Welcoming progress

On July 18, 2014, the President signed into law Republic Act (RA) 10641 allowing the full entry of foreign banks in the Philippines. This amended RA 7721, the law passed in 1994 which then liberalized the entry and scope of operations of foreign banks in the country.

Prior to RA 7721, the Philippines had restricted the entry of foreign banks to the country advocating nationalism and in the process, protecting the smaller domestic banks. It was not until 1994, when RA 7721 was passed, that foreign banks were actually allowed a regulated entry in the country, providing the Philippines with a much needed economic stimulation and competition. RA 7721 served as a channel for the international market and at the same time, provided safeguards for domestic banks and the local banking industry.

Now, the new law welcomes the entry of foreign banks in the country under lesser restrictions, thereby hailing in more foreign investors to the Philippines towards a more dynamic economy. 

In particular, RA 10641 now allows the ownership of up to 100 percent of the voting stock of an existing bank or investing up to 100 percent in the voting stock of a new banking subsidiary incorporated in the Philippines. RA 7721 previously limited this foreign equity to only 60 percent.

Before RA 10641, only the top 150 foreign banks in the world or the top five banks in their country of origin were allowed entry in the Philippines, making it particularly difficult for other foreign banks to do business in the country. But now, all foreign banks are allowed entry for as long as they are established, reputable and financially sound. They should be widely owned and publicly-listed in their own countries unless of course they are government-owned or controlled in the country of their origin. This now creates a competitive environment in the banking sector, benefitting consumers and encouraging greater foreign participation pursuant to the policy under RA 7721.

This healthy competition creates confidence in the current banking system, as reflected by the new law, by repealing the provisions that require the adoption of measures to prevent market domination by one bank or the concentration of economic power in a particular financial institution and the requirement of listing with the Philippine Stock Exchange (PSE) for foreign-owned domestic banks. In the same line, RA 10641 has lowered from 70 percent to 60 percent, the minimum level for which resources or assets in the banking system should be held by domestic banks majority-owned by Filipinos.

Previously, a minimum capital requirement of not less than a US dollar equivalent of P210,000,000.00 was essential for opening foreign bank branches. Now, foreign bank branches are only required to put in the same amount of investment as those of domestic banks under the same category.  Even their single borrower’s limit has been aligned with that of domestic banks.

Similarly, RA 10641 has increased the branching privileges for foreign banks up to five sub-branches, while locally incorporated subsidiaries of foreign banks are now granted the same branching privileges as domestic banks of the same category.  However, existing foreign banks operating through branches in the Philippines upon the effectivity of RA 10641 shall retain their original privilege upon entry to establish a limited number of sub-branches.  However, these banks’ previous restrictions on the locations of additional branches have been lifted.

A new provision under RA 10641 had been added allowing the participation of foreign banks in foreclosure proceedings. The new law allows foreign banks “to bid and take part in foreclosure sales of property mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property for a period not exceeding five years from actual possession”. But RA 10641 still maintains the Constitutional prohibition against foreigners owning real property such that in a successful bid involving realty, the foreign bank must transfer its rights thereto to a qualified Philippine national within five years.  A yearly fine will be imposed for failure to effect a transfer of such property within the five-year period until the same has actually been transferred.

Foreign banks already authorized to do banking in the country, may apply for a change in their original mode of entry under RA 10641.

As a member country of the Association of Southeast Asian Nations (ASEAN), RA 10641 and other laws have been timely signed into law to meet the ASEAN Economic Community’s goal of a regional economic integration come 2015.  RA 10641, in welcoming all foreign banks, does not only prepare the country for Asian integration, but gears up the Philippines for worldwide progress.

Juliet Marie M. Guevara is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected]

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