Metro Manila (CNN Philippines) — From 2010 to 2014, the Philippines’ gross domestic product (GDP) grew at an average annual rate of about 6.2%. According to the National Economic and Development Authority (NEDA) the figure equates to the country’s highest growth in nearly four years.
However, the National Baseline Survey on Financial Inclusion conducted by Bangko Sentral ng Pilipinas (BSP) earlier this year revealed that challenges remain in getting more Filipinos to participate in the formal financial sector.
According to the survey, only four out of 10 Filipinos save. Of those who save, about 32.7% keep their money in banks, while 68.3% store their funds at home.
The numbers don’t fare any better in the credit sector — a large majority of Filipinos who borrow money seek funds from the informal sector: friends, family (61.9%), and informal lenders (10.1%).
In contrast, the formal financial sector forms a small part of the country’s loan market. The survey observed that banks were the smallest source of lending (4.4%) — lower than lending or financing companies (12%), cooperative (10.5%), microfinance non-governmental organizations (9.9%), and government entities (6.1%).
Broader lending
“In order for financial inclusion to be realized here, banks have to find a way to lend more liberally,” said Burton Crapps, Philippines country director for analytics firm FICO, in an exclusive interview with CNN Philippines.
“That doesn’t mean that they have taken on unmitigated risk, but they have to find a way to lend to [a broader] market. We cannot continue to lend to the same people using the same standards.”
According to Crapps, the Philippines has practically the same bank lending and the same analytics as other banks abroad, except for one crucial aspect — “[H]ere, it’s very asset based. It’s not really based on a national risk score.”
“Banks do risk scoring; they have score models and they have score processes that they use. However, because there’s not a national standard for that score, everyone doesn’t have access to that.”
Crapps compared the situation to that in the U.S. about five decades ago. “In the 60s, there was no access to credit in the U.S either. It was all asset based lending… People got loans based on their father knowing the banker.”
“In the early 70s, the U.S. government came up with a program to provide access to credit for those unbanked and those marginalized people. Since that time, there has developed a credit process where even young people coming out of high school or coming out of college are able to go and start to build their credit.”
“Because every time you build something out credit process it gets recorded in the U.S. It goes into credit bureaus. The credit bureaus keep that data and that data becomes available for measuring your credit worthiness — that’s the process we don’t have access to yet here in the Philippines.”
Changes ahead
The government-owned Credit Information Corp. (CIC) is looking to accredit special accessing entities — otherwise known as credit bureaus — by the end of the year. The law defines such bureaus as firms engaged primarily in the business of providing credit reports, ratings, and other similar credit information products and services.
“Credit Bureaus are deemed essential to the proposed credit information ecosystem as they create innovative value-added products and services, such as credit scoring and analytics,” the CIC said in a statement.
The bureaus will be working with the CIC, which serves as the government’s central credit registry. The latter’s role would be to collect credit data — both positive and negative — from borrowers, and subsequently provide basic credit information to credit bureaus and possible lenders in the formal financial sector.
Crapps cited, for example, the use of a FICO score in the U.S. “If you’re in the U.S. and you go to get money, you must have a FICO score. That FICO score helps to qualify individuals as to whether they will be able to get a loan, how much they would have to pay, and what the tenure would be.”
“So in a FICO score we don’t care if you own 50 hectares of land or if you work in a call center… It doesn’t matter — it’s based on you’re repayment ability.”
In a speech last June, CIC President and CEO Jaime Garchitorena explained that: “In lending, just like other businesses, time is cost. If the time required for lenders to get to know their clients is reduced, then that should translate into better service to the borrowers while opening up a bigger market and a higher quality loan portfolio for lenders.”
“Being complete and up-to-date, we believe that credit scoring using CIC collected credit reports will be the standard in the Philippine financial market in the next few years.”
