BSP to prioritize financial inclusion, digital system under new governor

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Metro Manila (CNN Philippines, July 11) — Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla will prioritize the push for a financial system that will cater to all sectors of society by the year 2040.

Espenilla, who recently assumed the governorship, said that apart from shaping a "safe and sound banking system," he wishes to reach out to "parts of the economy [that] are unserved."

"That's a journey that I intend to continue, and we call it under the rubric of financial inclusion," Espenilla said, speaking to CNN Philippines' The Source on Tuesday.

"We want high quality banking services of the right kind to be accessible to all Filipinos from the northern tip to the southern tip," he added.

Around 86 percent of Filipino households do not have bank accounts, according to the 2014 BSP Consumer Finance Survey released in January this year.

A 2015 Banking in Asia-Pacific report by global financial services group Ernst & Young listed banking penetration in the Philippines at only 31.3 percent.

In a speech on July 3, Espenilla said the BSP is hoping to have an inclusive financial system that is "fully responsive to the needs of the domestic economy" in line with the government's medium-term development plan and vision, AmBisyon Natin 2040.

Espenilla was confirmed on May 8 to succeed Amando Tetangco Jr. as head of the central bank until 2023.

Tetangco served from 2005 to 2017 and is credited with guiding the country to a stronger and more globally competitive economy — leaving Espenilla with big shoes to fill.

"Maybe the better strategy is no longer even to aspire to fill up those shoes, but rather to look at it as something to aspire for... at the same time, go about designing your own shoes and make that work as well," said Espenilla.

Related: Espenilla is next BSP governor

In an earlier interview with CNN Philippines, Espenilla said he planned to focus on digital finance and informal lending, noting that "Far too many Filipinos have limited access to financial services."

Expanding Islamic banking

For Espenilla, financial inclusion means expanding the Islamic banking system to include more than one player.

An Islamic banking system is one that is consistent with Islamic law. Its principles include prohibition of interest, which is considered usurious.

The Al Amanah Islamic Bank, a subsidiary of the government-run Development Bank of the Philippines, is the only Islamic bank in the country. It has 9 branches, most of which operate in key cities in Mindanao such as Cagayan de Oro, Cotabato, Davao, General Santos, Iligan, Jolo, Marawi, and Zamboanga City.

"That bank is still around, except that it's not as active as it is expected to be," said Espenilla.

The bank was first established in 1974, but became a full-fledged Islamic bank in 1990 under Republic Act No. 6848, or the Charter of Al-Amanah Islamic Investment Bank of the Philippines.

"The idea that we were putting forward... is a substantial segment of our society are Muslims, and like the rest of society, they also need financial services," he added.

There around 5 million Muslim Filipinos in the country, according to 2010 figures from the National Statistics Office.

"The value of having [an] Islamic banking system — it's a network. They reinforce one another. Banking systems work best if they are not alone, because of the nature of the business itself," Espenilla said.

Legislative efforts for an Islamic banking system are underway in Congress.

House Bill 492 and its Senate counterpart Bill 668 which seek to amend the Charter of Al Amanah Islamic Investment Bank of the Philippines, was filed in July 2016. Both bills are pending at the committee level.

Taking Philippine banking into the 21st century

Espenilla is also prioritizing the shift to electronic banking, and continue the modernization of the retail payment system, which BSP began in 2015.

"The bigger aspiration is, we want to transform our financial system into a digital financial system. Meaning, you should be able to transact electronically using mobile phones, cards, and online," said Espenilla.

He noted the central bank also has to adjust to a younger Filipino market.

"This generation transacts in a different way... Increasingly, people buy things online, but the payment side of that is still old technology — cash on delivery, bank transfer," said Espenilla.

He added that a shift to electronic payments will be "cheaper, more efficient, and will actually support faster economic growth."

The shift to the latest standards of electronic banking will also prevent fraud and theft information.

In light of this, Espenilla reiterated the BSP is facilitating the transition of banking cards from those with magnetic stripes to EMV chips.

EMV, which stands for Europay, Mastercard, and Visa, is a new technology that levels up security against information theft through an embedded chip in each card that cannot be replicated.

Espenilla said the deadline for banks to fully transition is on June 30, 2018. "We recently enhanced that by requiring those banks which are delayed to set up provisions, loss provisions, as a buffer against fraud," he said.

"There is liability shift... if something goes wrong, the bank that has not adapted EMV technology bears the losses, not the customer," Espenilla said.

The BSP also looked into the Bank of the Philippine Islands system error that caused a two-day shutdown of its online system last June 7 to 8.

Related: BPI deactivates electronic channels following extended glitch reports

It found that the incident was a case of human error with "no evidence of intentionality."

The error, which caused false transactions to be reflected on user accounts, was remedied.

It was followed by reported potentially compromised automated teller machines of Banco de Oro Unibank.