By Felipe Jose Zamora III
WHERE DOES THE TIGER HIDE?
The Philippines develops fast, growing by about 6% yearly since 2010. In the same period, the country has shown the best dynamic, going by the net inflow of foreign investments among Southeast Asian countries. According to the World Bank, the figure increased ninefold from 2010 to 2017. Yet despite the economy growing more than twice since 2001, the high level of poverty has remained and real wages have not changed much.
There are certain reasons for the imbalance in economic development. First, the rapid growth of the population adversely affects GDP per capita by purchasing power parity. The World Bank put the Philippines in 116th place in the world in 2017.
Secondly, there is an imbalanced development among the economic sectors. Agriculture, with its great number of low-paid employees, has a slower progress than industry and services. Then, the distribution of the national income measured by the Gini coefficient is extremely uneven. According to one institution, the coefficient indicates significant inequality that is more remarkable in the Philippines than in neighboring Vietnam and Indonesia and nearly the same as in Thailand.
Combined with low expansion of financial services, these factors result in deficient savings among Filipinos that are estimated by the World Bank at 15.4% of GDP. This indicator is much smaller than in Indonesia (33.6%), Thailand (33%), and Vietnam (25.5%). The Philippine Statistics Authority stated that 19.9% of Filipino families had equal income and expenses. Consequently, several tens of millions in the islands do not have savings and turn extremely vulnerable to sudden expenses.
Along with that, we see that bank lending has been stagnating. According to the Bangko Sentral ng Pilipinas, the number of bank borrowers decreased from 2.1% to 0.6% in the period of 2015-2017. This situation is unusual from a macroeconomic point of view. The key interest rate stated by the Central Bank was equal to 4% in 2015 and 3% in 2017 and this started to grow only in May 2018. Lower interests and low inflation rates together usually lead to an increase in lending. However, it has not happened. The bank lending is at an extremely low level. At the same time, there is quite an opposite situation in alternative lending, where customer base increased from 4.7% to 7.6%.
As a rule, other countries have another tendency: more people get a bank credit than a microloan. This is connected with a deeper penetration of traditional bank services that have been existing for a longer time. The newer option of alternative lending is only starting to spread in the world and that is why it is less frequently used.
The particularity of the Philippines is in the two directions developing simultaneously in the financial system, which is in a nascent stage. These directions are the classic bank lending and the microfinance industry. In western countries, that process went another way. Banks had dominated the market until 2008 when the global financial crisis forced traditional bank lending to shrink and focus on middle and upper classes in the retail market.
Access to lending became limited for people with low income and small enterprises. That tendency coincided with the development of financial technologies which allowed a qualitative assessment of borrowers’ ability to pay and detection of probability of defaults with high accuracy. The aggregate of both factors helped to provide microfinance to people with diverse income levels and informal earnings.
Perhaps, these reasons make microloans more popular than bank credits among Filipinos. The change of the financial environment in the Philippines in 2018 will be able to significantly expand alternative lending. First, we saw inflation accelerate sharply in the third quarter by 6.2% compared to the same period last year and this has become the highest since 2009. Along with that, food prices have grown most of all (8.2%). That is why alternative lending can be expected to become even more popular by the end of the year, especially if we consider its idea to cover the gaps brought by unforeseen daily expenses.
Secondly, there is a probability that the Central Bank has finished the cycle of decreasing the key interest rate and will continue to increase it next year to hold back inflation within its target (3% +/-1%). The emerging markets have come across a large outflow of capital caused by raised interest rates in the overheated US economy.
They have to tighten monetary factors in a similar way to maintain their competitiveness with foreign investors. Consequently, the cost of bank lending will grow and this will reduce its accessibility to the population.
Last year, the Bangko Sentral raised the interest rate four times from 3% till 4.5% to cope with the inflation, stop the capital outflow and the weakening of the national currency. Despite relatively small rate hikes (0.25-0.50 p.p.), commercial banks have tightened their lending terms and are in no hurry to expand branches on islands. This aggravates the problem with financial accessibility in the Philippines and thus facilitates the growth of alternative lending.
Microfinance is dominating the industry of alternative lending in the Philippines that is represented by high-tech services operating both online and offline. Online services are accessible on the whole territory of the islands while offline branches are usually located in the capital district. That is why the development of financial accessibility in the Philippines is closely connected with the growth of the Internet penetration and FinTech. The Bangko Sentral acknowledges this and emphasizes the necessity of developing financial technologies for a better financial inclusion.
The implementation of this direction is extremely important for the efficient development of the country comprising seven thousand islands. The Government needs to introduce digital financial technologies and services that claim large investments in the communications infrastructure.
The Philippines can expect the rapid growth of the whole fintech industry and alternative lending in particular. Moreover, several tens of millions of people with low access to financial services hold tremendous potential for the Philippine economy.
Another advantage facilitated by the development of fintech and alternative lending is the creation of highly paid jobs. The problem which delays a decrease in the poverty level is stipulated by a slowly growing number of jobs in the highly efficient industry and service sector that provide great added value. Fintech development will create a big demand for qualified employees and contribute to the increase of real wages and changes in the employment structure.
Felipe Jose Zamora III is co-founder of fintech company Robocash Finance Corp.