How the Philippines Applied I-SIP Approach to Basic Deposit Accounts
The 2017 Global Findex indicates that 66 percent of Filipinos do not have an account at a bank or other financial institution. This is far higher than overall levels for the East Asia Pacific region, where on average only 30 percent of people lack access to formal financial services. While this figure shows gradual improvement from the 73 percent exclusion level in 2011, the Philippines clearly has further work to do to advance financial inclusion.
Bangko Sentral ng Pilipinas (BSP, the Philippine Central Bank) has taken several steps to deliver change, such as spearheading the implementation of the National Strategy for Financial Inclusion. In 2015, BSP partnered with CGAP to examine five in-country policy interventions centered on the interplay between policy goals often shared by central banks: financial inclusion, financial stability, financial integrity and financial consumer protection (I-SIP). I-SIP, the structured approach to achieving these goals that was pioneered by CGAP, opened opportunities for BSP to understand and adopt a systematic approach toward developing and implementing inclusive policy making. CGAP’s new toolkit, Financial Inclusion + Stability, Integrity and Protection (I-SIP), provides welcome guidance on how to manage the linkages among these four policy objectives in developing or revising regulations.
A recent application of I-SIP thinking is exemplified in the framework for basic deposit accounts (BDAs) that the central bank released in February 2018 via Circular 992. The purpose of the framework is to expand account ownership to the unbanked by addressing issues around the perceived cost and difficulty in complying with documentary requirements related to opening an account. As a complementary product that can facilitate payments, remittances and transfers, BDA also widens the range of store-of-value options that can serve as a gateway for accessing digital financial services such as electronic payments and transfers.
BDA’s key features are ease, accessibility, convenience and reasonable costs for both banks and clients. Circular 992 contains specific features designed to promote financial inclusion, such as an opening amount of not more than PHP 100 (approx. US$2), waiver of minimum balance and dormancy charges, and liberalized customer onboarding. By examining the framework through the I-SIP lens, BSP systematically considered the relationships between inclusion, stability, integrity and consumer protection to maximize any linkages between these different policy objectives. Here are some examples of how applying the I-SIP approach shaped the BDA framework:
- Inclusion and stability. The Circular requires banks offering BDAs to adopt clearly defined, written policies, procedures and controls to ensure due diligence and compliance with applicable rules and regulations. While the general framework allows flexibility in the design and delivery of BDAs to target markets to increase financial inclusion, banks are likewise expected to put in place the necessary controls in offering the account. The Circular also provides an additional incentive for banks to address cost considerations in monitoring these low-value depositors through a preferential zero percent reserve requirement. This incentive was approved following a thorough analysis of the potential impact on monetary aggregates. BSP will continuously monitor deposit levels in BDAs. Providing this additional incentive for banks will make it cheaper for them to offer such accounts to those currently excluded.
- Inclusion and integrity. The Circular espouses the BSP’s risk-based approach and is consistent with anti-money laundering/combating the financing of terrorism (AML/CFT) rules and regulations. Given the nature of the account, written documents or information establishing the customer’s identity may be accepted to onboard those who do not have the standard identification documents (e.g., valid ID cards). For example, banks may consider a certificate from the local village leader, a certificate of good moral character or letter of endorsement from an employer. The regulation also allows for electronic or technology-aided know-your-customer procedures, provided that the identification documents have been verified before the personal interview and that the entire procedure is documented. Banks are still required to indicate the level of risk the account poses. Liberalizing customer onboarding will help banks to lower their costs of AML/CFT compliance, allowing them to better serve currently unserved or underserved populations.
- Inclusion and protection. The Circular incorporates consumer-friendly features that ultimately protect clients and build trust in the financial system. It addresses cost issues that usually discourage potential small depositors from opening an account by eliminating minimum balance requirements and dormancy fees. Moreover, nonimposition of dormancy charges addresses the usual challenge of account balances being drained by fees, a particular concern among low-income people. Such fees can ultimately exhaust funds and lead to a zero balance, discouraging the uptake and use of these accounts. These consumer-friendly features make BDAs more accessible to unserved clients, helping to increase financial inclusion while also protecting clients.
With the increased client participation in the formal financial system that BDAs will facilitate, regulators will be better able to monitor consumers’ financial activities and transactions, thereby leading to enhanced policy and programmatic interventions. BSP will closely monitor the data arising from this new regulation, including data from the participating banks, and the number and volume of accounts. BSP will likewise continue to coordinate with the banking sector to further enhance the framework, as necessary.