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For expanding the financial services available to consumers — investment and lending to financial consulting — nonbank financial institutions (NBFIs) are unleashing their potential to transform the financial landscape. Nonetheless, though these institutions and traditional banks have different roles to play, these two are interconnected with each other and are balancing the financial ecosystem.

“The nonbank financial sector has noticeably grown since the GFC (Global Financial Crisis). On one hand, this is welcome news because it addresses some of the concentration risks that arise from relying too much on the banking industry. On the other hand, financial markets are never an ‘either-or.’ There is much diversity within nonbank financial institutions, just as there are interlinkages with nonbanks and banks. In exchanging interlinkages, its opportunities and risks should be of great interest to regulators and practitioners,” Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said in a forum last year.

Realizing the significant impact the nonfinancial sector could bring, the Philippine central bank is making breakthroughs to strengthen the nonbank financial sector.

NBFIs are seen leveraging technologies to redefine financial services, expand financial access, and cater to consumer demands. For instance, leveraging generative artificial intelligence (GenAI) has seen improvements in consumer banking, investment banking, and even in capital markets. It streamlined research and financial modeling, as well as improved business lending, risk management, service delivery, and customer interaction.

“[Generative AI] is an enabler for the nonbank financial market. It is something that banks have embraced. It is redefining the demands of the consumer,” Mr. Remolona said.

With further use of AI technologies and solutions, the central bank is looking to release regulations on the ethical use of the technology. It will cover regulations on untouched areas in managing risks associated with AI, biases, and AI-assisted cybersecurity, among others.

“We should always prioritize AI solutions that are human-centric solutions associated with AI,” Melchor T. Plabasan, BSP’s Director of Technology Risk and Innovation Supervision Department, said in a previous statement.

“While there are a lot of groundbreaking benefits that can be reaped from the use of AI, we must always remember that AI is primarily driven by humans. AI needs the prompts, instructions of humans. It is humans that set the direction for AI,” he added.

From this, both existing and new regulations are set to not only maximize the use of AI but also foster responsible digital environments for banking and nonbanking financial institutions.

“The BSP is committed to fostering an enabling regulatory environment that would promote responsible use of AI, the trustworthiness, and the resilience of our digital finance ecosystem,” Mr. Plabasan said.

Alongside technological innovations, the central bank is also looking at refining policy and regulatory frameworks to ensure financial stability and resilience in the sector, as mentioned in the BSP’s 2024 Financial Stability Report.

“Improving the monitoring of NBFIs and regulating shadow banking activities start with addressing gaps in the availability of granular data that are necessary for systemic risk surveillance,” the report said.

On another note, nonbanks are also stepping into the repurchase agreement (repo) market, which served as a financial market where one party sells securities to another and agrees to repurchase those securities later at a higher price. Currently leading this initiative is the Securities Exchange Commission (SEC).

Expanding the repo market for nonbanks means improved activities in financial markets. Previously, only established dealer networks, like the Government Securities Eligible Dealer (GSED), which are licensed SEC security dealers, were involved in the repo market. However, bringing nonbanks into the mix will not only broaden market participation, but will also potentially enhance financial market activity.

“The repo market is envisioned to support the market-making activities of government securities dealers in the country. Expanding this market provides us with another opportunity to improve liquidity, manage short-term funding, and boost overall market activity,” Emilio B. Aquino, chairperson of SEC, shared in a previous statement.

Also, in efforts to strengthen this initiative, the SEC has recently collaborated with the Bankers Association of the Philippines and the Asian Development Bank. Together, they organized a three-day Global Master Repurchase Agreement (GMRA) workshop, which put a spotlight on the implementation of GMRA frameworks, which are standardized international agreements used for repurchase transactions, its importance on the repo market, and the risks associated with it — Angela Kiara S. Brillantes

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