BSP bans multiple positions in banks' microfinance NGOs, foundations

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has prohibited bank executives from holding multiple positions in related microfinance non-government organizations (NGOs) or foundations to prevent abuses resulting in higher operational risks.

BSP Governor Amando M. Tetangco Jr. has issued Circular 725 laying down a new set of guidelines to address risks on relationships between banks and their related microfinance NGOs or foundations.

Under the new guidelines that cover NGOs or foundations that are engaged in retail microfinance operations, Tetangco said bank officers are prohibited from holding officership or otherwise that may cause them to be involved in the daily microfinance operations.

He pointed out that bank officers who concurrently hold officership in NGOs or foundations engaged in retail microfinance operations have until September 30 to give up their positions.

Failure to do so, he warned, would result in their disqualification from their present positions in the bank.

Tetangco explained that there have been an increasing number of banks that have tried to create synergy in having affiliated NGOs or foundations as their partners in providing complementary microfinance operations to prepare low income customers for formal banking relationships.

NGOs or foundations serve as a “laboratory” of several microfinance-oriented banks experimenting with new loan products, screening potential borrowers, and training new loan officers.

However, the banks eventually acquire the seasoned loan receivables of NGOs or foundations.

The BSP said there are at least 18 banks with such special relationships.

“Such close relationship may be subject to abuse that could increase operational, governance, and reputational risks, brought about by common based membership, shared resources, and loan transfers, among others,” Tetangco warned.

According to Tetangco, the new regulations and governance standards aim to mitigate risks resulting from the unique relationship and increased volume of transactions entered into by banks and their related NGOs or foundations.

As early as December 2007, the BSP through Circular 592 has prohibited interlocking officership as a concurrent officership in different financial institutions may present more serious problems of self dealing and conflict of interest.

According to the BSP, multiple positions could result in poor governance or unfair competitive advantage.

“As a general rule, there shall be no concurrent officerships, including secondments, between banks or between a bank and a quasi bank or a non bank financial institutions,” the BSP said.

The BSP chief added that the new guidelines cover those NGOs or foundations that are incorporated by any stockholders or directors or officers of related banks and are engaged in retail microfinance operations,

The new regulations also require formal written agreements or contracts covering transactions between banks and their related microfinance NGOs or foundations.

The BSP’s Monetary Board also issued MB Resolution No. 790 dated May 26 containing general governance principles and standards covering the business relationships of banks and their related NGOs or foundations when both are engaging in retail microfinance operations.

The principles include requirements to follow certain standards pertaining to the manner the banks manage their microfinance operations as well as the transactions entered into with their related NGOs or foundations.

An important feature of the new regulation is the liberal interpretation of DOSRI rules to encourage clients of NGOs or foundations to open formal micro-deposit accounts with the related banks in lieu of alternative savings mobilization mechanisms such as “capital build-up” schemes.

“The BSP believes this will result in better protection of customer savings,” Tetangco said.

Loans extended by banks engaged in microfinance breached the P7 billion level as financial institutions involved in microfinance continue to move out of urban areas in Luzon to far flung areas in the Visayas and Mindanao.

About 202 banks all over the country that are providing microfinance services extended P7.1 billion worth of loans to 942,072 clients.