Central Bank’s Regulatory Role Over
Non-Bank Financial Institutions
THE PHILIPPINE EXPERIENCE
Ricardo P. Lirio
Managing Director
Bangko Sentral ng Pilipinas
(Central Bank of the Philippines)
The Bangko Sentral ng Pilipinas (Central Bank of the Philippines) is an
independent central monetary authority of the Philippines that has regulatory and
supervisory power over banks and non-bank financial institutions (NBFI) as
provided under Republic Act No. 7653 “The New Central Bank Act” and the
General Banking Act of 2000. As of March 31, 2002 BSP supervises and
regulates 6,168 (Table 1) financial institutions, 925 of which are banks with 6,662
branches, and 5,243 are non-bank financial institutions with 4,444 branches.
Table 1
Type of Financial Institution
I.
Banks
Commercial Banks
Thrift Banks
Rural and Cooperative Banks
II. Non-Bank Financial Institution
A. With Quasi-Banking Functions
Investment Houses
Financing Companies
B. Without Quasi-Banking Functions
Investment Houses
Financing Companies
Investment Companies
Securities Sealers/Brokers
Lending Investors
Government NBFIs
Venture Capital Corporations
Non-Stock Savings and Loan
Associations
Pawnshops*
Credit Card Companies
III. Offshore Banking Units
*As of December 31, 2001
7,587
4,326
1,342
1,919
Head
Office
925
44
100
781
Other
Offices
6,662
4,282
1,242
1,138
9,687
31
17
14
9,656
30
50
9
26
9
2
9
117
5,243
12
7
5
5,231
26
40
9
26
9
2
9
85
4,444
19
10
9
4,425
4
10
9,397
7
12
5,018
7
11
4,379
Total
32
1
Banks and NBFIs in the Philippine Financial System have interrelated
activities. NBFIs are either subsidiaries or affiliates of banks and other NBFIs by
means of equity investment, management interlock, common stockholders,
management contracts or permanent/proxy voting stock. Some NBFIs were
established to complement the products and services offered by the banking
institutions. As a case in point, five of the biggest universal banks in the
Philippines, have five or more NBFI subsidiaries and affiliates as shown in
Table 2.
Table 2
with QB
Name of Bank
without QB
Invest. Financing Invest. Financing SecuritiesD
House Company House Company
ealers
Bank of the Philippine Islands
1
2
2
Metrobank
2
1
2
1
2
1
Equitable- PCI Bank
Philippine National Bank
RCBC
1
1
3
Credit
Card
Venture Invest.
Capital Company
2
1
1
1
2
1
1
1
1
1
1
1
1
Banks and NBFIs differ in the type of instruments they issue. Only banks
are allowed to use deposit instruments such as demand deposits/checking
accounts, savings deposits (passbooks) and certificates of time deposits. While
NBFIs primarily use deposit-substitute instruments like promissory notes,
repurchase agreements and certificates of participation/assignment.
There are several types of NBFIs offering varying services such as
investment houses, financing companies, investment companies, securities
dealers/brokers, lending investors, government NBFIs, venture capital
corporations, non-stock savings and loan associations, pawnshops and credit
card companies. NBFIs are generally classified into two major groups: (1) NBFIs
with Quasi-Banking Function, and (2) NBFIs without Quasi-Banking Function.
Quasi-banking is the issuance of deposit substitutes or borrowing instruments to
twenty or more persons or entities. Borrowing from the said number of
persons/entities is considered as borrowing from the public and would require the
prior approval and authority from the Bangko Sentral ng Pilipinas.
The development of the NBFIs started in the 1970s. They provided
alternative funding source for the public and other intermediary services. The
growing demand for their products and services began to pose considerable
pressure on the deposits and lending market, which called the attention of the
Central Bank of the Philippines. CBP, in partnership with the International
1
Monetary Fund (IMF), created a survey commission tasked to assess the
adequacy of laws and regulations governing the entire financial system including
NBFIs. The decrees prepared by the commission was signed into law in 1972 in
pursuant to their conclusion that NBFIs should be under the authority of the CBP
for effective credit administration. From 1972 to 1974 NBFIs were required to
register at the Central Bank of the Philippines.
In 1973, Presidential Decree Nos. 114 “Pawnshop Regulation Act “ and
129 “Investment Houses Law” were passed into law. PD 114 placed pawnshops
under the regulatory authority of the CBP. Prior to this decree, there was no
uniform law on pawnshops and their activities. They were governed principally
by the ordinances of their respective cities/municipalities. On the other hand, PD
129 granted exclusive authority to all investment houses to underwrite securities,
which reinforced their distinct function in the financial system.
The changes that took place in the financial system in the 1980s called for
strengthening the regulatory powers of CBP over NBFIs. The decade was
marked by intensified competition among the different financial institutions and
the increased availability of long term funds through direct and indirect financing
to increase stability of the financial system. CBP responded by consolidating the
rules governing operations of NBFIs in Book IV of the Manual of Regulations.
1990s marked a new era in the Philippine financial system as it opened its
doors to the international financial markets. The approval of the Foreign
Investments Act in 1991 providing greater leeway and fewer restrictions to
foreign investors served as the turning point for all industries. It was succeeded
by the full liberalization of foreign exchange and the unification of the two stock
exchanges in 1992. A revolutionary event that followed was the entry of foreign
banks and insurance firms in 1993. This prompted the NBFI industry to
strengthen its anchor in the highly competitive environment. One of the
measures to keep pace with the changes is the approval of the Republic Act
8366 in 1997, which increased foreign equity participation and the minimum
capitalization for Investment Houses.
The capital requirements for certain NBFIs were increased to strengthen
and protect the financial system from economic downturns. It aids in ensuring
strong solvency positions of NBFIs and automatically weeds out the weak
players in the industry that could only trigger systemic risk.
Year 200 called for a different regulatory approach to NBFIs as we strive
to protect the financial system from the flow of illegal funds. The passage into
law of the Anti-Money Laundering Bill was supplemented by the Bangko Sentral
ng Pilipinas by the issuance of Circulars providing rules and regulations to
combat money-laundering.
The Philippine financial system is dependent on public’s trust. It is in this
light that BSP, as a regulatory body exercise its authority to supervise and issue
regulations that would strengthen and protect the integrity of the system.
(List of the types of NBFIs under BSP regulatory authority and the corresponding governing laws
is attached as Annex A).