Capital market

FINEX
Business World

With-out much fanfare, a very important bill has been passed in the bicameral conference before Congress adjourned last month - the Personal Equity Retirement Account (PERA).

The bill provides tax incentives for long-term savings that will help fund long-term investments. In the works for several years now, it is puzzling that the President has not signed the bill into law yet. It would have made a perfect pasalubong to our kababayans when she visited the US. The law-in-waiting provides a maximum PERA annual contribution to the tax-free savings account of P100,000, and in the case of Overseas Filipino Workers, double this amount.

Institutions active in the Capital Market Development Council jointly chaired by the secretary of finance and a private sector representative (former Finex President Dave Balangue) are hoping for the passage of another important bill for development of financial markets - the Credit Information System Act (CISA). This bill is critical to financial market development because it will facilitate and lessen the cost of lending. With the mandatory submission of standard credit information on a timely manner, credit evaluation will be much easier.

As observed in a recent IFC paper, credit bureaus are essential elements of the financial infrastructure that facilitates access to finance. In particular, improved credit information helps increase the likelihood of small businesses being able to access credit. As much as 49% of small entrepreneurs reported high financial constraints in countries without credit bureaus, vs. only 27 percent for those that have them.

The bill has passed third reading in both chambers. But players in the financial market have raised important concerns over revisions in the features of the bill. In particular, the House version provides for a Credit Information Corporation to be 60% owned by government. This subjects it to restrictions on budgetary appropriations, bidding, and salary standardization law - a sharp departure from the public-private partnership that was the anchor for the original bill, and that has been found to work in other contexts.

Of even more serious concern is the regulatory framework. The original bills provided for the BSP to be the regulator, given that it supervises the majority of credit providers and has an overarching responsibility and enforcement power over credit matters. Instead, the bills now look only to the SEC to be the sole regulator. To be fair, it is an institution that is quite competent as well, but it has more general responsibilities in overseeing corporations.

As the IFC study noted, the role of the supervisor is crucial.

"It is the supervisor's role, as a trusted, reputable third party, to play the role of setting an enabling environment for credit reporting to flourish. By establishing the right regulatory environment, increasing cross-sector participation and hence the number of lenders contributing information and the quality of information they provide, many other variables - sector competition, increased sophistication of lenders, quality and pricing of bureau services, usage penetration and overall development and efficiency of infrastructure - will follow an outward expansion through market forces. "

The twin problems of (a) having a start-up institution which has the usual limitations covering government corporations and (b) leaving out the BSP from the regulatory framework are expected to impair the development and effectiveness of the institution in pursuing its mandate from day one of its corporate life. We are hopeful that the sponsors of the CISA bill in both houses can address these concerns in the bicameral committee and hammer out, on the back of the passage of PERA, a double win for financial and capital market development.