As the government looks for measures that will allow the country to build up from the economic debacle brought about by the COVID-19 pandemic, the message of former President Manuel Roxas comes to mind. Allow me to share the statement of President Roxas on signing the Rehabilitation Finance Corporation (RFC) legislation on Oct. 29, 1946.

“In approving the three bills which together provide for the establishment and the capitalization of the Rehabilitation Finance Corporation, the government is moving forward with its program to overcome as much as possible the inherent inertia which is holding back full-scale rehabilitation and reconstruction. The government is moreover taking the lead in the planned expansion of the national economy.

Our goal is, of course, an independent and broad-gauge economy, geared primarily to meet the consumption needs of our people, and integrating our national resources and capabilities so as to make the maximum use of our national genius and potentialities — to produce most what we can produce, but to produce best what we need most.

The Rehabilitation Finance Corporation is designed to provide credit facilities for all who wish to undertake the rehabilitation of war-destroyed enterprises and the expansion of our industrial potential. Where private enterprise has neither the capacity nor the means of initiating these endeavors, government corporations and entities are given the authority in this legislation to take the lead in this vital work.

The whole purpose and function of the Rehabilitation Finance Corporation is to permit our own people the greatest possible opportunity and give them every encouragement to participate in the national economic life on every front and in every field. Every inducement will be given to Filipinos to take advantage of the facilities here made available by law.

But it is primarily the responsibility of the people themselves and of Philippine private enterprises to take advantage of the opportunities offered. The government cannot and will not engage in economic mollycoddling or wet-nursing beyond the limits of sound economic practice. Nor is this legislation intended to provide operating subsidies for any enterprise. Every undertaking financed by the Rehabilitation Finance Corporation must be self-liquidating and must hold forth promise of profit in the free market place of economic endeavor. Capital will be provided, but losses will not be subsidized. Every enterprise must be able to stand on its own feet under the hardy condition of free competition in a free and open market. The Rehabilitation Finance Corporation will not be a party to the protection of monopoly at the expense of the consuming public.

As I said when I processed this legislation to the Congress, we face a magnificent opportunity. It is up to us to see that this opportunity is realized. Everything will depend on the administration of this legislation. The men who will direct this vast enterprise must be above personal consideration as well as above politics. This is an acid test for our nation.” (Source: Presidential Museum and Library)

While today, the RFC continues to exist as it has been converted into the Development Bank of the Philippines (DBP), there are key distinctions that have to be considered. Today’s DBP is classified as a universal/commercial bank subject to all regular rules of the Bangko Sentral ng Pilipinas (BSP) for similar institutions. By and large, it is treated as just another bank. This ensures that the DBP must remain competitive and market oriented to be viable. But is the setup fully supportive of the original RFC mandate?

Historically, development finance institutions (DFIs) like the RFC have been created by governments around the world to promote economic growth and support social development. Although many such DFIs were closed in the 80s and 90s due to “mismanagement,” the 2008 Global Financial Crisis saw a more balanced appreciation of DFIs role and mandate.

Many of these played an important countercyclical role in many jurisdictions especially by scaling up lending operations when private financial institutions (under Central Bank rules) experienced temporary difficulties in granting credit. The loan portfolio of more than two-thirds of DFIs expanded at double-digit growth rates, contributing to global recovery efforts. And majority of these DFIs operated under a supervisory system separate from banks in consideration of their development mandate.

Will the DBP which is pressured to remain in the top tier of the Philippine banking system using traditional bank measures be able to operationalize its RFC-like mandate under its present supervisory regime? It is a risky activity to finance projects in strategic sectors and to small and medium enterprises of the economy where there is insufficient financing from the private sector. But is the risk appetite there considering how regulators and supervisory institutions, e.g. BSP, CoA, GCG, and SEC instill a multitude of control measures.

Of course, to be effective, the DFIs still need to have business models that enhance long-term financial sustainability. They need to have sound risk management tools. They need to install high corporate governance standards so that the DFI is insulated from undue political interference especially from appointing authorities. Finally, standards for selection of the Board and management team must be at its highest in terms of integrity and competence. When the CEO and the Board have very limited security, i.e. a one-year renewable term, aren’t they more exposed to political pressure?

I argue that the DBP must be under a separate regulatory system applicable to development-oriented institutions. The institution must have a well-defined mandate, be subject to high standards on corporate governance and transparency and still be supervised and regulated but under a modified set of rules that encourage high but socially oriented risk taking. The Board and management must have the ability to properly monitor the business operations, assess the social and economic impact or additionality of programs and compare interventions with other alternatives.


Benel Dela Paz Lagua was previously Executive Vice President and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.