Rural banks: capital infusion

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It’s just one small step, but it could very well lead to a more comprehensive liberalization of the investment climate, something that the country needs if it is to redeem its people from centuries of poverty and ignorance.

We applaud President Benigno Aquino 3 for signing RA 10574, which allows non-Filipino citizens to own, acquire or purchase up to 60 percent of the voting stocks in a rural bank.

The stated purpose of the law is to open up ownership of rural banks to foreign equity, “thus attracting enough capital to spur economic development in the countryside,” says Senator Sergio Osmena, sponsor of the bill’s Senate version.

Until the law was signed, foreigners were prohibited from participating in rural banks.


Foreign banks were allowed to own equity but not foreign individuals or groups. The distinction has proven to be counterproductive. It keeps foreigners away without actually attracting foreign banks.

The law is long overdue. If there is one aspect of the economy where foreign investments are sorely needed, it is in the rural banking sector, especially at this time when agriculture has taken center stage in the rush to economic development.

Under the Rural Banks Act of 1992, the government announces it as a matter of state policy “the promotion of a comprehensive rural development,” and it assigns that responsibility to rural banks.

As things now stand, however, rural banks have very little capital to take on that ambitious undertaking.

One group of economists pushes industrialization as a means to develop the country. Another tells us to bypass industrialization and bring the country direct to the so-called knowledge economy, where the production and use of high-value intellectual products and services are the primary concern.

There is wisdom here, but the post-industrialization stage is easier to attain if we have a strong agricultural base. Indeed, even if we could reach that era, such accomplishment could prove hollow if the country has to import food and other agricultural products for its people.

The infusion of foreign capital would enable rural banks to extend more credit facilities to more farmers and fishermen and, under cooperatives, to more agribusiness enterprises.

There are close to 600 rural banks in the whole country, and many of them are struggling to survive because of lack of capital. Indeed, a number have already folded up in the last few years for exactly that reason.

The entry of foreign investors could prevent the demise of ailing rural banks and lead to the establishment of more of them.

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