US group hits BSP lack of rules to develop microfinance

A US-based microfinance research group has criticized the Bangko Sentral ng Pilipinas (BSP) for the lack of a proper regulatory framework to develop the country’s microfinance industry and bring about savings mobilization.

"Supervision is uneven: too little for non-bank institutions and potentially too much for banks," noted Microfinance Gateway in its latest country-level savings assessment for the Philippines.

Gateway is managed by the Consultative Group to Assist the Poor (CGAP), a consortium of 28 donors who support microfinance and is based in Washington, D

In particular, Gateway took note of the BSP’s moratorium on all banks which it believed is causing a problem in the mobilization of small savings.

"The implementation of the moratorium and its exceptions has also been problematic. Ambiguous guidelines on branching for microfinance-oriented thrift and rural banks and long waiting times to receive licenses slow down the creation of new branches and the entry of new players in underserved markets," it said.

To circumvent the branching moratorium, Gateway noted that banks have apparently been setting up non-bank microfinance subsidiaries. "While these companies can offer credit, they cannot legally take deposits," it noted.

According to Gateway, there are other BSP regulations that hinder small savings mobilization by banks.

One of these stumbling blocks, Gateway said, is the off-site deposit collection which was prohibited by the BSP in 1999.

"This rule reduces the ability of rural banks to mobilize savings, especially in less densely populated areas. Moreover, many customers have come to expect this type of service because roving moneylenders have traditionally offered doorstep repayment collection. Customer demands have motivated some rural banks to collect deposits through cash boxes or ambulatory deposit collectors, even if it means operating at the margin of legality," it said.

"The BSP’s concern is perhaps understandable from a security and fraud point of view. However, more openness to innovative practices would help regulated institutions capture more small deposits by reducing transaction costs to clients and attracting savings from the informal to the formal system," it pointed out.

Another issue is the lack of effective prudential supervision by the cooperative and deposit-taking non-governmental organizations (NGOs).

At the same time, Gateway noted that banks are constrained by a supervisory framework that may have erred on the side of too much caution in the aftermath of the Asian financial crisis.

"This tendency toward rules-based, rather than risk-based, supervision limits banks’ ability to reach out to underserved markets and seems to encourage regulatory arbitrage and evasion," it said.

"The most frequently mentioned example of this type of limitation is the moratorium on branching. Issued in 1999, it indefinitely suspended the opening of new branches and new banks except in municipalities without banks. In 2001, the BSP lifted this moratorium for rural and thrift banks engaging in microfinance activities (defined as a maximum loan of  P150,000 or $2,740).The intent of this exception is to encourage banking growth in underserved areas. But the exemptions themselves do nothing to change the risk/reward ratio intrinsic to opening a branch in a poor or remote locality," Gateway further noted.

In the meantime, Gateway said that the moratorium does protect the rural bank monopolies that exist in many municipalities again, dampening incentives for banks to improve service to low-income customers. Single-location rural banks also complain that the moratorium limits diversification of their operations, inhibiting risk management.

Gateway said the "Know Your Customer" (KYC) rules implemented to prevent money laundering also block poor customers who wish to open deposit accounts.

"As in many other countries, KYC rules in the Philippines require two forms of government-issued identification to open a bank account. The Philippines have no national ID system and poor people working in the informal sector often have only one ID, issued by the local authority. In addition, KYC rules require proof of residence. While higher-income clients may be able to furnish utility bills and other allowable forms of proof, these are often impractical or impossible for the poor," it said.

Microfinance Gateway is the most comprehensive source of information for and about the microfinance industry. It includes research and publications, discussion groups, specialized resource centers, organization and consultant profiles, and the latest news, events, and job opportunities in microfinance.

With these assessments, the firm suggested some possible strategies to improve small deposit mobilization in the Philippines. But these suggestions, it said, would require further reflection and elaboration with the stakeholders.

Among its suggestions are: collect more data on clients’ savings patterns and preferences; expand financial literacy efforts for residents, leveraging experiences with overseas Filipino workers; institutionalize and expand successful technical assistance programs on a sustainable basis; build on existing monitoring systems and rationalize ratings to enhance transparency and client confidence; evaluate alternatives for electronic banking and payment services for rural banks and cooperatives; strengthen financial cooperative supervision; re-evaluate the need for program loan funds, and continue phasing out directed credit programs; shift the supervisory framework for banks from operational restrictions toward risk-based supervision; and update the national microfinance policy.