Mandated credit, bank secrecy: Is it time to reconsider our approach?

By Pierce Oel A. Montalvo, Researcher

ON THE SIDELINES of The Asian Banker’s Finance Philippines 2025 forum in August, Bankers Association of the Philippines (BAP) President Jose Teodoro K. Limcaoco told reporters that mandatory credit lending rules and strict bank secrecy laws “have become constraints in today’s labor-driven financial marketplace.”

“By modernizing these laws, we create a fertile ground for tech-driven analytics, smart risk management, better credit assessment, and a more competitive and transparent banking sector,” added Mr. Limcaoco, who also serves as the president and chief executive officer of the Bank of Philippine Islands.

These calls for reform continue to echo throughout the banking industry. Last October, six major business groups in the Philippines, including the Makati Business Club (MBC) and the Management Association of the Philippines (MAP), signed a joint statement calling to amend the country’s bank secrecy laws.

Likewise, mandatory credit lending policies continue to be dragged into practice. The Asian Development Bank said that credit for micro, small, and medium enterprises (MSMEs) remained limited in the Philippines during 2024.

“The continued enforcement of the Magna Carta’s remaining provisions, alongside central bank oversight, underscores the government’s ongoing commitment to MSME development,” it said regarding the Philippines in its Asia Small and Medium-Sized Enterprise Monitor 2025 report. “However, the stalled legislative amendments highlight the need for renewed policy attention to ensure the law remains responsive and effective in addressing current MSME challenges.”

With players, policy groups, and regulators of the banking industry all pointing in the same direction, the question is no longer whether reform should happen — but when, and how.

BANK SECRECY
“The language of existing laws on bank secrecy makes the Philippines the only country to still have restrictive bank secrecy policy,” the Bangko Sentral ng Pilipinas (BSP) said in its 2024 legal primer on the laws on secrecy of bank deposits.

The primer cites three republic acts (RAs) that define the country’s bank secrecy laws: RA 1405 or the Law on Secrecy of Bank Deposits, RA 6426 or the Foreign Currency Deposit Act, and RA 8367 or the Revised Nonstock Savings and Loan Association Act of 1997.

RA 1405, enacted in 1955, was intended to encourage public investment in government securities and discourage private hoarding after World War II.

Passed later in 1972, RA 6426 aimed to attract foreign currency deposits from overseas Filipinos to address the country’s dollar deficit and boost international reserves.

However, the primer notes that more than half a century after their enactment, the conditions that once prevailed no longer exist, rendering the laws outdated for their original purpose.

The primer also cites the 2011 declaration by the Group of Twenty (G20) that the “era of bank secrecy is over” after endorsing standards on transparency and exchange of information. In 2014, the Organisation for Economic Co-operation and Development released the standard for automatic exchange of information as the new global standard for combating tax evasion and money laundering.

Now, the central bank is rocking the boat. The BSP resumed its push to reform these laws, BSP General Counsel Roberto L. Figueroa said at a House briefing last September.

The primer also mentioned that as of the document’s creation, the central bank is collaborating with BAP, MAP, MBC, and the Chamber of Thrift Banks (CTB) to propose the repeal of bank secrecy laws.

The Securities and Exchange Commission (SEC) also backed amendments to RA 1405 to fight corruption.

“The bank secrecy law has often been used as a shield for owners of bank accounts in cases of violations of RA 8799, or the Securities Regulation Code and RA 11232, or the Revised Corporation Code of the Philippines,” the SEC said in a press release last September.

“Lifting the bank secrecy provision will remove the greatest obstacle for authorities and regulators, to go after tax evasion and money laundering associated with corruption and other criminal activities,” said Filomeno S. Sta. Ana III, executive director of economic research and policy group Action for Economic Reforms (AER), in an e-mail message.

“Corrupt politicians, tax evaders, and other criminal elements have exploited the bank secrecy provision to keep law enforcers at bay.”

Thrift banks are also burdened by the bank secrecy laws. Suzanne I. Felix, executive director of the CTB, said that the “strict” secrecy laws can slow fraud investigations in smaller banks that lack big in-house investigative teams.

“The CTB strongly supports calibrated reforms to the Bank Secrecy Law that uphold depositor confidentiality while enabling effective enforcement of anti-money laundering, fraud prevention, and prudential supervision measures.”

MANDATED CREDIT
Despite being enacted 17 years ago, RA 9501 (the Magna Carta for MSMEs) remains largely unimplemented.

BSP data show that while bank loans for MSMEs grew by 7.1% to P536.51 billion as of end-June 2025, this was only 4.5% of their total loan portfolio of P12.05 trillion — still below the 10% overall requirement for banks under the Magna Carta for such enterprises.

Under the Magna Carta, banks were required to direct 8% of their lending to micro and small enterprises and another 2% to medium-sized businesses. The mandatory allocation ended in June 2018 after its 10-year term expired, though the BSP still monitors MSME lending as part of its oversight responsibilities.

Benel D. Lagua, a member of the Financial Executives of the Philippines and an independent director in progressive banks, said that the one-size-fits-all mandate “ignored radically different business models, risk appetites, and geographic footprints.”

“Rural and cooperative banks serve naturally micro clients, while large banks found it cheaper to pay penalties than build costly retail underwriting systems.”

The gap between mandate and reality is even starker when broken down by enterprise size. According to data cited by Ma. Aurora D. Geotina-Garcia, president of Mageo Consulting, Inc., 2024 figures show that only 1.8% of the mandated total loan portfolio went to micro and small enterprises — far below the 8% requirement. Medium businesses fared better at 2.83%, exceeding the 2% target.

“Over time, most banks have opted to incur penalties for noncompliance instead of fulfilling the 10% lending mandate,” Ms. Geotina-Garcia said in an e-mail interview. “This is due to the perceived risks of lending to micro and small businesses.”

Furthermore, research by Luis F. Dumlao, an associate professor of economics at the Ateneo de Manila University, shows agricultural lending declined to 9.5% by 2022 from 21.7% of bank portfolios in 2012, a drop that occurred even as mandates remained in place.

In an e-mail interview, Mr. Dumlao said that “the cost of doing business of paying the penalty has been less than the actuarial cost of default of lending to target lenders.”

His research calculates that for mandatory credit allocation to work effectively with government guarantees covering 100% of plus risk-free interest, it would cost taxpayers approximately P300 billion for the agricultural sector alone — vastly exceeding the P2.75-billion budget allocation prescribed by the Department of Budget and Management.

“The politically and fiscally feasible approach to finding how much government should guarantee is how much political capital politicians are willing to give up either by raising taxes or by reallocating budget,” Mr. Dumlao said, comparing it to the concept of “statistical value of life” in policy decisions.

The thrift banking industry presents a more nuanced picture. Total compliance for micro and small enterprises among thrift banks grew from P22.22 billion in December 2022 to P34.17 billion by June 2025, representing growth of more than 50% over the period, according to data provided by Ms. Felix.

“The data show that while we consistently exceed the medium enterprise requirement, other segments require more flexible and risk-sensitive approaches.”

For women entrepreneurs, barriers multiply. While women own or lead over 60% of MSMEs, they remain largely excluded from formal credit, Ms. Geotina-Garcia said.

“They instead turn to alternative sources of capital — usually friends and family — or informal lenders, or register businesses and loans under their husband’s name,” she said.

The gap between policy and market reality has spurred growth in alternative financing. Digital banks like Maya Bank now serve segments traditional banks have avoided.

Shailesh Baidwan, Maya Group president and Maya Bank cofounder, said in an e-mail interview that Maya’s reach has grown from 1.5 million bank customers in 2022 to nine million by September 2025, with more than 50% accessing formal credit for the first time.

“Our customer base is predominantly Millennials and Gen Z, who account for 84% of our bank users, and 76% are based outside Metro Manila,” Mr. Baidwan said. “This reflects how digital banking is closing access gaps in rural and emerging urban areas.”

Maya uses alternative data, such as transaction patterns, digital payment activity, and business cash flows, to assess creditworthiness, enabling first-time borrowers to access loans.

Ms. Geotina-Garcia said that fintech companies now offer loans with minimal requirements and shorter processing times. “MSMEs lean towards alternative sources of funding as they provide a more streamlined process, cutting out the numerous requirements of banks,” she said.

Industry experts increasingly advocate moving away from rigid quotas toward incentive-based systems. Mr. Lagua said that differentiating targets by bank category could be set, scaling penalties proportionately with bank size, and shifting from volume targets to access-oriented metrics such as the number of new-to-bank borrowers reached.

“Rather than penalizing all banks equally, government should reward institutions that demonstrate real capability-building,” he said. He also said that the need for transparent, bank-by-bank public reporting to enable accountability.

Ms. Felix echoed this view. “We believe inclusion is achieved better through incentives, not penalties,” she said. “Let’s reward banks that successfully expand MSME and Agri lending through lower capital charges, tax incentives, or supervisory recognition.”

The CTB also advocates for strengthening credit guarantee programs and promoting co-lending arrangements with government institutions. “Strengthen credit guarantees, improve data access through the Credit Information Corporation, and promote co-lending with government institutions — these are sustainable ways to grow lending without jeopardizing depositor protection,” Ms. Felix said.

OUTLOOK
As momentum builds for comprehensive banking reform, players in the banking industry paint differing pictures of urgency and caution. Yet, most agree the status quo is unsustainable.

On bank secrecy reform, consensus appears strongest. The convergence of BSP, SEC, and major business and policy groups behind careful reforms suggests legislative action may finally overcome decades of loopholes and oversight.

“The main deterrence to illicit activities that involve financial transactions is the near certainty of prosecution and conviction,” Mr. Sta. Ana said. “Lifting bank secrecy is a necessary condition to obtain information and evidence in order to prosecute and convict.”

Ms. Felix said that harmonizing local confidentiality rules with international anti-money laundering and counter-terrorism financing frameworks, particularly those under the Financial Action Task Force, could modernize the secrecy regime without compromising privacy.

The path forward for mandated credit leaves more to be agreed upon. Ms. Felix suggested a phased approach, with reforms rolling out over 18 to 24 months. “We support a phased approach — first pilot programs, then fine-tuning before full implementation,” she said.

The emergence of digital banks and fintech lenders adds innovation to the mandatory credit debate. Digital bank Maya Bank demonstrates that technology can reach underserved populations at scale.

“This includes support for the development of modern credit modeling practices; and a regulatory environment that allows for market-responsive, risk-based pricing,” Mr. Baidwan said.

Meanwhile, Ms. Geotina-Garcia said that reform must be evidence-based but rooted in grassroots insights. “There should be a process of consultation with intended beneficiaries, industry groups, and MSME associations as they know their situations best.”

“Unfortunately, the guarantee system or credit access in general is not a panacea to the problem,” Mr. Dumlao said.

“Financial assistance is just the n-th major concern of prospective borrowers. There are others like corruption that concern borrowers before they become competitive.”