PH banking sector in need of reform to catch up to ASEAN peers-report

The Philippines lags behind other comparable member states of the Association of Southeast Asian Nations (ASEAN), particularly Malaysia and Thailand, in terms of financial deepening, access, and efficiency, according to a report from a government think tank.

The Philippine Institute for Development Studies, in a review last month of the financial sector development in the ASEAN, observed how much smaller the size of the banking sector in the Philippines is compared to Malaysia and Thailand, but comparable to that of Indonesia. Compared to Vietnam, however, the banking assets of Vietnam starkly increased from 1999 to 2016, although its ratio to GDP was just half of the Philippines in 1999.

In terms of financial access by a wide range of households and firms, the Philippines has “significantly lagged behind other comparable ASEAN member-states in terms of access to banking services,” said the PIDS review authored by Melanie S. Milo. Notably, the Philippines’ number of deposit accounts per 1,000 adults was even lower than Lao PDR’s in 2016, even if it had more bank branches per 1,000 adults than the latter.

The Philippines also trailed its neighbors in accessing mobile money service. In particular, there was significant growth in the use of debit cards and electronic payments. The more advanced ASEAN member-states, such as Singapore, Malaysia, and Thailand, reported the highest access to digital financial services in 2017, followed by Indonesia, Vietnam, and the Philippines.

As for efficiency, the Philippines came out as having the lowest turnover ratio-defined as the value of domestic shares traded divided by their market capitalization-indicating the thinness of its stock market. Turnover ratio is highest in Thailand in recent years, followed by Vietnam, Singapore, and Malaysia.

The paper explained that the higher the turnover ratio is, the more liquid and efficient the market. Few transactions taking place in a thin market can lead to price volatility and less liquid assets.

Nonetheless, the Philippine banking system fared better with respect to financial stability. In many measures of financial development, Vietnam has also overtaken the Philippines, but the latter has generally performed better than Indonesia. The study found that Singapore’s banking system is the most stable, followed by the Philippines and Malaysia.

The report be noted that the banking sector in the Philippines has proven to be resilient in the face of global financial crises, underpinned by a strong regulatory and supervisory framework.

“However, a review of the state of the Philippine financial services sector indicated that there has been no significant transformation over the past three decades. A review of the financial regulatory framework also showed that key domestic regulations remain restrictive,” said Milo.

Moving forward, she added, the goal should be a more diversified, dynamic, competitive, and resilient financial system that offers a wider range of financial products and services both to consumers and businesses through more efficient delivery channels.

She suggests drawing up a comprehensive and detailed long-term strategic action plan for the Philippine financial sector to help identify reforms to address the weaknesses, and actualize a truly inclusive financial sector that is supportive of the country’s economic growth and development.

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