The Bangko Sentral ng Pilipinas (BSP) is seen to welcome more foreign players into the local banking system, as the Philippines’s financial industry remains a prime destination for international banks. Foreign banks also seem to make local banks “work harder” to improve their services, a Central Bank senior official said.

Since the full liberalization of the local banking sector to foreign players in July 2014, foreign banks, particularly those coming from the region, have been coming to the Philippines either to set up branches or to come in as stakeholders to existing local banks.

In particular, the Central Bank has already granted nine foreign banks licenses to operate in the local banking system since July 2014 with the passage of Republic Act 10641.

Earlier, the Central Bank said more foreign banks are to enter the Philippines this year; about six more, in particular, have expressed their intent on establishing and operating in the Philippines.

BSP Deputy Governor for the Supervision and Examination Sector Nestor A. Espenilla Jr. said the Central Bank expects the Philippines to continue to attract a lot of foreign banks, despite global volatilities this year—as the local scene comes from a position of strength and opportunity.

PHL’s lure

“The Philippines is an attractive market, because we are one of the fastest-growing economies, relatively big domestic market, young and upwardly mobile, and relatively underbanked. We also have large financing needs for infrastructure and other investments,” Espenilla replied to the BusinessMirror’s query.

Earlier this year international credit watcher Fitch Ratings lauded the Philippines for taking the “biggest steps” toward banking integration in the region, setting the country apart from the rather “slow and uneven” progress the region is making toward a unified financial sector.

The credit watcher noted the Philippines’s steps toward banking-sector liberalization, saying the country has one of the largest strides toward the Asean banking integration framework (ABIF)—or the initiative which envisions qualified Asean banks to eventually be allowed to operate freely in the region.

Fitch particularly noted the Philippines’s legislative move to allow full entry of foreign banks to the local sector through the removal of the cap on foreign ownership of banks, as signed by former President Benigno S. Aquino III.

Local benefits

The entry of foreign players in the country proved to bode well thus far to local players, easing earlier concerns that bigger regional banking giants will crowd out local financial institutions once they set up their operations on shore.

In Fitch’s most recent report of the Philippine banking sector, the credit rating agency said the influx of more banks would help improve the overall system of the banking industry in the Philippines.

“We believe the entry of well-managed foreign banks expands the system’s capacity to fund growing trade and investment needs, and enables potential knowledge transfer in areas such as risk management, project finance and systems,” Fitch Ratings said.

Espenilla added: “These resources are not just funding, but also managerial, technology, product innovations and market connections. These help a lot because the country remains underbanked.”

“The new players also bring healthy competition that makes our incumbent domestic banks work harder, innovate, improve their services and lower prices,” he said.

FDI

The deputy governor also said the entry of foreign banks promotes more foreign direct investments (FDI), in addition to their own investments, by attracting their business customers at home to come and do business in the Philippines. The new foreign players also bring in additional resources that expand and improve the capability of the banking system.

Latest data from the Central Bank shows FDI growing by about 25.4 percent from January to November 2016 to reach $6.97 billion in the first 11 months of last year. This is a leap from the $5.56-billion FDI seen in the same 11-month period in 2015.

The BSP said the rise in FDI was buoyed by investors’ confidence in the economy on the back of sound macroeconomic fundamentals and sustained growth potential.

In 2015 the Philippines had the lowest volume of FDI as compared to its counterparts in the Asean-5 bloc—with Singapore leading at $65.33 billion FDI of the year. This is followed by Indonesia with $20.22 billion, Malaysia with $10.96 billion and Thailand with $9 billion.

The Philippines’s FDI total in 2015 was at $5.84 billion.

While the Philippines is lauded for being one of the front-runners toward full Asean banking integration, the rest of the region, according to Fitch, remains slow in development.

‘Distant goal’

In particular, Fitch said full financial integration looks like a “very distant goal”, as initiatives from different jurisdictions in the bloc have been uneven and slow, with further moves projected to remain at a gradual pace.

“Bilateral deals have been slow to get off the ground. Malaysia and Indonesia have signed an ABIF agreement and others are being negotiated, but the bigger moves toward regional financial liberalization will be happening outside of the ABIF framework,” the credit watcher said.

For the Philippines, meanwhile, the BSP has already signed bilateral agreements with the central bank of Malaysia, marking one of the first bilateral agreements to be signed under the ABIF.

This particular agreement, according to Fitch, will allow for three new qualified Asean banks (QABs) to enter and operate in the local economy.

QABs are strong and well-managed banks, headquartered in Asean and majority owned by Asean nationals. Banks that apply for QAB status must be endorsed by the home country regulator and may be accepted by the host country regulator based on their bilateral agreement.

The Central Bank earlier said it is on its way to inking two more bilateral agreements with neighboring countries with regard to the guidelines allowing the entry of regional banks into the local industry.

The BSP, in particular, bared that it is about to initiate formal discussions with the Bank of Thailand and with the Otoritas Jasa Keuangan, or OJK, of Indonesia under the same ABIF guidelines as that of the country’s bilateral agreement with Malaysia.