The Monetary Board, through MB Res. No. 790 dated 26 May 2011, has approved the amendment of certain provisions in the Manual of Regulations for Banks (MORB) and the issuance of general governance principles and standards covering the business relationships of banks and their related non-governmental organizations (NGOs)/foundations when both are engaging in retail microfinance operations.
Over the years, an increasing number of banks have tried to create synergy in having affiliated NGOs/foundations as their partners in providing complementary microfinance operations primarily to prepare low-income customers for formal banking relationships. To date, there are at least eighteen (18) banks with such special relationships. This development replicates the early successes of several microfinance-oriented banks wherein related NGOs/foundations served as a "laboratory" - experimenting with new loan products, screening potential borrowers, and training new loan officers. Eventually, the banks acquire the NGOs/foundations' seasoned loan receivables. This unique relationship has served both entities well as shown by their continued asset growth and sustainability.
It was recognized, however, that such close relationship may be subject to abuse that could increase operational, governance and reputational risks, brought about by common board memberships, shared resources and loan transfers, among others. 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/foundations.
Under the new regulations, the BSP:
- Defined as related interests those NGOs/foundations that are incorporated by any of the stockholders and/or directors and/or officers of related banks and are engaged in retail microfinance operations;
- Required formal written agreements/contracts covering transactions between banks and their related MF NGOs/foundations; and
- Prohibited bank officers from holding any position that may cause them to be involved in the daily MF operations of related NGOs/foundations.
The Monetary Board also decided to issue, through a Memorandum to banks, a set of general principles on governance covering the business relationships of banks and their related NGOs/foundations. 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/foundations.
An important feature of the new regulation is the liberal interpretation of DOSRI rules to encourage clients of NGOs/foundations to open formal micro-deposit accounts with the related banks in lieu of alternative savings mobilization mechanisms in NGOs/foundations such as "capital build-up" schemes. The BSP believes this will result in better protection of customer savings.
Download Circular No. 725