Financial Inclusion: Reinforcing Economic and


Financial Stability

It is a distinct honor to present during this meeting on microinsurance.

During the last G20 Meeting in Pittsburgh, the Leaders pronounced their
commitment to improving access to financial services for the poor and to support
the safe and sound spread of new modes of financial service delivery capable of
reaching the poor. 1 This statement was made following the global crisis which
reinforced the adverse effects of financial exclusion yet also created a unique
opportunity for policy makers to rethink their financial inclusion initiatives that can
foster economic resilience. I am therefore happy for the opportunity to discuss
this very important and timely issue.

My brief presentation will start off with a general scenario of access to

finance, globally, as well as a Philippine specific scenario to provide us a clear
context for our discussion this morning. Driven by the said context, I will then
discuss our guiding principles in addressing the various challenges for financial
inclusion then go into specifics in how we have applied such principles in the
areas of microfinance, microinsurance and mobile banking. I will conclude with
some early results that we have seen and our next steps in moving forward.

Let me start with this table from CGAP’s research on the state of financial
access globally. Their 2009 survey 2 reveals the stark comparison between
developed and developing countries on the key dimensions of savings and actual
access points of banking services. These are important indicators of how we can
gauge our efforts to improve our financial systems. These comparative figures
gain even more significance and urgency when we translate them into actual


Presented by BSP Deputy Governor Nestor A. Espenilla, Jr. during the FSI Meeting on
Microinsurance – Promoting Successful Regulatory and Supervisory Approaches for Increased
Access to Insurance, 6 July 2010, Basel, Switzerland.
1
G20 Leaders Statement. Pittsburgh Summit, September 2009.
2
Financial Access 2009, Consultative Group to Assist the Poor, 2010.

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numbers. As many of us may already know, over half of the world’s adult
population, around 2.5 Billion adults, do not use formal financial services to save
or borrow. 3 These numbers represent a persistent challenge around the world
that we can no longer ignore.

In the Philippines, we are faced with similar access to finance challenges.

While our banking reforms and efforts at strengthening our banking system to
allow strong banks to expand their operating networks have borne fruit, there still
remains 37% of municipalities that do not have a banking office. Concentration
of the banking services are also biased toward higher income areas leaving
much of the low income areas significantly underserved. This can be seen in the
map (FIGURE 1) which shows that the
regions with the highest coverage are
also the highest income earning
regions. For example the yellow color
shows most part of the island of Luzon
where the National Capital Region is
located, and where bank density is
4,100 compared to the Autonomous
Region of Muslim Mindanao (green)
with 138,000. Coverage of
municipalities in the NCR is 100% as
compared to the 8% in ARMM. 4 In
addition, more than 50% of the
country’s total deposit accounts are in
the NCR 5 while many of those in other
areas still keep their savings at home. 6

3
“Half the World is Unbanked”, Financial Access Initiative, 2009.
4
BSP Data
5
Philippine Deposit Insurance Corporation Data
6
CGAP Survey of low income respondents in non-metro, mid sized cities found that 63.5% still
keep their savings at home.

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 Access to insurance products also leaves much to be desired. Our
insurance coverage is only 13 % of our population, roughly 12 million for a
country with over 90 million people. Insurance penetration, defined as total
premiums divided by GDP, is only at 1% which shows that there is more room for
growth for the insurance industry in the country. Insurance density is also below
global averages at USD 20. 7 In addition to the fact that these figures leave much
to be desired, it is important to point out further that this coverage mainly consists
of those in the formal sector. This is an important point because those in the
informal sector are in greater need of insurance services. Usually, micro, small
or informal businesses/ households with no insurance coverage would respond
to shocks by cutting back on consumption, reducing spending on education and
health and selling productive assets which do not help them gain back their
losses.

This issue is significant also in light of the number of micro, small and
medium enterprises in the Philippines. They make up 99.6% of our total
enterprises, contribute around 70% of total jobs generated and 30-32% of our
GDP. 8 They are an important foundation for broad based economic development
as well as an effective means for sustained poverty alleviation. Estimates also
show that 30% of Filipinos who live within the poverty line manage at least two
livelihood or microenterprise activities. These microenterprises are a major, if not
the only, source of income for these households.

The task of increasing access to appropriate financial services is therefore

something that we recognize as an urgent one. Let me sum up our guiding
principles in addressing this challenge.

7
Insurance Commission Data, 2008. Global reference figures from 2008 Deloitte Cross Country
Study of 7 Insurance Markets by Stephen Packard, 2008.
8
SME Statistical Report 2000-2004, BSMED, DTI 2007. (Figures reiterated in 2010 SMED Plan
Evaluation)

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 First, we recognize that financial inclusion is a worthy policy objective and
something that can be pursued alongside the promotion of stability and efficiency
in the financial system. Recognition of this and a commitment by policy makers
and regulators is critical.

Financial inclusion and financial stability can be mutually reinforcing.

Financial exclusion causes adverse effects in the economy and especially makes
people more vulnerable to financial distress, debt and poverty. On the other
hand, sound and stable financial systems are necessary for long term, balanced
and inclusive development. It therefore directly contributes to social cohesion
and shared economic development.

Financial stability and financial inclusion are not inevitable. Both demand
at least the same measure of energy, imagination and serious attention.

In addressing financial access issues, market based solutions are

feasible. Governments tend to be unsuitable providers of financial services and
are instead better positioned to establish a supportive regulatory environment for
the said market based solutions to work.

These solutions, of course, present real and valid risks but these are
concerns that can be managed.

The approach is to promote an enabling environment based on the

proportionate application of sound and generally accepted regulatory and
supervisory principles.

These principles shape our inclusive finance framework where we

recognize that financial inclusion involves the delivery of a wide range of services
such as savings, credit, insurance, payment services and remittance. It is not just
about credit. To reach all markets, including those that have been previously

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unserved/ unbanked, these products must be appropriately designed and priced
and delivered by institutions that have the authority and capacity to safely and
effectively provide or deliver such services.

Because of the many barriers to access, it is important that banks and

non-banks leverage on linkages and partnerships to expand their range of
products as well as their delivery channels to reach the financially excluded more
effectively. These linkages may range from banks acting as agents/ brokers for
insurance products or merchants acting as cash in/out points for electronic
money to provide a channel that will facilitate a client’s bank transaction. These
linkages will be discussed in more detail later.

For these to work, it is important that all players and financial service
providers are properly and proportionately regulated to ensure consumer
protection, financial system stability and integrity.

I need to re-emphasize the point of proportionate regulation as the

necessary approach. Useful innovations need not be stifled but instead be
allowed to operate in an environment where the risks associated with such
innovations are adequately understood and addressed and where there is a
judicious and proportionate application of sound principles.

The next three tables (TABLES 1 – 3) that I will show present the basic
issue and concern of the regulator/ supervisor, the point of balance that must be
struck and the possible initiatives that can be undertaken to address this need for
balance.

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 TABLE 1: Safety and Soundness
Issue Point of Balance
Safety and • Deposits should be
Soundness well-protected
• Innovative financial
services to the low-
income potentially
expose deposit taking
institutions to new
risks
• Prudential regulation
can impose undue
regulatory burden
TABLE 2: Consumer Protection
Issue Point of Balance
Consumer Financial Inclusion brings in
Protection new consumers who are
potentially vulnerable. They
need appropriate information
and increased capacity to use
financial access to their best
interest.
TABLE 3: AML/ CFT
Issue Point of Balance
AML/CFT Need to manage the risks to
financial system integrity of
easy access to the financial
system.
You will see how this general framework has been more specifically
applied to microfinance, microinsurance and mobile banking.
Possible Policy Initiatives
• Limit safety and soundness supervision to
entities with deposit taking activities
• Distinguish deposit taking activities from
fund transfer activities
• Risk-based supervision
• Ensure adequate supervisor capacity
through training
• Close coordination with other financial
regulators
Possible Policy Initiatives
• Financial education
• Price transparency and fair treatment
regulation
• Contestable markets to drive competition in
a multi-player environment (bank and non-
bank)
• Consumer redress mechanisms
Possible Policy Initiatives
• Allow simplified KYC requirements for small
value transactions only
• Leverage on KYC of other authorized
institutions
• Recognize the use of technology in e-
money systems in identifying and
suppressing illegal activities
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 The main objective in our policy and regulatory approach to bank-based
microfinance is to enable the delivery of commercially sustainable microfinance
in the banking sector. This is in line with our National Strategy for Microfinance
which was issued in 1997 with the main principle of market-based microfinance
policies. The emphasis was for the private sector to be the leading providers and
the government to provide a supportive role through policy, regulation and
capacity building.

There was a paradigm shift that enabled the mainstreaming of

microfinance in the financial system, and not treating it as a niche or merely a
CSR activity. To support this, we provided a mechanism wherein unregulated
institutions can transform to become banks. This has allowed some of our
pioneer microfinance NGOs to establish banks that can now also offer savings
products to their microfinance clients.

We also continue to stay abreast with the market developments and allow
for various innovations in products and delivery channels. With such innovations,
we endeavor to fully understand the risks associated with the business and
develop a proportionate policy and regulatory response. To be better able to
undertake this, we have developed our own capacity within the BSP for effective
risk based supervision.

The table below (TABLE 4) will show how the general policy and
regulatory approach that I discussed were implemented. You will note that our
generally accepted Core Principles of Effective Banking Supervision can indeed
be applied appropriately to microfinance activities. You will note that there is no
need to add new principles or change the existing ones. Instead, it is evident that
due to the peculiar characteristics of microfinance, there may only need to be
some tailor-fitting in how the existing principles are applied.

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 TABLE 4
Definition of Clearly define microfinance as a provision of a range of financial
Microfinance services to low income clients/ entrepreneurial poor – credit,
savings, insurance, fund transfers. Microfinance loans have specific
characteristics (i.e. cash flow based, frequent amortization, etc.)

Capital Requirements/ Banks comply with same standards and requirements for capital
Adequacy, Licensing adequacy and licensing
Requirements
Credit Risk Require banks to have clear underwriting standards and practices
for cash-flow based lending.
Risk Management / Require high frequency monitoring of portfolio-at risk and
Problem Assets/ corresponding provisioning requirements reflecting peculiar risks of
Provisioning microfinance.
Governance Specify necessary experience and track record in microfinance in
the board and management. Impose clear and comprehensive
governance standards.
Supervisory Approach Create a MicroSME Finance Specialist Group
Develop Manual of Examination Procedures

Similar to our approach to microfinance, our foray into microinsurance is

supported by a clear National Strategy and Regulatory Framework.

Our National Strategy was approved this year by a body comprised of the
relevant regulators, government agencies and the private sector. Again, the
policy direction is clear: the provision of microinsurance should be private sector
driven with the government creating a supportive environment to ensure its safe
and sound provision. There is also recognition of the importance of
mainstreaming informal insurance activities in light of the large risks associated
with such activities, as well as the need for a financial learning initiative to
increase public sector awareness and understanding of microinsurance.

The Regulatory Framework was also established this year. A well-

designed regulatory framework is a major factor for the effective and efficient
provision of microinsurance services. In promoting more professional and
expansive microinsurance services, regulation can play an important role by
encouraging microinsurers’ decision to become regulated, and by facilitating this
process.

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 This framework clearly defines microinsurance products, providers and
even contracts. It specifies the responsibilities of insurance companies as well as
agents and brokers. It is clear in the Framework that the Insurance Commission
is the primary regulator.

The BSP recognizes the importance of safety nets and risk protection
especially of the poor. As was mentioned earlier, the poor are those most
vulnerable to shocks and recovery from said shocks seem to be more difficult.
We therefore acknowledge that providing greater access points for
microinsurance is beneficial. Our thrift and rural banks have a wide network in
our countryside and in most cases are the most trusted financial institution in the
area.

Our general approach, therefore, is to expand the permissible activities for

banks engaged in microfinance to include marketing and selling microinsurance
products. In this expansion of activities, we ascertain that the bank has the
capacity to manage the risks associated with the activity.

To ascertain that the banks are operating under the microinsurance

regulatory framework, the banks are licensed as an agent/ broker of a licensed
insurance provider. The product, the agent/ broker and the insurance provider
are all duly supervised/ regulated by the Insurance Commission.

This general approach is implemented through the specific initiatives we

have undertaken. (TABLE 5)

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 TABLE 5
Definition of Activity providing insurance products that meet the needs
Microinsurance of the low-income sector for risk protection and relief
against distress, misfortune and other contingent events.
Premiums and benefits limited to at most 5 % of minimum
daily wage and 500 times minimum daily wage,
respectively.
Licensing Thrift, Rural and Cooperative Banks may market and sell
Requirements microinsurance products as a complementary component
of its primary business. Banks need to undergo training
and approval from IC as an agent/ broker.
Coordination with Clear coordination with the IC is established.
IC and Bank Bank Associations may be used to facilitate application
Associations process with IC and the BSP.
Risk Management Bank shall make microinsurance clearly distinguishable
from bank products in all materials used.
Consumer Bank shall ensure that insurance provider has functioning
Protection customer care and claims handling mechanism.
Supervisory Microinsurance product, Insurance Provider and Agents
Approach require IC approval.

I will also briefly describe the role of our policy and regulatory approach to
mobile banking and electronic money. We see this as an important piece in
supporting, if not completing, our inclusive finance framework. The use of these
technological innovations has a significant potential for increasing access points
to the financial services that I have already discussed.

Our basic approach to e-money is to clearly define its characteristics as

well as define who can be issuers of such e-money. In so doing, we clarify the
regulatory space in which these e-money issuers can operate.

E-money is clearly defined as a surrogate for cash – one that does not
bear interest, not insured by depository insurance, prepaid and fully re-
convertible to cash. We have delineated deposit taking activities from the mere
fund transfer activities associated with e-money. In this way, we retain prudential
regulation only for those entities that are deposit taking.

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 For the e-money issuers, by bringing them into our jurisdiction, we are
better able to ensure that they can operate in a sound and sustainable manner.
We have imposed capital requirements (i.e. PhP 100 M ~ USD 2M), liquidity
covers for outstanding e-money liabilities (i.e. 100%), operations risk
management standards, transaction limits (i.e. PhP 100,000 per month ~ USD
2,000), AML/ CFT compliance and customer care responsibilities.

They are, in turn, allowed to create and establish their own network of
agents provided that they are fully responsible for them. To ably supervise and
regulate these activities, we also built up our own capacity by creating a Core
Information Technology Specialist Group.

The figure below (FIGURE 2) presents the e-money ecosystem. With the
access points to e-money issuers’ agent networks, what will develop is a wide
and ubiquitous e-money ecosystem with a large coverage that can most certainly
compliment and augment the reach of bank brick and mortar offices.

FIGURE 2: Regulated E-money Ecosystem

Regulated E-Money Ecosystem

BANKS E-Money
ISSUERS

3rd Party Cash

Other Exclusive
ATMs In/Out Agents
Branches Banking Cash In/Out (Storefront
Offices Agents Infrastructure)

Banking Services Cash in/out of E-

money
Cash in/out of E-
money

User Enabled Person to Person Purchases

E-Money
Functionalities Bills Payment Remote banking services

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 I am happy to note that we have seen positive results so far. We can say
that microfinance is fully mainstreamed in the financial system. There are now
over 210 banks offering microfinance services from just a handful in 2000. The
outstanding portfolio has also shown an impressive increase of 125% in the last
7 years and the numbers are stable and consistent. Apart from the thrift and
rural banks, our larger banks are also finding ways in which they can participate
in the microfinance market either through wholesale loans or by purchasing rural
banks to be their retail microfinance arm.

This interest by larger players and commercial investors has also lead to a
greater professionalization of the industry. More and more are subscribing to best
practices and performance standards. Just recently, we issued a Circular
recognizing microfinance institution rating agencies as a response to market
demand. Four international microfinance rating agencies have already opened
offices in Manila.

We are also seeing banks with microfinance operations embrace

innovations in product and delivery channels. More and more are offering
housing microfinance and micro-agri loans. Many are already working on offering
microinsurance. They are also using the innovations in delivery channels
particularly the mobile phones using the electronic money platform. There are
now 52 rural banks with mobile banking applications from none at all just 5 years
ago. The use of these innovative channels has proven very beneficial. Some
banks have lowered their interest rates on loans by as much as 50bps for clients
who choose to transact through mobile phones for their microfinance loans.
These channels are also providing a competitive and cost-efficient alternative to
sending and receiving remittances.

While we have positive accomplishments in these areas, we remain

vigilant moving forward. We will closely monitor market practices and

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developments to identify new challenges and emergent risks such as financial
crime, over indebtedness, abuse of financial services, among others.

Hand in hand with these efforts we will also be proactive in committing to

our advocacy for responsible finance. As we become more successful in our
efforts for financial inclusion, we are bringing in new players who are also less
informed and more vulnerable. It is incumbent upon us to ensure that practices
in the market are fair and that consumer protection rights are known, upheld and
promoted. We are also working assiduously on our financial literacy promotion.

We have recently mounted a comprehensive economic and financial

learning program wherein we aim to promote greater awareness and
understanding of essential economic and financial issues and concepts to help
the public acquire the knowledge and develop skills needed to make well-
informed economic decisions and choices. The underlying philosophy is that a
citizenry that is well-informed can be our effective partner in maintaining the
effectiveness of monetary policy as well as in ensuring a stronger and safer
banking and payments system. At the same time, a knowledgeable citizenry is
able to contribute more meaningfully to economic development and benefit better
from the opportunities that it brings.

We hope that our holistic approach to building an inclusive and stable

financial system will bring more people into the financial system and allow them
to benefit from the many opportunities that it can bring.

Thank you.

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