The central bank welcomed the signing of a law allowing the full entry of foreign banks into the country because it would generate increased investments, but a group of private banks raised concern that the amended law could ease out smaller domestic players unable to survive the competition.
President Benigno Aquino 3rd signed Republic Act (RA) 10641, or “An Act Allowing the Full Entry of Foreign Banks in the Philippines, Amending for the Purpose RA 7721” into law on July 18.
The law allows foreigners to own up to 100 percent of domestic banks and facilitate the entry of “established, reputable and financially sound foreign banks” in the Philippines.
It also grants locally incorporated subsidiaries of foreign banks “the same banking privileges as domestic banks of the same category.”
“The economic benefits that can be derived from a further opening of the Philippine banking system to foreign banks are clear—augmentation of financial resources (thru increased foreign direct investments) that will be available to the domestic banking markets, transfer of technology, and enhancement of human resource skills,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said.
FDI expected to rise
In a text message to reporters on Monday, Tetangco noted that the liberalization is also expected to generate increased foreign direct investments in the Philippines, including in the manufacturing sector, which would create more jobs and raise output.
The BSP governor added that the amended law would also help further strengthen the banking system and make Philippine banks better positioned in the face of ABIF, or the Association of Southeast Asian Nations (Asean) Banking Integration Framework.
ABIF, one of the blueprints of the Asean Economic Community, aims to establish a set of criteria for Asean qualified banks to operate in any country in the region with a single “passport.” By 2015, any Asean qualified bank can freely expand to other Asean countries.
These banks can operate within Asean jurisdictions on equal terms as domestic banks of that jurisdiction, subject to certain prudential and governance standards.
“The liberalization of the banking system is part of the reform agenda on capital and financial market development that is designed to create an efficient working environment, where the needs of savers and users of funds could be addressed with the larger view of our pursuit of financial stability,” Tetangco said.
Tougher competition for small banks
Meanwhile, the Bankers Association of the Philippines (BAP) expressed concerns that many local banks may not survive the increased competition with the full entry of foreign banks.
BAP president Lorenzo Tan said in a text message that Philippine banks are still relatively small compared to other major Asean banks and that the resulting fierce competition may force more mergers and acquisitions in the industry.
BAP acknowledges, however, that the liberalization also brings in benefits to the industry and to customers. Banks will be forced to offer better products along with more attractive pricing and margins, and advanced technology could also be brought into the country.
“On a more positive note, increased competition would bring out the best from Philippine banks and likely benefit customers,” BAP president Lorenzo Tan said in a text message.