The Philippines recently passed a law allowing non-Filipinos to own 60 percent of equity in its rural banks. The law is designed to attract investments from non-Filipinos and other foreign sources. Republic Act 10574 amends the Rural Bank Act of 1992, which limited the ability of foreign corporations and banks to acquire equity. Under the new law, foreigners are allowed to own up to 60 percent of the voting stocks of a rural bank while citizens or corporations organized under Philippine laws should own no less than 40 percent. RA 10574 also permits non-Filipino citizens to become members of the Board of Directors of a rural bank, with participation limited to their proportionate share in the equity of the bank.
Philippine rural banks’ loan programs are designed to meet the credit needs of farmers, fishermen, and farming families. The Rural Bankers Association of the Philippines welcomed the new law as it is seen to be useful in attracting foreign investments that can help improve the financial condition of many rural banks as well as help develop better banking services. Rural banks can be found all over the country especially in agricultural areas.
The BSP or Bangko Sentral ng Pilipinas (the Philippines’ central bank) has been authorized to prescribe the implementing rules and regulations for the new law, subject to consultations with relevant sectors. It was also ordered to disseminate information regarding RA 10574 to potential investors and to promote rural banks to foreigners. The new law took effect June 8.
According to the BSP, of the 9,000 total bank branches in the Phillippines over one-third are in the greater Manila area alone. In 2012, 80 of the country’s 560 rural banks were considered unable to meet minimum capital requirements set out by the reserve bank, and 24 of these banks were forced to close. The World Bank reported in January that only one-third of Filipinos have bank accounts.
As of September 2012 (the most recent data available), the BSP reports that rural banks hold assets worth 173 billion Philippine pesos ($4.1 billion), only a small portion of the 7.57 trillion Philippine pesos ($179 billion) in assets of the entire Philippine banking sector. Growth in total assets held in rural banks has slowed in the past few years, falling from a rate of 6.89% in September 2011 to a rate of 2.2% in September 2012. The reform may reverse this trend, but analysts think foreign investors may be hesitant to invest, given that rural banks tend to only have one or two branches and therefore offer limited opportunities to expand.
The US already has some experience in investing in Philippine banks, and thus the new law could open up further opportunities for the mutual benefit of the two countries. Citibank and Bank of America already operated in the country when it was still a colony of the United States. American and other foreign banks have historically favored corporate clients over consumer services, however. US FDI in the Philippines is concentrated in the manufacturing sector, with relatively minor investments in the Philippine banking or finance industries.