and be able to take advantage of the economies of scale. Better yet, with the evening of the playing field, so to speak, our local companies need not be dependent on foreign sources of funding thereby eliminating a major stumbling block to their growth and thereby making them competitive with their foreign counterparts.

But how is this done in actuality? The workings of the Industrial Bank of Japan should provide a role model. The Japanese Industrial Bank financed with adequate long-term, low-interest credit facilities local Japanese companies that manufactured all the basic goods and commodities needed by their people for a decent and modern life. By this manner, they were able to obviate and discard the option of having to import these items of goods, thereby preserving their foreign currency reserves and securing for themselves a favorable balance of trade.

The Philippines can and should follow the Japanese lead. We suggest the creation and establishment of our own Philippine Industrial Bank that will lead the national program of import-substitution through credit support of all local industries that produce capital and consumer goods.

Since our country has been naturally endowed with abundant raw materials, even surpassing the natural resources of Japan, we see no reason why with the corresponding financial support from our own Industrial Bank we cannot produce and manufacture all our needs locally, and export the rest in an export-led program, as in the case of Japan. This way, we stop the hemorrhaging of our precious foreign currency reserves as a result of these relentless importations.

In this regard a twin move that should be undertaken in the reformation of our financial system is the creation and establishment of a Philippine Export Bank. While the Industrial Bank will concentrate on the development to the full potential of goods we should produce locally for our people’s needs, the specialized Export Bank will, in turn, through long-term, low-interest credit facilities made available to our local companies, finance the processing and manufacture of all our exportable items. With competitive credit facilities extended to our would-be exporters, our local companies will thus be able to compete globally with their foreign counterparts.

As it is, however, we have ample ferrous and non-ferrous deposits which for now we merely export as raw materials and later on import as finished products. The same situation prevails in the construction sector where we export all the raw materials which we later import as finished construction products. The idea instead is for us to ourselves process these raw materials here in the country, and, with their added-value now as finished manufactured products, export them ourselves and earn the foreign currency we so badly need. All that is needed is the financing that our Export Bank can provide and the technology that we can purchase.

The target solution, thus, is to create these two new government banks and properly and adequately capitalize them in order for them to effectively serve their mandate of extending loans to our local companies that are matched to their needs.

Specialization in the banking sector as well as the adequacy of their capitalization are, in sum, compelling reasons for our policy-makers and monetary authorities to re-think and re-invent our present financial structure which obviously has failed to meet the financial needs and requirements of the nation.

(The next article will deal with the need to restructure the DBP, the LBP and the creation of a Tourism Bank).

You may write your comments/suggestion at 15/F Equitable Bank Tower Paseo de Roxas, Makati City or through e-mail at [email protected])

(Editor’s note: Atty. Roxas is writing a limited series of articles dealing with financial matters and other important business topics. He is available for speaking engagements on the subject matters of his articles.)