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Competition in Philippine Banking Industry Remains Healthy Despite Consolidation

MANILA, Philippines - The Philippine banking industry remains competitive despite consolidation efforts, according to a recent study by the Bangko Sentral ng Pilipinas (BSP).

Market Concentration Remains Dispersed

The study found that while recent mergers have increased market concentration, competition levels remain dispersed among remaining players. The Herfindahl-Hirschman Index (HHI), which measures market concentration, stood at 585 for domestic banking deposits and 498 for loans as of end-June 1999.

  • A value above 1,800 indicates an oligopoly, but in the Philippine case, the HHI values suggest that there is still room for more mergers and consolidation without stifling competition.
  • Smaller banks can still thrive by catering to specific segments of the market. They can reach areas that larger banks may not be able to serve.

Foreign Bank Entry Boosts Competition

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The liberalization of foreign bank entry has also boosted competition in the Philippine banking industry. In 1994, the government passed a law allowing foreign banks to enter the market through three modes:

  • Acquiring up to 60% of an existing bank’s voting stock
  • Investing in up to 60% of a new banking subsidiary
  • Establishing branches with full banking authority

As of end-March 2001, there were 13 foreign banks operating in the Philippines, accounting for 15% of the total resources of the Philippine banking system. The BSP has also removed the 60% ceiling on voting stockholding by foreign banks.

E- Banking Boosts Efficiency

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The passage of the E-Commerce Act in June 2000 is expected to boost efficiency and growth in the banking sector. Electronic banking, which reduces information and transaction costs, is seen as an effective tool for reducing risk and increasing competitiveness.

However, there are risks associated with e-banking, such as security breaches and fraudulent transactions. The BSP has issued regulations requiring banks to seek prior clearance before providing e-banking services and to put in place risk management systems.

BSP Continues Market-Oriented Reforms

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The BSP will continue to implement market-oriented reforms to promote the soundness, stability, and global competitiveness of the Philippine banking system. Upcoming legislative reforms include:

  • Amendments to the 1993 New Central Bank Act
  • Anti-money laundering legislation

Prudential regulations will also be rationalized and aligned with international best practices, while regulatory oversight will be improved through consolidated supervision and risk-based examination.

The combined effect of these moves is expected to promote a stable and competitive Philippine banking system that can meet the growing demands of a globalized economy.