Mobilizing OF Savings for Development
Posted by butalidnl on 8 December 2011
Overseas Filipinos (OFs) remitted a total of $18.8 B in 2010. Most of this money went to family expenses e.g. food, education, health care and housing. The question that gets often asked is: how can we utilize OF remittances for Philippine economic development?
Remittances are already being utilized, in two different ways:
The Philippine government issues OFW Bonds that are supposed to siphon some part of OF remittances to help the overall national budget. These have relatively higher yields than ordinary government bonds. But the vast majority of those who buy these bonds are not OFs, but Philippine-based Filipinos.
Most OFs would not find OFW Bonds attractive. While the interest rate may be high in pesos; keeping their money in bank accounts abroad, or invested in foreign stocks could be more lucrative, especially when you consider that foreign currencies appreciate relative to the peso. Besides, there are also fears about their liquidity (or, how easily will it be to sell those OFW Bonds?).
OFs also set up micro-businesses e.g. tricycle, jeepney, taxi or sari-sari store. These are invariably run by their relatives.
There are often problems with relatives who manage these micro-businesses. They are not run in a business-like manner – vehicles are not properly maintained, they are used for personal purposes, funds are not set aside for buying replacement vehicles. So, the OF has to ‘invest’ again in a few years, or even regularly spend for maintenance.
These micro businesses are effectively given to relatives. They are not owned by the OFs. This OF ‘investment’ is thus limited to what they can afford to lose, to give away. The OF will keep their own savings (for their retirement, etc) safely in their host countries.
Ownership and Scale
The problem with either approach is that the OF does not have ‘ownership’ of their investment. In the first kind (OFW Bonds), the government can spend the money on anything it likes to; in the second kind (microbusiness), the OF cedes control to relatives. Thus, these investments do not really ‘feel’ as if the OF is saving for their future or for retirement. There is also the matter of mismanagement of funds by the government or by the relatives.
Ownership would mean that the OF has continuous control over the investment, and can even withdraw it when he/she decides to. He/she should have the freedom to get the best people to manage his investment, and to determine what happens with the money or any other benefit generated by it. With continuous control, the OF would then be said to ‘own’ it. The investment should also literally be in their name. When this is possible, more OFs could be convinced to invest their hard-earned savings in the Philippines.
Then there is the question of scale. An OF’s personal savings is usually limited, and it can only fund micro enterprises. In order to fund bigger businesses (small to medium sized) e.g. poultry, rice mill, grocery store, small factory, there need to be mechanisms by which OFs could bundle their savings.
Channels for OF Investments
There are a number of possible arrangements where the requirements of ownership and scale are fulfilled (in various ways and extents) and the OF can use them in investing in Philippine development. So far, though, none of these have really been developed.
Savings in Rural Banks. The rural bank can serve as an intermediary for OF savings for investment. The OF saves money there, and by agreement, the rural bank extends loans to the micro or small business of his relative. This way, the relative is forced to run his business properly, since he will be under the supervision of the rural bank.
‘Diaspora’ Funds. In this case, the OF saves his money in a Diaspora Fund (DF) based outside the Philippines. The DF extends loans to enterprises in the migrants’ home countries.
Mutual Funds. The OF could also invest in Philippine-based mutual funds that invest in Small and Medium sized Enterprises (SMEs). These mutual funds select SMEs that they invest in, choosing those that are well run and which just need a bit more money in order to expand.
The mutual fund could also specialize in investing money in ‘large’ corporations. It will then be a kind of portfolio investment fund in Philippine large cap stocks.
The OF only has a decision of being ‘in’ or ‘out’. Management decisions are made by the mutual fund’s managers.
Investment Fund Run by a Corporation or Cooperative. Some Philippine corporations (small or medium) could set up Special Funds, in which OFs can participate. The Special Fund will be put to a specific use, and profits distributed to participants regularly.
Shares of Corporation. OFs could also directly buy shares in a Philippine-based corporation, and exercise all the ‘powers’ of doing so. There could possibly be problems though regarding the nationality or residency requirements of those corporations.
It is the challenge that faces governments, NGOs and enterprises in the Philippines in the next few years to develop these, and perhaps more, forms to utilize the savings of OFs for economic development projects that go beyond the scale of a single family.