CHAPTER 6 Towards a Resilient and Inclusive Financial System

CHAPTER 6 Towards a Resilient and Inclusive Financial System Effective systems of support are essential to the realization of high and sustained economic growth and social inclusion, which are considered the pillars of inclusive growth. One of such support systems is the financial sector, which provides the mechanisms for effective and efficient mobilization of the region's financial resources to meet societal goals of economic growth and social inclusion particularly of the poor and vulnerable. As a support system for sustained economic growth, financial institutions (FIs) are expected to provide farmers, fishermen and the micro, small and medium enterprises (MSMEs) with resources for production and business capital. The updated development plan of Central Visayas shall focus on strategies that will increase the flow of resources to the financially deficient sectors of agriculture, fisheries and MSMEs. In the implementation of the strategies, special attention shall be given to production areas and small businesses recovering from natural calamities such as the earthquake in Negros Oriental and Bohol and Typhoon Yolanda, which greatly af fected the whole region. As a support system for social inclusion, financial institutions are expected to be a source of social security for the poor and vulnerable groups. The natural calamities that struck the region magnified the need for social security for the poor and vulnerable since they are the most affected. Hence, the updated RDP of the region shall focus on strategies that will improve the access of the poor and vulnerable to more secure financial products and ser vices. A. Assessment and Challenges The financial system of Central Visayas, consisting of banks, cooperatives and non-bank financial intermediaries, remain strong and stable with enough resources to address demand from MSMEs, poor and vulnerable groups. 6-1

For the region s universal and commercial banks, 2011-2013 was a period of strength and stability. Universal and commercial banks reported increased liquidity, which can be attributed to increased cash inflows from consumer spending, real estate sales and OFW remittances which were channelled through the banking system. On the other hand, increased capital accounts and prudent risk management practices helped to stabilized the industry's financial position. With regard the region s rural banks, the Bangko Sentral ng Pilipinas reported that between March 2011 and March 2012, the annualized net profit of rural banks in Central Visayas slightly increased. Rural banks of the region experienced one of the best annualized return on assets at 2.5 per cent during the same period. This meant more efficient management of the rural banks' existing assets to generate earnings. In terms of capitalization, the total capital of rural banks in the region for 2012 of Php1.5 billion was 4.7 per cent of industry's national total. While the rural banks continue to earn and make prof it, their nonperforming assets and loans were relatively high at 12.8 per cent and 13.9 per cent, respectively. These rates exceeded industry average and could affect the long-term stability of rural banks. Table 6.1 Newly- Registered Cooperatives: 2012 Central Visayas Types of Cooperatives 2011 2012 Agrarian Reform 1 -- Consumer 7 12 Credit 16 33 Dairy 4 -- Health Services 1 -- Marketing 1 6 Producer 4 6 Service 3 6 Transport 1 1 Multi-Purpose 10 21 Federation-Secondary 1 2 Source: Cooperative Development Authority For the cooperative sector, the report of the Cooperative Development Authority (CDA) indicated a much stronger cooperative movement in Central Visayas. The total number of cooperatives registered with the CDA in the region increased by 6 per cent from 1,523 in 2011 to 1,611 in 2012. There was also a 6-2

78 per cent increase in the number of newly-registered coops which generated 5,138 members. Many of the registered cooperatives are credit and multipurpose cooperatives which offer financial products such as credit to its members. Table 6.1 presents the number of newly-registered cooperatives in 2011 and 2012. On non-bank intermediaries, the sector of non-bank financial intermediaries consisting of pawnshops and money transfer facilities are fairly developed in the region. These entities have well-spread out physical network even in the countr yside. Overall, the financial system remained resilient amidst global economic challenges for the period 2010-2012. Despite its strength, the financial system continued to face constraints particularly on mobilizing resources to sectors where these are most needed. Many of the poor and vulnerable groups have no or limited access to financial services. Credit for business remain inaccessible to several MSMEs, farmers and fishermen. 1. L i m i t e d r e a c h o f f i n a n c i a l s e r v i c e s a m o n g l o w - i n c o m e g r o u p s Despite the strong performance of the region's financial insitutions, much is still to be desired in terms of making their services inclusive. It has been observed that several households in the region, particularly those with lower incomes, still conduct their financial transactions such as for credit and savings through informal means. The results of the 2011 Annual Poverty Indicators survey revealed that the annual expenditure of families in the bottom 30% of the income distribution was almost 3 per cent higher than the income earned. The survey also revealed that a third of families in the bottom 30 per cent engaged in entrepreneurial activity as a source of income. Given that majority of low income households do not earn enough, many of them try to find other sources of funds such as through the availment of loans. However, the survey results indicated low loan availment among low income families. Only 19 per cent of low-income families were able to avail of loans to supplement their income. Of those who availed of loans, more than a third lend from informal channels such as relatives, friends, and other informal lenders. With regard to savings generation, while majority of families in the bottom 30 per cent were not able to save, there was some groups who were able to generate savings from their meager income. The survey revealed that the savings rate of families belonging to the third decile (upper tier of the bottom 30 per cent) was about 2 per cent of their income in 2011. However, some of these savings may be unbanked given their limited access to banking services. 6-3

Reportedly, there is also little appreciation of insurance products and services among low income households. Farmers, for one, are said to be reluctant to avail of personal insurance, aside from crop insurance, from entities like the Philippine Crop Insurance Corporation which offer low-premium personal insurance. Table 6.2 presents the financial of families in Region 7 for 2011. Table 6.2 Financial Data of Families : 2011 Central Visayas Region Indicator Lowest 30% Highest 70% Savings Rate -2.54 16.56 Source of Income (% of families) a. Salaries and Wages 41.0 44.7 b. Family Sustenenance 4.7 0.7 c. Entreprenuerial Activity 32.0 16.0 Families Who Availed Loan (%) 18.8 24.9 Source: National Statistics Office, 2011 Annual Poverty Indicators Survey To cater to the needs of low income groups and small business, different microfinance products and services are available in the region. These products and services are aimed at securing financial transactions of the unbanked as well as provide resources for small businesses who are usually left out by the larger banking sector. Studies showed that microfinance services in the region have yet to reach more households, small producers and entrepreneurs. Table 6.3 Pover ty Outreach of Microfinance Institutions, 2012 Central Visayas Region Province % Poor HHs Penetrated % Clients Who Are Poor Bohol 6.38 5.01 Cebu 10.63 5.78 Negros Oriental 3.88 1.19 Siquijor 8.64 6.68 Source: Grameen Foundation A study conducted by the Grameen Foundation entitiled Pover ty Outreach of Selected Microfinance Institutions (MFIs) in the Philippines, 2012 showed that MFIs in the region are able to service 10 per cent, at most, of poor households in the areas where they are present. Among the provinces, the MFIs 6-4

in the provinces of Cebu and Siquijor penetrated the most number of poor in their service area. The MFIs in the province of Negros Oriental only penetrated about 4 per cent of poor households in their service area. Table 6.3 presents the poverty results of the study of the Grameen Foundation on outreach of microfinance institutions. Among the reasons cited in other studies is the limited reach of financial services is the concentration of FIs in urban areas. As of June 2012, the banking sector's physical network expanded by 7.36 per cent from 584 banking offices in 2011 to 627 banking offices in 2012. Office coverage is between 60 per cent to 79 per cent of municipalities and cities in the region. Table 6.4 presents number of banks in the region for the period 2010-2012. Table 6.4 Banking Statistics, 2010-2012 Central Visayas Region Indicator 2010 2011 2012 No. of Commercial/ Universal Branches 299 309 337 No. of Thrift Banks 114 114 122 No. of Rural and Cooperative Bank 167 161 168 Source: Bangko Sentral ng Pilipinas 7 The other factors, which constrained access to f inancial ser vices by lowincome groups include the limited understanding of financial instruments and the need for more inclusive infrastructure in the delivery of financial services Cooperatives, which reach more individuals and families than other financial institutions, make them the actors who are critical for improving access to financial services especially in rural areas where the poor are concentrated. However, majority of the cooperatives have very limited assets, low capitalization and have limited capabilities to handle ef f iciently quasibanking services. As of 2012, about 68 percent of coops in the region are considered micro with assets wor th 3 million and below. 2. C o n t i n u i n g c o n c e r n o n c r e d i t a c c e s s b y f a r m e r s, f i s h e r m e n a n d M S M E s Even with the passsage of the Magna Carta for MSMEs, access to credit of MSMEs remains a challenge as expressed by some business groups such as the Filipino-Cebuano Business Club. Banks continue to hesiste in giving out loans to MSMEs despite their number as they consider these high-risk borrowers. 6-5

Of the industry's total loan portfolio less than 50 per cent is accounted for by exporters who are mostly MSMEs. Banks were cautious in lending to exporters due to the slow down of the global economy. One of the main reasons for the limited access of MSMES to credit is their bankability. According to the BSP, the MSMEs must address concerns about their viability by making their marketing more effective, improving the efficiency of their production and priortizing innovation. Small businesses must also organize themselves and connect with larger enterpises. Many MSMEs also have inadequate capacities to prepare viable business plans and complete financial statements. The strength of the financial system serves both as a challenge and an opportunity. The region must be able to sustain this situation in the next three years and at the same time it must be able to increase capital flows to the countryside where agriculture and fisheries are concentrated and to MSMEs, which comprise the majority of the region's businesses. A strong financial system also poses as an opportunity for the region to focus on improving access of the poor and vulnerable to financial services, not only credit, but also savings generation and insurance as social security against natural calamities, economic crisis and political conflict. B. Strategic Framework The strategic framework for the next three years shall be focused on improving financial literacy of individuals so they can access secure financial transactions and enhancing capabilities of cooperatives, rural banks and microfinance institutions so they can be viable conduits and managers of funds for countryside and MSMEs. The conduct advocacy activities, which include lobbying for passage of laws and conduct of information campaigns, shall compliment financial learning and capability building programs. 1. Conduct wider financial education The implementation of existing financial learning programs, such as the ones implemented by the BSP, shall be expanded to include school-going children and members of cooperatives. BSP s learning programs shall be linked with the activities of the Department of Education (DepEd) and the CDA in the region. The BSP 7 and CDA 7 (through its coop laboratory program) shall closely coordinate with the DepEd in the training of teachers on the basics of financial management who in turn shall download their learning to their students. Local school boards will be enjoined to design incentive programs that would encourage teachers to incorporate financial education in their subjects. CDA 7 shall also link up with the Philippine Crop Insurance Corporation in the region and whenever possible, with microinsurance agents, to educate 6-6

coops and their members on the importance of insurance, par ticularly personal insurance for health, education and other providential needs. 2. C o n t i n u e t h e p r o m o t i o n o f i n n o v a t i v e m i c r o f i n a n c e p r o d u c t s a n d s e r v i c e s The region shall continue to disseminate information on non-traditional microfinance products suited to the savings, enterprise and consumption needs of low-income groups and small businesses who have limited access to typical banking services. These include targetted commitment savings, risk-based credit products based with cashflow-based payment terms, and communitymanaged microinsurance. More activities which would serve as venue for sharing of best practices among rural banks and coops on microf inance shall be organized. 3. E x p a n d r e a c h o f t e c h n o l o g i c a l l y d r i v e n m e c h a n i s m s i n t h e d e l i v e r y o f f i n a n c i a l s e r v i c e s The region shall promote co-branding arrangements among cooperatives, bank and non-bank intermediaries in the delivery of money transfer services particularly in the countryside. These type of arrangements will require cooperatives to invest in electronic services. 4. I n t e n s i f y c a p a c i t y b u i l d i n g f o r c r e d i t a p p r a i s a l a n d m o n i t o r i n g s t a n d a r d s o f c o o p e r a t i v e s, r u r a l b a n k s a n d m i c r o f i n a n c e i n s t i t u t i o n s The region, spearheaded by the BSP, shall boost its coordination efforts with CDA 7, bankers associations and local government units in the region to train more rural banks, cooperatives and other microfinance institutions on credit appraisal and monitoring. The trainings will be a venue for BSP to provide information and technical assistance on establishing credit standards based on best practices of well established financial institutions. With the ongoing amendment of the IRR of the Cooperative Code, the RDC shall also lobby for the inclusion of training on the establishment of credit standards as a mandatory training activity that all cooperatives with credit facilities must undergo. To complement the training activities, the CDA in coordination with the BSP shall endeavour to design and establish a credit information system for cooperatives and rural banks to assist these institutions in credit appraisal and monitoring. CDA 7 with the assistance of the BSP shall propose for the passage of laws and/or establshment of policies to regulate the activies of cooperatives 6-7

engaged on savings and credit. These policies will be for the protection of members as well as to strengthen the viability of cooperatives. 5. E c o n o m i c a l l y i n v i g o r a t e c o o p e r a t i v e, c o o p e r a t i v e b a n k s a n d r u r a l b a n k s The region through the RDC and other mandated agencies shall advocate for the implementation of programs that would rehabilitate fledging coops, cooperative bank and rural banks. Among these programs would be the Cooperative Bank Enhancement and Rehabilitation Program (CBERP) along with the Cooperative Bank Security and Rehabilitation Fund as proposed by Coop- NATCO and an expanded Strengthening Program for Rural Banks of the BSP. 6. S t r e n g t h e n p a r t i c i p a t i o n o f B S P, L G U s, c o o p e r a t i v e s a n d b a n k s i n t h e i m p l e m e n t a t i o n o f t h e C r e d i t S u r e t y P r o g r a m The region shall ensure the linkage of BSP with more cooperatives who shall facilitate access of their enterprising members to credit. Complementary to this effort would be for the CDA to intensify their assistance to strengthen the cooperatives financial management capacities necessary for participating in the credit surety program. The RDC shall encourage the provinces of Bohol, Cebu and Negros Oriental, where a credit surety fund has been established, to increase contribution to the fund to cater to more MSMEs. For the Province of Siquijor, BSP shall promote the establishment of a CSF for their province's MSMEs. The RDC in coordination with the BSP shall advocate for the passage of House Bill 278 which provides for the creation and organization of cooperatives for them to manage and administer credit surety funds. C. Major Programs, Activities, and Projects 1. Information/ education/communication (IEC) on insurance products and non-traditional micro-finance products 2. Promotion of co-branding arrangement among cooperatives, banks, and non-financial intermediaries in the deliver y of money transfer ser vices 3. Training on credit appraisal and monitoring 4. Strengthening Program for Rural Banks 5. Credit Surety Program 6-8

D. Policy and Legislative Agenda 1. Mandatory training on the establishment of credit standards for cooperatives with credit facilities (for inclusion in the amended IRR of Cooperative Code of the Philippines) 2. Provision of Cooperative Bank Enhancement and Rehabilitation Program and establishment of Cooperative Bank Security and Rehabilitation Fund 3. Advocate the passage of House Bill 278 An Act Providing for the Creation and Organization of Credit Surety Fund Cooperatives to manage and administer credit surety funds to enhance the accessibility of micro, small, and medium entrepreneurs, cooperatives, and non-government organizatons to the credit facility of banks and for other purposes" 6-9