PH banks snub growing middle class market

Lending

&

Credit

The Philippines has been identified as one of the world’s largest greenfield markets for digital financial services— but local banks are not rising up to attain its true potential.

Banking penetration rate remains among the lowest in the region. Traditional financial institutions focus heavily on commercial lending, leaving a rapidly growing, increasingly affluent, and digitally savvy potential customer base with little access to financial services that meet their needs, consulting firm McKinsey & Company said in a report.

“Traditional banks remain focused on wholesale banking and have been slow to reach new customers outside their existing client base. Rural areas are home to nearly half the population, yet rural households are especially underserved, and many have little or no access to brick-andmortar banking infrastructure,” wrote McKinsey senior partner Guillaume de Gantès; associate partner Hernan Gerson; and Manila partner Kristine Romano in the report.

“The result is a widening gap between the country’s enormous underbanked population and the expanding range of innovative financial technologies lying just beyond its borders,” they warned. Corporations receive 76% of all loans extended in the Philippines. In contrast, small and medium enterprises or SMEs continue to face binding credit constraints.

This is a problem for a country with over 15 million informal entrepreneurs and self-employed workers—a massive pool of would-be borrowers who have little access to traditional finance.

Retail lending also remains focused on a narrow band of wealthy households, McKinsey noted.

“This unbalanced distribution of existing loans—combined with a rapidly growing adult population, continuous broad-based gains in household income, ongoing regulatory efforts to promote financial inclusion, and the introduction of new digital technologies—makes retail lending especially prone to disruption and accelerated growth,” the report said.

Domestic banks have also traditionally ignored remittances, which mobile payment players such as GCash and Maya are now explicitly targeting. It’s easy to see why these e-wallets have set their sights on this: each year, on average, about $30.5b in remittances-or 10% of the country’s GDP-flows into the Philippines through wire-transfer services and traditional interbank networks.

Despite this massive market, traditional banks have not systematically incorporated remittance income into their lending decisions, McKinsey noted.

“Remittances play an especially vital economic role in rural areas, where households are least likely to have access to bank accounts, credit histories, and collateral.