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Foreign bank challenge in Philippines

Written by Lian Jye

Located in Zamboanga City in Mindanao, Al Amanah Islamic Investment Bank is one of the world’s earliest Islamic financial institutions. However, the bank has been struggling due to lack of scale and Islamic expertise. After posing record high loss of PHP 124 million in 2008, the bank is slowly reducing its loss. In the first quarter of 2014, the bank registered a loss of PHP 10 million, an improvement of 5% compared to the same quarter in 2013. Now the bank is ready to embrace another new opportunity: foreign fund injection.

This comes from the announcement of President Aquino III last July. A law was passed by the House of Representatives to lift the restriction of foreign bank ownership. Previously, foreign banks were only allowed to own 60% of a local bank, and now they could have full ownership of 100%. This decision is in line with the ASEAN Banking Integration Framework, which is due to be enforced in 2020. Under this framework, all ASEAN banks will be regarded as local banks to promote a large financial service market.

Philippine’s liberalization policy is a stark departure from Indonesian government’s decision to shun foreign ownership. Multiple acquisition deals initiated by banks from other ASEAN countries such as DBS from Singapore and RHB from Malaysia have failed to materialise. According to Reuters, Indonesia’s financial industry regulators intend to focus more on market access with authorities in other countries.

Philippines has a population size of 96.2 million, ranked only second to Indonesia within ASEAN. Since less than a third of Filipinos have an account in a formal financial institution, Philippines seems to be the next promising frontier. The lack of access and utilization of financial institutions is even greater among the low income group. In 2012, less than 10 percent of the population has any proper account.

Following the decision of liberalisation, the rumour is that CIMB of Malaysia is looking at acquiring Al Amanah Islamic Investment Bank. This should provide a market entry opportunity for a bank which is going to be potentially the first mega Islamic bank in the world.

On the other hand, CIMB’s domestic competitor, Maybank, has been involved in Philippines since 1997. During an interview, Maybank Philippines President and CEO Herminio M. Famatigan, Jr. was unfazed by the potential challenge posted by CIMB. Instead, he was more concerned with the market dominance of top three Philippines’ local banks – BDO Unibank, Metrobank and Bank of the Philippine Islands (BPI).

Mr. Herminio has every right to do so. The amount of loans and advances made by Maybank Philippines constituted 2% of the total overseas loans by Maybank, but its impairment loss is 6.5% of the total overseas impairment loss. This highlights the vulnerability of loan business in Philippines. Local giant BPI also faced an increase in impaired loan from 0.77% to 1.12%. Philippines booming economy does not automatically guarantee a healthy return of investment.

Therefore for CIMB, it is not a question of when, but how to maintain the competitiveness and sustainability in Philippines market.

–Edited by Kristine Diaz

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