VIII. TRADE AND PROJECT FINANCING A. The Banking System There are over thirty (30) commercial banks in the Philippines, including four wholly-owned branches of foreign banks (Citibank, Bank of America, Standard Chartered Bank, and the Hongkong Shanghai Banking Corp.). There are eighteen (18) offshore banking units (OBUs) in the country, six of them American. Besides the foreign commercial banks, there are also currently thirteen (13) representative offices of foreign banks in the Philippines, three of which are American. The five largest banks constitute roughly half of the commercial banking sector's total assets. A number of relatively smaller and less efficient institutions have generally managed to operate profitably partly because of limited new competition. Although interest rates have softened in recent years, relatively high inflation, high reserve requirements, a gross receipts tax, and other regulations (such as mandatory lending to the agricultural sector or, alternatively, investments in eligible low yielding government securities) have kept the nominal cost of lending high. Loans are also largely short-term, reflecting a history of high and volatile interest rate movements, as well as limited competition from alternative sources of longer-term capital (such as the corporate bond market, for example). Fourteen of the country's domestic commercial banks also perform investment house activities (such as securities underwriting), in addition to regular commercial banking functions. Use of consumer credit cards and automated teller machines is growing rapidly. Legislation signed by President Ramos in May 1994 will allow up to 10 new foreign banks to establish branches over the next five years. This law also permits foreigners to own up to 60 percent of a domestic bank's voting stock (up from the previous 40 percent ceiling) and will allow foreign banks putting up sufficient capital to obtain a universal banking license (which would permit them to undertake investment house activities in addition to regular commercial banking services). These reforms are expected to improve overall banking services by increasing competition and efficiency, and by encouraging the introduction of new products and technology. B. Foreign Exchange Controls Affecting Trading In 1992, the Philippine Government simplified both trade and non-trade foreign exchange rules, consolidated in Bangko Sentral Circular 1389 ("Consolidated Foreign Exchange Rules and Regulations"). Although certain restrictions remain on foreign investments and foreign borrowings, regulations on current account transactions (including trade) have been liberalized. Importers and exporters are now generally free to buy and sell foreign exchange, and to choose from a wider range of export/import payment modes. C. General Financing Availability The inadequacy of medium and long-term capital is a concern, given the country's underdeveloped capital markets. The problem affects virtually all sectors, but falls more heavily on small and medium enterprises (SMEs). Frequent rollovers of short-term loans tend to raise the cost of capital. Bank loans, regardless of maturity, are typically collateral-based and granted mostly to established companies with proven business and repayment track records. There are a number of specialized credit programs targeted specifically for SMEs, but resources are limited. Where available, SMEs also turn to funds made available by industry associations and cooperatives. The informal credit market remains an important source of financing for SMEs. D. Exports: Methods of Payments Payments for exports may be made under any of the following modes: letter of credit; documents against payment/cash against document; documents against acceptance; open account; intercompany open account offset (for firms with parent/affiliate relationships abroad); consignment; and export advances. E. Export Financing and Insurance Export Financing: Banks provide short-term preshipment export loans as well as postshipment export financing. Based on industry practices, preshipment export loans are typically set at 80 percent of the letter-of-credit, purchase order or sales contract. Postshipment loans are obtained largely through export bills purchase (EBP), usually for a period not more than 180 days. Exporters may borrow as much as 100 percent against their export bills. Other modes of postshipment export financing (such as bankers' acceptance financing or factoring), are not common in the Philippines. Commercial banks also extend short-term foreign-denominated credits funded from foreign currency deposit units (FCDU). A few commercial banks have initiated export credit programs funded from their own resources specifically for the SME market. These facilities provide short-term export credit. The Export-Import Bank of the United States offers both financing and guarantees for exports of U.S. goods and services. There are a number of other special credit programs which cater either exclusively to exporters, or to SMEs. Many of these credit programs are funded by foreign donor agencies (such as the Overseas Economic Cooperation Fund, the Asian Development Bank and the Japanese Eximbank) and channeled through conduit banks. The Development Bank of the Philippines is the most active financial institution in terms of export finance. It has an export-import banking facility which functions as both retailer and wholesaler of short-term and longer-term export loans, including pre and postshipment export credit. Other government agencies which administer credit facilities specifically for export-oriented projects are the Social Security System (SSS), the Technology and Livelihood Resource Center (TLRC) and the Philippine International Trading Corporation (PITC). DBP, SSS and TLRC also administer special credit programs for SMEs in general, which are open to export enterprises. The Land Bank of the Philippines operates an SME credit facility for countryside lending, which may also be tapped by exporters. The Philippine Bangko Sentral is a also a source of short-term finance through its rediscounting facility. Although the rediscount rate is uniform for all eligible loan papers, banks obtain rediscounting more readily on export loans. Export Insurance/Guarantees: Export credit guarantees are provided by a number of government agencies and through facilities funded by bilateral or multilateral donors. Most of these guarantee facilities operate through accredited banks or financial institutions. The major government guarantee agencies are the Philippine Export and Loan Guarantee Corporation (Philguarantee) and the Guarantee Fund for Small and Medium Enterprises (GFSME). The United States Agency for International Development (USAID), World Bank and Asian Development Bank jointly fund a facility known as the Industrial Guarantee and Loan Fund (IGLF), with the DBP serving as conduit bank. The USAID and the International Finance Corporation (IFC) each administer credit guarantee facilities through accredited financial institutions. Most facilities guarantee preshipment export and other short-term credits, and a number also guarantee longer-term loans extended to SMEs. Aside from straightforward credit risk guarantees, a number of facilities also provide "collateral short" credit guarantees (i.e., guarantees covering only the unsecured portion of a loan). There appears to be a gap in the availability of postshipment export credit guarantee facilities and insurance services for the export sector, which translates to inadequate protection from the financial and credit risks of nonperformance by foreign buyers. Export Advisory Assistance: The Philippine Exporters Confederation (Philexport) is the umbrella organization for Philippine exporters, representing various industry sectors which contribute over 70 percent of the Philippines' export earnings. There are currently nine Philexport regional chapters in the export-active regions of the Philippines. Philexport has tie-ups with some of the credit facilities targeted for exporters and SMEs. Exporters may contact Philexport for credit and other export-related advisory assistance: Mr. Sergio Luis Ortiz President Philippine Exporters Confederation, Inc. Ground Floor, Southside Philippine International Convention Center Roxas Boulevard, Manila Tel No.: (632) 8332531 to 34 Fax No.: (632) 8313707 or 8310231 F. Project Financing Available A wide variety of project financing is available in the Philippines, several types of which fall under the category of export financing. The Asian Development Bank and World Bank have financing available for specific projects, usually lent to or through government agencies. Both the ADB and the IFC (which is part of the World Bank group) also make financing available directly to private enterprises without government guarantee. Firms interested in project financing should consult the Department of Commerce. G. Banks with Correspondent U.S. Banking A number of Philippine commercial banks have branches in the United States. Reflecting a long history of economic and political ties, all commercial banks in the Philippines have correspondent U.S. banking relationships too numerous to list. The best way for a firm to determine whether its U.S. bank has a correspondent bank in the Philippines is to check with the U.S. bank. (Appendix C includes a partial list of the commercial banks in the Philippines.)