You Want A Progressive Economy? Let The Foreign Banks In

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The Republic Act No. 7721 is set to be amended to allow more than ten foreign banks in the country. But do you know what the financial implications on Filipinos are? The Philippine Senate committee on banks studies the approval of recent legislations and these are the pros and cons we can expect from this new legislation.

The Philippines is one of the forerunners in attracting foreign banks with its 7.2 percent growth in the gross domestic product (GDP) in 2013. Foreign financial firms also see the country’s GDP rising by 7.5 percent because of infrastructure projects and the participation of local businesses in the forthcoming economic integration in the region by 2015.

The effect of Foreign bank entry in the Philippines

Advantages

Increased Competition. Small businesses can avail to more credits and the cost of capital would lessen. This will also push banks to become more innovative to stay on top of the banking competition.

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Lower operating expenses due to increased efficiency.  Competition among banks may lead to increased operating efficiency that may lead to reduced operating costs and higher service quality for the customers.

Lower interest rates offered to the public. Stronger competition among bank results in significantly lower interest rates for most loan market products. As more banks offer credit, local and foreign borrowers will be capable of securing small or large business loan products at desirable interest rates and terms.

Lower Interest related income. Foreign and local banks may offer income-based repayment strategies designed to reduce monthly interest rates and payments to make it easier for the low-income earners to manage their loans.

Banks with High political influence will tend to close due to competition. The presence of foreign banks can increase the costs of bribery to dishonest government officials resulting in more transparency in government projects tendering.

Non-lending activities like cost optimization and seeking for greater efficiency would keep managers busy. Bank managers shall devote their time in:

  • Improving efficiency
  • Reducing costs and
  • Increasing profitability of the bank to keep up with other banks

The manager has to find ways to ensure that these goals are met without sacrificing the quality of bank services.

Disadvantages

Accounting profits would decline. Accounting profit refers to sales revenue minus all the costs the bank sustained in the conduct of its businesses except the cost of equity capital. Higher competition in the banking market is likely to lead to lower prices and the possibility of lower super-normal profits.

Risks

Profit volatility. Volatility for profit in the banking sector refers to the amount of uncertainty or risk about the size of changes in the bank’s security’s value. The higher the volatility, the greater the risk of dramatic change in the price of security. The lower the volatility, the smaller the risk of dramatic fluctuation in the price of security. In addition, lower interest rates may also squeeze up the bank’s capital. With stiffer competition, come lesser profits.

Encourages underwriting of riskier loans. Banks that are struggling to stay afloat the competition may resort to lax restrictions on credit. This will eventually encourage other banks to issue more high risk loans with flexible rates and lower underwriting standards.
Many borrowers may begin defaulting as they became unable to pay interest rates. These borrowers may also have trouble refinancing. Banks may lose huge amounts of capital, and many borrowers may lose their securities.

The Effects of Banking Liberalization in the Philippine economy

People would get cheaper credit therefore opening up business is easier. The competitive banking environment will make it easier for borrowers to obtain loans at lower interest rates. Once you have decided on your loan type and tenure that fits your needs, you can apply for a loan. With competition, banks may be easier on your collateral, credit scores and other loan requirements.

In addition, Bangko Sentral ng Pilipinas lose the following benefits of this amendment to the Philippine economy:

Foreign banks can attract more investments into the country: Foreign banks may put up their businesses in the Philippines to target investors who prefer offshore investments from their home country.

Opening the banking industry to foreign banks can sustain the country’s growth and expansion. Foreign banks have the capacity to serve the investment and financial interests of the country’s foreign direct investors.

The Government should Protect Local Bankers’ Interest

Many Filipino bank owners are worried that Senate Bill 2159 and House Bill 3984 may injure their interest. To address this issue, the government must maintain the current 30% ceiling on assets held by foreign banks. Allowing Filipinos to hold at least 70 percent of the assets of the entire banking system will protect the Filipino bankers. The new law must also give the Monetary Board the authority to suspend further entry of foreign banks if national interest is at stake.

Foreign banks are generally more efficient when it comes to operating costs and profitability than domestic banks. Liberalizing their entries in the Philippines will produce positive results like improving profit and cost-efficiency in the Philippine banking system. Can local banks keep up with the competition?

It depends. Domestic banks cannot sustain cost and profit efficiencies due to increased banking competition unless the government improves the regulatory and supervisory framework for domestic banks.

The big question is why our lawmakers have not acted to relax R.A. 7721 earlier if it has this much of a benefit?

6 Replies to “You Want A Progressive Economy? Let The Foreign Banks In”

  1. Another effect would of course be job creation. I will not go so far as to say that this is an advantage to bringing foreign banks in, but it would certainly offset the possible losses in jobs from banks that do close or streamline.

  2. “The Government should Protect Local Bankers’ Interest”?

    What is this?

    iMoney Philippines is advocating CRONY CAPITALISM?

    Businesses that make bad decisions SHOULD FAIL. That is how free market capitalism works. If some banks happen to fail, some investors will lose big, but that’s how markets work. It may even prove to be tragic, but those losses should remind you and everyone else to diversify your investments next time. Let the imprudent fail and the prudent pick up the bargains. If local banks and financial institutions fail to compete with an influx of foreign competitors, they should do the same thing the rest of us do in hard times: renegotiate with creditors and revalue assets.

    Government protection of Filipino companies from market forces by granting them privileges and helping them preserve their hegemony distorts the marketplace. While ostensibly taming (foreign) corporations from running roughshod over the local economy, this cozy relationship between government and business is just another extension of how the local oligarchy has manipulated the law to gain an advantage over any potential competitors.

    Worse, it isn’t the fear that the entrance of foreign competitors will cause a systemic collapse in the local financial system that should be the concern. Rather, by artificially propping up local banks, you destroy market discipline. The lack of competition encourages established local companies to stagnate, to fail to innovate. It also invites recklessness and promotes the folly to make the same bad decisions at our expense.

    1. your comment is full of irony.

      the USA Banks got trillions from quantitative easing and government financial policy and here you are talking about the local banks and your “market forces” – what are you an expert now!!!!

      so you are saying, multi-billion multi-national banks should be able to compete with local small banks because small banks don’t got market discipline??

      WHY?? do you own a bank?? what make you say that?? do you work in the financial sector??

      Do you even know how the local economy operates and how multi-billion banks operates and the difference to how each affects local economy?? I bet you how no clue.

      1. HEY STUPID!

        Full disclosure: I am not an economist. Nor do I pretend to be an expert in the financial sector. There is a lot I don’t understand. But I have been around long enough to recognise government’s incompetence whenever they attempt to ‘improve’ on the subtleties of the market. And I am confident enough to say that I at least have a balanced budget. Something neither the US nor Philippine governments can claim.

        Case in point: STUPID mentioned the bailouts and loan guarantees the US government bestowed on some companies like AIG and Citigroup. This gives them an unfair advantage over their competitors. It is the very definition of crony capitalism.

        In fact, Citigroup has been subsisting on US government bailouts since the Clinton administration. As a result of this collusion with US government officials — a number of whom would later be employed by Citigroup — they exhibited a tendency to engage in increasingly dubious investments (likely spurred on by the confidence that they could rely on government intervention to save them because they were ‘too big to fail’). By 2008, Citigroup’s poor risk management left it heavily exposed in the housing market crash. And that proved to be disastrous for their customers and financial markets throughout the world.

        Not for Citigroup and the rest, however. By subsidising these ‘too big to fail’ banks, the US government enabled them to grow to become even bigger than they were before the bailouts. While their customers and investors lost money.

        That STUPID cannot seem to comprehend the hazardous effects crony capitalism has on the local and world economies only confirms how ignorant, financially illiterate and intellectually bankrupt he is.

        “Do you even know how the local economy operates and how multi-billion banks operates and the difference to how each affects local economy?? I bet you how no clue.”

        I’ll take that bet. And double up. And win. (It’s ‘I bet you have no clue.’ Try reviewing the grammar lessons from your elementary days.)

        If STUPID had bothered to familiarise himself with local banks, STUPID might have been aware that companies like Banco de Oro, Metrobank and the Bank of the Philippine Islands all have international operations. And should be considered in comparison to foreign international financial institutions.

        Also if STUPID bothered to read the original article cited by iMoneyPH, STUPID might have been aware that crony capitalism would be ILLEGAL in the light of the international agreements the Philippines has entered into with the rest of ASEAN. Economic integration is planned to be implemented by 2015. This is intended to liberalise the regional economy and allow for open markets across Southeast Asia. iMoneyPH’s call for local protections runs contrary to regional economic integration.

  3. no way keep the rothschild banks out of everything. they will just rob your country. run up your debt like they did in america. fuck Israel fuck Zionism, fuck islam and fuck the banks all a bunch of criminals playing a rigged system set up to protect their children not yours

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