Background and Economy
The first stop on my travels has been the Philippines, where I spent a month exploring the wide variety of landscapes and attractions that the country has to offer. With a population of just over 100 million, it is the 12th largest country in the world. This enormous population is spread over 7,000 islands; 44.4% is urban population and 55.6% is rural (World Bank, 2015). Many of these rural populations are isolated. For example, I spent my first week in Sagada, a remote town in the northern mountains of Luzon. Despite being 400km away from Manila, the only direct bus per day took over 13 hours to arrive due to the mountainous terrain and dangerous roads.
In terms of its economy, the Philippines is regarded as a Newly Industrialised Country (NIC), and so whilst service industries now dominate much of the economy, agriculture continues to play a significant role. As much as 30% of the population is employed in agriculture, contributing around 11% of the country’s GDP (World Bank, 2014). Due to the low wages in agriculture, and typically lack of other opportunities in rural areas, many Filipinos have emigrated for work. In fact, there are so many Overseas Filipino Workers (OFWs) that remittances received totalled $25.6 billion USD in 2015 (BSP), making the Philippines third in the world for remittances received behind only China and India. This accounts for an estimated 10.2% of GDP, and is growing at a rate of 5.2% (BSP, 2015).
Financial Inclusion: The Story so Far
So what is the state of Financial Inclusion in the Philippines? There are many ways of measuring it; which Bangko Sentral ng Philippines (BSP, 2013) – the Central Bank of the Philippines – defines as “a state wherein there is effective access to a wide range of financial services for all Filipinos.” Basic measures of Financial Inclusion include bank account ownership, format of money savings, borrowing rates and borrowing institutions. The following bullet points will detail some of the key statistics for these measures, as well as touching on the state of remittances using the most recent data from The World Bank unless stated otherwise:
- 31.3% of people aged 15+ have a bank account, compared to 69% across East Asia and Pacific, and 42.7% for lower-middle-income countries average.
- 67.3% of people saved money in some form in the last year, compared to 71% total in East Asia and Pacific, and 45.6% for lower-middle-income countries average.
- Despite this high rate of savings, only 14.8% of people had bank savings in the last year; lower than the 36.5% in East Asia and Pacific and equalling the percentage for lower-middle-income countries.
- Whilst a high proportion of people do save, many do not have access to the financial institutions to do so, and instead are forced to lose both the security and interest that comes from access to financial services.
- As high as 48.7% of people borrowed from family or friends in the last year; significantly higher than 28.3% in East Asia and Pacific, and 33.1% for lower-middle-income countries average.
- A higher percentage of people (13.5%) borrowed from a private informal lender than a financial institution (11.8%). It is well known the perils of borrowing from informal lenders, which is often accompanied by strict repayment schedules and extremely high interest rates.
- Of received remittances, only 12.1% were via a financial institution, and 10.8% via mobile phone (2014).
- The World Bank’s (2015) study in remittances measures banks as the most expensive means at a 10.96% interest rate, and claims that most migrants typically send cash as a result of this.
These statistics suggest that there is much work to be done to reach the goal of providing suitable financial products and services to all in the Philippines. The next section will assess what the government is doing to make the country financially inclusive.
The Government’s Approach
The challenge of Financial Inclusion demands a government strategy to tackle it, in order to create an environment in which financial instututions are forced or incentivised to be inclusive, or in which innovations can flourish. On July 1st 2015, the BSP signed a Memorandum of Understanding on the National Strategy for Financial Inclusion (NSFI). The executive summary reads as following:
“The National Strategy aims to optimise collective efforts toward Financial Inclusion in the Philippines. It will raise awareness, appreciation and understanding of Financial Inclusion, and enable coordination among various stakeholders.”
Alongside this NSFI, efforts are being made to reach these goals. The BSP Deputy Governor Nestor Espenilla Jr. (Manila Standard, 2016) stated that:
“Rapid improvement of power supply and the digital infrastructure that makes telecommunications and broadband available everywhere and more reliable will be a particular help to Financial Inclusion by enabling affordable digital financial services”
Lack of infrastructure is often cited as a key obstacle for investors, banks and other financial insitutuons in expanding to far-flung islands and rural areas. Whilst in the Philippines I bought a local SIM card, which in certain islands was particularly slow to connect to the internet. The slow speed was still hugely faster than the almost non-existent local WiFi connection.
This requirement for improved infrastructure has been reflected in the government budget, as Budget and Management Secretary Benjamin Diokno (2016) announced that the Duterte Administration has allocated P8.2 trillion solely to fund the “golden age of infrastructure” over the next 6 years. This would boost infrastructure spending to around 5.2% of GDP.
Whilst we are yet to see much in terms of the concrete effects of the NFSI, the government’s focus on Financial Inclusion has not gone unnoticed. Think-Tank Brooking’s Insitution’s report titled ‘Advancing Equitable Financial Ecosystems’ ranked the Philippines as the most improved country in providing digital and Financial Inclusion from 2015-2016 in its data pool. The report claims that this was driven not only by the launch of NSFI, but also noted that:
“Strong performance in terms of mobile capacity, as measured through smartphone penetration; and highest rate of adoption of mobile money accounts among the South East Asian countries included in the report.”
This concludes Part One of the Philippines. Part Two will take a look at some of the startups and established companies using FinTech to tackle Financial Inclusion the Philippines.