Banking industry to face stiff competition

2
Ej Lopez

Ej Lopez

The newly enacted law liberalizing the banking industry “should” be a welcome respite to the abysmal economic and political news that we have been reading in the newspapers lately. The president signed into law Republic Act (RA) 10641, “An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the Purpose RA 7721”. The act was ratified on July 21, 2014.

Advertisements

What are the implications of this new law to our banking, economic and business industries? Depending on the reactions of the concerned players in the banking sector, the entry of foreign banks to the country is an indication of stability, or at least a good perception of our banking and finance environment. Or at least, the thrust of the law is to promote equal opportunity for the banking sector that would hopefully induce a more conducive business environment.

The law allows up to 100-percent ownership of domestic banks by foreigners and the liberalized entry of overseas banks and financial institutions into the country.

Likewise, it is a supportive law meant to impose the same privileges granted to local banks. As such, it is intended to strengthen or stabilize the operation of local banks and the financing industry as a whole.

The amended law is an indication of our objective to attract foreign investors to the country. It is likewise a diplomatic way to lure foreign and local investors to our turf. Perhaps the biggest benefit that the country can draw from this law is the possible inflow of foreign direct investment (FDI) which we are in dire need of and a serious requirement to achieve the tiger status we have long been aspiring for.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said that the law stands to strengthen the local banking industry as it positions itself for the Asean economic integration starting 2015. The Asean integration is a test of mettle of the participating countries’ financial stability, which effectively will culminate in a stronger financial performance of the region as a whole.

Although the passage of the law may have its good intentions and some beneficial effects to the local environment, the possible repercussions of the same to local banks’ stability remain uncertain. In terms of competition, the liberalization will mean stiff competition from foreign banking networks. Local banks and financial intermediaries’ stability may likewise be threatened by the entry of foreign financial intermediaries because of the latter’s international influence and high capitalization levels. Multinational banks likewise will have unlimited access to local operations and will enjoy the same privileges granted to local banks, which could then suffer from the strong competition that they offer.

Liberalization or not, banking operations will still follow the basic principles of competition. It is a given that the banking sector makes money from the borrowers more than from the savers. At some point the number of savers remains constant.

And the entry of foreign competition does not necessarily increase the number of savers. Therefore, local and foreign banks will compete with the limited savings available from same pool of depositors. At the end of the day, not all banks will survive the competition offered by the liberalization. Some banks will flourish, others will be mediocre, while others will slowly fade out from the competition.

The competition to lure savers to their side may result in bankruptcy in the case of some banks. Banks cannot always rely on borrowers to sustain banking operations because they generally draw their funds from bank savings and deposits. As such, without savings, how can you facilitate borrowings?

It seems that local authorities may have overlooked these prior considerations in the passage of the law. They were overtaken by emotions; overlooking the possibility that the local banking network may not survive the onslaught of foreign banking competition.

The local economy should not be misconstrued as having achieved a high-profile status where funds are available at the snap of a finger. Likewise, it should be understood that the Philippines still belongs to the Third World where the number of borrowers exceeds the number of savers. The nature of our economic and business environment can accommodate only so much number of participants in the banking sector. It will be more tragic than beneficial to the economy if we see banks unable to survive the blitz of the competition brought about by the crowding-out of banks in the industry. We have been a witness of bank closures that transpired several years back and it brought irreparable damage and apprehensions as regards the stability of our financial sector.

The present set-up is tailor fit to the stature of our economy; where everyone survives and makes do with whatever resources are available. It would be wise to maintain the status quo or device some measures that would provide incentives, subsidy or safety nets to cushion the impact of foreign banks’ “invasion.”

For comments e-mail: doc.ejlopez@gmail.com.

Share.
loading...
Loading...

Please follow our commenting guidelines.

2 Comments

  1. Dear Residential Legal Counsel and Executive Secretary
    Please take note that RA7721 is a law passed by the Philippine Congress, legislated law which cannot be amended, repealed, modified, revoked by the act of the Executive modifying it by signing and Executive Order which the executive termed as RA 10641, henceforth this is devoid of authority.

  2. I disagree that RA 10641 is likely to lead of bankruptcy of weaker players. It is more likely that these will be bought out by competitors. This happens even now, unless the weak bank is associated with fraud.

    It is also unlikely that RA 10641 will result in foreign banks setting up a lot of new branches. More likely is: some midsize domestic banks get taken over whole by foreign banks, and rebranded.

    We are already seeing a “beauty contest” of midsize banks going public, advertising more, adding branches, etc.

    Lastly, it should be mentioned that RA 10641 is part of our commitment under the ASEAN Economic Community (AEC). It is a quid pro quo that we open our protected banking sector, and the other ASEAN members open up whatever is their protected sector to Philippine investors. Our big businesses have ambitions of becoming multinationals, and breaking into our ASEAN neighbors is seen as a necessary step towards that.