Review of Financial Laws and Regulations Affecting the

1

Review ofFinancial Lawsand Regulations

Affecting theProvisions of

Financial Servicesto the

Basic Sectors1

C L A R E N C E G . D I N G C O N G

1 This study is part of the USAID supported Credit Policy Improvement Project (CPIP) of the Department ofFinance (DOF). The author gratefully acknowledges the comments of Gilberto Llanto, Ma. Piedad Geronand Robert Vogel on an earlier draft and the research assistance of Grace Becongco and Lalaine Joyas. Theusual disclaimer applies.

2

Published by theCredit Policy Improvement ProgramDepartment of Finance – National Credit Council

The Credit Policy Improvement Program (CPIP) is a technicalassistance provided by the United States Agency for InternationalDevelopment (USAID) to the Department of Finance (DOF) –National Credit Council (NCC). The Project is being implemented bythe International Management and Communication Corporation(IMCC). The findings, interpretations and conclusions in this book arethose of the author/s and should not be attributed to the USAID,IMCC or DOF-NCC.

Please address all inquiries to:

National Credit Council Secretariat Credit Policy Improvement ProgramDepartment of Finance Project Management Office

Gil S. Beltran Gilberto M. Llanto, Ph.DMa. Teresa S. Habitan Ma. Piedad S. Geron, Ph.DJoselito S. Almario Susan R. ElizondoMa. Lourdes V. Dedal Mary Ann D. RodolfoAurora Luz D. VillavirayFebe J. Lim 4th Floor Executive Tower BuildingEric C. Tipgos Bangko Sentral ng Pilipinas Complex

Malate, Manila4th Floor Executive Tower Building Telephone No: (632) 525-0487Bangko Sentral ng Pilipinas Complex Telefax No: (632) 525-0497Roxas Boulevard, Manila E-mail: [email protected] Nos: (632) 523-3825 and 525-3305Fax No: (632) 524-4287

3

Laws and regulations have been issued in recent years todirect the flow of credit to the basic sectors. Some of thesehave promoted greater efficiency in the pricing and allocationof financial resources while others have perpetuated thedistortions plaguing the financial markets in the 70s. This studyreviews existing laws and regulations affecting the provision offinancial services to the basic sectors. It provides a baselineoverview of the financial laws and regulations, and a generalassessment of these, in the context of the government’s overallpolicy framework. Only existing laws and regulations withspecific provisions relating to the delivery of financial servicesto the basic sectors are included. Past laws are also included tothe extent that they relate to or affect the present. Financiallaws that do not affect the basic sectors are excluded.

1 Introduction

5

A. Conceptual Approaches to Regulation

The government has relied on both legislation andregulation to direct the flow of financial services to target sectors.These two basic tools have invariably been used in response tothe demands of those whose welfare are perceived to have beenreduced by the behavior of agents in the market.

One conceptual approach to regulation holds that the veryexistence of this demand creates a “political” market forregulation and establishes incentives for politicians andbureaucrats to supply regulation services (Kane, 1977). Forexample, a mandatory credit allocation on banks’ loanable fundsis employed to address the financing needs of small farmers.The demand for this allocation is a demand by, or on behalfof, small farmers for government intervention in their favor.It is a demand to assist so-called “losers” in the credit market.

The rationale often quoted by lawmakers for theformulation of financial laws is that laws are essential inattaining the government’s avowed development objectives. Theviews on the creation of these laws are mixed. One view is thatlegislators enact financial laws to protect the public at large orsome large subclass of the public. The other view is that the

2ConceptualFramework

6

C o n c e p t u a l F r a m e w o r k

creation of laws is motivated by self-interest to win votes (Kane,1977).2

Whichever motive drives the legislator, these laws are ableto, for instance: force financial institutions to channel creditto target sectors through mandated credit quota; grantregulatory bodies the appropriate police power; and directgovernment line agencies to perform banking functions. Inother words, these laws have the power to move resources andaffect the economic decisions of households and firms. Inthe process, they affect financial intermediation and couldeven distort the operation of the market. One such distortiveregulation is the interest rate ceiling on loans to specific sectors.Another is the legislated credit allocation that coerces financialinstitutions to set aside a fixed proportion of their loanportfolio for a particular sector. Several studies have foundthese interventions ineffective and counter-productive. Yet,they continue to be popular in financial legislation (Adams,Graham and Pischke, 1984; Abiad and Llanto, 1989).

Regulation oftentimes generates unintended or undesirableeffects. These occur when government regulation leads to“financial innovation” creating incentives for firms to skirtregulations that restrict their ability to earn profits. Thisprocess of avoiding regulations is called “loophole mining.”(Kane, 1981). When regulatory constraints become soburdensome that large profits can be made by avoidng them,loophole mining and innovation are more likely to occur. Overtime, avoidance schemes are identified and spread to moreand more regulatees. Hence, the longer a given regulationremains in force, the more important the unintended effects

2 Coalitions are formed to persuade lawmakers to set up and to oversee for their benefit detailed systems ofregulation (Stigler, 1971). To this, lawmakers often submit.

7


become. (Friedman, 1962) A concrete example is the Agri-AgraLaw (PD 717) in the Philippines which legislators are trying toamend due to psuedo compliance among banks.3

Just as regulation leads to regulatee avoidance, circumventiongenerates political pressure for re-regulation (Stigler, 1971; Kane,1984). This sets the stage for a fresh cycle of regulation andavoidance. Re-regulation occurs because sponsors andproponents of regulation become aware of the unintended effectsand are increasingly frustrated. The precise timing and detailsof avoidance schemes are unpredictable. This makes re-regulationnecessary.

A second approach to understanding regulation highlightsthe role of information in credit markets. Unlike the goodsmarket, credit markets are characterized by an exchange offinancial resources and services for a commitment to pay aspecified amount in the future. The actual realization of thecommitment depends on both the ability and the intentions ofthe individual or firm making the commitment. One party oftendoes not know enough about the other party to make accuratedecisions. This inequality is called asymmetric information(Stiglitz and Weiss, 1981).

A borrower, for example, would usually have betterinformation than the lender about the potential returns and riskassociated with the investment project for which funds areearmarked. Lack of information creates problems of adverseselection and moral hazard in the financial system. Adverseselection occurs when potential borrowers who are the most likelyto produce undesirable outcomes (bad credit risks) are the ones

3 Several revisions have already been proposed by legislators both at the Senate and the House of Representatives.

8


who most actively seek out loans and are thus, most likely tobe selected. Because of adverse selection, it is more likely thatloans will be made to bad credit risks. As a result, lenders maydecide not to make any loans even if there are good credit risksin the market.

Moral hazard in financial markets is the risk that theborrower might engage in activities that are undesirable fromthe lender’s point of view because these activities make it lesslikely that the loan will be repaid. Because moral hazard lowersthe probability that the loan will be repaid, lenders may decidethat they would rather not provide loans. A result of asymmetricinformation is non-interest rate rationing. Because raising theinterest rate to the equilibrium level will lead to adverse selectionand moral hazard problems, lenders opt to ration credit instead.

Asymmetric information and the problems associated withit are critical in understanding the regulation of financialmarkets. Government can reduce these problems in financialmarkets and increase their efficiency by increasing the amountof information available to investors. Asymmetric informationcan also lead to widespread collapse of financial intermediaries.Depositors or provider of funds may not be able to assesswhether the institutions holding their funds are sound. If theyhave doubts about the overall condition of financialintermediaries, they may want to pull their funds out of bothsound and unsound institutions. The possible outcome is afinancial panic that produces large losses for the public andcauses serious damage to the economy.

To protect the public and the economy from financialpanics, the government has to install regulations. Theseregulations usually include deposit insurance, restrictions on

9

bank asset holdings, capital requirements, chartering, bankexamination, and separation of banking and securities industries(Mishkin, 1995).

Still another reason for regulating financial institutions isthe role that banks play in determining the supply of money.Much regulation of these intermediaries is intended to improvegovernment’s control over money supply. One such regulationis the reserve requirement which helps the Central MonetaryAuthority exercise more precise control over liquidity. Likewise,deposit insurance regulation gives depositors confidence in thebanking system and eliminates widespread bank failures, whichcause large, uncontrollable fluctuations in the quantity ofmoney.

B. Regulation and the Basic Sectors under the SRA

Figure 1 shows the general framework for analyzing howfinancial laws and regulations in the Philippines affect theprovision of financial services to the basic sectors. Under thegovernment’s Social Reform Agenda (SRA), the basic sectorsare the following: (1) farmers and landless rural workers; (2)fisherfolk; (3) urban poor; (4) indigenous cultural communities;(5) workers especially in the informal sector; and (6) otherdisadvantaged groups such as women, disadvantaged students,children and community youth, persons with disabilities, theelderly and victims of disasters and calamities. The overallvision is to grant these sectors access to quality basic services,productive resources and economic opportunities. For thesectors to be able to choose and for the vision to be sustained,the SRA asserts that there must be strong grassroots institutionsthat can effectively participate in self-governance.


10


There are laws that mandate government and non-government institutions to provide basic sectors access tofinancial services. These laws are directed either to institutionsin the financial system or to non-financial governmentinstitutions, or both. Also, in many instances non-financialgovernment agencies are directed to provide seed funds toinstitutions in the financial system for credit, guarantee,insurance, institution building and other financial services forthe basic sectors. Sometimes, these agencies are even asked tolend directly to end-borrowers at concessional rates. Theselaws, while not strictly financial laws, affect the effectivefunctioning of the financial market.4 On the other hand,regulatory agencies are directed by law to ensure the complianceof concerned institutions to specific regulations. For example,the Bangko Sentral ng Pilipinas (BSP) monitors the complianceof banks to mandatory credit allocations and applies appropriatepenalties for non-compliance.

The laws and regulations target formal financial institutions(such as banks and insurance corporations), cooperatives andnon-government organizations (NGOs) for the delivery offinancial services. The BSP regulates the formal financialinstitutions while the Cooperative Development Authorityregulates cooperatives. . There is no clear oversight body thatregulates the activities of NGOs. The Securities and ExchangeCommission (SEC) regulates only in terms of registration anddisclosure requirements (financial and organizationalinformation).

As shown in Figure 1, laws and regulations in the financialsystem affect the behavior of agents in the financial market.Financial institutions will make the appropriate adjustments

4 These laws are usually part of laws that address a bigger or sectoral concern.

11

to cover risks and costs associated with different characteristicsof agents in the market . Since the basic sectors are viewed asdisadvantaged (i.e., they are small and do not have collateralsto offer), government intervention was deemed needed toinfluence the allocation and pricing of credit.

The problem with the former (e.g., mandatory creditallocation) is that it forces lenders to act against their economicinterests. Rather than put funds to the most profitable use,institutions are supposed to lend funds to targeted beneficiaries.But the more profits a lender forgoes, the greater the economicpressure it feels to allocate current fund flows away from thetargeted population.

On the other hand, influencing the price of credit (e.g., aceiling on interest rate) may achieve a good portion of itsintended distribution effects in the short run. Beyond thatunintended costs are incurred. For one, the excess demandresulting from a ceiling will lead financial institutions to rationcredit resources towards the relatively bigger borrowers. Second,because of the ceiling, the price of credit would not be sufficientto cover the cost of administration. Third, the interest ceilingwill discourage savings mobilization because the return ondeposits is not enough to attract depositors. In essence, themain welfare cost results from inefficient financialintermediation between savers and investors.

Preferential credit allocation to specific sectors and interestrate ceilings or subsidies are characteristics of a supply-led policyenvironment. Savings mobilization is not viewed as an essentialfunction of financial institutions since rural people do not saveanyway and, thus, do not respond to price incentives. Hence,the government provides most, if not all, of the funds. As


12


previously discussed, this approach to credit delivery taxes thefinancial system since it leads to inefficient allocation offinancial resources (Shaw, 1973; McKinnon, 1973).

The current credit policy framework of the government isa reversal of the supply-led strategy implemented in the 60sand 70s. The basic elements are: (a) greater reliance on marketmechanisms in the allocation and pricing of financial resources;(b) termination of direct lending activities of non-financialgovernment institutions; and (c) greater private sectorparticipation in the delivery of financial services. This approachis envisioned to result in greater financial market efficiency(Fry, 1982). However, its realization may be thwarted by a“political” market for regulation that perpetuates inefficiencies.5

As institutions are directed to deliver credit to the basicsectors, transaction costs are expected to be higher due to thesmall loan sizes. This may cause lending institutions to shifttheir loan portfolio away from small and towards largeborrowers. However, lenders who want to continue providingmicro-credit to small borrowers will have to introduce financialinnovations to cope with transaction costs and risk problems.On the other hand, beneficiaries must learn to deal withfinancial institutions and develop their credit-worthiness giventheir relative inexperience in handling formal credit. Institutionand capacity building will play a major role in addressing thisconcern. Appropriate interventions in this area will facilitatethe steady access of beneficiaries to the services of financialinstitutions.

A legal mandate to lend to a targeted group will notnecessarily result in an individual securing a loan even though

5 This has been thoroughly discussed in the previous section.

13

his objective characteristics are identical, or nearly so, with otherapplicants who are able to obtain loans. The basic assertion isthat credit rationing occurs because of asymmetric informationabout the factors that influence the outcome of investmentprojects and the relative riskiness of basic sector borrowers.Even with a guarantee mechanism in place, financial institutionsmay still ration credit in favor of tried and tested borrowers.

The adjustment in the portfolio mix of financialinstitutions, particularly banks, will be influenced by the relativeattractiveness of alternative forms of assets. Funds may bedrawn away from the basic sectors as other financial investmentsbecome more attractive. Regulation may not even be able toarrest this as financial innovations intended at avoidance orcircumvention emerge.

The maturity structure of loans will adjust according tothe type of borrower. For borrowers in the basic sectors, therisks are perceived to be greater and therefore the maturity isexpected to be shorter. At the same time, monitoring andcollection systems suited for small borrowings will be designed.An example is the weekly collection and monitoring of loans.

Finally, laws and regulation can either promote or thwartsavings mobilization efforts. To the extent that they are able toinduce the accumulation of savings, loanable funds will begenerated without having to resort to scarce governmentresources. A supply-led approach, on the other hand, willdiscourage savings and will make the provision of financialservices to the basic sectors difficult to sustain.


15

A. General Laws and Regulations

The erstwhile Central Bank of the Philippines (CBP) starteda series of reforms in the financial market in the 80s whichcontinued on in the 90s. Interest rate ceilings were lifted; thesubsidized rediscount window was abandoned and mademarket-oriented; interest rates of subsidized credit programswere aligned with market rates; bank entry and branching wereliberalized; and universal banks were allowed to have expandedareas of equity investments. In 1994, Republic Act (RA) 7653changed the CBP to the Bangko Sentral ng Pilipinas (BSP).The new Charter strengthened the bank and gave it greaterflexibility and independence in the conduct of monetary policy.

As can be observed from its recent policy issuances, theBSP’s efforts have generally been directed at promoting greaterefficiency in the financial system. This overall policy thrust,however, has often been contradicted by laws and regulationsthat seek to allocate financial resources to specific sectors ofthe economy. Oftentimes these laws create distortions in thefinancial market rather than promote allocative efficiency.Annex A provides a summary of these laws and regulationsand their implications on financial intermediation. This sectiondiscusses the specific areas that these laws affect.

3Review of

Financial Lawsand Regulations

16

R e v i e w o f F i n a n c i a l L a w s a n d R e g u l a t i o n s

Intermediation Taxes. The liberalization of the financialsystem starting in 1981 has not resulted in the total eliminationof intermediation taxes on the financial sector. The taxesimpinging on the efficiency of financial intermediation includethe credit quota schemes, the gross receipts tax, the depositretention scheme, taxes on interest income and the reserverequirement. The general result is often higher lending rateswhich negatively affect real investments and the affordabilityof formal credit to the basic sectors.6

A credit quota or allocation scheme usually directs banks toset aside a certain portion of their loanable funds for targetedsectors. Because of this, banks do not have the flexibility toefficiently manage their loan portfolios since a fixed portion ofloanable funds are not channelled to the relatively more profitablesectors. As a result, banks incur additional costs, which may bepassed on to borrowers through higher interest rates.

The Agri-Agra Law (PD 717) and the Magna Carta forSmall Enterprises (RA 6977) mandate credit allocation totargeted sectors. Both are implicit taxes on financialintermediation.7 The Agri-Agra Law, passed in 1975, directsbanks to allocate 25 percent of their loanable funds foragricultural lending. Of the 25 percent, 15 percent should bealloted to general agricultural lending while 10 percent shouldgo to agrarian reform beneficiaries (ARBs). While banks havegenerally complied with the agricultural lending component,compliance with the agrarian component has largely beenthrough the purchase of reserve eligible government securitieswhich pay lower-than-market interest rates.8 PD 717 doesnot only raise the cost of intermediation, it also penalizes thenon-agriculture sector by depriving them of a fixed percentageof banks’ loanable funds.

17


The Magna Carta for Small Enterprises was legislated in1991. Among its provisions is a mandate to banks to set asidea portion of their loan portfolios to small enterprises accordingto the following schedule: at least five percent by the end ofthe first year of the effectivity of the law; 10 percent from thesecond to the fifth year, five percent on the sixth year anddeclining thereafter. Its effect on the cost of intermediationwas somewhat softened when the Central Bank allowed equityinvestments by member banks in, and loans by members banksto, the BAP Credit Guaranty Corporation (BCGC), as part ofcompliance with the mandatory allocation (provided, theBCGC extends its loans to small enterprises). (BSP Circular1385, 1993) This was, however, allowed only for one year (in1993). Hence, the relative flexibility of banks to manage theirportfolios arising from the alternative compliance was short-lived.

While RA 6977 directs credit to small enterprises, it doesso at the expense of financial market efficiency. In the longrun, the targeted sector does not really benefit due to the law’simpact on the cost of intermediation. But instead of liftingthe mandatory allocation, the Magna Carta for SmallEnterprises was amended in July 1997, extending the provisionon mandated credit allocation for another 10 years. In addition,banks were mandated to set aside at least six percent of theirtotal loan portfolio for small enterprise credit and at least twopercent for loans to medium-sized enterprises.

6 Annex A provide a summarization according to type of law/regulation in chronological fashion. In thissection discussion is provided by subject area that these laws/regulations affect.

7 It should be noted however that the distribution of the burden of these taxes depends on the elasticities ofsupply and demand. In general, borrowers bear relatively more of the burden the more elastic is supply andthe less elastic is demand.

8 There is implicit taxation because they distort the financial market without the government having todirectly impose or collect taxes.

18


Besides mandatory credit allocations, another implicit taxis the deposit retention scheme. This scheme requires banksto invest in the same geographical region at least 75 percent ofthe total deposits generated from that region, net of requiredreserves against deposit liabilities and the total amount of cashin vault (BSP Circular No. 24, 1994). This restriction distortsthe financial market since it narrows the area wherein bankscan lend. It, thus, prevents banks from exploiting betterinvestment opportunities outside a given geographical area.

Still another implicit financial intermediation tax is thereserve requirement. The tax is due to the (a) reduction inbanks’ loanable funds out of deposits and (b) lower-than-marketearnings on the reserves that are required to be deposited withthe BSP. Since banks have to pay interest on deposit liabilities,they recoup the forgone income from the reserve requirementby increasing their lending rates.9 However, reducing reserverequirements to improve financial intermediation is not thatsimple since lowering the reserve requirement involves a trade-off between intermediation cost and inflation.10

The BSP has recently reduced the reserve requirement ratio(Table 1). The required reserves on demand and savings depositsof commercial banks (KBs) was reduced to 14 percent effectiveJanuary 1997 and further to 13 percent effective July 1997(BSP Circular No. 119, 1996). This is a significant reductionsince the requirement was as high as 25 percent in 1991. Ruralbanks and thrift banks, on the other hand, have lower required

9 Investment in government securities as a form of compliance is allowed under PD 717. Further, RA 7900enacted on February 23, 1995 exempts banks from PD 717 provided they lend 5% of loanable funds forthe production, processing, marketing or distribution of high-value crops.

10 The penalty for non-compliance with the required reserve is stiff, - 1/10 of 1% per day on the amount ofdeficiency or the prevailing 91-day T-Bill rate plus three percentage points (CB Circular No. 8, 1993).

19


ratios due to the preferential treatment given them under theThrift Banks’ Act of 1995 (RA 7353) and the New Rural Banks’Act of 1992 (RA 7906). The reserve requirement on savingsdeposits for thrift banks is 12 percent effective January 1997and 11 percent effective July 1997. For rural banks, it is sixpercent effective January 1997 and 5 percent effective July 1997(BSP Circular No. 119, 1996). While the reductions will helplower the cost of intermediation and release more loanable fundsfor the economy, the uneven requirements for different typesof banks also cause distortions. Nonetheless, the extent bywhich the basic sectors are able to capture the incremental fundsassociated with a lower reserve requirement ratio for thrift banksand rural banks depends on how the banks perceive theircreditworthiness and bankability.

The gross receipts tax (GRT) is an explicit tax imposed onall receipts of a bank. Again, the increase in the cost ofintermediation is passed on to borrowers in the form of higherinterest rates. Under the 1981 Internal Revenue Code, theGRT for all finance companies was set at five percent. Withthe 1991 Local Government Code, this was changed to a ratenot exceeding 50 percent of one percent of gross receipts ofthe preceding year.

Finally, the 20 percent withholding tax on interest earnedfrom bank deposits weakens domestic resource mobilization(National Revenue Code, 1986). Where there is a hugedomestic savings-investment gap, an economy is forced to fillthe gap by tapping foreign resources such as foreign loans, grantsand aid. The amounts sourced externally will have implicationson the fiscal deficit and inflation as debts have to be servicedupon maturity. Savings, therefore, have to be mobilizeddomestically in order that there will be less pressure on the

20


fiscal budget and more resources available for capitalaccumulation and economic growth.

Interest Rates. Administrative ceilings on interest rates havebeen around since the enactment of the Anti-Usury Law in1916 (Act 2655). The law was virtually repealed in 1973 whenthe country’s monetary authority was granted the power tochange the interest rates “when warranted by prevailingeconomic conditions.” In 1981, the gradual freeing of interestrates formed part of the IMF-World Bank reform package.Since 1983, interest rates on deposits and loans of variousmaturities and rediscounts have been largely market-determined. In the long-run, the deregulation is expected tobring about greater transparency and deepening of the financialmarket. There will be increased incentive to invest in financialassets and greater efficiency in the pricing and allocation ofcredit. Also, it will lead to a better loan portfolio since viableprojects that have high rates of return are the ones financed.

While the pursuit of market interest rates has been thegeneral thrust since the 80s, legislated interest rates have,nonetheless, been a common feature in recent laws. Forinstance, the Comprehensive Agrarian Reform Law or theCARL (RA 6657, 1988) specifies that small landowners,farmers and farmers’ organizations should be extendedconcessional and collateral-free credit.11 As the government’slending arm for the agrarian sector, the Land Bank of thePhilippines (LBP) is seriously affected by this provision. Theprovision undermines its credit delivery program to the targetedsector since LBP’s cost of credit delivery is much higher thanthe 12 percent ceiling imposed on its lending rate to the agrariansector. For example, based on its foreign funds, LBP’s totalcost of credit ranges from a low of 21.1 percent to a high of

21


24.7 percent. On the other hand, the cost of credit on internalfunds or deposits ranges from a low of 15 percent to a high of28.8 percent (Table 2 and 3). This means that LBP has beenoperating below break-even. Hence, for LBP to sustain itscountryside lending operation, it has to rely on its commercialbanking operations and on appropriations from the nationalgovernment. The latter obviously has implications on the fiscalsector, particularly on the resources that need to be mobilizedto meet the requirements of small farmers. This shows thatthe cost of maintaining concessional rates on loans ultimatelyfinds its way back to the government.

The adoption of legislated concessional loans to smallfarmers affects the quantity, quality, and productivity ofagricultural investments since projects with low rates of returnmay be made artificially-viable by the ceiling. Over time, theconcessional rate may not be sustained and the projects financedmay fail. In a recent survey, it was reported that the repaymentrate of LBP farmer cooperatives was no greater than 50 percentfor the majority of the responses (Dingcong, 1997). Amongthe major reasons cited were project failure and low profitmargin. The LBP, nonetheless, has to follow its mandate inproviding concessional loans. In 1994, the LBP was furtherinstructed to increase its loans and financial assistance to farmersat low cost as a safety net measure under the GATT UruguayRound (AO 162). In response to this, LBP reduced its interestrates on agricultural production loans from 12 percent to 10percent.

11 Usually there is more than one combination of reserve requirements and inflation that cover a given level ofbudget deficit. Unless therefore the fiscal position is stable or the deficit manageable reducing reserverequirements will likely induce higher inflation.

22


The Magna Carta for Small Farmers (RA 7607, 1992)further reinforces the subsidized interest rate feature in theCARL. The law mandates that the interest rate on small farmerloans should not exceed 75 percent of the prevailing marketrate, inclusive of all service charges. Although this provisionallows the interest rate to follow interest movements in themarket, it still is a cap on the interest rate that can be charged.Still another law in the agriculture sector that legislates interestrates is RA 7900, providing for low-cost credit for thepromotion, production, processing and distribution of high-value crops. It sets interest rates based on the prevailing LBPrate, which, as provided for in the CARL, should beconcessional.

While major laws have been passed setting price limits oncredit to specific sectors, the BSP has been moving towardsallowing interest rates to move freely in the financial market.It has not subjected banks to any ceiling on lending rates forrediscounted papers covering agricultural production, cottageand small industries and financing of working capital (BSPCircular No. 52, 1994). No ceiling is likewise imposed on theamount of loans that banks can extend by various loan types(i.e., maturity structure, securitization, etc.).12 Similarly, thereis no ceiling on interest paid on savings and time deposits.13

The direction that the BSP is taking is consistent with thecurrent thrust of financial liberalization and will likely resultin a more efficient allocation of financial resources.

Nonetheless, what is apparent in the directives of lawmakersis not to set an administrative ceiling on interest rates in generalbut to direct government institutions to adopt ceilings on loansfor specific sectors. The effect is a decrease in the supply ofcredit to targeted sectors, rather than an increase (as the laws

23


hoped to achieve). This is because at the ceiling rate, theamount that lenders are willing to provide is smaller than whatthey would have been willing to lend at the market rate (andless than the amount borrowers would like to avail of at thatrate). With excess demand for credit, the group mostdiscriminated against are the small borrowers, the sector thelaw aims to protect. The end result is that small borrowers,particularly those in the basic sectors, have less access to formalcredit.

Bank Branching and Entry. Bank entry restrictions in themid- and late-80s consisted of: (1) strict prohibition of entryinto areas categorized as heavily branched and ideally-branched;(2) increased required reserves in government securities forpurposes of opening branches; (3) increased requiredcapitalization for banks of all types; and (4) an implicit rule inthe Monetary Board not to allow new banks and branches toenter.14 Towards the end of the 80s, monetary authoritiesinstituted a new policy of liberalizing bank entry and branching.In 1988 the CB eliminated the prerequisite investment ingovernment securities for opening branches and other bankoffices (Circular No. 1188). In 1991 it deleted the requirementfor banks wanting to establish branches to comply with therequired loans-to-deposit ratio for four consecutive quarters(Circular No. 1290). In early 1993, it further removed thepolicy of bidding out franchises to establish branches. Finally,in line with RA 7721 of 1994,15 the BSP allowed the entry of

12 RA 7906 is the Thrift Banks’ Act of 1995 while RA 7353 is the New Rural Banks’ Act of 1992.

13 RA 6657 provides that these collateral-free loans are to be based on social collaterals like guarantees offarmers’ organizations.

14 Central Bank Manual of Regulations for Banks and Other Financial Intermediaries, 1991.

15 Ibid.

24


foreign banks to attract foreign investments, enhance theefficiency of the domestic financial system and make Philippinebanking more globally competitive. All these reforms in bankentry and branching had led to an increased level of competitionand a relative improvement in the efficiency of the bankingsystem.

Table 4 shows the number and distribution of banks andbranches, particularly those of commercial banks andspecialized government banks. It is clear that the number ofbanks of different types (except thrift banks) increased from1989 to 1993. The number of rural banks increased but moreslowly than commercial banks. However, new banks andbranches are concentrated in the Metro-Manila area. As a result,bank offices in Metro Manila comprise one-third of all thebanks in the Philippines.

The liberalization of bank entry has led to improvementsin the bank density ratios of all regions (Table 5). However,there are still regions, such as the Autonomous Region ofMindanao, the Cordillera Region, Eastern Visayas, WesternMindanao, Cagayan Valley and the Bicol Region, that are notwell reached by banks. This reflects the preference of banksfor Metro Manila, presumably because of the bigger marketand better infrastructure compared to the lack of rural andregional development in other parts of the country. It is inthose regions with low bank density ratios where the povertysituation is relatively more pronounced.

The competition arising from a more liberal bank entryand branching policy has somewhat reduced the level ofconcentration in the banking structure. The spread betweenlending rates and deposit rates, a rough indicator of bank

25

concentration level, decreased from a high of 18 percent in1991, to 10 percent in 1992 and further to seven percent in1994 (Table 6). To a large extent, this drop in bank spreadscan be attributed to the incentives provided by the BSP forbank branching. These include the lifting in 1991 of thecompliance requirement with the loans-to-deposit ratio for fourconsecutive quarters. Also, banks were allowed in 1992 toestablish one branch in an area of their choice (without havingto bid) for every three branches that they were able to establishin 5th and lower class municipalities (CB Circular No. 1349).As the BSP continues to promote greater competition in thebanking system, concentration levels are likely to fall further.

Prudential Regulation. Financial liberalization requiresstrong prudential regulation and effective bank supervision.Inadequacies in these reduce public confidence in the financialsytem as well as in the monetary authorities (McKinnon, 1987).As seen from the experience of Latin American countries,financial liberalization is likely to fail whenever there ismacroeconomic instability and inadequate bank supervision(Diaz-Alejandro, 1985). The BSP, while moving towardsfinancial liberalization, has at the same time been ensuringstability in the banking system. As early as 1980, the CB hasbeen gradually increasing the minimum capital requirementsof various types of banks. In 1996, it required a new set ofminimum capital requirements (BSP Circular No. 117): P4.5billion for expanded commercial banks; P2 billion for ordinarycommercial banks; and P250 million for thrift banks withinMetro-Manila and P40 million for those outside Metro-Manila.These changes are important in enabling banks to generate agreater volume of business and in improving the public’sperception of their stability. Other recent regulations intendedto strengthen banks and influence the provision of financial


26


services, particularly in the countryside, are: (1) setting limitson the rediscounts of rural banks based on their credit ratings(Circular no. 76, 1995); (2) applying qualification standardsfor rural banks accessing loans from GFIs (Circular No. 58,1994); (3) providing incentives for mergers and consolidationamong banks and other financial intermediaries (Circular No.1312, 1991); (4) regulating RB’s capital adequacy ratio to notless than 10 percent of risk assets (Manual of Regulations, BookIII, 1991); (5) setting guidelines on rediscount ceilings for ruralbanks that need to supplement their operating capital for loansto agrarian reform beneficiaries (Manual of Regulations, BookIII, 1991); and (6) granting additional assistance to Rural banks(with satisfactory rediscounting repayment records)participating in special financing programs under supervisedcredit schemes (Manual of Regulations, Book III, 1991).

Deposit Insurance. The Philippine Deposit InsuranceCorporation (PDIC) was created by virtue of RA 3591 in 1963,primarily to insure bank deposits. In 1992, its Charter wasamended to make it more responsive to the needs of the bankingsystem. Changes include an increase in the authorized capitalto P3 billion; an increase in the deposit insurance to P100,000;an increase in the assessment premium of insured banks; and amandatory role as receiver of closed banks. While theseamendments are expected to bring more stability to the bankingsystem, deposit insurance could also lead to the entry of banksinto riskier financial markets. Like financial liberalization, itworks well when banks are regulated and supervised effectively.Given these prerequisites, deposit insurance can be highlyeffective in maintaining financial stability.

27

B. Role of Specialized Financial Institutions

Over the past 50 years, financial institutions have beencreated and existing ones rehabilitated, strengthened or re-organized to address the perceived financing needs of specificsectors. When commercial banks made little effort to penetratethe countryside and supply financial services to its residents, asystem of rural banks was set up (RA 720, 1952). Whendemand for medium and long-term development finance rosein the early years after World War II, development institutionssuch as the Development Bank of the Philippines (RA 85,1946)and a number of private development banks were created orencouraged (RA 4093, 1964). Recognition of the perceivedunfulfilled credit needs of small-scale industries led to thecreation of the National Cottage Industries (RA 3756, 1963).Similarly, the perceived shortage of financial services inMindanao prompted the establishment of the Amanah Bank(PD 264, 1973). Oftentimes, new financial institutions were“customized” to fit specific sectors. Hence, the legal frameworkwithin which they operated reflected rigidly the need (asperceived by legislators) for additional financial services ofspecific types of clientele. This approach to the organizationof the financial sector has prevailed to date.

Specialized Government Financial Institutions. The mostrecent financial institution organized to cater to a specific sectoris the People’s Credit and Finance Corporation (PCFC).Created on February 22, 1995 through Memorandum OrderNo. 262, PCFC became operational in June 1996. Fully-capitalized by the LBP, the objective is to use PCFC for povertyalleviation programs so that LBP can concentrate on itsmandate of financing agrarian reform beneficiaries and servicingagriculture’s growing demand for various financial services.


28


PCFC is an entity fully supervised and controlled by theLBP. It provides investment credit loans to accredited NGOs,financial institutions (FIs) and people’s organizations (POs)implementing credit assistance programs for livelihood projects.It also provides credit for institution and capability buildingactivities and other expenditures related to the lending program.

Following the establishment of the PCFC, the new charterof the LBP was signed into law on February 25, 1995 (RA7907). The bank’s authorized capital was increased from P3billion to P9 billion, enhancing its viability to perform vitalfinancial and development assistance to small farmers andfisherfolks. Moreover, the stronger capital base and greateroperational flexibility are expected to level LBP’s playing fieldwith other players in the banking industry. Among the changesintroduced in the new Charter is the strengthening of the bank’scapital base via the establishment of a national marketingumbrella for farmers and fisheries cooperatives to attract massivecapital formation from the savings deposits of thesecooperatives. This will not only aid in the further financialstrengthening of LBP but will also promote savingsmobilization nationwide which is essential for sustaining theoperations of farmers cooperatives.

Other amendments to the LBP Charter include therequirement for the Presidential Agrarian Reform Council(PARC)16 to provide funds from the Agrarian Reform Fund(ARF) to pay all obligations incurred as compensation tolandowners, and the allocation of at least 60 percent of theproceeds from the Asset Privatization Trust (APT) to the LBPfor payment of agricultural lands.

16 Presumably because of the financial crisis experienced in the early 80s that led to the collapse of a numberof banks.

29


These provisions, assuming sufficiently available funds fromsaid sources, will free LBP from the enormous burden ofservicing payments for its land transfer operations and allow itto concentrate on the delivery of financial services to smallfarmers and fishermen. However, if funds are not adequatelyavailable, LBP remains liable for the payment of bonds issuedto landowners. The mismatch in the payment structurebetween landowners and ARBs does not augur well for theLBP. The time period of 10 years for payments to landownersis much shorter than the 30-year land amortization scheduleof ARBs. Further, ARBs pay an interest rate of six percent perannum while the government pays the landowners LBP bondsat market rates. This mismatch in payment structure createsan instant financing gap that has to be sufficiently supplied bythe ARF and the APT. Otherwise, additional resources willprobably have to come from tax revenues.

At the forefront of LBP’s re-organization under its newCharter is the Unified System Program (USP). This principallyinvolves the merger of the branches and field office networksinto a single delivery system of a whole range of bank productsand services. With the comprehensive assistance offered, theLBP is expected to expand its outreach to small farmers andfisherfolks and provide banking convenience to them. Also,linkages will be formed with commercial clients, particularlyin the marketing of their produce resulting in improved ruralincomes. The USP is also envisioned to realize financial savingsvia lower operating expenses, thus strengthening LBP’s financialposition. Moreover, the savings in operating and capitalexpenditures will likely reduce the cost of credit delivery tofarmers. The USP, launched in 1995, will be completed in1997.

30


Part of the reforms in the 80s was the rehabilitation of DBPand PNB. On December 3, 1986, the government issuedrevised charters for PNB and DBP (EO 8O and EO 81,respectively). These two GFIs were accorded importancebecause of the size of their non-performing assets and theconcomitant budgetary losses these entailed to the government.The change in charters effectively relieved them from thefinancial burden of servicing their non-performing assets. Theobjective of the financial restructuring of the DBP was toreorient it into a wholesale bank with private sector orientationso that it will be able to mobilize long-term funds and act as amarket for long-term papers. This is essential because of thescarcity of term credits needed for economic development. Inthe case of the PNB, the objective was to retain its expandedcommercial functions and privatize it with the governmenthaving a minor share after the privatization. With thesereforms, DBP and PNB are still expected to performdevelopmental functions since their new charters mandate themto provide financing to agricultural and industrial small andmedium enterprises in the countryside. They are, however,required to be financially viable and not depend on governmentassistance.

The new policy regime in the mid-80s also effected thetransfer of special lending programs from the erstwhile CentralBank (CB) to the DBP and LBP. The rationale was to free theCB from all developmental banking functions and allow it toconcentrate on monetary management, regulation andsupervision. Hence, the Agricultural Loan Fund (ALF) andthe Integrated Rural Financing (IRF) programs were transferredto the LBP while the Industrial Guarantee Loan Fund (IGLF)was moved to the DBP. The IGLF and the ALF are exemptedfrom the legal reserve requirement on deposits arising from

31

their operations (CB Circular NO. 1133, 1987). Loans grantedunder the ALF facility to finance both seasonal productioncredit and medium and long term sub-loans for fixed assetsand permanent working capital were set at market-orientedlevels (CB Circular no. 1151, 1987). These measures enhancedthe sustainability of these special programs and released fundsto the agriculture sector. Further, in 1991 the CB exemptedfrom the reserve requirement, special time deposits of financialinstitutions under the special financing programs of thegovernment and/or international financial institutions being(or previously) administered by the CB (CB Circular No. 1276,1991). While it appears that the exemption was intended tolower the intermediation cost of special financing programs, areserve requirement that is different from that imposed on othertypes of deposit is inconsistent with market-oriented monetarypolicy.17

In 1988, the CARL paved the way for the transfer andattachment of the National Livelihood Support Fund (NLSF)to the LBP.18 The NLSF was designated as one of theinstitutions to provide support services to Agrarian ReformCommunities (ARCs). In 1993, AO 75 directed the transferunder LBP supervision of all NLSF assets and funds. In essence,NLSF is a fund used to provide livelihood credit andinstitutional development services for ARCs.

The Al-Amanah Islamic Investment Bank is anotherspecialized government bank recently provided with a newCharter. On January 26, 1990, RA 6848 was enacted into lawauthorizing Al-Amanah bank to perform banking, financing


17 An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for OtherPurposes, May 18, 1994.

18 Which the LBP co-chairs.

32


and investment operations and to establish agricultural,commercial and industrial ventures in the Autonomous Regionbased on the Islamic concept of banking. Among the privilegesgranted to the bank are an eight-year exemption from all taxesunder the National Internal Revenue Code related to itsconduct of business and exemption from all customs dutiesfor all importations. The establishment of the bank will provideincreased availability of banking services to the Islamicpopulation in the Autonomous region. Its exemption fromtaxes implies lower intermediation costs. However, being ahighly-specialized bank, it has a less diversified portfolio and alimited geographical outreach. In the long-run, both factorsmay take its toll on the bank.

The period from the mid-80s to the mid-90s has been atime of reforming the specialized government financialinstitutions. Strengthening these institutions to better servetheir targeted clientele has been the focus of charteramendments. All these efforts have not reduced the presenceof the government in directly providing financial services tothe basic sectors. In fact another financing agency, i.e., thePCFC, was created to handle a specific task of lending to thepoor.19

It is important to note that there is always the danger ofreverting back to the 70s when a proliferation of specializedfinancial institutions (particularly those of government) led tothe fragmented and segmented credit markets. As a result, therewas little competition among financial institutions,intermediation costs were high, and resource allocation wasinefficient. What that experience taught us is that creating

19 This provision is being effected even if the special funds have been transferred to GFIs because time depositsare usually subject to reserve requirement.

33


specialized institutions is not a panacea for the basic problemof credit allocation.

International experience over the past 40 years suggests thatspecialized institutions, particularly those that have attractedforeign resources, have failed completely. These institutionshave a mixed record in allocating funds to productivedevelopment projects (Gordon, 1983). Very few of theseinstitutions became self-supporting, autonomous financialinstitutions capable of mobilizing resources entirely oncommercial terms. This is partly because specialized institutionshave often been required by legal mandate to grant loans atlow interest rates, frequently negative in real terms (World Bank,1985).

The main problem with virtually all specialized financialinstitutions is that they are established to lend to those thatexisting financial institutions - the commercial banks - haveavoided. By and large, commercial banks choose not to lendwhen the perceived risks are too high. Hence, specializedfinancial institutions are deliberately set up to lend to high-risk borrowers. But instead of allowing them to charge higherrates for assuming higher risks, government subsidies andprivileges are provided. As a result, the specialized financialinstitution set up to support a problem sector of the economyitself becomes a problem institution. In the case of thePhilippines, this is true not only for specialized governmentbanks but also for rural banks.

Specialized Non-Government Financial Institutions. Ruralbanks had been the primary conduits of large-scale government-sponsored credit programs. Under the so-called “supply-leading strategy” of development finance, the government

34


provided rural banks with a host of incentives and subsidiesfrom the early 50s to the mid-80s. This strategy turned out tobe costly for the rural banking system. The availability of cheaploanable funds led rural banks to (a) neglect savingsmobilization and (b) follow less rigorous credit discipline. Thelatter, in turn, instilled among borrowers a “dole-out” mentality.Hence, when the government pursued financial liberalizationin the 80s and terminated rural banks’ special previleges, manyof these banks increasingly became insolvent and illiquid. Thus,years of government support only weakened the rural bankingsystem.

The rehabilitation of distressed rural banks began in 1987with CB Circular 1143 and 1172. The scheme was able tohelp some banks especially the stronger ones and those withdynamic and entrepreneurial managers (Agabin and Lim, 1993).The New Rural Bank Act 1992 (RA 7353) offered an evenmore generous scheme. The major incentives are: theconversion of past due loans into government preferred shares,the extension of concessional loans by the LBP and othergovernment banks to rural banks; the lower reserverequirements on deposits; and the grant of tax exemptionprivileges. While RA 7353 seeks to address the problems ofrural banks and enhance their viability, there are specificprovisions that are contrary to current policy.

First, mandatory subscription by GFIs to rural bank sharescontradicts the government’s privatization efforts. Second,allowing an appointive or elective public official to serve inany capacity in a rural bank raises the issue of conflict of interest.Third, extending concessional loans runs counter to the avowedmarket-orientation of financial and credit policies. Theseprovisions highlight the type of government support that is

35


not likely to strengthen rural banks in the long-run. Insulatingrural banks from competition through legislation and subsidieswill only perpetuate their inabilities to follow sound businesspractices that are based on independent assessments of risksand profits.

In recognition of the role of rural banks in promoting thebasic sectors, the BSP also issued specific regulations for ruralbanks to better serve the basic sectors. These includeauthorizations: to reduce interest rate by two percent as anincentive to farmer-borrowers (under supervised credit) whoare able to pay their loans in full on or before maturity date; togrant clean loans to meet the health, education and subsistenceneeds of farmers, farm families and merchants as well as otherinhabitants within their service areas; and to grant loans underthe supervised credit system. (Manual of Regulations, BookIII, 1991).20

Over the course of the 1960s, several laws were passed tostrengthen other types of financial institutions and make themmore responsive to the needs of the basic sectors. In particular,RA 3779 was passed in 1963 to ensure the sound, stable andefficient operation of Savings and Loan Associations (SLAs).The law came in recognition of the importance of SLAs inproviding financial services to small member-borrowers.

In 1964, the Private Development Banks’ Act (RA 4093)was promulgated to provide medium- and long-term loans foragriculture and industry. Among others, it allowed the DBPto subscribe to the initial capitalization of a private development

20 NLSF is wholly comprised of Kilusang Kabuhayan at Kaunlaran (KKK) accounts made available forlivelihood projects during the Marcos regime.

36

bank. However, despite the proliferation of development banksin the countryside following RA 4093 and the huge demandfor term loans, lending for longer-term projects remainsminimal (Segura, 1977; ACPC, 1993). Banks continue to prefershort-term loans to protect themselves from adverse changesin interest rates (ACPC, 1993; Lamberte, 1991). The fewfinancial institutions that have extended medium and long termloans have done so either because of their mandates or becauseof the availability of seed funds from multilateral organizations(ACPC, 1993).

In 1995, a new Thrift Banks Act was passed (RA 7906)topromote agriculture and industry and provide easy access tomedium and long-term credit facilities at reasonable cost. Thislaw encourages the mobilization of savings from the public bygranting thrift banks preferential terms on reserve requirements,unrestricted branching rights within a region, and taxexemptions (with the exception of corporate income taxes andlocal taxes) for a period of five years. As in the case of ruralbanks, these privileges only promoted inefficiencies in the thriftbanking system.

In support of RA 7906, the BSP has also made availablepotentially larger credit funds to thrift banks through its existingfacilities. These include rediscounting privilege coveringspecific papers (such as agrarian reform credit under PD 717),access to BSP credit facilities for supervised lending operations,and rediscounts of up to 100% of networth (Manual ofRegulations, Book II, 1991).


37

C. Guarantee and Insurance Schemes21

In 1986, the consolidation of special lending funds of theDepartment of Agriculture (DA) into the ComprehensiveAgricultural Loan Fund (CALF) signalled a radical shift in thepolicy orientation of the government (EO 113). As part ofthis new policy orientation, direct lending programs wereterminated. Instead, agricultural credit guarantee schemes werepromoted and expanded through capital allocation from theCALF portfolio. The underlying view was that the key tointegrating the rural financial market into the formal financialsystem is the introduction of financial innovations to reducelending risk and administrative cost. Credit guaranteemechanisms were perceived to be less distortionary becausethey leave intact the decision processes and institutionalrelationships of the private credit market. As such, they werealso perceived to be generally cost-effective since a guaranteeinstitution, unlike direct lending programs, can leverage a givenfund base by a multiple (Bautista, 1992).

Experience with credit guarantee schemes, however, has notbeen very promising. Studies reveal that guarantee programshave not resulted in the expected expansion of outreach offormal credit in the rural areas (Llanto et al, 1991; Llanto andMagno, 1994). Banks still prefer to lend to their regularclientele, perhaps doubting the adequacy of guarantee facilitiesto meet sufficiently large claims. Collateral was required despitethe presence of the CALF guarantee. Thus, access to formalcredit remains a problem for small borrowers even with theguarantee.


21 There are current initiatives through a pending bill in Congress to privatize PCFC.

38


Despite the ambiguity of credit guarantee, laws have beenissued to create and re-organize guarantee institutionsspecifically intended to induce private banks to lend to smallborrowers. LOI No. 1308 (1983) established the KKKGuarantee Fund as a special account in the CB to guaranteesmall- and medium-sized KKK loans released through banks.Initial funding came from the Economic Support Fund. TheFund evolved into the Guarantee Fund for Small and MediumEnterprises (GFSME) which caters to the financing needs ofSMEs. In 1991, the Small Business Guarantee and FinanceCorporation (SBGFC) was created to provide variousalternative modes of financing for small enterprises and toguarantee loans obtained by qualified borrowers (RA 6977).The following year, the Quedan Guarantee Fund was re-organized and renamed Quedan and Rural Credit GuaranteeCorporation (1992).

To strengthen the implementation of the CARP, RA 7905was signed into law in 1995. Among others, it called for thecreation of a guarantee fund for agricultural landowners thatwill enhance the collateral value of their lands affected by theCARP. Presumably, this provision was made in response tothe non-negotiability of government-issued land instruments(such as Emancipation Patents (EPs)) used as collaterals in bankloans. That is, since EPs are non-transferrable, if the farmerdefaults on his loan, the EP reverts to the farmer. This prejudicesthe bank’s right to foreclose the property (PD 27; RA 6657).Indeed, based on a bank survey, private banks do not acceptfarm lands as collateral due to, among others, the uncertaintiesover land ownership created by the implementation of theCARP (Llanto and Dingcong, 1994). For banks that acceptfarm lands as collateral, the land is required to not exceed thefive-hectare CARP retention limit. Among the different types

39


of banks, only rural banks are allowed to foreclose lands coveredby the CARL (RA 7353 1992).

Also, RA 7900 (1995) created the High Value CropsDevelopment Fund (HVCDF) with an initial capital of P1billion to be sourced from the Comprehensive AgriculturalLoan Fund (CALF). Managed by the LBP and the DBP, partof the fund was to be used for low-cost credit for farmers andfarmers’ cooperatives and the other part for high-value cropinsurance. Credit guarantee was to be provided by Quedancor.Participating banks are exempted from the Agri-Agra Lawprovided they lend a minimum of five percent of their loanablefunds to the sector.

In 1995, RA 8175 gave the Philippine Crop InsuranceCorporation (PCIC) a fresh mandate. The Act increased thecapitalization of the PCIC; expanded the coverage ofagricultural insurance to include other crops such as coconut,coffee and pineapple and non-crop agricultural assets such asmachinery, equipment, transport facilities and othe relatedinfrastructure; created a state reserve fund; and allowed PCICto undertake reinsurance. The charter amendments wereintended to enhance the viability of PCIC’s operations andaddress the insurance requirements of small farmers moreeffectively. Moreover, the expansion of agricultural insurancecoverage was envisioned to provide broader protection to smallfarmers and fishermen and reduce PCIC’s risks throughportfolio and asset diversification.

40


D. Role of Non-Financial Government Agencies22

Direct Lending. Experience over the past 20 years has shownthat non-financial government agencies cannot be bankers. Forone, they do not have the capacity to assess project viabilityand to monitor and collect loans. The resulting high level ofdefaults jacked up administrative costs which, in turn, ate up alarge proportion of the treasury-sourced budgets of the agencies.Moreover, another problem with direct lending by non-financial government agencies is their exposure to politicalinfluence (not to mention harassment) as they make decisionsrelated to loan approvals and collections. Lastly, non-financialgovernment agencies have to rely on external funding to meetall the fund requirements of the intended beneficiaries. Withits scarce resources, the government cannot accommodate theestimated requirements for lending to targeted beneficiaries.

With the change in government in 1986, Executive Order(EO) 113 terminated all direct lending programs of non-financial government agencies and consolidated some 20agricultural credit programs into the CALF. However, whilethe policy of government has been to abandon direct lendingby non-financial government agencies, the existing realitiesseem not to support it. In 1987, EO 158 created the “Tulongsa Tao Fund”. The Fund seeks to provide credit for microentreprenuers, create employment and enhance income in ruralareas, and develop and strengthen NGO capabilities for theimplementation of livelihood projects. The EO mandated theDepartment of Trade and Industry (DTI) to administer theFund and determine the conditions and availments of the Fund.Clearly, DTI’s involvement in credit management and decisioncontradicts the policy of no direct lending.

22 Provisions in the Manual of Regulations apply unless amended or revoked through issuance of a BSP Circular.

41

Similarly in 1987, the Technology Resource Center (TRC)became the Technology and Livelihood Resource Center(TLRC). It was mandated to act not only as the technologydelivery arm of the government but also to further livelihoodopportunities. This new mandate opened the door for TLRC’sdirected credit programs, which remain operational to date.

In November 1988, Cabinet Resolution No. 29 was passedas part of the anti-poverty campaign of the Aquino government.It contained an approved set of policy guidelines forgovernment-sponsored livelihood programs and vested theDepartments of Agriculture, Trade and Industry, Labor andEmployment, Agrarian Reform, Social Welfare andDevelopment, Natural Resources, Education, Culture andSports, and Local Government with the primary responsibilityof implementing livelihood programs and projects. While onlythe Department of Social Welfare and Development (DSWD)was allowed to engage in direct lending activities, the resolution,nonetheless, allowed non-financial agencies to extend creditthrough banks and NGOs. Thus, the Cabinet Resolution,which explicitly allowed regular non-financial governmentdepartments to implement livelihood programs and projects,circumvented the normally tedious process of securing approvalwhen using budgetary appropriations for directed creditprograms (OECF, 1995; Esguerra, 1996). This measure openedthe floodgates to various livelihood programs and projectssponsored by government agencies in the name of povertyalleviation. It directly contradicted efforts taken in 1986 toconsolidate numerous programs in agriculture. It also ignoredthe costly experience in the 70s of direct lending by governmentline departments (Esguerra, 1996).


42


Following the Cabinet Resolution, there was a proliferationof livelihood programs administered by government non-financial agencies. The Overseas Workers (OWI) Fund Act(RA 7111, 1991) established a credit facility for the livelihoodprojects of overseas workers. An OWI Fund Board was createdto administer the Fund, with loans extended at concessionalrates.

Likewise, the Local Government Code (RA 7160, 1991)enabled LGUs to secure loans from banks and lendinginstitutions for livelihood projects and other economicactivities. LGUs can also access financing and guaranteefacilities through the Bagong Pagkain ng Bayan (BPnB) foragricultural and support projects. In 1992, the BPnB wastransferred to TLRC giving TLRC an additional mandate toprovide financial services to LGUs. These laws, created insuccession, promoted a supply-led approach to credit. Theyencouraged non-financial government agencies to go into directlending, mandated funds be delivered at concessional rates,and allocated credit to specific sectors.

Still another legislation that promotes direct lending is RA7368 (1992). The Act created the CountrywideIndustrialization Fund (CIF) to finance the industrializationprojects of towns and cities. The Countrywide IndustrializationOffice (CIO), which is attached to the DTI, was set up tomanage the fund. The CIO Management Board makes thefinal credit decision while the conduit bank simply releases thefunds.

In 1994, AO 148 created the Task Force on Credit for thePoor under the Presidential Commission to Fight Poverty(PCFP). Its main task was to review the existing government

43

credit programs for the poor with the end in view ofrationalizing these programs and formulating a Master Planfor the PCFP. While the PCFP has already beenoperationalized, the proliferation of subsidized livelihood andcredit programs seems not to reflect the concept ofrationalization.23

In 1995, RA 7882 was passed providing credit assistanceto women engaged in micro and cottage business enterprises.Under the law, GFIs were to extend loans at the lower of banks’prime rate or at 12 percent per annum. The law mandated theBureau of Small and Medium Business Development of theDTI to implement the Act. Further, GFIs were directed toearmark five percent of their loan portfolio for women coveredunder the law. Clearly, this Act has all the ingredients that distortthe credit market.

It is important to note that even before the reforms in the80s, there were already non-financial government agenciesmandated to go into direct lending. Among these agencies arethe DSWD (RA 5416, 1969) and the Rural Workers’ Officeof DOLE (PD 1365, 1978).

In recent years, the General Appropriations Act24 has setaside large amounts of financial resources to support thegovernment’s drive against poverty. The two major fund sourcesare the Countrywide Development Fund (CDF) and thePoverty Alleviation Fund (PAF). While the intentions areindeed meritorious, these allocations have great potential indistorting the credit market. These resources find their way in


23 Guarantee institutions and programs are reviewed in greater detail in a separate survey. This section merelyfocuses on the legal basis for these schemes.

24 Refer to Annex B for a summary.

44

the budgets of non-financial government agencies to financelivelihood and credit programs.25 Line agencies evaluate andselect the conduit or beneficiary group, and in some cases, withthe endorsement of the Congressman or Senator concerned.26

Ceilings on interest rates are also imposed. This credit deliveryapproach to targeted sectors is clearly not consistent with thegovernment’s policy of promoting greater efficiency in thepricing and allocation of financial resources. It is, however,important to note that recent guidelines on the use of the PAFindicate that funds for livelihood will be used only for capabilitybuilding and not for extending credit.

Coordinating Bodies. Coordinating bodies were organizedin the mid-80s to put to order the various credit programs ofthe government. EO 113 (1986) created the AgriculturalCredit Policy Council (ACPC) to synchronize all credit policiesand programs in support of the DA’s priority programs. TheCouncil is mandated to review and evaluate the economicsoundness of all on-going and proposed agricultural creditprograms. The same EO mandated the consolidation of allexisting and future agriculture and agriculture-related loanfunds under the CALF.

Cabinet Resolution No. 29 (1988) designated the SocialDevelopment Council (SDC) as the coordinating body forlivelihood development programs and projects. SDC isresponsible for monitoring and evaluating livelihood projects.It reports to the President and the Cabinet.


25 There are at least 111 directed credit programs based on the NCC report.

26 See for example RA 8250, General Appropriations Act of 1997 and EO 363, August 23, 1996 which setsthe guidelines for the allocation of the Poverty Alleviation Fund.

45

AO 86 (1994) created the National Credit Councilcomposed of respresentatives from government financial andnon-financial agencies and private sector organizations. TheCouncil is tasked to rationalize the various credit and guaranteeprograms of the government, define the role of guaranteeagencies, develop a national credit delivery system gearedtowards productive capability of beneficiary groups andefficiency and effectiveness of financial intermediaries, andencourage private sector participation in credit delivery in thecountryside.

It is interesting to note that while these coordinatingagencies were created to rationalize the various credit programs,directed credit programs have continued to proliferate. Manyof these adopt subsidized interest rates and direct lending bynon-financial government agencies. The problem is that noneof these coordinating bodies are empowered by law to enforcethe necessary penalties for non-compliance. Also, there is noclear authority vested upon them to approve, disapprove andterminate projects.

Another coordinating body recently created is the NationalCommission on Savings (EO 364, 1996). The Commission isdirected to take the lead in accelerating capital formation,particularly through savings in banks and other financialintermediaries. The E.O. is timely in view of the absence ofsavings mobilization in many of the existing financial laws.

E. Role of Cooperatives and NGOs

The government’s thrust towards private sector involvementin development and people empowerment at the grassrootslevel gave rise to non-bank financial institutions servicing the


46

basic sectors. There are now cooperative credit unions andvarious self-help groups (including farmers’ cooperatives)encouraging savings mobilization among small rural folks andproviding lending to their members. Similarly the rise of NGOsin the rural areas has increasingly contributed to fundingwholistic and integrated rural development programs. Theseinclude livelihood and rural industry projects.

Cabinet Resolution No. 29 clearly supports the role ofNGOs27 in institution building and as conduits of lendingprograms. This role was further articulated in the NCC PolicyGuidelines for Credit Programs (1994). Since theseorganizations deal closely with targeted beneficiaries, they areable to gather better information about the creditworthinessof small borrowers. Hence, the problems associated withasymmetric information are not as severe as those faced byprivate financial institutions.

NGOs involved in credit delivery however are hamperedby institutional constraints (Llanto, Garcia and Callanta, 1996).The General Banking Act (RA 337, 1948) does not allow themto lend through the receipt of deposits of any kind. Hence,they have to rely heavily on donors and funding agencies. Also,as non-formal financial institutions, they cannot raise sufficientequity. Furthermore, unlike banks, they are constrained notto have extensive and viable networks for delivering services tothe poor. All these contraints tend to hamper NGOs’ expandedoutreach and long-term sustainability.

In 1990, RA 6938 was passed ordaining the CooperativeCode of the Philippines. The Act promotes the growth and


27 A separate survey on directed credit program forms part of the CPIP set of studies and hence is not discussedin this paper.

47

development of cooperatives. Specifically, it recognizes the roleof cooperatives in the provision of financial facilities and non-formal education to members. It also allows cooperatives toorganize among themselves a cooperative bank. Cooperativesare exempted from taxes on transactions to members.

Together with the Cooperative Code, RA 6939 was passedcreating the Cooperative Development Authority (CDA). TheCDA has powers to develop and conduct training programsfor cooperatives, merge and dissolve cooperatives, cancelcooperatives’ certificates of registration, and assist cooperativesin arranging for financial and other forms of assistance, amongothers.

The Magna Carta for Small Farmers (1992) is another lawthat highlights the role of cooperatives and NGOs. It mandatesthe DA, through ACPC and other concerned agencies, to givesubsidies for education and training of small farmers on creditawareness, loan acquisition and loan repayment. Further, itmandates an information drive to promote the establishmentof strong and viable farmer’s organizations such as cooperatives,credit unions, rotating savings and credit associations andNGOs, which play a major role in increasing small farmers’access to credit. In order to have greater outreach to smallfarmers, the Act promotes the growth of networks ofdevelopment banks.

These laws, including the CARL, brought a resurgence ofinterest in cooperatives from the latter part of the 80s up tothe 90s. Since the enactment of the CARL in 1988, the LBPhas shifted from individual lending to wholesale lendingthrough cooperatives and rural financial intermediaries. LBPlending to cooperatives has grown dramatically a few years after


48

the CARL was launched. In the 90s, however, lendingcontracted. LBP became more cautious as high past due rateswere registered in cooperative lending. In 1995, theCooperative Accreditation Program was launched to helpcooperatives transform into viable and bankable community-based enterprises.

Two reasons appear to explain the non-sustainability ofmany cooperatives: the lack of maturity; and the wrongmotivation to organize (many do so not voluntarily but becauseof government initiatives) (Dingcong, 1997; Llanto, 1994).However, with the appropriate supervisory and regulatoryenvironment, as well as efficient management policies andpractices, credit cooperatives can grow into self-reliant and self-sustaining financial institutions. They have enormous potentialin providing self-sustaining financial services to small borrowers,especially if capitalization is adequate and members’ share andcapital are adequately protected (Llanto, 1994).

In 1994 the general framework for fighting poverty wasspelt out in Memorandum Order (M.O.) No. 213, otherwiseknown as the Social Reform Agenda. The expansion of creditin all the basic sectors was identified as one of the “flagship”programs. The Agenda launched a “Credit-for-the-Poor”program with (a) a socialized credit program using the GrameenBank Approach for the ultra poor, (b) active and sustainedcooperative formation and development for the average poor,and (c) dynamic mainstreaming for the near-poor. Thiscomponent of the credit flagship program seemed to promotea supply-led approach to credit delivery. It transmitted theperception that in socialized credit, large amounts of financialresources are directed to the poor at concessional rates.However, without satisfying viability and sustainability


49

conditions, these socialized programs are not likely to succeed.In this regard, the LBP has been designated as the trustee bankfor socialized credit programs with cooperatives and NGOs/POs as actual program implementors. Accreditation of theseprogram implementors is to be carefully undertaken to ensurethe effectiveness of the programs.


51

Existing financial laws and regulations affecting theprovision of financial services to the basic sectors often conflictwith the government’s thrust towards financial liberalization.The transition appears to be slow because of the more thantwo decades of heavy regulation and subsidies that permeatedthe financial sector. Some of the laws that should have beenabolished remain. The difficulty lies, in part, on the fact thatrecent legislations are still reminiscent of the supply leadingstrategy of the 60s and 70s.

Despite the policy reforms that started in the 80s, financiallaws and regulations continue to be generally repressive.Mandatory loan allocations, the deposit retention scheme, thegross receipts tax, reserve requirements and taxes on interestincome remain. Positive developments, however, can be notedin recent reductions in the reserve requirements.

While the BSP has been exerting effort to fully deregulateinterest rates, legislation that mandate ceilings abound. Thisconflict thwarts the gains made in allocative efficiency. Theimplications of an administrative ceiling on interest rates arewell known and documented, yet it has become, and still is, apopular course of policy action. Reversing the legislation is

4 Conclusions

52

doubly difficult because of the tedium in amending orabolishing laws.

The BSP has been doing its part in promoting greaterefficiency and competition in the banking industry. It hasliberalized bank entry and branching policy. This has led to(a) an increase in the number and distribution of banks andbranches, (b) improved bank density ratios for all regions and(c) reduced bank concentration levels (as seen in narrowingspreads between bank lending and deposit rates). Also, signsof financial deepening have been observed with the ratio ofmoney supply to GDP rising since 1993 and reaching about40 percent in 1995 (Table 7). Nonetheless, while the BSP ismoving towards financial liberalization, its positive moves canbe deterred by subsidy promoting legislations.

Specialized banks, specifically, Al Amanah Bank, rural banksand thrift banks, have been getting preferential treatment.These banks are exempted from the GRT and have lower reserverequirements. While these exemptions lead to lowerintermediation cost for these institutions, they distort thefinancial system since they are selective and do not cover otherinstitutions performing financial intermediation functions. Inaddition, these specialized financial institutions enjoy implicitsubsidies in the form of tax exemption (e.g., customs duties)28

from all except corporate income taxes and local taxes. Further,government banks are directed to extend loans to rural banksat concessional rates. These subsidies create inefficiencies inthe financial market and the government ends up bearing alarge part of the cost.

28 A case in point is DTI’s assistance to micro enterprise development program (AMEDP) and sectorallivelihood program.

C o n c l u s i o n s

53

Despite privatization efforts, existing banking laws do notseem to reflect a diminished government presence. Governmentsubscription in rural banks, emergence of new governmentfinancial institutions, and rehabilitation and strengthening ofspecialized banks through increased capitalization and transfersof assets and liabilities suggest growing government involvementin financial markets. Only the privatization of the PNB underits new charter appears to signal less government presence. But,as in the case of the DBP after its rehabilitation, the PNB is stillexpected to perform development functions.

The other banks with new charters are the LBP and Al-Amanah Islamic Investment Bank while the newly-organizedinstitutions are the SBGFC and the PCFC. These specializedinstitutions are set up or given new charters to provide financialservices to sectors that commercial banks and other privatefinancial institutions have avoided. Because of the relatively highrisks associated with these types of borrowers, these institutionsmust be compensated with higher loan rates for assuming higherrisks. However, this does not seem to be the case as reflected inthe laws on interest rate ceilings.

One of the problems associated with having too manyspecialized institutions is the fragmentation of credit programsresulting in higher administrative costs. This is also likely to betrue for special funds. In recent years, there have been a numberof special funds created by law for livelihood and credit. Theseare the NLSF, HVCDF, CALF, CIF, PAF, CDF, agrarianguarantee fund, TST fund, trust fund for the Credit for thePoor, ARF, etc. To the extent that they affect the fiscal budget,these funds may have to be reviewed and rationalized.Consolidation may be necessary for those funds that duplicateeach other.


54

Greater protection has been accorded to bank depositorswith the amendments to the PDIC’s Charter. To the extentthat there is adequate supervision, the amendments are alsoexpected to bring more stability into the banking system.

Since the mid-80s, laws promoting guarantee schemes werepassed targeting small borrowers in specific sectors. However,experience with the agriculture credit guarantee scheme hasnot been very positive. There was no significant expansion ofaccess to credit among small farmers. Banks continued to caterto regular and tested clients and required collateral even in thepresence of the guarantee.

Government has not veered away from direct lending bynon-financial agencies. Several pieces of legislation have beenpassed directing non-financial government agencies to managecredit programs and make credit decisions. Many of theselaws even mandate the adoption of subsidized interest rates.Administrative costs of these mandated direct lending programsusually eat up a large proportion of the treasury-sourced budgetof the agencies. Given scarce government resources, financingthe requirements of direct lending programs will exert pressureon the fiscal budget. Meanwhile, government has to deal withcompeting development concerns such as those in education,energy and infrastructure. Adequate funding from tax andnon-tax sources is also needed for these sectors. If thegovernment’s revenues are not able to catch up with itsexpenditures, the fiscal deficit will rise. Financing the deficitthrough money creation will generate inflationary pressuresbecause of substantial amounts that have to be raised over theperiod of program implementation. On the other hand, theflotation of government securities will put pressure on interestrates to rise. Similarly, foreign borrowing will increase the debt


55

stock. These point to the need for reforming the direct lendingapproach to targeted disadvantaged groups.

Recent laws have stressed the importance of cooperativesand NGOs in the provision of financial services to the basicsectors. Their emergence has enabled groups previouslyunserved by private banks to access credit and savings facilities.Credit cooperatives and credit NGOs possess informationtechnologies in screening and monitoring small borrowers thatare not otherwise available to private banks. Also, they havegreater outreach to the poor. A major constraint, however, inthe growth and sustained development of these institutions isthe absence of regulation and supervision. Like banks, theytoo are subject to risks that can lead to financial failures andclosures. The CDA currently assumes the regulatory role forcredit cooperatives. However, its mandate to promotecooperatives and regulate them at the same time seem to beconflicting objectives. The capability of the CDA to performregulatory functions is another constraint. In the case of creditNGOs engaged in savings mobilization, there is no singleagency performing the functions of regulation and supervision.It should be noted that these institutions differ in the risksthey face compared to banks (Vogel, 1997). Their mission,organizational objectives and structure also differ. Supervisionand regulation of these institutions, therefore, need not be asrigid as those applied to banks (Llanto, 1994; Llanto, Garcia,Callanta, 1996; Vogel, 1997).

Coordinating bodies have been created to oversee andrationalize credit programs. However, despite the presence ofthese bodies, fragmented credit programs continue to persistas a result of laws formulated by Congress. These programs,many of which are directed to targeted beneficiaries, mandate


56

non-financial government agencies to perform direct lendingfunctions and lend at a fixed interest rate. Coordinatingagencies are ineffective in regulating and rationalizing theseprograms because they lack the power to enforce penalties forviolations. These agencies have no clear authority to approve,disapprove and terminate projects.

A positive development in the formulation of laws andregulations in the post-1986 regime is the inclusion of savingsmobilization and institution building. These are criticalingredients for sustaining a credit delivery system. The lack ofthese ingredients led to the failure of supply-led programs inthe 70s. If the government is to make a significant impact onpoverty alleviation, it should focus on institution building,training and savings mobilization rather than on supplying largeamounts of cheap credit.

In sum, despite the overall policy framework of promotinggreater efficiency in the financial market, many laws are largelycharacteristic of the supply leading approach of the 60s and70s. At the program and sectoral level this disparity is evenmagnified. Legislation to address the financial requirementsof the basic sectors has often created unintended effects. Apositive note, nonetheless, is the BSP’s initiatives to increasecompetition and efficiency in the financial market. Thechallenge really lies in reversing and preventing laws andregulations that are inconsistent with the government’s thrustto free the market of distortions and improve the allocation offinancial resources.


57

Based on the results of the review, this section providessome broad recommendations to improve and rationalize thecredit policy environment. The necessary administrative andlegislative measures are highlighted.

Review of intermediation taxes. Although a much moreliberal bank entry and branching policy now exists, thecontinued imposition of various intermediation taxes as wellas portfolio restricting measures contribute to highintermediation costs. These taxes reduce financialintermediation, which in turn, affects overall economic growth.It is therefore, important that they are eventually abolished.In view of their fiscal implications, however, a time-boundphased reduction program may be undertaken, taking intoaccount the revenue (and monetary in the case of reserverequirements) implications of their reduction.

The Agri-Agra loan quota should be lifted. The agrirequirement is redundant since the scope for profitableagricultural lending is substantial and generally complied with.On the other hand, the agra requirement is inappropriate and,in any case, does not result in increased lending for ARBs.Likewise, the mandatory requirement for small enterprises is

5 Recommendations

58

sufficiently complied with and is unnecessary.29 The phase-out or outright abolition of these implicit taxes requires an actof Congress. The same can be applied for the explicit GRT.

On the other hand, the abolition and/or further relaxationof the deposit retention scheme and the reduction of reserverequirement need only appropriate action by the MonetaryBoard.

Abandon the adoption of interest rate ceilings particularlyon those programs not supported by any law. This will have theimmediate impact of reducing financial losses of government-subsidized credit programs. In the long-run it will improveefficiency in the utilization of funds. Abandoning interest rateceilings will require implementing financial institutions to liftthe ceilings and non-financial institutions to transfer theirprogram lending functions to GFIs. However, for thosesupported by law, an increased level of advocacy with Congressneeds to be done.

Abandon direct lending by non-financial governmentagencies. Government line agencies do not have the capabilityto assess project viability, monitor loan usage, and collect loansat a level and margin adequate to cover both the administrativeand high levels of default. Most of the lending programs directlyimplemented by government non-financial institutions aresupported by laws and, therefore, would require reversal byCongress. Advocacy on the fiscal implications and theineffectiveness of the direct lending approach are necessary.

Formulation of a legislative agenda that would define theneeded reforms on financial laws and regulation affecting the

R e c o m m e n d a t i o n s

29 Information provided by Ma. Piedad Geron.

59

R e c o m m e n d a t i o n s

basic sectors. The agenda should identify specific legal issuancesthat need to be revoked and revised and propose alternativelegal measures that will promote greater efficiency in thefinancial market. It should also review pending bills in Congressand identify those that thwart or promote the reforms.Coordination and advocacy with Congress and concernedsectors have to be undertaken to effectively push the agendaforward.

Review and rationalize various special funds earmarkedfor the basic sectors particularly those that source appropriationsfrom the national budget. These fragmented special funds incurhigh administrative costs and, in many cases, are likely toduplicate each other. Rationalization of these funds wouldrequire a policy coordinating body such as the NCC to act asan overseer. It should be noted that many of these funds werecreated by law and therefore would require an act of Congressto effect their transfer, consolidation, and the like.

Rationalization of coordinating agencies created to overseeand rationalize credit programs. Currently, this is done in asporadic fashion. What is perhaps needed is a single agencythat is provided with sufficient police powers to ensure thatcredit programs are consistent with the government’s overallpolicy objectives. Legislation may be needed in order to attainthis goal. The transfer of the NCC secretariat to the DOF is amove in the right direction. However, further review needs tobe done to rationalize the remaining coordinating bodies.

61

To provide further bases for rationalization and policyformulation, the following studies are suggested:

Impact of the New Rural Bank Act. Given the relativeimportance of rural banks in the countryside, this study willfocus on the impact of the law on the efficiency and financialperformance of the rural banking system five years after itseffectivity. Given that a more generous scheme was granted toailing rural banks under the Act, the study will also look into thefiscal effects of the subsidies and assistance provided by thegovernment. These include tax exemptions, conversion of pastdues into government shares and concessional loans granted torural banks. Government financial losses arising from theseinterventions will be documented. A similar study can also bedone for the Thrift Banks Act and the Al-Amanah Bank. Thesebanks have also received explicit and implicit subsidies, the extentof which in terms of fiscal magnitude is unclear. It would beinteresting to look into the viability of the lending operations ofthese institutions given the privileges they enjoy from thegovernment. Further, the viability of specialized governmentfinancial institutions is critical not only in terms of providingsustained financial services to the basic sectors, but also in termsof fiscal support. This is particularly true of the LBP under itsnew Charter, and the PCFC after two years of operation.

6Recommendationsfor Further Study

62

Regulatory environment of credit cooperatives and NGOs.A separate study for each type of institution will review andassess in detail existing regulatory environments covering theseinstitutions. It will also develop a framework for regulation wherethe appropriate indicators for ensuring stability and sustainabilityare identified. The approriate institutional framework andregulatory approaches will also be developed in this study.

As pointed out in this review, there are still numerous directlending programs of non-financial government agencies that werecreated by law. The cost and effectiveness of these programsneed to be studied in greater detail. Overall, government costsand savings that may be realized through rationalization have tobe determined. The programs’ impact on the basic sector’s accessto financial services also needs to be documented. Corollarily,institutional changes required for the transfer of direct lendingprograms by non-financial agencies to financial institutions needto be investigated. In particular, the institutional and legalreforms associated with transferring programs have to be clearlyoutlined.

Subsidized interest rates are characteristic of many of thelaws reviewed. Documenting the costs and inefficiencies of thispolicy would provide further basis for reforming the various creditprograms created by law and institutions mandated to lend atconcessionary rates.

Intermediation taxes repress the financial market. The extentto which these taxes distort the market needs to be documented.These taxes include mandatory allocations, deposit retentionscheme, reserve requirements, gross receipts tax and thewithholding tax on interest earnings. The costs and efficiencyimplications of these interventions have to be clearly determined.

R e c o m m e n d a t i o n s f o r F u r t h e r S t u d y

63

R e c o m m e n d a t i o n s f o r F u r t h e r S t u d y

Tables and Figures

64

T a b l e s a n d F i g u r e s

Fina

ncia

l Law

san

d re

gula

tion

s

Fina

ncia

l Sys

tem

Reg

ulat

ory

Age

ncie

sFi

nanc

ial I

nsti

tuti

ons

Coo

pera

tive

sN

GO

s

Fina

ncia

l Mar

ket

Pric

ing

Cre

dit A

lloca

tion

Savi

ngs

Mob

iliza

tion

Port

folio

Mix

Bor

row

er M

ixM

atur

ity

Stru

ctur

eLo

an V

alue

Bas

ic S

ecto

rs

Farm

ers

& L

andl

ess

Rur

al W

orke

rsFi

sher

folk

Indi

geno

us P

eopl

eU

rban

Poo

rW

orke

rs in

the

Info

rmal

Sec

tor

Dis

adva

ntag

ed G

roup

sN

on-F

inan

cial

Gov

ernm

ent

Age

ncie

s

Figure 1General Framework

65


Table 1Reserve Requirementson Deposit Liabilities, By Type of Bank1993 to 1997 (as of End of Period Indicated)

1993 1994 1995 1996 1997*

Commercial BanksDemenad Deposits 22% 19% 15% 15% 14%Savings Deposits 22% 19% 15% 15% 14%Time Deposits 22% 19% 15% 15% 14%NOW Accounts 22% 19% 15% 15% 14%

Thrift BanksDemenad Deposits 22% 19% 15% 15% 14%Savings Deposits 19% 16% 13% 13% 12%Time Deposits 19% 16% 13% 13% 12%NOW Accounts 22% 19% 15% 15% 14%

Rural BanksDemenad Deposits 22% 19% 15% 15% 14%Savings Deposits 14% 11% 7% 7% 6%Time Deposits 14% 11% 7% 7% 6%NOW Accounts 22% 19% 15% 15% 14%

* required reserves until June 1997, effective July 1997, required reserves will be reduced by onepercentage pointSource: CB Annual Report; CB Circulars

66


Effective Cost of Deposit (Range) 4.0 8.6 13.2 17.8

Loan Loss Provision 5.6 5.6 5.6 5.6

General Administrative Expenses 5.4 5.4 5.4 5.4

TOTAL COST (Break-even) 15.0 19.6 24.2 28.8

Table 2Cost Of Credit Delivery on Agrarian Sector Lending of LBPBased on Internally-generated Funds

Table 3Cost Of Credit Delivery on Agrarian Sector Lending of LBPForeign Funds (In Percent)

Item On Rice And Corn On Other ProductionProduction Loans Loans And Other

Projects

Cost of Funds 10.10 - 11.70 10.10 - 11.70

Insurance 2

Loan Loss Provision 5.6 5.6

General andAdministrative Expenses 5.4 5.4

TOTAL COST 23.1 - 24.7 21.1 - 22.7

Source: LBP

Source: LBP

67


Table 4Number and Distribution of Banking Offices inMetro Manila and Outside Manila

Outside Metro Manila Metro Manila

Bank Year No. % Share % to No. % Share % to TOTALType Total Total

KBs 1986 903 36.2 52.1 830 76.2 47.9 1,7331989 901 36.7 51.7 841 75.8 48.3 1,7421993 1,235 42.5 52.0 1,142 79.5 48.0 2,377

TBs 1986 429 17.2 64.5 236 21.7 35.5 6651989 432 17.6 64.0 243 21.9 36.0 6751993 421 14.5 62.8 249 17.3 37.2 670

RBs 1986 1,065 42.7 98.3 18 1.7 1.7 1,0831989 1,025 41.8 98.3 18 1.6 1.7 1,0431993 1,083 37.3 98.5 16 1.1 1.5 1,099

SGBs 1986 95 3.8 95.0 5 0.5 5.0 1001989 97 4.0 92.4 8 0.7 7.6 1051993 168 5.8 85.3 29 2.0 14.7 197

ALL 1986 2,492 100.0 69.6 1,089 100.0 30.4 3,5811989 2,455 100.0 68.9 1,110 100.0 31.1 3,5651993 2,907 100.0 66.9 1,436 100.0 33.1 4,343

Source: Bangko Sentral ng Pilipinas, Factbook, various years.

68


Region 1977 1980 1983 1986 1989 1993 1994

I Ilocos Region 1.3 1.6 1.7 1.5 1.5 2.1 2.2

II Cagayan Valley 0.7 1.0 1.0 0.9 0.9 1.4 1.6

III Central Luzon 2.8 3.3 3.4 3.3 3.41 3.9 4.3

IV Metro Manila 41.4 54.3 69.8 64.1 65.3 87.8 99.2

IV-A Southern Tagalog 1.7 2.2 2.4 2.3 2.4 3.3 3.5

V Bicol Region 1 1.4 1.4 1.3 1.2 1.4 1.4

VI Western Visayas 1.7 2.0 2.1 2.0 1.9 2.4 2.5

VII Central Visayas 1.2 1.6 1.8 1.6 1.6 2.3 2.5

VIII Eastern Visayas 0.5 0.7 0.7 0.6 0.6 0.7 0.6

IX Western Mindanao 0.6 0.8 0.7 0.7 0.7 1.1 1.1

X Northern Mindanao 1.0 1.3 1.4 1.3 1.3 1.5 1.6

XI Southern Mindanao 1.9 2.3 2.2 2.1 2.1 2.5 2.6

XII Central Mindanao 0.7 0.8 0.7 0.8 0.8 1.2 1.4

CAR 0.8 0.9

ARMM 0.5 0.5

Table 5Density Ratios: Total Number of Banking Offices toTotal Municipalities and Cities Per Region

Source: Bangko Sentral ng Pilipinas, FactbookLamberte (1995)

69


Ratio (%)

1972 26.31973 29.41974 25.61975 25.21976 26.51977 28.51978 29.21979 26.41980 25.61981 26.91982 28.01983 29.41984 22.41985 21.71986 22.51987 22.51988 24.01989 26.31990 26.61991 27.91992 28.51993 32.61994 35.91995 39.9

Average 1972-1980 27.0Average 1981-1991 25.3Average 1992-1995 34.2

Table 6Flow of Loanable Funds*1972 - 1995

* M3/Nominal GDPSources: Selected Philippine Economic Indicators (June 1996)NEDA Philippine Statistical YearbookCentral Bank Annual Report

70


Savings Deposit Interest Rate on Gross SpreadRate Secured Loans

1992 Jan 5.013 23.035 18.022Feb 9.840 23.257 13.417Mar 9.879 21.694 11.815Apr 9.874 21.418 11.544May 9.456 18.931 9.475Jun 8.905 20.382 11.477Jul 8.759 19.769 11.010Aug 9.260 20.778 11.518Sep 8.809 19.386 10.577Oct 9.464 18.419 8.955Nov 9.232 16.832 7.600Dec 9.455 16.383 6.928Ave 8.996 20.024 11.028

1993 Feb 10.168 15.775 5.607

1994 Feb 8.741 14.687 5.946Mar 8.852 16.273 7.421Oct 6.302 13.902 7.600Dec 7.006 13.392 6.386

Table 7Savings Deposit Rate, Loan Rate and Gross Spread, 1992 to 1994(in % per annum)

Source: CB Review

71

Annexes

72

June 15,1948

July 14,1948

June 22,1963

June 22,1963

June 22,1963

June 19,1964

Republic Acts

RA 265, as amendedAn Act Establishing theCentral Bank of thePhilippines

RA 337, as amendedThe General Banking Act

RA 3765An Act to Require theDisclosure of FinanceCharges in Connection withExtensions of Credit or Truthin Lending Act

RA 3779, as amendedAn Act to Provide for theRegulation of Organizationand Operations of Savingsand Loan Associations, or theSavings and LoanAssociation Act

RA 3591Philippine DepositInsurance Act

RA 4093, as amendedPrivate Development Banks’Act

Provides the Central Bank withauthority to oversee the entire financialand credit system.

Only entities authorized by theMonetary Board of the Central Bankmay engage in lending through thereceipt of deposits of any kind (Sec. 2).

Mandates any credit institution tofurnish each person to whom credit isextended the true cost of credit inclusiveof all finance charges.

Regulates and supervises savings andloans associations for purposes of sound,stable, and efficient operation;encourages industry, frugality andaccumulation of savings among thepublic and the members of savings andloan associations

Creation of a Philippine DepositInsurance Corporation to insure thedeposits of all banks entitled to thebenefits of insurance

Establishment of a system of privatedevelopment banks which will promoteagriculture and industry

Date Law/Regulation Description

Annex ASummary of Financial Laws and Regulations Affecting the Provision ofFinancial Services to the Basic Sectors: Financial Institutions

73

Supervision and regulationof the financial and creditsystem.

Monetary and financialpolicy.

Savings mobilization andlending operation

Transparency in creditpricing

Savings and loan facilities.

Deposit insurance

Availability of mediumand long term creditfacilities

All sectors

Across sectors

Across sectors

All sectors

All sectors

All sectors

Maintains internal monetaryand external stability;

Fosters monetary, credit andexchange conditions conduciveto a balanced and sustainablegrowth of the economy

Constrains non-formalfinancial institutions (e.g.,NGOs) from mobilizingsavings

Greater transparency in thepricing of credit

Promotion of savings;

Access to financial services forsmall borrowers/producers;

Lower borrower transactioncost;

Reduction of informationalproblems;

Timeliness of loans

Insures deposits andencourages more savings foreconomic development andthe building of a more stableand progressive bankingsystem

Increases the availability ofterm credit facilities toindustry & agriculture

Area of Financial Targeted Sector Impact/ImplicationsIntermediation Affected

74


Annex A cont.

Aug 4,1969

July 10,1988

Jan. 26,1990

Mar 24,1992

RA 5980, as amendedFinancing Company Act

RA 6657Comprehensive AgrarianReform Law

RA 6848Charter of Al-AmanahIslamic Investment Bank

RA 7279An Act to Provide for aComprehensive andContinuing UrbanDevelopment and Housing

Regulation of financing companies toplace their operations on sound, stableand efficient basis

Extends concessional and collateral-freecredit to small landowners, farmers andfarmers’ organizations for agro-industrialization (Sec. 35.5)

Promotes, develops and extends financialassistance to small and medium-scaleindustries in agrarian reform areas (Sec.35.6)

LBP to act as the financial intermediaryof the CARP and prioritize the socialobjectives of the CARP (Sec. 64)

Non-transferability of land acquired bybeneficiaries except to the state or theirheirs, or to other beneficiares after tenyears (Sec. 27)

PARC to ensure that farmer-beneficiariesare provided liberalized terms on creditfacilities and production loans (Sec. 37)

Transfer of the BKKK to the LBP (Sec.37) including all existing funds

The bank will perform banking,financing and investment operations andestablish and participate in agricultural,commercial and industrial venturesbased on the Islamic concept of bankingin the Autonomous Region (Sec.3)

Transactions related to the conduct ofbusiness of the bank are exempted fromall taxes under the National InternalRevenue Code (Sec. 37)

Grant of livelihood loans by governmentagencies to beneficiaries of the SocializedHousing Program

Launches the Community Mortgage

75


Availability of creditfacilities to consumers andto industrial, commercialor agricultural enterprises

Supply and demand ofcountryside credit

Pricing of credit

Formation of farmers’organizations andcooperatives

Land collateral

Availability of bankingservices in theAutonomous Region

Intermediation cost

Supply of credit forlivelihood

Supply of funds forhousing of the urban poor

All sectors

Small landowners,farmers and farmers’organizations

Small entrepreneurs inagrarian reform areas

Islam population in theAutonomous Region

Urban poor

Provision of financingfacilities

May promote supply-ledapproach to credit

Subsidized/ fixed interest ratedistorts the credit market

Increased growth of farmers’organizations/ cooperatives

Pressure on LBP’s financialoperation

Non-acceptability to banks ofland acquired due non-transferability problem

Increased availability ofbanking services in theAutonomous Region

Reduction in intermediationcost due to exemption fromtaxes

Less diversification inportfolio & limitedgeographical outreach

May promote a supply-ledapproach to credit

Enhance access to housingfinance

76


Annex A cont.

Apr. 22,1992

Apr 13,1992

Program, Establish theMechanism for ItsImplementation, and forother Purposes

RA 7353An Act Providing for theCreation, Organization andOperation of Rural Banks,and for Other Purposes

RA 7393Reorganizing the QuedanGuarantee Fund, renamingit as Quedan and RuralCredit GuaranteeCorporation, Enlarging itsPowers and Resources toSupport Farmers and RuralEnterprises

Program (CMP) of the NHMFC toassist associations of underprivileged andhomeless citizens to purchase lands underthe concept of community ownership;

Home Insurance Guaranty Corporation(HIGC) to design appropriate guaranteescheme to encourage FIs to go into directlending for housing

To promote rural finance, additionalincentives were incorporated toencourage RBs to expand theiroperations and strengthen their financialconditions

In granting loans, preference shall begiven to farmers and merchants whosecash requirements are small

Unrestricted branching rights

The Corporation to establish a credit-support mechanism for farmers,fishermen, rural workers, coops, retailers,wholesalers and primary processors ofagricultural and aquatic commodities;implement a guarantee system for agri-aqua commodities; provide uniformnegotiable quedan or warehouse receiptforms for quedan financing

77


Guarantee for housingloans of the urban poor

Financial services in thecountryside

Rehabilitation ofdistressed rural banks

Intermediation cost

Availability of credit forfarmers, fishermen, ruralworkers, cooperatives,retailers;

Risks in lending

Farmers, fishermen, farmfamilies, cooperatives andmerchants

Farmers, rural workers,fisherfolk

Expansion of credit forhousing of the urban poor

Increases the flow of credit tothe countryside;

Strengthens rural banks’ financialcondition due to the conversionof all supervised past due andrestructured past due loans intopreferred stocks of the rural bankissued in favor of the LBP, theDBP or any governmentfinancial institution;

Allows RBs to foreclose RA6675 morgaged lands leadingto the acceptability of CARL-covered lands by RBs

Government subscription isinconsistent with itsprivatization thrust

Exempts RBs from paymentof all taxes, fees and chargesexcept corporate income tax& local taxes, therebyreducing intermediation cost

Increased availability of creditfor farmers and fishermen

Reduction in risks to lendingdue to guarantee

78


Annex A cont.

Apr 13,1992

May 18,1994

June 14,1994

Feb. 23,1995

RA 7400Major Amendments to thePDIC Charter (RA 3591)

RA 7721An Act Liberalizing theEntry and Scope ofOperations of Foreign Banksin the Philippines and forOther Purposes

RA 7653The New Central Bank Act

RA 7900An Act to Promote theProduction, Processing, andDistribution of High-ValueCrops, Providing FundsTherefor and for OtherPurposes

Expansion of PDIC’s power in theexercise of its regulatory functions:• deposit insurance coverage raised to

P100,000.00;• increased authorized capital to P3.0

billion;• increased assessment premium of

insured banks;• mandatory role as receiver of closed

banks

Encourages greater foreign participationthrough increased ownership indomestic banks by foreign banks and theentry of new foreign bank branches(Sec.1);

Loans extended to finance educationalinstitutions, cooperatives, hospitals andother medical services, socializedhousing, and to local government unitsshall be considered compliance withP.D. 717 (Sec. 9)

Creates an independent and accountablebody known as the Central MonetaryAuthority responsible for money, bankingand credit.

This body shall enjoy fiscal andadministrative autonomy

The Act includes the transfer of certainassets and liabilities from the old Centralbank to the BSP

Creation of a High-Value CropsDevelopment Fund (HVCDF) with aninitial amount of P1 billion to sourcedfrom the CALF and to be managed bythe LBP and DBP. Part of the fund shallbe used for the establishment of low-costcredit

Participating banks exempted from PD717 provided they lend a minimum 5%of their loanable funds

79


Deposit insurance

Stability of the bankingsystem

Bank competition

Availability of bankingservices

Monetary, banking andfinancial policy andregulation.

Supply of credit fund forhigh-value crops

Intermediation cost

Pricing of credit

Credit guarantee

All sectors

Across sectors

All sectors

Upland dwellers andlowland tenants,indigenous and culturalcommunities, CARPbeneficiairies, uplandfarm owners, farmers,farmers’ organizations/association/ cooperatives,community associationsand farmworkers

Increased deposit insurancecoverage;

Encourages and facilitates thestrengthening of banks;

Cushions the adverse effectsof bank closures

Increase in the efficiency andavailability of bankingservices

Reduction in interest rates

Allows greater flexibility andindependence in the conductof monetary policy

Strengthens BSP financially

Promotes supply-ledapproach to credit delivery

Unsustainability ofconcessional interest rate

Higher intermediation costdue to mandatory allocation

Possible reduction in lendingrisks due to credit guarantee

80


Annex A cont.

Feb. 23,1995

Feb. 23,1995

Feb. 25,1995

RA 7905An Act to Strengthen theImplementation of theComprehensive AgrarianReform Program, and forOther Purposes

RA 7906An Act Providing for theRegulation of theOrganization andOperations of Thrift Banks,and for Other Purposes

RA 7907An Act Amending RA 3844,as amended, otherwiseknown as the “Code ofAgrarian Reform in thePhilippines”

Crop insurance to cover high value crops.

HVCDF to be loaned to farmers’organizations/ associations/ cooperativescomposed of but not limited to CARPbeneficiairies.

QUEDANCOR to provide creditguarantee.

Creation of a guarantee fund foragricultural landowners that will enhancethe collateral value of agricultural landsthat are affected by their coverage underthe agrarian reform program

Establishment of a thrift banking systemwhich will promote agriculture andindustry and provide easy access tomedium and long-term credit facilities atreasonable cost;

Encourage the accumulation of savingsfrom the public;

Equitable preferential terms on reserverequirements over those imposed on KBs;

Unrestricted branching rights within theregion;

Exemption from payment of all taxesexcept corporate income taxes, fees andlocal taxes for a period of 5 years.

Amends the LBP Charter. Among othersthe amendents include;• strengthening the capital base of the

bank by establishing a nationalmarketing umbrella for farmers andfisheries cooperatives to attract massivecapital formation from savings depositsof cooperatives nationwide;

• the PARC shall provide funds fromAgrarian Reform Fund or otherunappropriated funds of the national

81


Guarantee

Flow of credit to agrarianreform areas

Savings mobilization;

Medium and long termloans;

Intermediation cost

Savings mobilization

Financial viability of LBP

Agricultural landownersunder the agrarianreform program

Across sectors

Agrarian reformbeneficiaries; farmers andfisheries cooperatives

Guarantee will likely increasethe flow of credit to agrarianreform areas

Reduction in the risksinvolved in lending toagrarian reform beneficiaries

Promotion of savingsmobilization;

Availability of financing formedium and long term creditneeds;

Reduction in intermediationcost due to exemption fromtaxes and preferential terms onreserve requirements;

Enhances the efficiency andsustainability of thrift bankingoperations

Promotion of savingsmobilization nationwide

Financial strengthening ofLBP

Expansion of outreach

82


Annex A cont.

Dec. 29,1995

Jan. 29,1973

May 29,1975

Apr 3,1980

RA 8175Amending PD 1467 or thePhilippine Crop InsuranceCorporation (PCIC) Charterto Make the Crop InsuranceSystem More Stable andMore Beneficial to theFarmers and for theNational Economy

Presidential Decrees

PD 114Pawnshop Regulation Act

PD 717Providing an AgrarianReform Credit FinancingSystem for Agrarian ReformBeneficiaries ThroughBanking Institutions

PD 1688Authorizing Banks to Investin the Equity of VentureCapital CorporationsOrganized to Assist Smalland Medium-ScaleEnterprises

treasury sufficient to pay all maturingbonds, debentures and other obligationsincurred as compensation tolandowners;

• at least 60% of proceeds from the AssetPrivatization Trust shall be transferred toLBP for payment of agricultural lands

Increased capitalization of PCIC

Expanded coverage of agriculturalinsurance to include other crops such ascoconut, coffee and pineapple and non-crop agricultural assets such asmachineries, equipment, transportfacilities and other related infrastructure

Creation of a State Reserve Fund

Allows PCIC to undertake reinsurance

Regulation, establishment and operationof pawnshops

Requires all banks to utilize 25% oftheir loanable funds for agriculturallending, i.e., 15% for agricultural creditand 10% for agrarian reformbeneficiaries

Allows banks with prior approval of theMonetary Board to acquire a majority ofthe equity of a venture capitalcorporation organized to assist small andmedium scale enterprises in the form ofequity financing

83


Agricultural insurance

Risks in lending

Credit for small borrowers

Credit allocation;

Intermediation cost

Equity financing forventure capitalcorporations organized toassist small and mediumscale enterprises

Farmers, rural workers,fisherfolk

All sectors

Agrarian reformbeneficiaries: tillers,tenant farmers, settlers,agricultural lessees,amortizing owners,owner-cultivators,farmers cooperatives andcompact farms

Across sectors involved insmall and mediumenterprises

Expands coverage ofagricultural insurancebeneficial to farmers, ruralworkers and fisherfolks

An agricultural insurancewhich is more cost-effectiveand affordable to farmers

Risk minimization throughportfolio and assetdiversification.

Access to credit for smallborrowers unserved by banksand other financialinstitutions

Increase in intermediation Cost

Penalizes the non-agriculturesector by imposing fixedallocation for agriculture onbanks’ loanable funds

Restricts banks’ efficientportfolio management

Psuedo compliance amongbanks

Financial strengthening ofventure capital corporationsassisting small and mediumscale enterprises throughprovision of capital fundsfrom banks

84


Annex A cont.

Apr 12,1983

Dec. 3,1986

Dec. 3,1986

July 22,1987

June 9,1988

Letter of Instruction

LOI No. 1308

Executive Orders

EO 80Providing for the 1986Revised Charter of thePhilippine National Bank

EO 81Providing for the 1986Revised Charter of theDevelopment Bank of thePhilippines

EO 229Providing the Mechanismsfor the Implementation of theComprehensive AgrarianReform Program

EO 327Implementing CertainProvisions of EO No. 715(1981), EO238 (1987),EO314 (1987) and forOther Purposes

Establishes the KKK Guarantee Fund asa special account in the CB to guaranteesmall and medium sized KKK loansreleased through duly accredited banks

Initial funding to come from theEconomic Support Fund

The Fund evolved into the GFSME

The bank shall give preference to loansfor agriculture and small and medium-scale commercial and industrialenterprises, particularly in thecountryside (Sec. 4)

Transfer of assets and liabilites to thenational government to rehabilitate thebank

The bank shall provide banking services,principally to service the medium andlong term needs of agricultural andindustrial enterprises, particularly in thecountryside and preferably for small- andmedium-sized enterprises (Sec. 2)

Rehabilitation of the bank throughtransfer of assets and liabilities to thenational government (Sec. 30)

Upon transfer, each beneficiary whoactually farms his land shall be eligible for aproduction loan to finance one crop cycleunder terms and conditions to bedetermined by the LBP on a case to casebasis, renewable upon repayment (Sec. 13)

BKKK was subsumed under the NationalLivelihood Support Fund (NLSF). Thenew mandate provided for a funddelivery system and organizationalmachinery for the provision of socializedlivelihood credit as well as the collection

85


Guarantee

Availability of credit to thecountryside

Financial viability of thebank

Availability of bankingservices for longer-termcredit needs in thecountryside.

Demand for and supply ofproduction loans

Credit and institutionbuilding funds fordisadvantaged sectors

Across sectors,particularly thoseengaged in small andmedium enterprises

Agriculture and smalland medium-scalecommercial andindustrial enterprises inthe countryside

Agricultural andindustrial enterprises inthe countryside,preferably small- andmedium-sized enterprises

Agrarian reformbeneficiaries

Disadvantaged sectors,agrarian reformbeneficiaries

Increases the flow of credit toSMEs due to the guarantee

Reductions in lending risks toSMEs

Increase in the availability ofcredit facility in thecountryside.

Stronger and more viablebank to service financingneeds in the countryside

Increase in the availability ofmedium and long term creditfacilities in the countryside

Stronger and more viableBank to service the MLTneeds in the countryside

Expansion of loans for cropproduction

Provision of funds forlivelihood credit andinstitution building

May promote supply-ledapproach to credit

86


Annex A cont.

Aug. 6,1993

Dec. 7,1994

Feb. 9,1995

July 13,1973

Administrative Orders

AO 75Directing the Transfer andAttachment of the BKKKSecretariat to the LBP,Including all its Applicable andExisting Funds, Personnel,Properties, Equipment andRecord, In Accordance withSec. 37 of RA 6675 (1988).

AO 162Directing the LBP to IncreaseIts Loans/ Financial Assistanceto Small Farmers andEnhance its InstitutionalTraining Programs of Farmerscooperatives, as a Safety Netmeasure for the Implementationof the GATT-UR.

Memorandum Orders

M.O. 262Directing the PresidentialCommission to Fight Povertyand the LBP to review theLegal Requirements for theCreation of the People’s Creditand Finance Corporation(PCFC)

Central Bank Circulars

Circular No. 374Rules and Regulations forPawnshops

and consolidation of all KKK funds

Funds shall be made available on“wholesale” basis for livelihood programsof line gov’t agencies, PVOs or NGOs.

Effected the final transfer of all NLSFassets, funds, personnel and equipmentunder LBP supervision

LBP provided with low-cost revolvingfunds from the GATT-support funds foron-lending to the agriculture sector;

LBP exempted from the requirement torechannel investible funds to the Treasuryand the BSP

Creation of PCFC with capitalizationfrom the National Livelihood SupportFund (NLSF)

Empower pawnshops to engage in thebusiness of lending on the security ofpersonal property

87


Funds for livelihood creditand institution building

Supply of funds for theagriculture sector

Supply of credit for thepoor

Funds for institution andcapability building

Availability of credit forsmall borrowers

Regulation of pawnshops

Disadvantaged sectors,agrarian reformbeneficiaries

Farmers, fisherfolk,agrarian reformbeneficiaries

Across sectors

All sectors

Transfer of NLSF to LBPprovide proper fundmanagement for supportservices to farmers/agrarianreform beneficiaries

Expand LBP’s fund base forfarmers and fishermen

Fiscal burden since LBP willsource funds from the GAAand not from internally-mobilized funds

Expansion of credit to thebottom poor

Strengthening programpartners and targeted clients

Access to credit for smallborrowers unserved by banksand other institutions;

Promotes the sound andstable operation ofpawnshops

88


Annex A cont.

BSP Circular No. 119Lowering ReserveRequirements for RuralBanks, Thrift Banks,Commercial Banks andNon-Bank FinancialIntermediaries

BSP Circular No. 12Mandatory PortfolioAllocation for SmallEnterprises Credit

BSP Circular No. 24Deposit Retention Policyfor Rural Banks

BSP Circular No. 38Lower Reserve Requirements

BSP Circular No. 51Rules and RegulationsImplementing RA 7721“An Act Liberalizing theEntry and Scope ofOperations of Foreign Banksin the Philippines”

BSP Circular No. 52Provisions Governing theRediscounting of EligiblePapers under the RediscountWindow of BSP

Lowers required reserves against demanddeposits, NOW accounts of RBs to 14%effective 1/3/97 to 13% effective 7/4/97and against savings and time deposits to6% effective 1/3/97 and to 5% effective7/4/97

Requires all lending institutions set asidea portion of total loan portfolio based ontheir consolidated Statement ofCondition/Balance Sheet at the end ofthe previous quarter (5% by 12/31/91,10% by 12/31/92 thru 12/31/95 and 5%by 12/31/96 to 0% by 12/31

At least 75% total deposits, net of requiredreserves against deposit liabilities & totalamount of cash in vault, accumulated bybranches, agencies, extension offices, unitsand/or head offices of RBs, in a particularregional grouping outside NCR shall beinvested to develop

Reduction of reserve requirement by 3%points on all types of deposits anddeposit substitutes of commercial banksand non-banks with quasi-bankingfunctions and certain types of depositsand deposit substitutes of thrift banksand rural banks

Liberalization of the entry of foreignbanks into the Philippines to attractforeign investments, enhance theefficiency of the domestic financialsystem and make the Philippine bankingsystem more globally competitive

80% of the loan value with rediscount of1% below 91day treasury bill revisedevery 3 months for papers coveringagricultural products, cottage & smallindustry credits, general purposeworking capital financing & othershort-term credits. No ceiling onlending rates banks charge on rediscount

Dec. 31,1996

Feb. 8,1994

May 18,1994

Aug. 2,1994

Oct. 14,1994

Nov. 8,1994

89


Intermediation cost

Credit allocation;Intermediation cost

Intermediation cost;Portfolio managementand fund allocation

Intermediation cost

Availability of bankingservices;Pricing of credit

Intermediation cost;Pricing of credit

Across sectors

Rural/small-scaleentrepreneurs

Across sectors

Across sectors

Across sectors.

Farmers, fisherfolk,rural entrepreneurs

Lowers cost ofintermediation;

Expands/increases resourcesfor lending

Increase in cost ofintermediation;

Retricts banks’ efficientportfolio management

Portfolio management is notoptimized;

Retricts banks efficientportfolio management;

Higher intermediation cost

Lower cost ofintermediation,

Expand/increase resourcesfor lending

Increased availability andimprovement in the deliveryof financial services,

Reduction in interest rates

Increases available creditfunds for the rural sector;

Allows market forces todetermine lending rates toend-users

90


Annex A cont.

BSP Circular No. 58Guidelines In ConnectionWith the Grant by Land Bankof the Philippines and theDevelopment Bank of thePhilippines or any GOCC/GFIof a Loan to a Rural Bank

BSP Circular No. 76Guidelines Governing RuralBank’s Application for aRediscount or Loan

CB Circular No. 1133Exemptions From the ReserveRequirements

CB Circular No. 1143Guidelines Governing theRehabilitation of Rural Banks

CB Circular No. 1151Implementing GuidelinesRegarding the ALF Facilities

CB Circular No. 1188Conditions for Establishment/Opening of Branches andOther Banking Offices of AllBanks

CB Circular No. 1226Deposit Retention Policy forKBs and TBs

Granting of loans by LBP, DBP or anyGOCC/GFI to a rural bank are subjectto issuance of certification by theMonetary Board, a set of qualificationstandards with regards to capital to riskasset ratio, past due ratio and allowancefor probable losses

Sets the following limit on rediscounts orloans rural banks may avail of from theBSP: P900,000 or rural banks with A orB credit rating; P700,000 for rural bankswith C rating; and P400,000 for ruralbanks with D rating and those which arenewly established

Exempts from legal reserve requirementspecial time deposits and depositsubstitutes arising from the lendingoperations of IGLF and ALF

Sets the guidelines for the rehabilitationof RBs through a CBU consisting of aprerequisite fresh capital infusion and asubsequent conversion and/or plan ofpayment of all arrearages with the CBwhich are past due and unpaid as of12/31/86

Provides that ALF facility may beextended to finance both seasonal prodcredit & medium & long-term sub-loansfor fixed assets & permanent workingcapital (except for acquisition of land)

Eliminates the prerequisite investment ingovernment securities for purposes ofestablishing/opening branches and otherbanking offices by banks

Requires at least 75% of total deposits ofKBs and TBs, net of required reservesagainst deposit liabilities and totalamount in vault accumulated in aparticular regional grouping outside

Dec. 29,1994

June 2,1995

Feb. 9,1987

April 24,1987

Aug. 27,1987

Oct. 28,1988

Jan. 31,1990

91


Viability of RBs;Fund sourcing

Viability of rural banks;Fund Sourcing

Intermediation cost

Viability of ruralbanks

Credit access;

Viability of specialfinancing programs


Intermediation cost;Portfolio management andfund allocation

Rural borrowers,farmers, fisherfolk,agrarian reformbeneficiaries, ruralentrepreneurs

Rural borrowers:farmers, fisherfolk,agrarian reformbeneficiaries andother rural workers

Across sectors

Rural borrowers;farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers/entrepreneurs

Farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers/entrepreneurs

Across sectors

Across sectors

Expands fund base of RBs;

Regulates loans to RBs

Regulates availment ofrediscount facilities and loans torural banks;

Expands fund base of ruralbanks

Lowers cost ofintermediation;

Increases available funds forlending

Enhances viability of ruralbanks

Increases available creditfunds for the rural sector;

Allows market forces todetermine interest rateshence, enhancing lending

Increases available bankingservices for the rural sector

Portfolio management is notoptimized;

Retricts banks efficientportfolio management;

92


Annex A cont.

CB Circular No. 1245Requirements for CreditAccomodation of UnsecuredLoans

CB Circular No. 1255Penalties on Past Due Loans

CB Circular No. 1264Guidelines GoverningOrganization of CooperativeBanks

CB Circular No. 1276Exemptions From the ReserveRequirements

CB Circular No. 1290Conditions for the Processing/Approval of Bank Applicationto Qualify for BranchingPrivilege, Permit to OperateNew Banking Offices and ToAvail of CB Credit Facilitiesand Special FinancingPrograms

CB Circular No. 1312Guidelines GoverningMergers and Consolidation ofBanks and Other FinancialIntermediaries

CB Circular No. 1315Terms of Reference for theImplementation of the CFIEP

NCR, to be invested therein as a meansto develop the region

Provides the following requirements forcredit accomodation of unsecured loansfor KBs, TBs and NBFIs: photocopy ofthe borrower’s/co-maker’s ITR and copyof the borrower’s balance sheet

Allows RBs to impose penalty on pastdue loans of their borrowers providedthe latter’s failure to pay their loans ontime is due to inexcusable neglect andthat the penalty shall be reasonable andunconscionable

Sets revised guidelines for theorganization of cooperative banks

Exempts from the reserve requirementsspecial time deposits of financialinstitutions under the special financingprograms of the government and/orinternational financial institutions beingor previously administered by the CB

Deletes the requirement of compliancewith the loans to deposit ratio for 4consecutive quarters to a) qualify forbranching privilege; b) permit tooperate new banking offices and to availof CB credit facilities and specialfinancing programs

Lists the incentives for mergers andconsolidations among banks and otherfinancial intermediaries, which includecondonation of liquidated damages and/or penalties on loan arrearages to the CB

Sets the terms of reference for theimplementation of the CFIEP whichaims to raise the capital base, reduce the

June 29,1990

Oct. 12,1990

Nov. 8,1990

March 5,1991

June 17,1991

Oct. 15,1991

Oct. 29,1991

93


Credit access

Repaymentperformance ofborrowers


Intermediation cost

Availability of bankingservices;Fund sourcing

Viability of financialinstitutions

Viability of ruralfinancial institutions

Farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers/entrepreneurs

Rural borrowers:farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers/entrepreneurs

Rural borrowers:farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers/entrepreneurs

Across sectors

Across sectors

Across sectors

Rural borrowers:farmers, fisherfolk,agrarian reform

Higher intermediation cost

Enhances access to credit ofsemi and non-bankable

Discourages late paymentsand loan defaults

Increases available financialservices for the rural sector

Lowers cost of intemediation;

Increases available fund forlending

Increases available bankingservices for the rural sector;

Includes and increase in thevolume of loans

Improves viability of financialinstitutions;

Enhances delivery of financialservices

Improves viability of RFIssuch as rural banks and thriftbanks;

94


Annex A cont.

CB Circular No. 1349Incentives in BankBranching

CB Circular No. 1369Guidelines Governing theImplementation of the RuralBanks Act of 1992.

CB Circular No. 1385Compliance With theMandatory Credit Allocationto Small Enterprises

CB Circular No. 1386Liquidity Floor Requirementon Government Deposits/Funds

CB Circular No. 8Sanctions on ReserveDeficiencies

Circular-Letter:Declaration of Period April24 to 30 as CreditConsciousness Week perPresidential ProclamationNo. 1827 Dated March30,1979

debt burden and improve the long-termviability of countryside financialinstitutions

Allows banks to establish one branch inareas of its choice without bidding for every3 branches that a bank has established in5th and lower class municipalities wherethere are less than 4 banks.

Covers exemption from ownershipceiling, settlement or liquidation ofarrearages w/ the CB, acceptance ofdemand and government deposits, equityinvestments in allied undertakings andexemption from the 15% ceiling ondeposits maintained with depositor

Includes equity investments by memberbanks in, and loans by member banks to,the BAP Credit Guaranty Corp.,provided that the same will be allowedonly in 1993 and that BCGC will extendits loan facilities only to small enterprises

Obliges authorized government depositorybanks and authorized private banksincluding government-acquired bankswith special depository privileges tomaintain a 50% liquidity floor withrespect to deposits of, borrowings from,and all other liabilities to the Government

Imposes a penalty on banks with reserveposition below the required minimum;the penalty is equivalent to 1/10 of 1%per day or the prevailing 91-day T-Billrate plus 3 percentage points on theamount of the deficiency

Requiring all banking institutions toundertake supportive publicity andpromotional activities, putting up ofwindow or counter displays, streamers andplacements in observance of the CreditConsciousness Week

July 24,1992

Nov. 26,1992

Feb. 26,1993

March 3,1993

Oct. 7,1993

April 4,1994

95



Viability of RBs.

Credit allocation;Intermediation cost

Intermediation cost

Intermediation cost

Borrower bankabilityand creditworthiness

beneficiaries and otherrural workers/entrepreneurs

Farmers, fisherfolk, ruralworkers, workers in theinformal sector

Rural borrowers, farmers,fisherfolk, agrarianreform beneficiaries,rural entrepreneurs

Rural/small-scaleentrepreneurs

Across sectors.

Across sectors

Across sectors

Enhances delivery offinancial services

Increased availability andimprovement in thedelivery of financialservices in the countryside

Enhances viability of RBs

Increase in cost ofintermediation;

Retricts banks’ efficientportfolio management

Increases cost ofintermediation;

Contacts available forlending

Increases cost ofintermediation

Enhances public awarenessof the role of credit andcreditworthiness

96


Annex A cont.

Circular-Letter: Declarationof Period June 30 to July 6,1994, and Every YearThereafter as SavingsConsciousness Week PerPresidential ProclamationNo. 380 Dated May 15,1994

Internal Revenue Code:Section 261 Tax on FinanceCompanies

Internal Revenue Code:Section 52E Withholding ofFinal Tax on Interest on BankDeposits and Yield fromDeposit Subs.

Local Government Code:Tax on Finance Companies

National Revenue Code:Withholding of Final Tax onInterest on Bank Deposits andYield from Deposit Substitutes

RA 6657Comprehensive AgrarianReform Law

Requiring all banking institutions toundertake relevant publicity andattention-generating activities, such asraffles, distribution of give-aways,putting up of window displays, treamers,ads and the use of other promotionaldevices

Imposes a tax of 15% on the grossreceipts derived by all finance companiesas well as other financial intermediariesnot performing quasi-banking functionsdoing business in the Philippines

Imposes 15% withholding tax oninterest earned from savings deposits and20% on interest earned from timedeposits

Imposes tax on banks and other financialinstitution at a rate not exceeding 50%of 1% on the gross receipts of thepreceding calendar year

Imposes 20% withholding tax oninterest earned from bank deposits

Extension to small landowners, farmersand farmers’ organizations the necessarycredit, like (concessional and collateral-free loans) for agro-industrializationbased on social collaterals (guarantees offarmers’ organization) (Sec. 35)

Promoting, developing and extendingfinancial assistance to small andmedium-scale industries in agrarianreform areas (Sec. 35.6)

LBP shall be the financial intermediaryof the CARP and shall insure that thesocial objectives of the CARP shall enjoy

May 26,1994

12:00:00AM

12:00:00AM

Jul. 10,1988

97


Savings/depositmobilization

Intermediation cost

Intermediation cost;

Deposit/Savingsmobilization

Intermediation cost

Intermediation cost;

Deposit/Savingsmobilization

Supply and demand ofcountryside credit;

Pricing of credit;

Formation of farmers’organizations andcooperatives;

Land collateral

Across sectors

Across sectors

Across sectors

Across sectors

Across sectors

Small landowners,farmers and farmers’organizations;

Small entreprenuers inagrarian reform areas

Promotes savingsmobilization and enhancessustainability of lendingoperations



Discourages savings amonghouseholds



Discourages savings amonghouseholds

May promote supply ledapproach to credit;

Subsidized/fixed interest ratedistorts the credit market;

Increased growth of farmers’organizations/coops;Pressure on LBP’s financialoperation;

Non-acceptability to banksof land acquired due non-transferable

98


Annex A cont.

RA 6846An Act Creating the Abot-Kaya Pabahay Fund,Otherwise Known as theSocial Housing Support FundAct, and for Other Purposes

Section 1116Networth to Risk Assets Ratioof EKBs and KBs - CentralBank Manual of Regulationsfor Banks and OtherFinancial Intermediaries -Book I

Section 1269.1Rediscount Ceilings for EKBsand KBs - Central BankManual of Regulations forBanks and Other FinancialIntermediaries - Book I

Section 1273Rediscounting of SpecificPapers - Central BankManual of Regulations forBanks and Other FinancialIntermediaries - Book I

preference among its priorities (Sec. 64)

Non-transferability of land acquired bybeneficiaires except to the state or theirheirs, or to other beneficiares after tenyears (Sec. 27)

PARC shall ensure that farmer-beneficiaries are provided with liberalizedterms on credit facilities and productionloans (Sec. 37)

Transfer of the BKKK to the LBP (Sec.37) including all existing funds

Creates the Abot-Kaya Pabahay Fund tobe used exclusively for low-cost housingby low-income families and for otherpurposes

The National Home Mortgage andFinance Corporation (NHMFC) and theHome Insurance Guaranty Corporation(HIGC) are administering agencies andtrustees of the Fund

Sets the networth of a bank at not lessthan an amount equal to 10% of its riskasset to regulate EKBs’ and KBs’ capitaladequacy position vs. risk assets

Sets the rediscount ceiling of EKBs andKBs at 100% of their networth

Allows KBs to avail of the rediscountingprivilege of the CB, covering specificpapers such as those pertaining toagrarian reform credit under PD 717

Jan. 24,1990

July 1991

July 1991

July 1991

99


Supply of funds forhousing

Viability of EKBs and KBs

Fund availability

Fund availability

Urban poor

Across sectors

Across sectors

Farmers, fisherfolk,agrarian reformbeneficiaries, ruralworkers, workers in theinformal sector, urbanpoor

Expansion of credit for socialhousing

Regulates financialperformance of EKBs andKBs;

Enhances delivery of financialservices

Increases available creditfunds

Increases available creditfunds

100


Annex A cont.

Section 1303Interest and Other Chargesfor EKBs and KBs - CentralBank Manual of Regulationsfor Banks and OtherFinancial Intermediaries -Book I

Section 1341.3Required/MandatoryAllocation for AgrarianReform and AgriculturalCredit - Central BankManual of Regulations forBanks and Other FinancialIntermediaries - Book I

Imposes no ceiling on the interest rate of(including commissions, premiums, feesand other charges) of loans extended byEKBs/KBs, or forbearance of any money,goods or credits,regardless of maturityand whether secured or unsecured

Obliges each EKB/KB to set aside anamt equivalent to 25% of its loanablefunds for agri. credit in general, of whichan amount equivalent to at least 10% ofthe loanable funds shall be madeavailable for agrarian reform credit.

July 1991

July 1991

101


Pricing of credit

Credit allocation;

Intermediation cost.

Across sectors

Agrarian reformbenficiaries: tillers,tenant farmers,settlers, agriculturallessees, amortizingowners, ownercultivators, farmerscooperatives andcompact farms.

Increased efficiency inallocation of financialresources andimprovement in thedelivery of financialservices


Penalizes the non-agrisector by imposing fixedallocation for agri onbanks loanable funds;

Retricts banks’ efficientportfolio management;

Pseudo compliance amongbanks

102


June 15,1969

Aug. 22,1991

Oct. 10,1991

Sept 24,1992

Republic Acts

RA 5416An Act Providing forComprehensive SocialServices for Individuals andGroups in Need of AssistanceCreating for this Purpose

RA 7111Overseas Workers’ (OWI)Fund Act or An ActEstablishing the OverseasWorkers’ Investment Fund toProvide Incentives toOverseas Workers, Reduce theForeign Debt Burden, andfor Other Purposes

RA 7160An Act Providing for a LocalGovernment Code of 1991

RA 7637Mt. Pinatubo Assistance,Resettlement and Develop-ment Fund

Allows DSWD to provide social welfareservices designed to ameliorate the livingconditions of distressed Filipinos. Amongothers, the DSWD is authorized toundertake income-producing projects

Creates the OWI Fund Board toencourage the greater remittance ofearning of Filipino workers overseas and tosafeguard and oversee the participation ofsaid worker’s remittances and savings in theGovernment’s debt-reduction efforts andother productive undertakings

Among others, the gains from the Fundshall be used for: housing program foroverseas workers; credit facility forbusiness enterprises and/or livelihoodprojects at concessional rates; health/hospitalization insurance for the family ofthe worker

A local government may secure loans fromany bank and lending institution againstsecurity of real estate or other acceptableassets for livelihood projects and othereconomic enterprises (Sec. 297)

Appropriates P10 billion for the aid, relief,resettlement, rehabilitation and livelihoodservices for victims of the Mt. Pinatuboeruption

Creates the Mt. Pinatubo Assistance,Resettlement and DevelopmentCommission primarily responsible forformulating policies and plans for servicesand infrastructure support for victims

Annex BSummary Of Laws And Regulations AffectingThe Provision Of Financial Services To The Basic Sectors:Non-financial Government Agencies

103


Pricing of credit resources;

Delivery mechanism

Availability and pricing ofcredit facility

Supply and price of credit

Funds for livelihood

Handicapped, youth,physical and mentaldisability, victims ofnatural calamities,cultural minorities, othersocially disadvantagedgroups

Overseas contractworkers and theirbeneficiaries

Across sectors

Mt. Pinatubo eruptionvictims

Granting of subsidizedconcessional loans;

Promotes direct lending bynon-financial gov’t agency

Concessional interest rateundermines the sustainabilityof the credit facility

May promote a supply ledapproach to credit;

Direct lending

Provides funds for livelihoodprojects and other supportservices;

May promote “dole-out”syndrome in the long-run.

104


Annex B cont.

RA 7882An Act Providing Assistanceto Women Engaging inMicro and Cottage BusinessEnterprises, and for OtherPurposes

Presidential Decrees

PD 1365Creating the “Rural WorkersOffice” in the Department ofLabor and for OtherPurposes

Executive Orders

EO 158Creating the “Tulong sa TaoFund” and for OtherPurposes

EO 515Transferring the BagongPagkain ng Bayan Programto the Technology ResourceCenter and Rationalizing itsMandate and Organization


AO 148Creating the Task Force on

Provides women who have existing microand cottage business with loans at primeinterest rate or 12% per annum,whichever is lower, from any governmentfinancing institution;

Mandates the Bureau of Small andMedium Business Development of theDTI to implement the Act;

All GFIs shall earmark 5% of theirloan portfolio for the implementationof the Act

Creates the Rural Workers Office inthe Department of Labor with, amongothers, the following functions andpowers: general supervision and controlof the social amelioration fund in thesugar industry; to engage in incomeand employment generating projects

Mandates the Department of Tradeand Industry (DTI) to administer theFund for purposes of self-employmentassistance and subcontracting financingin the rural areas. The DTI alsodetermines the conditions or availment

Bagong Pagkain ng Bayan shall serve asthe institutional vehicle through whichLGUs shall have access to facilities,resources, technical assistance, andinvestment support services - such asresearch and development - direct loansor guarantees on loans for agriculturaland support projects

Main task of the task force is to reviewthe existing credit for the poor

Feb. 20,1995

May 1,1978

Apr 13,1987

Apr 19,1992

Sept. 8,1994

105


Unsustainability of interestrate ceiling;

Interest rate ceiling will resultin credit rationing;

Mandatory credit allocationtaxes the GFIs and thereforeincreases their cost ofintermediation;

Direct lending by non-fonancial gov’t agency

Allows a non-financial agencyto go into direct lendingthrough a livelihood program

May promote a supply ledapproach to credit

Promotes the supply ledapproach to rural finance

Direct lending by non-financial government agency

Provision of credit funds foremployment generation andlivelihood

Possible rationalization ofgovernment credit programs

Pricing/cost of credit;

Credit allocation

Availability of creditthrough a livelihoodprogram

Supply of credit for ruralareas

Lending and guaranteefunds for LGUs

Review of governmentcredit programs

Women engaged for atleast one year in anymicro and cottagebusiness with dailyinventory of no moreP25,000 or any businessequipment with bookvalue of no more thanP50,000

Landless rural workers.

Rural entreprenuers

Across sectors, LGUs,NGOs

Across sectors

106


Annex B cont.

Nov. 1988

Sept. 8, 1994

Credit for the Poor of thePresidential Commission toFight Poverty

Cabinet Resolution

Cabinet Resolution No. 29Guidelines for CreditPrograms

Proclamations

Proclamation No. 466Authorizing the Task Forcefor Credit for the Poor,Action Arm of the Presiden-tial Commission to FightPoverty, to Conduct a FundCampaign from Date Hereofto Sept. 7, 1995

programs and mechanisms of theGovernment with the view ofrationalizing the Credit for the PoorProgram and formulating a MasterPlan for PCFC

Policy guidelines for government-sponsored livelihood programs. OnlyDWSD was allowed to engage in directlending activities

Authorizes the Task force for CreditFor the Poor to conduct a fundcampaign to establish a Trust Fund

107


Direct lending by non-financial governmentagencies

Availability of financialresources for capabilitybuilding and credit for thepoor

Across sectors

Across sectors

Gives way to the creation offragmented livelihoodprograms

Expand financial resourcesfor credit for the poor

May induce a supply ledapproach to credit.

108


Annex CSummary of Financial Laws and RegulationsAffecting the Provision of Financial Services to the Basic Sectors:Across Institutions

Jan. 24,1991

Apr 10,1992

Republic Acts

RA 6977Magna Carta for SmallEnterprises

RA 7368Countrywide Industrializa-tion Act of 1992

Creates the SMED Council primarilyresponsible for the promotion; growthand development of small and mediumenterprises in the country. One of itsspecific functions is directing/assistinggovernment agencies in the provision ofconcessional interest rates, lowerfinancing fees, effective substitution ofgovernment guarantee cover on loansfor the borrower’s lack of collateral

Creates SBGFC to provide variousalternative modes of financing for smallenterprises and to guarantee loansobtained by qualified borrowers

Mandates all lending institutions toallocate a portion of their total loanportfolio for small enterprise credit

Provides financial assistance to everytown and city not exceeding P30million and P40 million respectively forthe promotion of countrysideindustrialization

Creates the CountrywideIndustrialization Fund (CIF) as asource of financial assistance to eligiblecountrywide industrialization projectsto be sourced from the national budgetand supplemented by bilateral andmultilateral sources

Creates the CountrywideIndustrialization Office (CIO)attached to the DTI

The Executive Committee of themunicipal, city and provincialdevelopment councils shall serve in theLocal Countrywide Industrialization

109


Interest rate

Risks in lending

Intermediation cost

Funds for countrysidecredit

Monitoring andevaluation of loans

Interest rate

Across sectors particu-larly those engaged insmall and mediumenterprise

Rural workers

Unsustainability ofconcessional interest rate

Reduction in risk due tocredit guarantee

Higher intermediation costdue to mandatory allocationon banks’ loanable portfolio

Promotes direct lending ofnon-GFI

Interest rate ceiling willundermine the sustainabilityof the credit delivery scheme

Credit decision andmonitoring not performed bythe bank will lead to highdefault rates

110


Annex C cont.

June 4,1992

RA 7607An Act Providing a MagnaCarta of Small Farmers

Board. Among others, the Board shall beresponsible for evaluation and approvalof projects for funding

Projects owned by cooperatives orNGOs are qualified

Financial assistance from the CIF will beprovided at soft or concessional terms.Interest rate shall not be more than 11%

Chapter VII mandates the following:

Credit to farmers shall not exceed 75%of prevailing market rate p.a. inclusive ofall service charges

The DA through ACPC and otherconcerned agencies shall give subsidiesfor education and training of smallfarmers on credit awareness, loansacquisition, and loan repayment. It shallconduct an information drive that willpromote the establishment of strong andviable farmers’ organizations such ascooperatives, credit unions, rotatingsavings and credit associations andNGOs which play a major role inincreasing small farmers’ access to credit

Expansion of loan guarantee coverageunder the CALF to cover not only riceand corn but other crops, livestock,poultry, fishery and agro-forestry as well

Conduct of special projects to promoteinnovative credit schemes

Promote the development of farmers’organizations. Government shallsubsidize costs of info dissemination,monitoring, training and registration

An amount shall be earmarked forlending exclusively to farmers’cooperatives at subsidized interest rates

All agricultural lending programs shall

111


Distortion in the creditmarket due to interest rateceiling

Promotes capacity buildingof farmers’ organizationsand cooperatives

Promotes alternative creditdelivery channels such asNGOs, credit unions,savings and loanassociations, etc

Reduction in agri lendingdue to guarantee

More efficient managementof agri credit programs

Interest rate;

Institution building;

Credit delivery system;

Risks in lending;

Fund management

Farmers and ruralworkers;

Fisherfolk

112


Annex C cont.

RA 8250General Appropriations Act,1997

Executive Orders

EO 113Establishing the Comprehen-sive Agricultural Loan Fund(CALF), Creating theAgricultural Credit PolicyCouncil

EO 363Guidelines on the Allocationand Release of the 1996Poverty Alleviation Fund(PAF)

Feb. 12,1997

Dec. 24,1986

Aug. 23,1996

be consolidated under theadministration of the LBP

Promotion of cooperative banks andgrowth of networks of cooperative banks

Appropriates funds for the operation ofthe government of the Philippines forFY 1997

Provides funds for countrywidedevelopment projects; and povertyalleviation particularly in 5th and 6th

class municipalities and cities inidentified SRA convergence areas

Consolidates all existing and future loanfunds that are agricultural andagriculture-related under one fund calledCALF. The Fund shall be controlled,supervised and administered by theMinistry of Agriculture and Food. In nocase shall any portion of the CALF beused for direct lending to end-users butshall be administered through thebanking system, except in the cases ofthe GFSME and QGFB

Creation of the Agricultural CreditPolicy Council (ACPC) which shallreview and evaluate the economicsoundness of all on-going and proposedagricultural activities. It shall alsoundertake measures to increase its fundbase, adopting liquidity, intereststabilization and risk cover mechanismsfor its various financing program

Provide guidelines for the allocation ofthe PAF (P4B) in the 1996 GAA,designating seven national agencies tooversee the implementation

Preference in allocation is given to the20 priority provinces

113


Available funds for credit

Fund management;

Credit delivery;

Agricultural credit policy

Supply of credit funds forthe SRA priority provinces

Across sectors

Farmers, rural workers,fishermen

Across sectors in thepriority provinces

May create programs thatpromote a supply ledapproach to credit.

Termination of directlending program on non-GFIs

Lower administrative cost inmanaging funds for agrilending

Coordination andformulation of agriculturalcredit policy

Expansion of creditguarantee schemes

Induce bank lending toagriculture

May lead to fragmentedcredit programs

May promote a supply ledapproach to credit

114


Annex C cont.

The Commission shall take charge ofaccelerating capital formation throughnon-inflationary means, particularlythrough saving in banks and otherfinancial intermediaries

Creation of a Council composed ofgovernment financial and non-financialagencies and private sectororganizations

The Council shall rationalize variouscredit programs of government;

Rationalize the role of guaranteeprograms and guarantee agencies;

Develop a national credit deliverysystem towards enhancing productivecapability of beneficiary groups andefficiency and effectiveness of financialintermediaries;

Encourage private sector participationin credit delivery in the countryside

Launches a “Credit-for-the Poor”program;

Establishes partnerships between GFIs,and coops and other NGOs, with LBPas trustee bank for socialized creditprograms and coops and NGOs/POs asactual implementors;

Designates specific roles for differentplayers in the financial system

Aug. 23,1996

Oct. 8,1993

June 17,1994

EO 364Creating the NationalCommission on Savings


EO 86Creating the National CreditCouncil

Memorandum Orders

M.O. No. 213Approving and Directing theImplementation of the SocialReform Agenda

115


Savings mobilization

Efficiency of the ruralfinancial markets

Supply of and demand forcredit for the poor

Pricing of credit

Delivery scheme(s) for thepoor

Across sectors

Across sectors

All basic sectors: farmersand landless ruralworkers, fisherfolk, urbanpoor, indigenous culturalcommunities; workers inthe informal sector, otherdisadvantaged groups

Promotion and growth ofsavings nationwide

Rationalization of gov’tcredit and guaranteeprograms

Greater efficiency andoutreach in credit delivery tothe countryside

Expansion of credit for thepoor;

Can lead to subsidizedinterest rate and thereforedistort the credit market

Sustainability and viabilityof credit delivery cannot beassured

117

Adams, Dale W., Douglas Graham, and John D. Von Pischke,eds. 1984. Undermining Rural Development and CheapCredit. Boulder, Colorado: Westview Press.

Central Bank of the Philippines. 1991. Manual of Regulationsfor Banks and Financial Intermediaries.

Diaz-Alejandro, C. 1985. “ Goodbye Financial Repression,Hello Financial Crisis. Journal of Development Economics.

Esguerra, Emmanuel. 1996. Rural Credit Programs in thePhilippines: Lessons and Policy Issues. Agricultural CreditPolicy Council.

Fry, Maxwell J. 1982. Models of Financially Depressed DevelopingEconomies. World Development, Vol. 10, pp. 895-911.

Kane, Edward J. 1977. “Good Intentions and UnintendedEvil: The Case Against Selective Credit Allocation.” Journalof Money, Credit and Banking, 9:55-69.

Bibliography

118

Llanto, G. and M. Magno. 1994. An Evaluation of the Impactof the Comprehensive Agricultural Loan Fund Guarantee.Manila: Agricultural Credit Policy Council, PhilippineDevelopment Foundation, Inc. and Philippine Institute forDevelopment Studies.

Llanto, G. and C. Dingcong. 1994. “Bank Behavior in anAgrarian Reform Regime. Financial Intermediation in anAgrarian Reform Regime. Department of Agriculture andDepartment of Agrarian Reform.

McKinnon, R. 1973. Money and Capital in EconomicDevelopment. Washington, DC: Brookings Institution.

Mckinnon, R. 1987. Financial Liberalization in Retrospect:Interest Rate Policies in LDCs in G Ranis and Schultz (eds.)The State of Development Economics: Progress andPerspectives, Basil Blackwell, Inc.

Overseas Economic Cooperation Fund. 1995. Policy BasedDirected Credit Programs in the Philippines. OECFDiscussion Papers. Tokyo: The Research Institute ofDevelopment Assistance, OECF.

Segura, T.V. 1977. Term Lending in Agriculture. Paper presentedat the 3rd National Workshop on Agricultural Credit, SanFernando, La Union, May 6-8.

Shaw, Edward S. 1973. Financial Deepening in EconomicDevelopment. Oxford University Press.

B i b l i o g r a p h y

119

B i b l i o g r a p h y

Stigler, George J. 1971. “The Theory of EconomicRegulation.” Bell Journal of Economics and ManagementScience, 2:3-21.

Stiglitz, Joseph E., and A. Weiss. 1981. “Credit Rationing inMarkets with Imperfect Information.” American EconomicReview, 71:393-410.

121

CLARENCE G. DINGCONG is a microfinance and ruralfinance specialist. He has served as Staff Consultant forMicrofinance of the Asian Development Bank and asProject Management Consultant of the USAID supportedDeveloping Standards for Microfinance Project. Formerlya Director of the Policy Development and Planning Staff,Agricultural Credit Policy Council (ACPC) and a ChiefEconomic Development Specialist of the MacroeconomicsDivision, National Planning and Policy Staff, NationalEconomic and Development Authority (NEDA). He haswritten and published a number of studies and has servedas consultant and resource person of international and localagencies. Mr. Dingcong completed his graduate studies atthe School of Economics, University of the Philippines.

About the Author

Review of Financial Laws and Regulations Affecting the

Documents

Transcript of Review of Financial Laws and Regulations Affecting the