Regulation Spurs Innovation in the Philippines

Why should policymakers--whose primary responsibility is the stability and integrity of the financial system--care about financial inclusion?

Only two out of 10 Filipino households have access to a simple savings account. So for the Philippines central bank, the answer seemed obvious:  “It’s a two-speed economy,” says Deputy Governor Nestor Espenilla Jr. in this interview. For a central bank to be relevant in such an environment, says Espenilla, “We needed to connect our work with the important objective of including people in the financial system.”

More and more  policymakers are now recognizing that financial exclusion is a risk to political stability and impedes economic advancement, and that financial inclusion measures can complement, not undermine, financial stability, financial integrity, and consumer protection.

Mindful of their responsibility to maintain the safety and soundness of the financial system, and to prevent exploitation of customers, the Philippines central bank has worked to develop appropriate regulations that conform to the principles espoused by international standards. At the same time, the central bank creates space for the private sector to develop new products that cater to the requirements of the poor.

Bangko Sentral ng Pilipinas has set out to work closely with the private sector to encourage competition because they see the private sector as key to innovation. “We have positioned ourselves as regulators to study closely these innovations… let them test new ideas, and learn from those ideas,” says Espenilla.

Thirty-seven percent of municipalities in the Philippines operate without a banking office but mobile phones have an 80% penetration rate, with most customers being active users. The central bank saw this as a distinct opportunity. Regulation has now opened up the opportunity for telcos to compete with banks to deliver mobile money services through a dedicated subsidiary. Competition from telco-based remittances has not only enriched the variety of services available; it has also been an important driver in lowering the prices of remittances for customers--a critical issue in an environment where remittances are such an important part of the economy. (External remittances alone make up 10% of GDP and internal remittances between family members working in urbanized areas sending to beneficiaries in the provinces are a significant part of daily life in the Philippines.)

“The mere entry of competition,” says Espenilla, “has improved the cost and quality of services and that is really a big win.”

Banko Sentral ng Pilipinas has set up a dedicated unit that specializes in these new technologies: “While we allow the market to lead, we cannot afford as regulators, to get left behind, we have to stay very close to the innovators just to make sure things don’t go out of hand. The target market are people who may not have had extensive experience of use of financial services and are also in that regard potentially vulnerable.”

Bangko Sentral ng Pilipinas sees a vibrant mobile money market as an important starting point--a service that is directly relevant to most Filipinos, and a good entry point for introducing people into other kinds of banking services, such as savings in banks and eventually credit as well.

Regulations have allowed banks to rely on KYC (Know Your Customer) verification through third-parties, one of the most significant barriers to getting a person into the financial system; and regulations have liberalized ID requirements—in the Philippines there is no national ID—so that a certification from a local barangay chieftain is allowed. 

One result is BanKo, the first mobile bank in the Philippines, a partnership between the oldest bank and one of the leading telcos that allows people to open full service bank accounts through local agents such as sari-sari stores and pharmacies. BanKo began operations in January 2012, and only eight months later had opened 200,000 mobile banking accounts, with ambitious plans to reach the one million mark in 2013.

All this activity is taking place in a broader international context in which regulators and policymakers are increasingly recognizing the importance of financial inclusion as a development opportunity.

G20 leaders have made financial inclusion a development priority, and established the Global Partnership for Financial Inclusion  to implement the G20’s multi-year Financial Inclusion Action Plan. A significant number of countries have stepped up their efforts to advance financial access to households and very small enterprises through national financial inclusion strategies. More than 35 members of the global Alliance for Financial Inclusion have made specific financial inclusion commitments under the Maya Declaration.

This week policymakers in Basel including the five global standard-setting bodies most relevant to financial inclusion (the Basel Committee on Banking Supervision, the Financial Action Task Force, the Committee on Payment and Settlement Systems, the International Association of Deposit Insurers, and the International Association of Insurance Supervisors) met to discuss financial inclusion. Support from these international bodies, as well as the increasing leadership of policymakers in countries with large underserved populations, means that financial inclusion is gaining acceptance as a fundamental development principle.

For the Philippines, says Nestor Espenilla, it’s important to link to sound international standards that create legitimacy and help mainstream financial inclusion:
“If the objective is to reach large segments of the population, we have to rely on the mainstream financial system to gear up and deliver these services, we want it to be seen as a viable business model that can be done sustainably.

--------- The author is the Director of Knowledge Products and Communications at CGAP.