Corporate Strategy for Financial Inclusion
Bangko Sentral ng Pilipinas

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
Prior to 2000, banks were hesitant to provide credit and other financial services to micro, small and medium enterprises (MSMEs) due to a general perception that these are risky clients with high probability of default, as well as high transaction cost of providing small loans. Such hesitation also stemmed from a prevalent view that requirements of collateral and financial statements from borrowers may be difficult to obtain from this market. Since MSMEs, which comprise 99.6% of all enterprises in the Philippines, usually have no marketable collateral or formal financial documentation, they generally face difficulties in qualifying for bank credit. This lack of access to formal financing left MSMEs to rely on informal sources which typically exact a steep price and are unsustainable. They are therefore deprived of the ability to seize economic opportunities and grow their businesses. While other providers like credit cooperatives and microfinance non-government organizations (MFNGOs) were serving the needs of MSMEs, their outreach and range of services were generally limited. Consequently, the limited access to financial services also hampered MSME’s capacity to grow their business, generate enough income and improve their quality of life. It was therefore ideal for the banking system, which can mobilize public deposits, and has a countrywide branch network consisting of different types of banks like commercial, thrift and rural banks, to also be tapped as sources of formal financing. The BSP recognized the need to address the regulatory barriers to MSME access to finance, and the importance of changing the banking sector’s perception of credit risks associated with lending to MSMEs. The solution to these problems required the Bangko Sentral ng Pilipinas (BSP) to collaborate with relevant government agencies like the Department of Finance-National Credit Council, participate in the legislative process, and advocate for a regulatory environment that would enable interested banks to also participate in the provision of microfinance loans and related financial service to the MSME market. This collaboration and advocacy lead to the passage of the General Banking Law in 2000, which mandated the BSP to recognize microfinance as a legitimate banking activity and set the rules and regulations for its practice within the banking sector. In addition to MSMEs, the general access to finance scenario in the Philippines left much to be desired. Many Filipinos, especially the poor, are still without access to much needed financial services like savings, loans, insurance, and payments: • 37% of municipalities have no banking offices, and existing banking services are biased toward higher income areas, leaving much of the low income areas significantly underserved (BBSP Financial Inclusion Report 2012) • Only two (2) out of 10 Filipino households have a deposit account (BSP Consumer Finance Survey 2009), and 43% of the country’s deposit accounts are found in the National Capital Region (BSP Financial Inclusion Report 2012) • 10.5 percent of Filipino adults have accessed loans in the past 12 months (World Bank Financial Inclusion Index 2011).

B. Strategic Approach

 2. What was the solution?
The BSP’s solution is the establishment of a clear strategy to create an enabling policy and regulatory environment that allowed banks to provide responsive and responsible financial products to a market that was severely underserved. This was done through multiple initiatives that involved the broad participation of stakeholders in the policy making process as well as in other support initiatives. The General Banking Law of 2000 provided the legal foundation upon which BSP established the enabling environment necessary to achieve greater access to financial services by the unserved and underserved, in other words, financial inclusion. While central banks, mainly focus on maintaining price and financial system stability, do not always pursue the objective of financial inclusion, the BSP embraced this policy objective to complement its traditional role as monetary authority and financial sector supervisor. This central bank approach was quite unique in the early 2000s . In 2000, the BSP declared microfinance as its flagship program for poverty alleviation. In 2002, it established specialized units and a high level microfinance committee (that have now evolved into an inclusive finance unit and an inclusive finance steering committee). With guidance from the microfinance committee, the BSP focused its work on three main areas: Policy and Regulation, Capacity Building and Advocacy. These initiatives have clearly governed the work of the BSP in this area. The strategy has since then evolved and refined, but the key components still remain. It is the belief of the BSP that access to financial services will empower individuals, households and enterprises to manage their finances better, seize economic opportunities, guard against shocks and ultimately improve the quality of their lives. The main objective therefore is to mainstream microfinance in the formal financial system to provide a safe and sustainable alternative to informal financial service providers and to enable banks to expand their reach and serve the unbanked and underbanked through innovative and prudent mechanism. The main beneficiaries of the initiative are the millions of still unbanked Filipinos. Building on the clear policy and regulatory framework for microfinance, the BSP has taken additional strides toward financial inclusion. Recent issuances and specific measures have been put in place; which bear the transformational potential of increasing access to finance in a significant way. The said issuances ensure the following: a. Wider range of products b. Expanded physical network c. Expanded virtual reach d. Lower barriers to customer acquisition e. Greater transparency and consumer protection The BSP sees these recent issuances, taken together, as groundbreaking measures that can unlock the potential of reaching the large populations of unbanked in our country. These issuances provide a clear signal to financial institutions the unbanked, which have been left wanting for financial services, are also a worthy target market. These issuances also provide clear guidance that financial institutions can take advantage as they develop innovative channels and creative products.

 3. How did the initiative solve the problem and improve people’s lives?
The solution offered was a broad strategy for financial inclusion, but one specific example was the BSP policy on micro-banking offices (MBOs). As earlier mentioned, 37% of municipalities in the country do not have a single bank branch. Banks understandably establish branches in areas that are densely populated or have higher economic activity. To encourage expansion of banking services to unbanked areas, BSP crafted regulations on scaled down branches or MBOs; which have very small costs to operate (i.e. small room with limited personnel) yet, they can offer a wide range of services - small loans, small deposit accounts, limited foreign exchange for beneficiaries of overseas Filipino workers - which are needed by the target market. The crafting of the MBO regulation was quite unique. BSP top management, including the Governor and Deputy Governor, as well as members of the Monetary Board, went on field visits to personally witness how microfinance operations are implemented by financial institutions. They discussed with clients and saw the situation on the ground. This exposure informed policy decisions and ensured that regulations and supervisory processes are realistic, adequately addressing current needs. This innovative “hands-on” approach to policymaking has characterized many regulatory issuances of the BSP.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
The Financial Inclusion Strategy and action plan were guided by a clearly articulated vision as well as roadmap on how to achieve this vision: Where do we want to go? The vision of an inclusive financial system is consistent with the Philippine Development Plan (PDP), the government’s medium term reform agenda. The PDP envisions a “regionally responsive, development-oriented and inclusive financial system which provides for the evolving needs of its diverse public”. This inclusive financial system is characterized by: a. The provision of a wide range of financial services (credit, savings, payments, insurance, innovative products) to serve demand of different market segments; b. The availability of financial products that are appropriately designed, priced and tailor-fitted to market needs and capacities; c. The participation of a wide variety of strong, sound and duly authorized financial institutions utilizing innovative delivery channels to provide financial services to more Filipinos; d. The effective interface of bank and non-bank products/delivery channels, technology and innovation to reach the financially excluded. e. Adequately educated and protected citizenry confident to make well-informed financial decisions The above articulates what the BSP aspires in its financial inclusion initiatives. How do we get there? a. Guiding Principles • Financial inclusion is a worthy policy objective and something that can be pursued alongside the promotion of stability and efficiency in the financial system. • Financial inclusion and financial stability can be mutually reinforcing. Financial exclusion causes adverse effects in the economy and especially makes people more vulnerable to financial distress, debt and poverty. On the other hand, sound and stable financial systems are necessary for long term, balanced and inclusive development. It therefore directly contributes to social cohesion and shared economic development. • Financial stability and financial inclusion are not inevitable. Both demand at least the same measure of energy, imagination and serious attention. • In addressing financial access issues, market based solutions are feasible. Governments tend to be unsuitable providers of financial services and are instead better positioned to establish a supportive regulatory environment for the said market based solutions to work. These solutions, of course, present real and valid risks but these are concerns that can be managed. b. General Approach Anchored on the above principles, the general approach for the Financial Inclusion Strategy is as follows: • Promote an enabling environment based on the proportionate application of sound and generally accepted regulatory and supervisory principles. It is important that all players and financial service providers are properly and proportionately regulated to ensure consumer protection, financial system stability and integrity. • Enable the delivery of a wide range of services such as savings, credit, insurance, payment services and remittance. To reach all markets, including those that have been previously unserved/unbanked, these products must be appropriately designed and priced and delivered by institutions that have the authority and capacity to safely and effectively provide or deliver such services. • Allow banks and non-banks to leverage on linkages and partnerships to expand their range of products as well as their delivery channels to reach the financially excluded more effectively. These linkages may range from banks acting as agents/brokers for insurance products or merchants acting as cash in/out points for electronic money to provide a channel that will facilitate a client’s bank transaction. • Facilitate useful innovations to operate in an environment where the risks associated with such innovations are adequately understood and addressed and where there is a judicious and proportionate application of sound principles.

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
The BSP was the primary implementer. However, the successful implementation of the strategy can also be attributed to an approach to establish, develop and sustain symbiotic relationships and build a network of meaningful partnerships in order to advance the financial inclusion agenda of the BSP. Stakeholders/partners may be broadly categorized as below. For each of these stakeholders, the BSP uses various fora for engagement. • Regulators, policymakers, and other government institutions – interagency committees have been created for specific purposes to ensure proper coordination among government partners. For example in 2005 an inter-agency was established for the celebration of International Year of Microcredit which received a recognition from the United Nations as the Best National Team. • Financial service providers (bank and non-bank) and their networks - As mentioned earlier, financial service providers are tapped particularly to gather information on the needs and challenges of the market and solutions in which they can be addressed. For example, visits to these providers have been undertaken on “study visit” mode (as differentiated from BSP supervisory mode) to enrich policy making. • Donors, multilateral institutions, and international organizations - The BSP is considered a thought leader in microfinance and financial inclusion and it keeps active in global discussions. For example, BSP is the Chair of the Alliance for Financial Inclusion Steering Committee, and the Chair of the Basel Consultative Group Workstream on Financial inclusion. • Technology providers, subject matter experts, capacity builders, and financial inclusion advocates - Similar to relationships with financial service providers, linkages with these bodies enable BSP to be more responsive. • Financially underserved/unserved/excluded sectors - The BSP has events such as Microfinance Stakeholder Summits, Award programs and financial education programs for the underserved and unbanked where it is able to have direct contact with the market it wishes to help.
 6. How was the strategy implemented and what resources were mobilized?
It is noteworthy that the efforts and significant strides that the BSP has made in microfinance and financial inclusion have utilized resources and mechanisms that were already within the bank. There have been limited expenses related to mobilizing events and meetings. In addition, in recent years, international experts in microfinance and financial inclusion have regularly approached the BSP to provide technical support. This can be seen as a sign of recognition that the BSP will put their expertise and resources to good use. In the past 3 years, the BSP has collaborated with like-minded donors (e.g. International Finance Corporation, German International Cooperation, Consultative Group to Assist the Poor, Alliance for Financial Inclusion) in specific projects that aim further advance the BSP microfinance and financial inclusion agenda.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
The BSP’s success in microfinance development has demonstrated how a previously marginalized sector can be served sustainably using market-based products and services. For five years in a row, the Economist Intelligence Unit (EIU) has ranked the Philippines as number one in the world in terms of regulatory framework for microfinance. Learning from lessons in microfinance, the BSP is now pursuing the broader goal of financial inclusion to also reach other underserved and unbanked sectors. The EIU recognition is quite a privilege, yet the more important measure of success is the impact of BSP microfinance and financial inclusion initiatives. 1. From none in 2000, there are now 186 banks offering microfinance services, serving over a million clients with an outstanding loan portfolio of PhP 8.0 billion. These clients are saving PhP 8.9 billion (June 2013). Studies also indicate that 6 out of 10 microfinance borrowers had the opportunity to save for the first time in their lives. The following data further showcase significant results: • Housing Microfinance: 19 banks are now offering housing microfinance with an outstanding portfolio of PhP 235.3 Million (June 2013). These banks now address the need of microentrepreneurs for house/lot acquisition, especially since their place of business is usually at home. • Micro-Agri Loans: 35 banks are now providing micro-agri loans with an outstanding portfolio of PhP 845.12 Million (June 2013). These banks address the financing need of microentrepreneurs that have small farming activities who lack access to traditional agricultural loans. • Microinsurance: 76 banks have been notified to pursue full authority to offer microinsurance (June 2013). This is a significant indicator considering the vulnerability and need of microentrepreneurs and low-income households for protection from contingent events. • Micro-banking Offices: With enabling regulations, 391 MBOs have been established around the country. Around 49 municipalities are serviced only by these MBOs (June 2013). • Electronic Money (e-money): With e-money regulations, 25 banks and 5 non-banks have been licensed as E-Money Issuers (EMIs). About 54 rural banks now have electronic banking services, mostly using e-money thru mobile, from none in 2005 (June 2013). The network of EMI agents (e.g. duly accredited stores or shops) providing e-money services have expanded to over 12,000. The e-money platform has enabled government to people (G2P) transfers, for example in the delivery of cash benefits to about 500,000 beneficiaries of the Pantawid Pamilyang Pilipino Program of the Department of Social Welfare and Development.

 8. What were the most successful outputs and why was the initiative effective?
At the micro-level, all individual policies and activities related to financial inclusion are consistently evaluated and recommendations for improvement are embedded in management reports. On a holistic level, the BSP publishes a regular year-end report, which can be found at, as the mechanism of communication to stakeholders about the BSP’s yearly accomplishments in the area of microfinance and financial inclusion. In addition, the BSP is implementing various initiatives to improve its capacity to collect, monitor and analyze financial inclusion data to better evaluate success and inform policy making. One such initiative is a product catalogue, a survey of financially inclusive products in the market, which aims to identify opportunities as well as risks of introducing these products. Another initiative in the pipeline is a nationwide financial inclusion baseline survey to generate a firmer grasp of households’ access to finance situation, so that BSP initiatives can be fine-tuned to better address access gaps.

 9. What were the main obstacles encountered and how were they overcome?
The main challenges that we are seeing include the following: • Speed and degree of buy-in from other stakeholders of the financial inclusion agenda. Since financial inclusion goes beyond the banking sector, there is a need for other financial sector regulators as well as non-bank financial service providers to also embrace financial inclusion as an objective. This is being addressed through the BSP proposal for the adoption of a national financial inclusion strategy. • Lack of robust and systematically collected data that supports evidence-based policymaking, and evaluation of the impact of initiatives. This is being addressed through the above-mentioned data initiatives. The BSP also put together a data team within its Inclusive Finance Advocacy Staff to focus on the development of a comprehensive financial inclusion database and framework. • Practical application of proportionality in the regulation of financial service providers that serve the bottom-of-the-pyramid poor. This challenge entails the delicate balancing between the objectives of financial inclusion, stability and integrity, as well as consumer protection. There is a constant need to improve regulatory and supervisory capacities so that financial inclusion and innovative solutions can be promoted without compromising prudential standards. • Limited outreach of consumer education initiatives and need for increased consumer protection. While the BSP implements a financial education program, finite human and financial resources limits outreach. A diagnostic study is currently ongoing to identify measures to better improve the program. The consumer protection framework of the BSP also needs to be improved to ensure that financial institutions are satisfactorily complying relevant rules. The BSP is currently developing a consumer protection rating framework that can be used to assess such compliance.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
Apart from the tangible results discussed earlier, BSP sees key benefits as those that have fundamentally changed the paradigm of the BSP as regulator, and the banking sector as providers of financial services. These paradigm change guarantees broad-based and sustained efforts to pursue financial inclusion. For instance, there is an increased recognition within the BSP that financial inclusion is an important policy objective, one that should be pursued, even though it is not the traditional role of a central bank. This recognition resulted to an institution-wide awareness of the BSP financial inclusion agenda, the mainstreaming of the financial inclusion perspective in the policymaking and regulatory processes of the BSP, and the institutionalization of mechanisms that ensure a unified approach and seamless coordination in the implementation of inclusion-friendly initiatives. The BSP is also recognized as a thought leader in financial inclusion. It has been given many opportunities to share its financial inclusion experience in domestic and international discussions, has contributed to the growing body of knowledge products on financial inclusion, and influenced the mainstreaming of financial inclusion as an important global development agenda. Another key benefit is the change in mindset of banks and financial institutions about serving the low-income and poor households, which they now see as a target market that provides viable and profitable business opportunities. This new thinking is generating a multiplier effect. It is paving way for the development of innovative products, building of bank and non-bank linkages, and forging of new multisectoral partnerships - all aimed to provide a variety of financial products and services targeted to the low-income market, improve efficiencies and reduce costs of delivering these services. The entry of new players positioning to serve the bottom-of-the-pyramid poor is expanding the number of traditional and non-traditional financial service access points; and also increasing competition, which can drive down the cost of financial services thus ultimately benefiting end clients.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
The initiative is definitely sustainable and transferable. Because it is a clear and well articulated approach and strategy, it can be shared with other central banks and other stakeholders. In fact, the BSP is a favorite destination of central bankers, policy makers and international delegations from various countries wishing to learn from the regulatory experience in microfinance and financial inclusion. In the past three years alone (2010-2012), over 200 individuals representing over 40 countries have visited the BSP to gain deeper understanding of how it implements microfinance and financial inclusion initiatives, and see possible ways in which its practices can be adopted in their own jurisdictions. The BSP also make available the copies of relevant circulars and initiatives to interested parties; and willingly shares its experiences in global discussions and forums.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
Some of the key lessons learned: It is important for top management support in an undertaking that is new or that challenges old constructs. This top management involvement needs to be supported by adequate data, evidence and real life examples. A clear strategic framework is necessary to achieve significant gains. A piece-meal approach will not work especially if the problem is multi dimensional. A well-coordinated action plan is integral in this framework. Consistency in the application of principles is important so that all objectives are met and unnecessary trade offs are avoided. Central banks have such an important role to play in enabling the market players to provide the much needed, appropriately designed products for people who are wanting for the same. Creativity is necessary coupled with a firm ground on fundamentals to be able to come up with solutions to solve large problems such as financial exclusion. A financial system that is sound and stable can be truly meaningful if it is also inclusive. Multi-stakeholder support and partnerships should be encouraged to ensure complementarities and synergy of action.

Contact Information

Institution Name:   Bangko Sentral ng Pilipinas
Institution Type:   Government Agency  
Contact Person:   Amado Jr. Tetangco
Title:   Governor  
Telephone/ Fax:   632-7087209
Institution's / Project's Website:  
Address:   A. Mabini Street, Malate
Postal Code:   1004
City:   Manila

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