Offsetting negative infrastructure through financial inclusion

Banking institutions are beginning to target issues of poor infrastructure and limited access to technology in order to drive financial inclusion in the Philippines

 
RCBC’s headquarters in the Philippines 

The reach and sophistication of financial services in the Philippines has greatly improved in recent times, while the national government is among the most impressive worldwide in terms of support for financial inclusion. Without a doubt, the need to establish inclusive systems for low-income customers and SMEs is important, but the successful creation of an accommodating financial ecosystem is a feat only a few developing nations have so far managed to achieve.

The Rizal Commercial Banking Corporation (RCBC) appreciates how financial inclusion in the Philippines has improved dramatically in recent years, referring in particular to the expanded list of activities and services permitted by the Central Bank of the Philippines (BSP) for microbanking offices, and the waiver of payment of processing fees for offices in unbanked areas.

As the financial flagship company of the Yuchengco Group of Companies, RCBC is one of the country’s leading private domestic banks. In its more than 50 years of existence, the bank has done a great deal to further the Philippines’ growth. World Finance spoke to Lorenzo V Tan, RCBC former president and CEO about the challenge of promoting financial inclusion in south-east Asia and the role of microfinance, green banking and the ASEAN integration in facilitating this expansion.

Increasing access
Studies have shown that financial inclusion empowers lesser earners by teaching them how to manage finances and access to credit, insurance or savings. “As of 2015”, Tan told World Finance, “63 percent of cities and municipalities in the Philippines had a banking presence, while 87 percent had at least one financial access point.”

Poor infrastructure, limited access to technology and a lack of credit information are among the most significant impediments to progress. As a result, only 39.2 million people (38.6 percent of the population) are part of the formal banking system, with the remainder of the population, according to figures cited by RCBC, partially or entirely unbanked. Based on BSP data after to 2015, as little as 31.3 percent of the total Filipino adult population has an account with a formal financial institution, while 37 percent of cities and municipalities have no banking presence whatsoever.

According to RCBC, a key part of the solution to this problem is microfinance. The Economist Intelligence Unit, an independent business within the Economist Group, has ranked the Philippines as a microfinance leader in Asia, as well as the third-highest ranking country globally in terms of its regulatory environment for financial inclusion.

Such findings led to the establishment of Rizal Microbank, RCBC’s microfinance arm, which focuses on providing a suite of financial products and services to the ‘bottom of the pyramid’. According to Tan, “over 90 percent of households in the Philippines still remain unbanked or under-banked, thus providing Rizal Microbank with a huge market for its microfinance services”.

Aside from its Microdeposits and Microenterprise Revolving Credit Line Facility, Rizal Microbank offers an Agrifinance Value Chain Loan Facility in cooperation with the International Finance Corp. This loan product aims to support the agricultural industry by giving key players (for example, agri-input suppliers, post-harvest facility providers and post-harvest processors, integrators and consolidators) valuable access to financing.

RCBC’s green banking solutions and microfinance arm both seek to foster a more sustainable means of prosperity

This facility is hugely influential, particularly given the agricultural sector employs approximately 27 percent of the Filipino workforce, according to the latest data from the Philippine Statistical Authority. What’s more, attempts like this to further the sector’s development are critically important for the Philippines as they represent a relatively easy means of driving growth and creating new jobs.

Looking at the last few years, growth in the agricultural sector has been stagnant, and financial solutions such as RCBC’s are only now beginning to improve the sector’s productivity. However, financial services, together with a host of new and innovative initiatives, are spearheading positive developments in agriculture, and increased funding should serve to improve both infrastructure and food security: the Philippine Rural Development Project (PRDP), for example, is a World Bank-sponsored initiative that aims to significantly expand the country’s rural infrastructure over the next six years.

The intention is to establish a government platform for a modern, climate-smart and market-orientated sector. Once completed, the PRDP should result in a five percent increase in annual real farm incomes, a 30 percent increase in income for targeted beneficiaries of enterprise development, a seven percent increase in market output, and improved access to Department of Agriculture services.

ASEAN integration
Aside from the evolution of microfinance, the issue of ASEAN integration is similarly important for the region’s ongoing development. According to Tan: “ASEAN economic integration would make the region more competitive as an investment destination, a base for production and an attractive market distribution. It would increase economic activity in the region, especially in terms of trade, capital, investments and labour, and would result in a bigger market for ASEAN-based investors, businesses and exporters”.

Total ASEAN GDP equates to around $2.5trn, more than eight times the Philippines’ GDP of $292bn. The region’s population, meanwhile, stands at around 629 million – six times greater than the Philippines’ own – which would allow companies to export to and invest more freely in other ASEAN countries, and would in turn result in greater business activities and faster economic growth. The integration would also mean more choices for ASEAN consumers in terms of product and service offerings, while demand for real estate (office, commercial, residential and industrial) would increase as ASEAN investors moved to different countries within the region.

“ASEAN is one the fastest growing regions in the world”, said Tan – something that is especially significant “given its relatively young population, its important part in the global supply/production chain, and attractive market for products”. Electronics, tourism, agriculture, consumer goods, medical tourism, real estate and banking are all major drivers of ASEAN economic integration, though the list is by no means limited to those sectors.

Duty of care
The rise of green banking is fast emerging as a central part of the region’s development plans. According to Tan: “Care for the environment and conservation of natural resources have become critical advocacies in light of climate change and increase in global population. With the improvement in technology, this has paved the way for financial institutions to develop products and services that promote resource-savings and ecological balance.”

RCBC has been at the forefront of promoting green banking through the implementation of advanced technology in staple banking services, such as cash and cheque deposits, cash withdrawal, cheque encashment, bills payment, fund transfer, MyWallet reloading, and account opening, along with many others. Over the next two years, RCBC intends to install Touch Q Lobby Management machines in all of its branches, with the aim of promoting paperless transactions.

RCBC will also continue to support the green programme by providing financing to environmentally friendly institutions, such as when it provided backing to the North Luzon Renewable Energy Corporation for the development of a wind farm in the northern part of the Philippines.

RCBC’s green banking solutions share a great deal in common with the firm’s microfinance arm, in that the two branches seek to foster a more sustainable means of prosperity. Tan said: “RCBC will further contribute to the growth, as well as benefit from the resiliency, of the Philippine economy, which is among the fastest growing in ASEAN, subject to continued improvements in the country’s economic and credit fundamentals and supported by favourable demographics.”

According to Tan, the bank will continue to advocate for these causes in both the short and long term. With regards to financial inclusion, RCBC will support the country’s agriculture sector by doubling its agri-lending this year through its microfinancing arm. Lastly, in preparation for ASEAN economic integration, RCBC will continue to bolster its tie-ups with Asian and ASEAN banks and securities houses, and will look into establishing relationships with new foreign entrants in order to explore new opportunities that may arise.

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