Report and Recommendation of the President to the Board of Directors

Project Number: 51309-002 July 2020

Proposed Policy-Based Loan for Subprogram 2 Republic of the Philippines: Inclusive Finance Development Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.

CURRENCY EQUIVALENTS

(as of 30 July 2020)

Currency unit – peso/s (₱) ₱1.00 = $0.0203

$1.00 = ₱49.0500

ABBREVIATIONS 4Ps – Pantawid Pamilyang Pilipino Program ADB – Asian Development Bank AVCF – agriculture value chain finance BSP – Bangko Sentral ng Pilipinas (Central Bank of the Philippines) CIC – Credit Information Corporation COVID-19 – coronavirus disease DOF – Department of Finance GDP – gross domestic product MNGO – microfinance nongovernment organization MSMEs – micro, small, and medium-sized enterprises NSFI – National Strategy for Financial Inclusion PCW – Philippine Commission on Women PhilGuarantee – Philippine Guarantee Corporation PhilSys – Philippine Identification System PPP – public–private partnership SEC – Securities and Exchange Commission TA – technical assistance

NOTE

In this report, "$" refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Kelly Bird, Country Director, Philippines Country Office (PHCO), SERD

Jose Antonio Tan III, Public Management, Financial Sector and Trade Division (SEPF), SERD

Team leaders Kelly Hattel, Senior Financial Sector Specialist, SEPF, SERD Stephen Schuster, Principal Financial Sector Specialist, SEPF, SERD Team members Meenakshi P. Ajmera, Principal Safeguards Specialist, Office of the

Director General (SEOD), SERD Arup Chatterjee, Principal Financial Sector Specialist, Finance Sector

Group, SDSC (SDSC-FIN), Sustainable Development and Climate Change Department (SDCC)

Lisette Cipriano, Senior Digital Technology Specialist, Financial Technology Services, SDSC-FIN, SDCC

Jenamae Dajay-Java, Operations Assistant, SEPF, SERD Cristina Lozano, Principal Country Specialist, PHCO, SERD Antoine Morel, Principal Environment Specialist, SEOD, SERD Takako Morita, Senior Counsel, Office of the General Counsel Keiko Nowacka, Senior Social Development Specialist (Gender and

Development), Gender Equity Thematic Group, SDTC, SDCC Karen May Sanchez, Senior Project Assistant, SEPF, SERD Elizabeth Burges-Sims, Senior Social Development Specialist (Gender

and Development), Human and Social Development Division, SERD Peer reviewer Giacomo Giannetto, Principal Financial Sector Specialist, Public

Management, Financial Sector, and Regional Cooperation Division, East Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 1

A. Background and Development Constraints 1 B. Policy Reform and ADB’s Value Addition 4 C. Impacts of the Reform 10 D. Development Financing Needs and Budget Support 10 E. Implementation Arrangements 10

III. DUE DILIGENCE 11

IV. ASSURANCES 12

V. RECOMMENDATION 12

APPENDIXES

1. Design and Monitoring Framework 13

2. List of Linked Documents 16

3. Development Policy Letter 17

4. Policy Matrix 19

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 21072020122411208181 Generated Date: 21-Jul-2020 17:55:21 PM

1. Basic Data Project Number: 51309-002Project Name Inclusive Finance Development Program

(Subprogram 2)Department/Division SERD/SEPF

Country Philippines Executing Agency Department of FinanceBorrower PhilippinesCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=51309-002-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=51309-002-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Finance Inclusive finance 300.00

Total 300.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainabilityStrengthening governance and institutional capacity

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 36.09

Mitigation ($ million) 20.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.1, 1.2, 1.5SDG 2.3SDG 4.5SDG 5.aSDG 8.10SDG 10.2SDG 13.a

Some gender elements (SGE)

Poverty TargetingHousehold Targeting

4. Risk Categorization: Complex .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 300.00 Sovereign Programmatic Approach Policy-Based Lending (Regular Loan): Ordinary capital resources

300.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 300.00

Currency of ADB Financing: US Dollar

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed policy-based loan to the Republic of the Philippines for subprogram 2 of the Inclusive Finance Development Program, and (ii) the proposed inclusion of subprogram 3 in the programmatic approach.1 2. The program directly supports reforms included in the Philippine Development Plan 2017– 2022 and will increase financial inclusion by (i) strengthening the institutional and policy environment, (ii) improving financial infrastructure, and (iii) increasing the capacity and reach of financial service providers. The program contributes to Strategy 2030 of the Asian Development Bank (ADB) by addressing remaining poverty and reducing inequalities, accelerating progress in gender equality, promoting rural development and food security, strengthening governance and institutional capacity,2 and enhancing climate resilience through financial inclusion (table).3 The program is consistent with ADB’s country partnership strategy, 2018–2023 for the Philippines, in which financial inclusion is included under the third strategic pillar on investing in people. The program is also included in ADB’s country operations business plan, 2020–2022 for the Philippines.4 While the reforms were underway well before the onset of the current coronavirus disease (COVID-19) pandemic, the measures under subprogram 3 will facilitate the economic recovery process in the Philippines.

II. PROGRAM AND RATIONALE A. Background and Development Constraints 3. The programmatic approach and budget support. The program uses a programmatic approach that aligns ADB assistance with key government reform programs over the medium-to-long term, to support increased access to financial products and services as part of an inclusive economic growth agenda. In October 2018, ADB’s Board of Directors approved the programmatic approach and a $300 million loan for subprogram 1.5 Through 14 policy actions, subprogram 1 helped the government prepare to increase the safe use of financial services and scale-up the delivery of financial services, especially through digital channels. Through 15 policy actions, subprogram 2 builds on the policy reforms under subprogram 1 by implementing a national identity system, continuing to test new initiatives in agriculture finance including insurance, further strengthening financial consumer protection and literacy, expanding digital finance, and supporting further innovation and capacity development among financial service providers. 4. The program was originally designed to have two subprograms. Considering the ambitious targets set by the government to considerably increase financial inclusion by 2023, the complex nature of the remaining and upcoming reforms, and the need to sustain progress of such reforms, the government has requested further support from ADB through subprogram 3, for an indicative

1 The design and monitoring framework is in Appendix 1. 2 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific .

Manila. 3 Alliance for Financial Inclusion. 2017. Sharm El Sheikh Accord: Financial Inclusion, Climate Change & Green

Finance. 4 Government of the Philippines, National Economic and Development Authority. 2017. Philippine Development Plan

2017–2022. Manila; ADB. 2018. Country Partnership Strategy: Philippines, 2018–2023—High and Inclusive Growth. Manila; and ADB. 2019. Country Operations Business Plan: Philippines, 2020–2022. Manila.

5 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 to the Republic of the Philippines fo r the Inclusive Finance Development Program. Manila.

2

amount of $300 million. While supporting COVID-19 recovery efforts, subprogram 3 will continue support for the government's ongoing inclusive finance agenda by leveraging the national identity system to expand financial inclusion, building on the growing digital payment ecosystem, further increasing the capacity of financial service providers through their digital transformation, and supporting reforms to reduce inequalities in women’s access to finance and to promote women’s economic empowerment. 5. The development problem. The Philippine economy grew at an average rate of 6.3% per year during 2010–2019, up from 4.5% during 2000–2009 and 3.0% in the 1990s.6 A total of 1.4 million jobs for wage-earners and salaried employees were added in 2019, reducing the unemployment rate from 5.3% in 2018 to 5.1% in 2019. Important policy reforms—including the passage of the 2019 Universal Health Care Law and social protection reforms—aim to reduce inequalities in household income. However, the impact of the COVID-19 could erase these gains. Gross domestic product (GDP) is expected to contract by 3.8% in 2020, accompanied by increased unemployment.7 In Luzon alone, job losses are expected to reach 4.3 million in the second quarter of 2020. The COVID-19 pandemic has also amplified poverty as a development challenge. While the poverty rate fell from 23.3% in 2015 to 16.7% in 2018, given the significant job and income losses resulting from the pandemic, ADB estimates suggest that an additional 5.5 million Filipinos will fall into poverty, with poverty incidence rising to 20.7% in 2020.8 6. Financial inclusion remains low by regional comparison, but with some gains. According to the Global Findex Survey 2017 (the most recent available), the Philippines had one of the lowest rankings in Southeast Asia for almost all financial inclusion indicators. Only 34% of Filipino adults have an account at a formal financial institution, compared with 49% of adults in Indonesia, 82% in Thailand, and 85% in Malaysia. From 2014 to 2017 the proportion of the population that borrowed from a formal financial institution fell from 12% to 10%, and the proportion that saved at a formal financial institution declined from 15% to 12%. Lower-income households were disproportionally excluded—in 2017 only 18% of the poorest 40% (by income) had an account.9 To address these low figures, the Bangko Sentral ng Pilipinas (BSP), with ADB support under subprogram 1 and subprogram 2, has taken steps to make it easier to open new accounts, strengthened the focus on digital financial inclusion, and pushed for digital payments. As a result, financial inclusion as captured under several key metrics has improved. According to the BSP's quarterly financial inclusion dashboard as of the fourth quarter of 2019, since the issuance of the policy allowing basic deposit accounts (BDA) in 2018, 119 banks have offered BDAs to 4 million depositors amounting to ₱3.5 billion ($70 million equivalent).10 The number of e-money wallets has grown exponentially, from 5 million in 2018 to 8.8 million in 2019 representing 74% year-on-year growth. Further, the number of cities and municipalities without a banking presence declined from 35.6% as of the end of December 2016 to 31.8% in 2019. 7. Other important indicators of financial inclusion have stagnated or declined. Year-on-year growth of loans to micro, small, and medium-sized enterprises (MSMEs) declined by 12% during 2018–2019, primarily because of a tightening of credit standards. While the gender gap in financial inclusion in the Philippines continues to favor women—39% of women hold accounts compared to 30% of men, and 61% of women save through formal and informal channels

6 ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Special Topic: The Impact of the

Coronavirus Outbreak—An Update. Manila. 7 ADB. 2020. Asian Development Outlook Supplement: Lockdown, Loosening, and Asia's Growth Prospects. Manila. 8 Philippine Statistics Authority. June 2020. Updated 2015 and 2018 Full Year Official Poverty Statistics. Manila. 9 World Bank. 2017. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution.

Washington, DC. 10 BSP. 2019. Financial Inclusion in the Philippines Dashboard Fourth Quarter 2019 . Manila.

3

compared to 57% of men—the lack of sex-disaggregated data in other areas, including entrepreneurship, makes other gender gaps less visible. More nuanced data is required, notably in terms of digital financial literacy and access to credit. Over the medium term, actions to mitigate climate change, which is among the greatest threats to sustainable development, poverty reduction, and financial stability including financial inclusion, will be critically important. 11 Expanding financial services across the country, especially in regions with the highest levels of poverty and areas that are particularly vulnerable to climate change, is crucial to achieving the government’s agenda of promoting inclusive growth.12 8. The COVID-19 pandemic adds to the complexity of addressing barriers to financial inclusion. The widespread loss of income and rapid increase in poverty resulting from COVID-19 in the midst of various community quarantine measures call for even greater efforts to achieve financial inclusion. Focusing on the poorest 40% of the population is particularly urgent. COVID-19 emergency subsidies exposed challenges in ensuring timely provision of social assistance and financial inclusion, as many of the non-Pantawid Pamilyang Pilipino Program (4Ps) families were not identifiable from national databases, and most lacked deposit accounts to facilitate expedient and efficient transfers.13 Timely implementation of the national identification system with linkages to the finance sector is needed to improve access to social services by the poor. 9. Binding constraints. The government has recognized the challenges and has identified three primary constraints to financial inclusion: (i) structural impediments which limit access to finance, especially for the rural poor; (ii) fragmented financial infrastructure which does not provide an enabling environment; and (iii) limited capacity of financial institutions to expand outreach and increase access to finance.14 10. Structural impediments that limit access to finance. While the Philippine Identification System (PhilSys) has been approved, implementation has required a long lead time to ensure that the system is robust, secure, and inter-operable. Further, PhilSys’s linkages to the finance sector, credit reporting system, and overall payment infrastructure have yet to be formally established. In addition, agriculture finance remains underdeveloped and underutilized, with

climate change-related risks exacerbating these weaknesses. To better understand these weaknesses, the BSP introduced a program for rural and thrift banks to increase agriculture value chain finance (AVCF) and pilot test new approaches.15 While crop insurance is available from a sole government provider, it fails to meet the risk protection needs of the estimated 10.26 million farmers and producers. 16 Finally, additional targeted financial literacy activities need to be designed for poor households and MSMEs, particularly those led by women. 11. Fragmented financial infrastructure. Recent efforts by the BSP to build the foundation for a modern, efficient, and low-cost payment system, particularly through facilitation of digital

11 Alliance for Financial Inclusion. 2019. Inclusive Green Finance. 12 BSP. 2015. National Strategy for Financial Inclusion. Manila: and Climate Change Assessment (accessible from the

list of linked documents in Appendix 2). 13 The Pantawid Pamilyang Pilipino Program (4Ps) was launched by the Government of the Philippines in 2008 to target

poor households and help them improve the education and health of their children so that they can escape poverty. Non-4Ps families include other vulnerable groups such as informal workers and households just above the poverty line.

14 Sector Assessment (Summary): Finance (accessible from the list of linked documents in Appendix 2). 15 BSP. 2019. Speeches. BSP Governor B. E. Diokono. Sustainable Finance Towards a Climate-Resilient Philippine

Economy. 21 November. 16 The Philippines Crop Insurance Corporation, an agency attached to the Department of Agriculture, is mandated by

law to provide insurance protection to the country’s agricultural producers, particularly subsistence farmers.

4

payments, support the financial inclusion of small businesses and poor individuals. However, achieving higher levels of financial intermediation also depends on the ability of lenders to assess credit risks and to compensate with collateral if necessary. Collateral registries enable businesses to access credit more affordably and allow financial institutions to reduce their lending risk. Legislation was passed in 2008 to establish a comprehensive credit reporting registry, but awareness of the system is limited, which reduces participation among financial service providers. Further implementation of the 2008 law will also help address the lack of credit data and support bank lending, especially to MSMEs. These processes will also support women’s access to credit by overcoming barriers associated with the gender gaps in asset and land ownership. Likewise, strengthening the government’s credit guarantee system will help to better meet the needs of MSMEs, particularly those engaged in agriculture. 12. Limited capacity of financial institutions. Traditional financial service providers have limited capacity to reach the underbanked and those excluded from financial services, including women. Rural banks, which are best placed to reach MSMEs and agricultural enterprises in rural areas, have limited financial and operational capacity. Microfinance nongovernmental organizations (MNGOs) reach the largest numbers of microenterprises and low-income clients but given the current regulatory structure—where MNGOs are monitored and accredited based on financial, social, and governance performance standards—only 30 MNGOs have been accredited. While recent reforms encourage financial institutions to develop their capacity through digital transformation, reducing operating costs and reaching clients more effectively with a wider range of products and services, most financial institutions lack the resources or ability to innovate. Innovation that employs women-friendly financial products and services and enables more women to access finance remains limited. Finally, following the adoption of a legal and regulatory framework for Islamic finance, financial institutions need support to develop client-responsive Islamic Financial Services that can support inclusion for a large segment of the population, particularly in conflict-affected regions of the country such as Mindanao. B. Policy Reform and ADB’s Value Addition 13. The government’s reform agenda. The government’s National Strategy for Financial Inclusion (NSFI) coordinates broad-based initiatives for greater financial inclusion. Its key elements include digital finance, financial literacy, credit information systems, development of a movable collateral registry, diversification of financial products and services, and capacity strengthening of MNGOs. The government institutionalized the NSFI by establishing a steering committee, requiring line agencies to develop medium-term work plans to achieve NSFI targets, and developing a monitoring and evaluation framework. The committee comprises 13 government agencies, private sector institutions, and development partners. The BSP serves as the secretariat responsible for monitoring and coordinating NSFI implementation. The committee’s most recent priority areas of focus have included agriculture finance and digital payments. As a result of the COVID-19 pandemic, the government has announced 12 areas for structural reforms during 2021–2023, including financial inclusion. The government aims to ensure that every head of household from the poorest sector has at least one bank account. To help achieve this target, the government will prioritize accelerating PhilSys registration of 5 million low-income household heads by December 2020. 14. Programmatic approach. The program consists of three reform areas that support the government’s efforts to increase financial inclusion. It contains high-impact policy actions to support the implementation of the NSFI to (i) strengthen the institutional and policy environment for financial inclusion, (ii) strengthen the infrastructure for financial inclusion, and (iii) increase the capacity of service providers with a focus on rural banks and nonbank financial institutions. The

5

government completed 15 policy reforms comprising 8 prior actions and 7 policy milestones. The program supports several Sustainable Development Goals and is aligned with key operational priorities of ADB’s Strategy 2030 (footnote 2), as shown in the table. Four policy actions exceeded expectations and were strengthened to reflect stronger achievements. For example, to increase the share of digital payments to total transactions, the BSP introduced a National Quick Response Code Standard for payments, promoted payment of salaries through formal accounts, and digitized payments in public transportation. Under subprogram 2, at the request of the government, two policy actions were added to reflect (i) the financial consumer protection policy reforms introduced by the government and (ii) the steps taken to strengthen and diversify the NSFI, with the Philippine Commission on Women (PCW) participating in its implementation.17

Alignment with Strategy 2030 Strategy 2030 Priority Program

Addressing remaining poverty and reducing inequalities

The program supports f inancial literacy and extends af fordable formal f inancial services to the poor and rural microenterprises, which have a direct impact on poverty reduction.

Accelerating progress in gender equality

The program supports approaches that address prevailing gender inequalities in women’s access to f inance and support women’s economic empowerment.

Promoting rural development and food security

The program supports the government in strengthening agriculture value chain f inance and agriculture insurance through intergovernmental dialogue, pilot testing of new approaches, development of tools to help mitigate risk and scale outreach, and policy reforms.

Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability

The program supports policies that directly and indirectly help to increase the climate and disaster resilience of individuals and micro, small, and medium-sized enterprises throughout the country, especially in the priority areas that are particularly vulnerable. These priority areas include provinces with a high concentration of poor and marginalized farmers, f isherfolk, traders, drivers, and workers, who have limited access to credit f rom formal f inancial institutions and are at high risk to climate extreme events.a

Strengthening governance and institutional capacity

The program helps strengthen regulatory and supervisory bodies responsible for overseeing a range of dif ferent types of financial service providers including rural banks and microf inance nongovernmental organizations.

a Climate Change Assessment (accessible from the list of linked documents in Appendix 2). Source: Asian Development Bank.

15. Reform area 1: Institutional and policy environment for financial inclusion strengthened. This reform area builds on the government’s introduction of institutional reforms across the financial sector to improve access to finance for low-income households and MSMEs. Under subprogram 2, the Philippine Statistics Authority: (i) issued implementing rules and regulations to guide implementation of the PhilSys, which include provisions to facilitate registration of children, senior citizens, and persons with disabilities; (ii) issued procurement packages that constitute major system implementation milestones; (iii) began pilot testing of the registration process; (iv) developed a monitoring and evaluation framework; and (v) developed a strategy for linking the national identification to increased financial inclusion. A well-functioning PhilSys will be critical to the implementation and integrity of social assistance programs similar to

17 Further elaboration on the strengthened actions and additional actions taken by the government as compared to the

original subprogram 2 indicative reforms, is provided in Comparison of Original and Revised Reforms under Subprogram 2 (accessible from the list of linked documents in Appendix 2).

6

those under the country’s COVID-19 response program. 18 To support expanded agriculture finance including for enterprises owned by women and better inform policymakers, the BSP helped develop the AVCF framework through a pilot program for rural and thrift banks to increase lending to individuals and businesses in the value chain. 16. The Insurance Commission developed guidelines for distribution channels that deliver microinsurance products to clients. It also supported a regulatory sandbox approach for a public–private partnership (PPP) pilot to expand the coverage of agriculture insurance involving the Philippine Crop Insurance Corporation and private insurance companies. To further increase nationwide financial literacy, the BSP developed strategic partnerships, including with the Department of Education.19 The BSP also strengthened financial consumer protection by issuing regulations to promote access to high-quality financial services, drafting a financial consumer protection law, and developing a Chatbot using artificial intelligence to provide a more efficient and accessible way to reach the BSP on consumer protection matters. Finally, the BSP strengthened the NSFI’s gender-responsive policies and actions by endorsing the membership of the PCW in the NSFI steering committee and establishing a project steering committee to oversee the design of the first comprehensive national MSME survey with a gender focus. With ADB support, the BSP led a national stakeholder workshop that helped define the survey framework and provided a venue to discuss key issues related to women’s entrepreneurship. This MSME survey complements the enterprise survey conducted by the Department of Finance (DOF) in collaboration with ADB to investigate the impact of COVID-19 on MSMEs in the Philippines, including enterprises owned and/or led by women. 17. Under subprogram 3, the government will: (i) continue to implement PhilSys and link this to financial inclusion, beginning with 5 million low-income household heads by December 2020 and reaching at least 50 million persons by 2022; (ii) further strengthen AVCF by using lessons from the pilot program to help expand support to other financial institutions; and (iii) pursue further reforms that support women’s financial inclusion and entrepreneurship based on the national MSME survey with a gender focus. Adoption of a robust monitoring and evaluation framework for the NSFI and a gender impact assessment will support an updated NSFI action plan with gender-focused targets and the establishment of a national taskforce on MSMEs owned and/or led by women. The program will expand the PPP for agriculture insurance, simplify insurance instruments to enhance access of marginalized sectors, and build on key partnerships to expand financial literacy and financial consumer protection without discrimination.20 18. Reform area 2: Infrastructure for financial inclusion strengthened. This reform area builds on the government’s efforts under subprogram 1 to improve the national retail payment system, launch a national credit registry, establish a moveable collateral registry, and reform credit guarantee schemes. Under subprogram 2, the BSP continued to enhance the national retail payment system and support the expansion of digital payments. The number of basic deposit accounts was increased through: (i) the issuance of guidelines for ensuring interoperability of

18 Signed into law on 24 March 2020, the Bayan Bayanihan to Heal as One Act includes a ₱205 billion Social

Amelioration Program, a cash emergency subsidy program to ensure income and food security for up to 18 million families (4P and non-4P) adversely affected by the COVID-19 pandemic.

19 Through the partnership, the Department of Education incorporated financial literacy in the K to 12 Basic Education Program (policy finalization, development of curriculum exemplars, and a monitoring and evaluation framework [disaggregated by sex] to assess the financial literacy of teachers and students covering 47,000 public schools, 800,000 teachers, and 29 million learners).

20 The Magna Carta of Women mandates government agencies to “enhance access of women entrepreneurs/potential entrepreneurs to credit and capital through, among others, simplified insurance instrument through contract standardization.” (Republic Act 9710. Sec. 26 (D).

7

rapid response-enabled payment and financial services; (ii) a partnership with the Department of Labor and Employment to promote payment of salaries through formal accounts and the digitizing of payments in public transportation; and (iii) the issuance of guidelines and standards to further extend the reach of a range of financial services, including cash agents and branch-lite units to allow approved banks to act as a microinsurance agent or broker. 21 To increase financial consumer protection and expand the credit history of low-income clients, the Microfinance NGO Regulatory Council (MNRC) required accredited MNGOs to report to the Credit Information Corporation (CIC), which will expand the coverage of credit information. In addition, the Cooperative Development Authority issued regulations requiring all borrowers to submit basic credit data to the CIC. The Personal Property Security Act was signed into law in August 2018, and the Implementing Rules and Regulations for the Act were issued in October 2019 to support the development of a centralized and nationwide electronic collateral registry. Finally, to improve MSME access to more affordable credit and enable financial institutions to lower their lending risk, the government streamlined credit enhancement mechanisms by consolidating and recapitalizing all its guarantee programs under the Philippine Guarantee Corporation (PhilGuarantee), and subsequently approving a restructuring plan. 19. Under subprogram 3, the government will build on the payments infrastructure by promoting use of the national quick response code standard and increasing the use of digital channels for government payments, including expansion of payment channels to support the government's social protection programs. The government will provide licenses to more cash agents and increase financial literacy outreach to include gender-focused digital financial literacy strategies. Additional reforms will increase the coverage of the credit reporting system to expand credit histories of clients and MSMEs and establish linkages to PhilSys. The Land Registration Authority will increase awareness and use of the online collateral registry, and PhilGuarantee will expand the number of MSMEs supported through state-financed guarantee-backed lending by 10%, with a dedicated target for MSMEs owned and/or led by women. 20. Reform area 3: Capacity of financial service providers increased. This reform area aims to improve the capacity of MNGOs and rural banks, and to expand their reach. First, the MNRC accredited and monitored the compliance of MNGOs. The MNRC also provided training programs to help build their capacity for compliance by (i) adapting the internal information technology systems of the Securities and Exchange Commission (SEC) for collecting sex-disaggregated data covering boards of trustees, management personnel, and client borrowers of MNGOs, and (ii) designing a training program that will help the MNRC and MNGOs to comply with MNRC accreditation and CIC requirements, starting with the development of a supervision manual for MNGOs, pilot testing, and onsite training. As of March 2020, all 30 accredited MNGOs have women on their boards. Second, to further develop the capacity of rural banks, the BSP enabled the safe use of cloud-based core banking technology by issuing guidelines on cybersecurity and cloud computing, and authorized 26 rural and thrift banks to use a cloud-based system.22 Third, with the passage of the Islamic Banking Act, the BSP issued implementing rules on the licensing Islamic banks, establishment of Islamic banking windows, and Shari’ah governance principles.

21 The BSP circulars and guidelines issued in 2018 and 2020 provide a framework for offering of basic deposit accounts

and allowing banks to contract third party entities as cash agents. A branch-lite unit refers to any permanent office or place of business of a bank, other than its head office or a branch. A branch-lite unit performs limited banking activities and records its transactions in the books of the head office or branch.

22 Based on the results of the pilot supported under subprogram 1, the BSP issued non-objections for 25 rural banks to operate using cloud-based core banking systems.

8

21. Under subprogram 3, the MNRC will continue to improve its collection of sex-disaggregated data and its conduct of onsite supervisory examinations of MNGOs. The BSP will continue to support the use of financial technology innovations through a regulatory sandbox approach, application of regulation technology solutions, and innovations that specifically address MSMEs led by women who are unserved or underserved because of constraints in access to financial services from formal financial institutions. Finally, the government will take steps to increase the availability of Islamic financial services through awareness-raising and capacity-development activities, with special consideration for women and enterprises owned by women. 22. ADB experience. Starting with the Rural Microenterprise Finance Project in 1996, ADB has worked closely with the government to establish a foundation for successful microfinance wholesale lending operations and to contribute to the growth of microfinance.23 Subsequent programs, such as the Microfinance Development Program helped to strengthen regulatory and supervisory capacity and carried out a national microfinance literacy program.24 ADB further supported the development of the sector with the Developing Financial Cooperatives Project, which improved the regulatory environment for credit and savings cooperatives, and the Developing Microinsurance Project, which helped the government set up a suitable regulatory environment and launch the National Strategy for Microinsurance in 2010.25 These programs provided a conducive regulatory framework that allowed financial inclusion. Approval of the program in October 2018 provided support to address persistent constraints to increased financial inclusion (footnote 5). 23. Lessons. Key lessons from ADB’s long-term involvement in the development of a more inclusive finance sector provide valuable input to the program design and implementation.26 First, a comprehensive strategy with high-level support, such as the NSFI, which address types and accessibility of products and services offered, infrastructure and payment system, and capacity of financial service providers is a prerequisite to effectively address the lack of access to financial services. Second, to successfully implement reforms, government ownership and widespread political will are necessary. Third, pilot projects that test new strategies through a regulatory sandbox approach are important for evidence-based policy development and building stakeholder support for institutional reforms. Fourth, reforms and capacity development should include close ADB involvement, with national and local government ownership and development partner support.27 Fifth, financial inclusion becomes even more important in times of crisis to ensure that the poor get access to social assistance. Without a national identification system linked to a deposit account, the government was challenged to distribute grants through the Social Amelioration Program to the non-4P families (footnote 18) (box). 24. ADB’s value addition to program design and implementation. The overall program design resulted from close engagement with implementing agencies. The program incorporates knowledge gained from sustained ADB policy dialogue and technical assistance (TA) implementation. ADB has supported implementation of PhilSys in key areas by tapping TA and

23 ADB. 1996. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical

Assistance Grant to the Republic of the Philippines for the Rural Microenterprise Finance Project . Manila. 24 ADB. 2005. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical

Assistance Grant to the Republic of the Philippines for the Microfinance Development Program. Manila. 25 ADB. 2006. Grant Assistance Report: Proposed Administration of Grant to the Republic of the Philippines for the

Developing Financial Cooperatives Project. Manila; and ADB. 2008. Grant Assistance Report: Proposed Administration of Grant to the Republic of the Philippines for the Developing Microinsurance Project. Manila.

26 ADB. 2005. Completion Report: Rural Microenterprise Finance Project Program in the Philippines. Manila; ADB. 2006. Completion Report: Microfinance Development Program, Subprograms 1 and 2 in the Philippines. Manila; and ADB. 2018. Technical Assistance Completion Report: Capacity Building for Microinsurance in the Philippines. Manila.

27 ADB. 2015. Technical Assistance to the Republic of the Philippines for Unlocking Innovation for Development. Manila.

9

staff resources across ADB. Under subprogram 2, with transaction advisory support, bidding packages were issued for program elements (including for registration kits and the Authenticated Biometric Identification System) that constitute major program milestones.28 With ADB TA and staff support, a 4-year implementation road map on the identification system was approved in January 2019. 29 The road map includes actions to increase financial inclusion through streamlined identity verification process that would enable opening of accounts. A communications strategy was developed as well as an overall monitoring and evaluation framework. Additional TA supported an assessment and plan for upgrading information technology systems to facilitate integration of PhilSys within the Department of Social Welfare and Development and to help increase efficiency, reduce cost, and better support the 4Ps conditional cash transfer program.30 Further, ADB has worked closely with the BSP to build on subprogram 1 reforms to collaboratively test ways to strengthen agriculture finance and insurance, improve coordination and monitoring of financial literacy, and explore innovation in the banking sector using financial technology. ADB has also worked closely with the SEC to further develop accreditation standards for MNGOs to professionalize and scale-up their operations. Through additional TA, ADB has provided awareness-raising and capacity-building workshops and training for government and civil society organizations supporting Islamic financial services.31 ADB will also be supporting gender-focused policy reforms that support women’s financial inclusion and entrepreneurship, which will be developed under subprogram 3.32

How the Inclusive Finance Development Program Complements Other Asian Development Bank Initiatives in the Philippines

The Inclusive Finance Development Program (IFDP) complements and supports a number of recent Asian Development Bank programs in the Philippines. The Competitive and Inclusive Agriculture Development Program aims to support the government’s effort to increase competitiveness and inclusiveness of the agriculture sector by (i) implementing agricultural trade policy and regulatory reforms, (ii) enhancing public services and finance for the sector, and (iii) increasing social protection to rural families.33 Under the IFDP, strengthening agriculture value chain finance and incentivizing private sector participation in agriculture finance will reinforce the efforts to make agriculture in the Philippines more competitive and inclusive. Building the technology capacity of rural banks and extending digital platforms for agriculture financial services under the IFDP will further enhance the impact and reach of the Competitive and Inclusive Agriculture Development Program. The Expanded Social Assistance Project, approved in May 2020, supports the government’s Pantawid Pamilyang Pilipino Program by financing a portion of the education and health conditional cash transfers provided to poor households; strengthening the Department of Social Welfare and Development’s compli ance verification, payroll, and grievance redress systems; building linkages with complementary social programs; and improving project management, monitoring, and impact evaluation.34 The IFDP will help accelerate and enhance the efficiency and impact of the Expanded Social Assistance Project with the rollout of the Philippine Identification System, which prioritizes low-income heads of households and linkages of the identification system to a bank account. Source: Asian Development Bank.

28 ADB's Office of Public–Private Partnerships has provided substantial TA from various sources and staff resources to

support PhilSys. 29 ADB. 2016. Technical Assistance to the Republic of the Philippines for Financial Inclusion Framework Strengthening.

Manila. 30 ADB. 2018. Technical Assistance for Digital Development Facility for Asia and the Pacific. Manila; and ADB. 2020.

Technical Assistance for Strengthening Social Protection Reforms Facility. Manila. 31 ADB. 2017. Technical Assistance to the Republic of the Philippines for Islamic Finance in the Philippines. Manila. 32 ADB. 2018. Technical Assistance for Promoting Transformative Gender Equality Agenda in Asia and the Pacific.

Manila. 33 ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach and Policy-Based Loan for Subprogram 1 Republic of the Philippines: Competitive and Inclusive Agriculture Development Program. Manila.

34 ADB. 2020. Report and Recommendation of the President to the Board of Directors: Expanded Social Assistance Project. Manila.

10

25. Development partner coordination. For over two decades, ADB has supported the government’s goal of increasing financial inclusion in the Philippines through close coordination and collaboration with development partners. Overall coordination of development partner support has been managed through the NSFI steering committee, chaired by the BSP. Bilaterally, ADB and the Deutsche Gesellschaft fur Internationale Zusammenarbeit have worked together to develop a strong regulatory framework and financial literacy for microinsurance and have jointly supported development of a pilot PPP program for agriculture insurance. Since 2018, the World Bank and ADB have collaborated to support implementation and rollout of PhilSys. ADB also closely coordinates with the United States Agency for International Development, which recently approved additional funding for the E-PESO project that supports use of  electronic payments, and launched the Delivering Effective Government for Competitiveness and Inclusive Growth Program to expand financing, markets, and linkages for MSMEs. Finally, in addition to its parallel cofinancing of subprogram 1, the Agence Française de Développement will provide TA to support subprogram 3 in key areas including agriculture insurance, regulatory strengthening, and digital transformation of financial institutions.35,36 C. Impacts of the Reform 26. Economic impact of the program. The program impact assessment considers the objectives of the program and how likely the key reforms will generate economic benefits. Overall, the program acts as a catalyst by creating an appropriate regulatory structure and business environment and by encouraging businesses to grow through the use of technology. The benefits of the program come from more adults with bank accounts, which are necessary for financial inclusion. In addition to economic growth, the program will produce other social benefits, including reduced poverty; decreased inequality; improved financial stability; more opportunities for women; and increased climate resilience of the vulnerable poor, MSMEs, and financial institutions.37 D. Development Financing Needs and Budget Support 27. The total financing needs of the Philippines in 2020 are expected to be substantial. The annual budget deficit was originally programmed at 3.2% of GDP in 2020, down from 3.4% in 2019. However, revenues will be significantly lower because of the economic contraction and higher spending resulting from the impact of COVID-19, and the deficit is expected to widen to 8.4% of GDP in 2020. As such, the government’s financing requirement is expected to reach a record ₱2.9 trillion ($58 billion), financed through domestic borrowing (74%) and foreign borrowing (26%). The government has requested a regular loan of $300 million from ADB’s ordinary capital resources to help finance subprogram 2. The loan will have a 15-year term, including a grace period of 3 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the loan agreement. The loan size for subprogram 2 reflects the government’s development financing needs, the strength of the program, and the economic benefits (para. 26). E. Implementation Arrangements 28. The DOF is the executing agency. The BSP, the SEC, PhilGuarantee, the Philippine Statistics Authority, the Department of Justice, and the Insurance Commission will be the primary

35 The Agence Française de Développement anticipates to also cofinance subprogram 2. 36 Development Coordination (accessible from the list of linked documents in Appendix 2). 37 Program Impact Assessment (accessible from the list of linked documents in Appendix 2).

11

implementing agencies. Implementation will be overseen by a steering committee chaired by the DOF, with the implementing agencies as members. The implementation periods are May 2018– April 2020 for subprogram 2 and May 2020–May 2023 for subprogram 3. The proceeds of the policy-based loan will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

III. DUE DILIGENCE 29. Safeguards. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category C for environment, involuntary resettlement, and indigenous people’s safeguards. The program is not expected to have any environmental or social safeguards impacts within the meaning of ADB’s Safeguard Policy Statement. 30. Poverty. The poor are most affected by the low levels of financial inclusion across the country as financial exclusion deprives them of opportunities to increase their income and mitigate various risks through credit, savings, insurance, pensions, and remittances. COVID-19 is expected to exacerbate absolute poverty in the short term because of the weak labor market, critical food shortages, reduced or eliminated household earnings, and a drastic decline in remittances. Measures under subprogram 2 will help create opportunity and build resilience, particularly among poorer segments of the population through (i) inclusion in the PhilSys, (ii) increased support for agriculture finance and insurance, (iii) facilitation of basic deposit and digital accounts, and (iv) targeted financial literacy initiatives. 31. Gender. Subprogram 2 is categorized as having some gender elements. Financial inclusion in the Philippines continues to favor women, with a higher proportion of women (39%) holding accounts as compared to men (30%) (footnote 9). At the same time, women face cultural, social, and educational barriers, including the lack of (i) formal documentation of identification, (ii) immovable properties and assets owned under their names, (iii) financial independence from their partners or from other family members, and (iv) mobility. Many of these barriers are linked to their role as their families’ primary caretakers. The program targets reforms while ensuring consideration of the unique challenges faced by women and businesses owned by women. Key policy measures under subprogram 2 supported financial inclusion among women through: (i) implementation of a national identification system, considering that women are less likely than men to have identification documents required to open a bank account; (ii) introduction of cash agents and other financial technology innovations such as digital platforms, which can benefit more women in areas without a banking presence; (iii) strengthening of MNGOs, which predominantly serve women; (iv) increased diversity and impact of activities in the NSFI with the inclusion of the PCW in the financial inclusion steering committee; and (v) approval of the first comprehensive MSME demand study with a gender focus. The collection of sex-disaggregated data has been prioritized throughout the program. Subprogram 3 is expected to achieve effective gender mainstreaming through the inclusion of the PCW to the NSFI and the results of the comprehensive MSME survey which will be used to (i) approve an updated an NSFI action plan with gender-focused targets, (ii) adopt a national definition of women-owned or led businesses, (iii) establish and chair a national task force on women-owned or led businesses, and (iv) adopt a robust monitoring and valuation framework for measuring progress that includes sex-disaggregated data. 32. Governance. While an updated assessment of the 2016 Public Expenditure and Financial Accountability report is being carried out, the government has set an aggressive reform agenda to promote effective and honest governance and to create an enabling environment for citizens and the private sector. The framework of the Public Financial Management Reform Roadmap,

12

2017–2022 aims to strengthen the foundation of the public financial management system.38 The key reforms target improvements in costing, cash management, planning and budgeting, and procurement. The government's performance relative to international fiscal transparency standards and indicators of corruption has improved. The draft public financial accountability act will further clarify rules and policies on budget formulation, preparation, enactment, and execution and significantly improve linkages between budgeting and planning, congressional powers of the purse, and oversight of public spending. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, including the DOF. 33. Risks and mitigating measures. Overall risks are considered substantial because of the economic, financial, and social impacts of the COVID-19 pandemic on the country. Areas of highest risk include changes in political priorities preventing implementation of identified reform areas, a significant and rapid deterioration in macroeconomic conditions, and corresponding increase in poverty rates. The government's rapid, targeted fiscal policy response to the pandemic and an accommodating monetary policy stance signal a readiness to take further steps as necessary to strengthen macroeconomic conditions.39 The lack of sufficient capacity limits the ability of relevant government agencies to upgrade their existing systems to support increased financial inclusion. ADB has helped mitigate risks through TA prior to and throughout implementation of the program and will continue to engage in regular policy dialogue through the NSFI steering committee. 40 ADB and other development partners will mitigate the risk of corruption with a whole-of-government approach to strengthen public financial management and improve procurement.

IV. ASSURANCES 34. The government, including the DOF, has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement.

V. RECOMMENDATION 35. I am satisfied that the proposed policy-based loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $300,000,000 to the Republic of the Philippines for subprogram 2 of the Inclusive Finance Development Program, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board, and

(ii) the inclusion of subprogram 3 in the programmatic approach, as described in paragraph 4.

Masatsugu Asakawa President

30 July 2020

38 DBM Bulletin. January–March 2017. PFM Corner: Development of the PFM Reform Roadmap 2017-2022 Gets the

Green Light. Manila. 39 International Monetary Fund Assessment Letter (accessible from the list of linked documents in Appendix 2) 40 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK Country’s Overarching Development Objective Resilient and inclusive f inance sector achieved (Philippine Development Plan 2017–2022)a

Results Chain Performance Indicators with

Targets and Baselines

Data Sources

and Reporting Mechanisms

Risks

Effect of the Reform Financial inclusion increased

By 2023: a. Individuals holding an account at a bank or another type of f inancial institution increased to at least 70% overall: with at least 70% of men holding an account, at least 70% of women holding an account, and at least 65% of youth holding an account (2017 baseline: overall: 34%, men: 30%, women: 39%, and youth: 24%)b, c, d

b. Poorest 40% by income (age 15+) with an account at a formal f inancial institution increased to at least 55% (2017 baseline: 18%) c. The proportion of rural inhabitants with accounts at a formal f inancial institution increased to at least 65% (2017 baseline: 27%)

a.–c. Global Findex Survey

Because of COVID-19, a signif icant and rapid deterioration in macroeconomic conditions and corresponding increase in poverty rates may af fect the capacity of individuals to open bank accounts. Changes in political priorities prevent implementation of identif ied reform areas. Conf idence in the formal f inance sector weakens. Climate impacts on the vulnerable, poor, and MSMEs hinder f inancial inclusion.

Reform Areas Subprogram 2

1. Institutional and policy environment for f inancial inclusion strengthened

Key Policy Actions By 2020: 1.1 PhilSys launched (2018 baseline: multiple and f ragmented national identif ication) 1.2 Agriculture value chain f inance f ramework supported through pilot testing with f ive banks (2018 baseline: No pilot) 1.3 Public–private partnership model for agriculture insurance launched. (2018 baseline: No model)

1.1 Press release f rom the Philippine Statistics Authority 1.2 Progress report f rom BSP 1.3 Progress report f rom the Insurance Commission

14 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms

Risks

1.4 Financial literacy program with corresponding monitoring and evaluation f ramework incorporated by the Department of Education in K to 12 Basic Education Program curriculum (with indicators disaggregated by sex) (2018 baseline: Not applicable) 1.5 Philippine Commission on Women endorsed to the National Strategy for Financial Inclusion Steering Committee: (i) f irst national stakeholder workshop conducted on MSME survey with gender focus, with participation of the Philippine Commission on Women; (ii) approval of the f irst comprehensive MSME demand study with gender focus; and (iii) rapid MSME survey with sex-disaggregated data conducted in response to COVID-19 (2018 baseline: Not applicable)

1.4 Draf t policy 1.5 Memo endorsed by BSP governor

2. Inf rastructure for f inancial inclusion strengthened

2.1 Key policy reforms and programs implemented to increase the share of digital payments to at least 20% of total transactions by value implemented by the BSP (2013 baseline: 1%) 2.2 Executive order approved and action plan adopted by the government to reorganize and strengthen operations of the Philippine Guarantee Corporation (2018 baseline: No consolidation and action plan) 2.3. Coverage of the credit reporting system expanded by requiring cooperatives and microf inance nongovernment organizations, through SEC and the CDA, to submit sex-disaggregated credit data to Credit Information Corporation (2018 baseline: no coverage)

2.1 Digital payments study 2.2 Executive order and implementing rules and regulations 2.3 MNRC and CDA circulars

Appendix 1 15

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms

Risks

3. Capacity of f inancial service providers increased

3.1 Internal SEC information technology systems adapted by the MNRC to include collection of sex-disaggregated data on boards of trustees, management, personnel, and client borrowers of microf inance nongovernment organizations (2018 baseline: Not applicable) 3.2 Regulations issued to promote and enable the use of cloud-based core banking technology and approval given to at least 26 rural banks (2018 baseline: 0 rural banks) 3.3 The BSP supported passage of the Islamic Banking Bill and conducted awareness-raising and capacity-building campaigns (2018

baseline: Law not enacted)

3.1 MNRC memo 3.2 BSP regulations; approval documentation 3.3 Approved legislation and capacity-building program

Budget Support Asian Development Bank: Subprogram 2: $300.00 million (policy-based loan)

BSP = Bangko Sentral ng Pilipinas, CDA = Cooperative Development Authority, COVID-19 = coronavirus disease, MNRC = Microfinance NGO Regulatory Council, MSMEs = micro, small and medium-sized enterprises, NGO = nongovernmental organization, PhilSys = Philippine Identification System, SEC = Securities and Exchange Commission. a Government of the Philippines, National Economic and Development Authority. 2017. Philippine Development Plan

2017–2022. Manila. b Estimated targets revised based on BSP overall target of 70% by 2023.

c Number of people having an account (by themselves or together with someone else) at a bank or another type of financial institution or personally using a mobile money service in the past 12 months.

d Youth defined as individuals aged 18–25.

Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=51309-002-3

1. Loan Agreement

2. Sector Assessment (Summary): Finance

3. Contribution to the ADB Results Framework

4. Development Coordination

5. Country Economic Indicators

6. International Monetary Fund Assessment Letter

7. Summary Poverty Reduction and Social Strategy

8. Risk Assessment and Risk Management Plan

9. Climate Change Assessment

10. List of Ineligible Items

11. Approved Report and Recommendation of the President to the Board of Directors: Inclusive Finance Development Program (Subprogram 1)

Supplementary Documents

12. Public Financial Management Assessment

13. Program Impact Assessment

14. Comparison of Original and Revised Reforms under Subprogram 2

Appendix 3 17

DEVELOPMENT POLICY LETTER

18 Appendix 3

Appendix 4 19

POLICY MATRIX

Subprogram 1 Accomplishments

(March 2016 to April 2018) Prior actions in bold

Subprogram 2 Accomplishments

(May 2018 to April 2020) Prior actions in bold

Indicative Subprogram 3

(May 2020 – May 2023) Prior actions in bold

Reform area 1: Institutional and policy environment for financial inclusion strengthened.

1.1 National single identification system

reformed.

The government begins implementing PhilSys. Actions include:

1. The government submitted

proposed legislation to

Congress to develop a foundational NIDS with an identification card to provide

for a range of benefits and government services and improve access to finance.

(IA: PSA)

1. To institutionalize PhilSys, the

government (i) issued

implementing rules and regulations which include

provisions to facilitate registration of children, senior citizens, and persons with

disabilities; and (ii) approved a four-year implementation road map on the foundational

ID system and its role in increasing financial inclusion through streamlined identity

verification for financial account opening, among others.

1. To expand the coverage of

PhilSys and benefit the low-

income and vulnerable

sectors of society, the

government (i) enrolls at least

50 million persons by 2022,

generating sex-disaggregated

identity data; and

(ii) operationalizes linkages

within the financial sector and

PhilSys.

2. The government allocated US$40 million (equivalent) through the 2018 GAA for NIDS development.

(IA: PSA)

2. To ensure ef fective implementation of PhilSys, the government allocated (i) ₱2 billion ($40 million equivalent) through the 2019 GAA for the purchase of 5,000 registration kits and budget for the Automated Biometric Identif ication System provider; (ii) ₱2 billion ($40 million equivalent) through the 2020 GAA for the ongoing implementation of the PhilSys, including the procurement of the

2. To ensure ef fective

implementation of PhilSys, the government allocates suf f icient

budget through the 2021 and 2022 GAA for PhilSys

development.

20 Appendix 4

Systems Integrator, f ixed and mobile registration centers costs, card production costs, compensation for staf f requirements; and (iii) ₱ 1 billion ($20 million equivalent) f rom 2020 unprogrammed funds for the ongoing implementation of the PhilSys.

1.2 Financial products

and services expanded. The government continues to expand agricultural f inance, microinsurance and consumer protection. Actions include:

3. The BSP introduced a policy framework to promote AVCF.

Under this framework, BSP-supervised financial institutions participating in

AVCF would be able to address risks associated with lending to the agriculture

sector by shifting the focus of lending from individual farmers to the whole value

chain. (IA: BSP)

3. To promote the financial inclusion of agricultural

enterprises, with endorsement from the NSFI Steering Committee, the BSP supported

implementation of the pilot AVCF program for rural and thrift banks, which fosters

value chain finance lending to agriculture enterprises, including women-owned

enterprises.

3. Based on the outcome of the pilot AVCF program, the BSP

endorses the use of a toolkit that includes (i) guidance on use of digital solutions to

support AVCF, and (ii) gender-responsive analysis to identify gender-based

constraints to guide financial institutions to increase financing for stakeholders in

the agriculture value chain with targets for women-owned enterprises.

4. The Insurance Commission issued regulatory f rameworks for microinsurance that (i) allowed microinsurance providers to further develop microinsurance products on agriculture and health; (ii) enhanced functions of licensed microinsurance general agents, brokers, Cooperative Insurance Societies, and Mutual Benef it Associations to increase the outreach of microinsurance; (iii) def ined acceptable distribution channels and permissible functions to further

4. To expand the availability and diversity of insurance products, the government, through the IC (i) formulated registration guidelines to support implementation of distribution channels that include women-owned enterprises to increase the number and diversity of insurance products, and (ii) supported a test and learn approach to implementing a pilot public private partnership for agriculture insurance.

4. To further expand availability and diversity of insurance products, the IC (i) collects sex-disaggregated microinsurance data as entry point in examining gender-dif ferentiated outputs and impacts that microinsurance has produced; (ii) issues market conduct guidelines for intermediaries and distribution channels; and (iii) based on the outcome of the pilot public private partnership in agriculture insurance, issues gender-sensitive guidelines to further

Appendix 4 21

increase outreach; and (iv) enhanced performance indicators and standards for microinsurance providers.

(IA: IC)

promote private sector participation in agriculture insurance.

1.3 Financial consumer protection mechanisms

strengthened.

The government continues to strengthen f inancial consumer protection. Actions include: 5. Legislation was enacted for an

annual Economic and Financial Literacy Week to increase f inancial literacy awareness among the public and policymakers.

(IA: BSP)

5. To increase nationwide f inancial literacy, the BSP implemented an enhanced Economic and Financial Learning Program informed by (i) a Financial Education Stocktaking Study; and (ii) a Financial Inclusion Survey including information related to gender, age, access to f inancial services such as savings and credit, and knowledge on basic f inancial concepts (51% of respondents were female).

5. To ensure wider reach of the national f inancial literacy program, the BSP strengthens and expands the Economic and Financial Learning Program through additional strategic partnerships with public and private sector stakeholders, with a particular focus on digital f inancial literacy and with targets for marginalized women, men, and their families; and tracks progress through a robust monitoring and evaluation f ramework to measure progress of activities based on data disaggregated by sex and age.

6. To strengthen f inancial consumer protection mechanisms, the BSP (i) amended existing regulations on f inancial consumer protection to promote broad and convenient access to high quality f inancial services and consider the interest of the public, including vulnerable groups such as the low-income earners and persons with disability; (ii) draf ted introduction of Financial Consumer Protection Act; and (iii) developed a prototype Chatbot using artif icial intelligence and natural language processing to provide the public

6. To institutionalize f inancing consumer protection, the BSP (i) submits the Financial Consumer Protection Act to Congress, which mandates f inancial persons to, among others, observe fair and respectful treatment of clients regardless of race, ethnicity, origin, gender, disability, and sexual orientation; and (ii) implements the Chatbot to provide the public a more accessible and ef f icient means to engage the BSP on f inancial consumer concerns.

22 Appendix 4

with a more accessible and ef f icient means to engage the BSP on f inancial consumer concerns.

1.4 NSFI action plan strengthened.

The government supports and enhances the outreach and impact of the NSFI. Actions include: 7. To promote women’s f inancial

inclusion, the BSP as chair of the NSFI Steering Committee (i) endorsed the inclusion of the PCW as a full member of the Committee; and (ii) conducted the f irst national stakeholder workshop, with participation of PCW as a member of the project steering committee, on the design of the f irst comprehensive, national MSME survey with a gender focus, complementing the enterprise survey conducted by the DOF in collaboration with ADB investigating the impact of COVID-19 on Philippine MSMEs, including female owned or led enterprises.

7. To further promote women’s f inancial inclusion, based on the outcome of the MSME demand survey, the NSFI Steering Committee and project steering committee will (i) approve an updated NSFI action plan with gender focused targets; (ii) adopt a national def inition of women-owned or led businesses; (iii) establish and chair a national taskforce on women-owned or led MSMEs; (iv) develop guidelines on gender-responsive procurement to promote women entrepreneurship and access to supply value chains; (v) recommend policy and f inancial support measures to rescue af fected MSMEs in light of COVID-19, especially targeting women-owned MSMEs through a phased approach including loan restructuring and new credit delivery, with focus on business and employment retention; and (vi) adopt a robust monitoring and evaluation f ramework for the NSFI for measuring progress, which includes gender impact assessment.

Reform Area 2: Infrastructure for financial inclusion strengthened. The government continues to upgrade the retail payment system. Actions include:

Appendix 4 23

2.1 Payment infrastructure developed.

6. The BSP issued a policy framework to promote the establishment of a safe,

efficient, and interoperable national retail payment system (NRPS) that allows (i) transfer

funds from one bank or financial service provider to another through transaction

accounts, and (ii) any qualified financial service provider to participate on a level playing

field. The goal is to drive usage of electronic payments from the current 1% to 20% by 2020

and promote a digital finance ecosystem that can facilitate the deployment of a wide

range of affordable financial products and services.

(IA: BSP)

8. The share of digital transactions increased from 8% in 2013 to 20% in 2019 by

value and from 1% in 2013 to 8% in 2019 by volume. To achieve this, the BSP (i) issued

amendments to regulations on Electronic Banking Services, (ii) introduced a National QR

Code Standard for payments necessary for ensuring interoperability of QR-enabled

payment and financial services, (iii) formulated a partnership with DOLE to

promote payment of salaries through formal accounts and digitizing payments in public

transportation, and (iv) pilot tested the government’s BTMS that enables direct transfer of

payments to suppliers through PESONet integration.

8. To further increase the share of digital payments equitably and comprehensively, the

BSP (i) collects sex-disaggregated data to identify difference in use patterns and

refine delivery interventions, (ii) scales up adoption of the National QR Code Standard

for payments, (iii) supports DOLE to promote payment of salaries through formal

accounts and digitizing payments in public transportation, and

(iv) mainstreams the government’s BTMS that enables direct transfer of

payments to suppliers through PESONet integration.

7. The BSP collaborated with the

banking and payments industry to establish two ACHs for (i)

batched electronic fund transfer credit that could be used to

replace checks, and (ii) real time low value push that enables low

value electronic fund transfers. (IA: BSP)

8. To extend the reach of traditional branches, the BSP issued new

guidelines for banks allowing them to use third party cash

agents as a cost-ef ficient service delivery channel. Among others,

the guidelines allow the cash

9. To extend the reach of traditional branches, the BSP (i) issued policies to support implementation of cash agents and guidelines for usage of branch-lites, and established standards for the conduct of

9. To extend the reach of traditional branches, the BSP

supports (i) expansion of cash agents through licensing of f inancial institutions to use cash agents and by raising awareness of agent banking

24 Appendix 4

agents to collect deposits, disperse cash, and provide other

f inancial services on behalf of banks.

(IA: BSP)

these activities; and (ii) issued rules and regulations to support payment channels for the government's social protection programs including the 4Ps program (for which 85.3% of benef iciaries are women), and other cash transfer programs, particularly in rural areas.

through targeted f inancial literacy outreach activities, and (ii) scaling of payment channels for government’s social protection programs.

2.2 Comprehensive credit reporting and collateral registry systems

deployed.

The government expands coverage of credit information and collateral systems. Actions include:

9. The government, through the SEC, increased the number of people with a formal financial

credit history by (i) requiring financing companies to provide their 3-year historical

and current credit data to the CIC, and (ii) enabling MNGOs to submit credit data to the CIC

with the assistance of the MIDAS (a credit bureau for microfinance NGOs).

(IA: SEC)

10. To increase coverage of the credit reporting system, the SEC and CDA required

cooperatives and MNGOs to submit sex-disaggregated credit data to the CIC.

10. To further increase coverage of the credit reporting system, expand credit histories of

clients and MSMEs, and better understand the borrowing behaviors of men and women,

(i) at least 50% of MNGOs and cooperatives submit sex-disaggregated credit data to

the CIC, and (ii) operational linkages to PhilSys are established.

10. The government submitted legislation to Congress to establish a modern secured

transactions system and the creation of a centralized, online national collateral

registry. (IA: DOJ)

11. To improve access to credit, following approval of Republic Act No. 11057 (Personal

Property Security Act) in August 2018, the government adopted rules for the online

national movable collateral registry through the issuance of Implementing Rules and

Regulations in October 2019.

11. To promote use of and expand benefits of the registry, the government conducts a

gender-sensitive awareness raising campaign, including specific outreach activities to

traditionally excluded groups, and tracks usage of the registry using sex-

disaggregated data. 2.3 Credit enhancement mechanisms streamlined.

The government implements reforms on the system of credit guarantees. Actions include:

11. The government submitted a

draft Executive Order to bring the state financed guarantee

12. To strengthen credit enhancement

mechanisms, the government formulated an action plan that

12. To improve access to

credit by MSMEs,

PhilGuarantee will

Appendix 4 25

funds (e.g., PhilEXIM, Agriculture Guarantee Fund Pool, Small Business and

Guarantee Finance Corporation (or SB Corporation), Industrial

Guarantee and Loan Fund and the Home Guaranty Corporation together under

one governing entity to increase efficiencies and expand access to finance.

(IA: PhilGuarantee)

included (i) merger and transfer of guarantee functions, programs, and funds into one entity, the

PhilGuarantee (formerly PhilEXIM); (ii) review of guarantee policies, pricing structure, and risk

management; establishment of a sound governance structure and internal control framework to

safeguard its sustainability, integrity, and efficiency; (iii) infusion of capital, as part of its

capital build-up plan; and (iv) issuance of Circular 1-2019 approving the Restructuring Plan of

PhilGuarantee.

increase the number of

MSMEs with state-

financed guarantee-

backed lending by 10%

by 2022, with targets for

agriculture-related and

women and youth-owned

enterprises.

Reform Area 3: Capacity of Financial Service Providers Increased. 3.1 Capacity of MNGOs increased.

The government continues to provide structured mechanisms to improve the capacity of microf inance institutions. Actions include:

12. The government established the MNRC as a microfinance

standard-setting body. The MNRC (i) adopted governance performance standards for

MNGOs (including gender diversity on the board), and (ii) prescribed a standard chart of

accounts for accredited MNGOs.

(IA: SEC)

13. To strengthen regulatory

oversight over MNGOs, the

MNRC (i) adapted internal SEC

IT systems to provide for

collection of sex-

disaggregated data on boards

of trustees, management,

personnel, and client

borrowers of MNGOs;

(ii) designed a training

program to build capacity of

the MNRC and MNGOs to

comply with MNRC

accreditation and CIC

requirements, starting with the

development of a supervision

manual for MNGOs with pilot

testing and onsite training; and

(iii) issued revised guidelines

13. To further build capacity of MNGOs with a gender focus

and improve regulatory oversight, the MNRC will (i) collect sex-disaggregated

data from MNGOs using the MNRC approved chart of accounts, and (ii) conduct

onsite supervisory examinations of at least 30% of the accredited MNGOs.

26 Appendix 4

for accreditation of MNGOs in

December 2018. As of March

2020, 30 MNGOs have been

accredited with 100% having

female representation on their

boards.

3.2 Outreach of financial institutions scaled.

The government continues to support the use of f inancial technology innovations. Actions include:

13. The BSP approved an innovative pilot for a rural bank

to migrate its physical core banking system to a cloud-based system to showcase

how digital innovation can enable banks to manage operations and serve clients

more effectively. (IA: BSP)

14. To support innovative and inclusive financial technology

solutions, the BSP issued licenses to financial technology companies and

financial institutions to expand the range and reach of financial services.

14. To expand the range and reach of financial services,

the BSP will (i) support a regulatory sandbox approach to test new business models

and assess potential risks; (ii) apply regulatory technology solutions to

streamline supervisory functions, particularly to address regulatory

compliance and reporting requirements of supervised financial institutions; and

(iii) support the development of a wider range of financial technology innovations that

specifically address women-led MSMEs unserved or underserved due to

constraints in access to financial services from formal financial institutions.

14. The government submitted legislation to Congress to establish a strong legal and policy f ramework for the development of Islamic f inance in the country. This f ramework also ensures an environment of increased consumer awareness

15. To broaden the range of f inancial products to include Islamic f inance, Congress enacted the Islamic Banking law, and the BSP (i) conducted awareness-raising and capacity-building campaigns; and (ii) issued regulations outlining a f ramework for licensing of Islamic banks and

15. To leverage the f ramework and guidelines for Islamic Financial Services, the BSP implements an awareness-raising and capacity-building campaign that consider the preferences and needs of women and women-owned enterprise and cooperatives.

Appendix 4 27

ACH = automatic clearing house, ADB = Asian Development Bank, AVCF = agriculture value chain finance, BSP = Bangko Sentral ng Pilipinas, BTMS = budget transparency and management system, CDA = Cooperative Development Authority, CIC = Credit Information Corporation, COVID-19 = coronavirus disease, DOF = Department of Finance, DOJ = Department of Justice, DOLE = Department of Labor and Employment, GAA = General Appropriation Act, IA = implementing agency, IT = information technology, MNGO = microfinance nongovernmental organization, MIDAS = Microfinance Data Sharing System, MNRC = Microfinance NGO Regulatory Council, MSME = micro, small, and medium-sized enterprise, NIDS = National Single Identification System, NSFI = National Strategy for Financial Inclusion, PCW = Philippine Commission on Women, PhilSys = Philippine Identification System, PSA = Philippine Statistics Authority, QR = quick response, SEC = Securities and Exchange Commission, 4Ps = Pantawid Pamilyang Pilipino Program. Source: Asian Development Bank

and capacity building of providers on Islamic f inance.

(IA: BSP)

Islamic banking windows by existing banks, and supporting government’s issuance of sukuk or sharia-compliant bonds.