The Philippines Takes the Lead: Banking Law Creates Opportunities for Foreign Investors

By Dylan Kean

President Benigno Aquino speaking at the World Economic Forum on East Asia in Manila on May 22, 2014. Source: World Economic Forum's flickr photostream, used under a creative commons license.

President Benigno Aquino speaking at the World Economic Forum on East Asia in Manila on May 22, 2014. Source: World Economic Forum’s flickr photostream, used under a creative commons license.

President Benigno Aquino III on July 21 signed into law Republic Act 10641, known as “An Act Allowing the Full Entry of Foreign Banks in the Philippines.” This law amended a previous legislation that limited foreign ownership of local banks to 60 percent and capped the number of foreign-owned lenders in the Philippines at 10. The new law removed these restrictions, allowing foreign banks unfettered access to the Philippine banking system in an effort to attract much needed investment to the country.

During his State of the Nation address in July, President Aquino placed the country’s newfound economic success at the forefront of his administration’s accomplishments, tying it to his legacy of reforms. Opening up the banking industry to foreign investment is a powerful lever he can use to ensure high growth continues and that his economic legacy continues after he leaves office.

Before the law took effect on July 31, foreign banks were already eyeing the Philippines for potentially lucrative opportunities. CIMB Group, an investment bank headquartered in Malaysia, expressed interest in acquiring a stake in Philippine Business Bank (PBB), one of the country’s largest savings banks, as well as Al-Amanah Islamic Investment Bank. Another Malaysian bank, Maybank, has identified several financial institutions of interest in the Philippines. Both Japanese and Taiwanese lenders have also been in talks to buy stakes in Rizal Commercial Bank, the fifth largest bank in the country. Citigroup, Bank of America, and J.P. Morgan, all of which already operate in the Philippines, would be smart to follow suit given the new business climate.

The new law will likely give the Philippines a competitive edge over neighboring Indonesia, which appears to be moving its banking regulations in the opposite direction. The Indonesian central bank has since 2012 capped foreign holdings of local banks at 40 percent. Meanwhile, the Indonesian parliament is considering a bill that, if passed, would force foreign banks to reduce their majority stakes in local lenders. Both CIMB Group and Maybank, which hold controlling stakes in Indonesian banks, have yet to be assured that such a law would not be retroactively applied.

Nonetheless, reactions from the Philippine business community have been mixed. Law professor Francis Lim focused on a section of the law that allows foreign lenders to bid on foreclosed property mortgaged to their bank, pointing out that certain ambiguities in this provision could have unintended legal consequences in the future. Alfredo Yao, chairman of the Philippine Chamber of Commerce and Industry and owner of PBB, warned that local banks would not be able to stand up to competition from significantly larger foreign banks. Yet, despite his warning, Yao has responded favorably to an offer from CIMB Group to purchase a 35 percent share of PBB.

The new law is expected to benefit the Philippine economy in the long run. An influx of foreign capital will not only boost technology transfer, human resources skills training, and foreign direct investment, but can potentially provide more financing opportunities for the Philippines’ aging infrastructure system. U.S. banks will also have an opportunity to expand further into the Philippine market and compete with their Asian counterparts as the Philippines continues to grow and liberalize its economy.

Mr. Dylan Kean is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS.

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2 comments for “The Philippines Takes the Lead: Banking Law Creates Opportunities for Foreign Investors

  1. Chayut
    August 28, 2014 at 10:55

    This is an interesting sector to keep an eye on in terms of Asean intergration. The researcher and CSIS should go down the rabbit hole with this and compare the status and stratgy of other Asean central banks, especially those of Malaysia and Thailand and the overall progress of the Asean Banking Intergration Framework (ABIF)

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