Improving Access And Financial Literacy Are Key To Financial Inclusion In PH—PIDS Study

Improving financial literacy and broadening access to financial institutions like banks and insurance companies, especially in the rural areas, are key to achieving financial inclusion in the country.

This was according to a study by state think tank Philippine Institute for Development Studies (PIDS) on factors affecting financial inclusion in the Philippines. The research showed that more educated individuals living in urban areas, wherein most financial institutions like banks are situated, are more likely to have savings and insurance than their less educated counterparts in the rural areas.

The World Bank defines financial inclusion as a situation where people and businesses have access to useful and affordable financial products and services that meet their needs. Financial products and services include payments, savings, credit, and insurance.

Authors Gilberto Llanto and Maureen Ane Rosellon, PIDS president and research associate, respectively, emphasized that access to finance allows the poor to accumulate assets like savings and insurance to protect them from potential risks and shocks, and to invest in income-generating activities.

However, access to financial products and services remains a big challenge in the Philippines as shown in the latest data of the Bangko Sentral ng Pilipinas(BSP). According to BSP, only about 43 percent of Filipino adults have bank savings while 72 percent of those who borrow, transact with informal financial institutions. Also, only about 30 percent of small and medium enterprises have formal lines of credit and/or bank loans.

One of the main factors that limits people’s access to formal financial institutions, according to Llanto and Rosellon, is their remote location in the rural areas. “For example, data on bank network vis-à-vis population on a regional level indicate a great difference between urban areas like the National Capital Region (ARMM) and highly rural regions like the Autonomous Region of Muslim Mindanao (ARMM),” they explained. Citing statistics from BSP, they noted that the number of banks per 10,000 adults in the NCR is estimated at 3.6 in 2010 and 2015 compared to only one bank per 100,000 adults in ARMM for the same period.

“Due to the absence of banks, people would usually just keep their money at home or join informal group savings in the community, such as rotating savings and credit associations locally called “paluwagan”, the authors concluded.

Also, data from BSP show that majority of adults (about 70%) find pawnshops as the nearest and easiest to reach among financial products and service providers. Likewise, nonstock savings and loan associations, payment centers, and remittance agents take the shortest time to reach at 17 to 18 minutes. The cost of a round-trip travel to these establishments is also the lowest, at PHP 31 to PHP 37.

Llanto and Rosellon said the first step to encourage people to access banks and other formal financial institutions is to improve people’s education. “A higher level of education increases the likelihood of saving and borrowing from a formal financial institution. Educational attainment can be an indicator of the knowledge and level of understanding of credit options and opportunities, and confidence to apply for a loan,” they pointed out.

Furthermore, the authors highlighted the importance of looking at potential barriers to access, which includes, among others, cost or proximity to providers of financial services.

Meanwhile, banks have recently introduced electronic banking (e-banking) to the market as a proper response to global innovations in banking. According to the study, e-banking has started to penetrate “unbanked” markets. Still, poor people in far-flung areas are unable to access this technology as it requires suitable electronic devices and strong Internet connection.

“Although mobile financial services have taken a foothold in the financial markets, the majority of retail transactions by individuals and businesses in the Philippines are still done in cash,” the authors stated. They cited a 2015 report by Better Than Cash Alliance showing that only 1 percent of the 2.5 billion retail payments per month in the country were done electronically.

This press release is based on the PIDS discussion paper titled “What Determines Financial Inclusion in the Philippines? Evidence from a National Baseline Survey”.