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Global Banking & Financial Policy Review

2015/2016

In association with

Global Banking and Financial Policy Review153

Overview of Legal and Regulatory Developments in the Philippines

By Rafael A. Morales, SyCip Salazar Hernandez & Gatmaitan

The Philippine banking system remains strong and resilient to

external and internal risks, under the able supervision of the

Bangko Sentral ng Pilipinas (BSP). To be sure, the early imple-

mentation of Basel III-based capital adequacy standards for universal

and commercial banks is proof of the stability of the system. Certain legal

and regulatory developments in the Philippines, which this article pres-

ents, reinforce this positive outlook.

LIBERALIZATION OF FINANCIAL SECTOR

The areas of business activities wherein foreign ownership is restricted

or limited are specified in the Negative List issued, from time to time,

pursuant to the Foreign Investments Act of 1991. Under the Ninth Neg-

ative List, foreign equity is limited to up to 60% of the voting stock in fi-

nancing companies and investment houses, which are financial

institutions supervised by the BSP if they performed quasi-banking func-

tions. Significantly, the Tenth Negative List, issued by the President of

the Philippines through Executive Order No. 184 (2015), does not men-

tion any such limit. Still, a law must be passed by the Congress of the

Philippines to remove those limits in the Financing Company Act and

the Investment Houses Law, before those financial institutions can be

legally owned 100% by non-Philippine nationals. Until then, the Tenth

Negative List should be construed merely as a Presidential goad to the

legislature to pass the requisite amendatory law to allow full ownership

by non-Philippine nationals of the said financial institutions.

The passage of such amendatory law would be consistent with the

further liberalization of the banking industry by Republic Act No. 10641,

which allows full entry of qualified foreign banks into the Philippines.

Presently, a qualified foreign bank can (i) acquire up to 100% of the vot-

ing stock of an existing domestic bank, (ii) establish a 100%-owned do-

mestic banking subsidiary, or (iii) establish a Philippine branch with full

banking authority. To date, five foreign banks have been granted entry

by the BSP into the Philippine banking sector under the liberalized sys-

tem.

ISLAMIC BANKING AND FINANCE

Islamic banking and finance will get a boost from the expected passage

of the Bangsamoro Basic Law, which will be the charter of the au-

tonomous region envisaged by the agreement between the Philippine

government and the Moro Islamic Liberation Front to end the armed

conflict and bring peace in southern Philippines. Under that proposed

law, the BSP, the Department of Finance and the National Commission

on Muslim Filipinos are tasked to “jointly promote the development of

an Islamic banking and finance system, to include among others the es-

tablishment of a Shariah Supervisory Board.” They are to conduct a re-

view of “existing market environment and policies” and adopt “measures

to enhance the competitiveness of Islamic finance products,” so that “Is-

lamic financial players are not inhibited from introducing of Islamic fi-

nance products.” Part of these objectives is the eventual acquisition by

the Bangsamoro government of the only existing Islamic bank in the

country, namely the Al-Amanah Islamic Investment Bank of the Philip-

pines. One will recall that the Philippines officially recognized Islamic

banking and finance more than 40 years ago when a legislative charter

was granted to the Al Amanah Bank, the first Islamic bank in the country

established to cater to the banking requirements of the Muslim popu-

lation. The said bank was reorganized and phased out in 1990 with the

formation of Al-Amanah Islamic Investment Bank of the Philippines.

The proposed Bangsamoro Basic Law also aims to “further promote

investor awareness and acceptance in order to build a broader customer

and asset base.” In fact, the private sector has already taken the lead in

this area. For one, the Philippine Stock Exchange (PSE) released a list

of companies that passed the AAOIFI Shariah rulebook, with a view to

diversifying the investor base of the PSE. This list is updated quarterly

to ensure its continuing validity. Further, civil society organizations in

southern Philippines are espousing the development and establishment

of hybrid financial services or a combination of conventional and

Shariah-based financial services, which cater to both Muslim and Chris-

tian borrowers.

P H I L I P P I N E S

Global Banking and Financial Policy Review154

FINANCIAL CONSUMER PROTECTION

Considering that the Consumer Act of the Philippines appears to cover

consumers of goods or merchandise, the BSP issued Circular No. 857

which embodies the regulations on financial consumer protection, as a

fundamental part of corporate governance and culture applicable to all

BSP-supervised financial institutions. The regulations ensure that these

financial institutions are “responsive to the needs of their stakeholders

while being held to a high standard of accountability.” The regulations

provide for the minimum standards of consumer protection not only in

the areas of disclosure, transparency and fair treatment, but also in the

protection of client information, effective recourse and financial educa-

tion.

PROSPECTS

With a healthy international reserve (now approximately US$80.7bn),

the BSP remains confident in the bright prospects of the Philippine

banking system in the years to come. In this respect, the BSP continues

to promote mergers and consolidations in the banking sector, as well as

require local banks to meet their Basel-based capital adequacy ratios, to

make them competitive as the Association of Southeast Asian Nations

(ASEAN) Economic Community is being implemented and in anticipa-

tion of the eventual establishment of a semi-integrated financial market

and the formation of Qualified ASEAN Banks within the community.

P H I L I P P I N E S

About the authorRafael A. Morales is the Managing Partner in SyCip Salazar Hernandez &Gatmaitan, the largest law firm in the Philippines, and before that thehead of its Banking, Finance & Securities Department.

He is a Professorial Lecturer at the College of Law of the University ofthe Philippines, as well as the author of two books (The PhilippineGeneral Banking Law (Annotated) and The Philippine SecuritiesRegulation Code (Annotated)) and numerous legal articles. Among hismany recognitions, he is cited in Euromoney Legal Media Group’s Guideto the World’s Leading Banking Lawyers and included in Asian LegalBusiness’ List of 100 pre-eminent Asia-Pacific lawyers. He is a formerPresident of the Inter-Pacific Bar Association.

Mr. Morales finished his Bachelor of Arts in Political Science (cum laude,1970) at the University of the Philippines, where he also took hisBachelor of Laws (cum laude and class valedictorian, 1974).

He holds a Master of Laws (1978) from the University of Michigan,where he was a DeWitt Fellow. While in the United States, he trained asa foreign attorney at Rosenman Colin Freund Lewis & Cohen in NewYork City (1978-1979). He later on became a foreign attorney atAnderson Mori & Rabinowitz in Tokyo (1984-1986).

Rafael A. MoralesManaging partner in SyCip SalazarHernandez & Gatmaitan

E: ramorales@syciplaw.comW: www.syciplaw.com