President's Message
Ma. Victoria C. Españo Message from the President:

Ma. Victoria C. Españo


PRESIDENT’S MESSAGE

Year 2018 is indeed a special year for FINEX: it marks our 50th anniversary as a leading organization of finance professionals. Through the able leadership of our past presidents and the multitude of members who have actively participated in and supported our different initiatives, we have made significant achievements in supporting the professional development of finance executives,

Read More
Affiliations
Ads
A Single Guarantee Corporation?
Print PDF
BENEL D. LAGUABy BENEL D. LAGUA

MANILA BULLETIN (Business Option)
July 11, 2017

A Single Guarantee Corporation?

Business Option is a rotating column of members of the Financial Executives Institute of the Philippines appearing every Tuesday & Thursday in Manila Bulletin, business section.



Government has recently announced plans to consolidate all guarantee corporations into one unit. Ostensibly, the main reason is efficiency as government noted that most, if not all, of the governments’ guarantee operations “technically were losing money”. Fund raising through bond issuances could be easier with one big solid institution instead of having several small ones.

The revived concern for the guarantee business is most welcome, but is the policy direction addressing the root causes bugging the effectiveness of the Philippine government guarantee initiatives. Perhaps a more extensive review is warranted . We need to learn from the rich lessons of operating guarantee institutions especially in Asia. The news reports discuss the need to add new funds of P500M into the consolidated entity and while the new money is most welcome, the quoted sum looks paltry.

Let’s start by reviewing how our neighbors handle this business. In Japan, they have appropriated and transferred a huge funding of billions of Yen to their 52 credit guarantee corporations (CGC) in each prefecture (local government subdivisions headed by a governor) throughout the country. These CGCs in turn reinsure their exposure with the Japan Finance Corporation, which is wholly owned by national government. Japan has used its guarantee system to respond to various financial crises and to the country’s recession. They have saved tens of thousands of enterprises from bankruptcies, kept intact hundreds of thousands of jobs. And yes, the guarantee corporations are not making money but their key result areas are more defined by the macro-economic externalities.

Korea has two major guarantee companies, the Korea Credit Guarantee Fund and the Korea Technology Credit Guarantee Fund, employing around 4,000 staff and maintaining a network of branches throught the country, and even overseas. Taiwan not only enlarged its credit guarantee coverage and capacity for economic recovery, but has effectively used it to rebuild like in the devastating earthquake of 1999. This was made possible through policy decisions creating new guarantee facilities focused on strategic sectors such as construction, SME development, agricultural automation and industrial development.

In other words when our Asian neighbors built their guarantee systems they realized it was an investment and not a cost. And they poured funds into the system so it works as desired to catalyze industrial growth and job creation , not as income generating ventures that earn money for their government coffers. Historically, all those agencies receive regular funding support from their governments. This is the mindset that must govern any move to modify the structure of guarantees in our country. It needs full comprehension of the policy objective of setting up guarantee funds and institutions.

The financial system works well when it is able to channel funds from those labeled as surplus units (the savers) to those that have a deficit (the borrowers). Ideally, the flow of funds should be to those with the best use of funds, or to the borrowers which have an excess of investment opportunities. A large part of the funds flows are handled by intermediaries which, in this instance, are our private financial institutions like banks, finance companies and micro-finance conduits. Unfortunately, the funds flow does not happen automatically. To illustrate, people deposit money in a bank which in turn use the fund to entertain a borrower. The depositor’s claim on the loan is not a direct one. The deposit has a risk and liquidity feature different from the bank’s loan to the borrower, which by the way is now an asset of the bank. The depositor’s fund is theoretically safe and liquid; but the bank’s asset is now subject to risk and uncertaintly, especially of default. It is likewise not so liquid. Here lies the major mismatch.

The characteristics of the funds flow changes the risk and liquidity feature of financial instruments utilized. Someone has to absorb the risk of loans. Banks normally do this as part of their risk taking activity. In the normal course of business, the bank makes a lot of loans and not all loans will be good ones. Some borrowers will eventually default on its obligations. The losses out of these classses constitute the cost of the asset transformation and the risk.

If the banks are rationale wealth maximizers, certain sectors critical to the economy will be rationed out. Given these issues, the presence of guarantees are intended to reduce the cost of administration as well as the risks involved for the identified priorities. Loan losses are effectively reduced, even if the guarantee is not 100%. The banks should find it less difficult to address the concern of the sector with the incentives provided by the guaratee system. The guarantee mechanism represents a policy intervention to direct funds flow to important but unattractive sectors.

We need to have strong guarantee institutions to make this functional to the system. Oftentimes, the private financial sector institutions are concerned about the financial and administrative strength of the government guarantee institutions. Hence, the guarantee institution must have a strong capital base and must be professionally managed. Freedom from political intervention must be assured. Loan guarantees help funds flow to the priority sector while it reduces the cost and risk of banks. We have to make better use of this important resource for the financial system to efficiently allocate scarce resources from savers to borrowers.

At it core, the guarantee is an insurance product and since it is designed to address a priority concern that is by definition of higher risk class – whether SMEs, agriculture or disaster recovery – it must not be viewed as an income generator per se. Many times, premium pricing will not follow actuarial realities lest it becomes unattractive . Other economices have accepted this persective. It is about time we focus on its impact, its leveraging effects and its efficacy in achieving the target additionality outcome.

(Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)

FEATURED ARTICLES
Chinese influence in business
Ms. Wilma Inventor MirandaMs. Wilma Inventor Miranda

BUSINESS MIRROR (FINEX Free Enterprise)
February 16, 2018

Chinese influence in business

With the celebration of Chinese New Year, it is a perfect time to look deeper into how the Chinese greatly influence our economy. When we see “made in China” nowadays, we usually relate that to cheap items, low quality, fake goods and imitations. But this article will not focus on the Chinese from the mainland but the Chinese who began their businesses generations ago and have children who are now Filipino-Chinese and successful businessmen themselves.

Read more...
Dr. Jose Pardo – Just Think Positive!
Flor G. TarrielaBy Flor G. Tarriela

Business World (FINEX Folio)
February 16, 2018

Dr. Jose Pardo – Just Think Positive!s

Last Saturday Jose “Titoy” Pardo, PSE Chairman and former Secretary of Trade/Finance was conferred the Degree of Doctor of Science in Finance by De La Salle University headed by Br. Raymundo Suplido.

At the luncheon celebration, the “new Doctor” was asked to dispense a cure to problems at hand, he shared how to cope with emerging VUCA (Volatility, Uncertainty, Complexity and Ambiguity) related problems. Dr. Pardo picked up from Dr. Charles Handy, author of The Age of Unreason, who said “All businesses or any economic activity are vulnerable to shock and inevitably will experience tremors in the market place. The important thing is to be quick in responding to change and to never succumb to the status quo style of management. If it ain’t broke, fix it.”

Read more...
PSE: Unified at last
J. Albert GamboaBy J. Albert Gamboa

MANILA TIMES(FINEX Files)
February 16, 2018

PSE: Unified at last

More than 25 years after the merger of the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MKSE) into the Philippine Stock Exchange (PSE), the country’s securities industry is set to be finally unified in a single trading floor.

Read more...
Ethical challenges in today’s world
By Mercedes B. SuleikBy Mercedes B. Suleik

BUSINESS MIRROR(FINEX Free Enterprise)
February 14, 2018

Ethical challenges in today’s world

Pundits sometimes quip that “business ethics” is an oxymoron, a contradiction in terms because it is said that there is an inherent conflict between ethics and the pursuit of profit. But more and more, as we see the effects of such unmitigated self-interest, we begin to wonder whether the mantra of the 1980s, “Greed is good” has not visited disaster on so many people today. Today we find ourselves in a quandary—is our world spinning out of control? Has evil taken root in every sphere of our lives, so that even the very means of our efforts to sustain our existence are now suspect?.

Read more...
A La Juventud Filipina
By Mercedes B. SuleikBy Mercedes B. Suleik

BUSINESS MIRROR(FINEX Free Enterprise)
September 13, 2017

Faith in the workplace

It has often been considered that faith and the ordinary life of a person, that is his work, his daily activities, are not compatible. That, for instance, being ethical and being guided by morals in business or in the workplace, must be dichotomized from religious belief.

Read more...
Swedish death cleaning and Lagom
BENEL D. LAGUABy BENEL D. LAGUA

Swedish death cleaning and Lagom (Business Option)
Feb.15, 2018

Swedish death cleaning and Lagom

Mafe, my beloved spouse, has been asking me recently to start disposing some of the old stuff that have been untouched in our attic. After all, I’ve accumulated quite a ton of books, magazine and school stuff from studying and teaching all these years. And even my clothes and gadget collection (men stuff) have remained to pile up. It all came to head recently when she shared Margarita Magnusson’s new book, “The Gentle Art of Swedish Death Cleaning.”.

Read more...
Partners