High rates seen straining financial services growth in 2024

MANILA, Philippines — The local financial services sector is projected to post a slower year-on-year growth in 2024 on the back of high interest rates and “continued” growth in unsecured lending, McKinsey & Company said.

In a report, the global management consulting firm said it expects the country’s financial sector to grow at a slower pace of about 5 percent in 2024, from the 7-percent expansion recorded last year.

Inclusive finance would be one of the main drivers of growth this year, McKinsey said, noting the continued investments of the Bangko Sentral ng Pilipinas in financial inclusion initiatives.

READ: BSP reforms keep PH rank high in financial inclusion

The report said basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing to 56 percent in 2021, from 29 percent in 2019.

McKinsey also said the local financial services industry could also draw some strength from digital adoption, citing central bank data that shows 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction.

“Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks,” McKinsey said.

Risks to growth

But the report flagged “challenges” that could weigh on the industry’s growth this year, specifically higher borrowing rates and an increase in unsecured lending.

READ: Fitch Ratings wary of rising unsecured loans in PH

“Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans,” McKinsey said.

“Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years … Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge,” it added.

Moving forward, McKinsey explained that supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, McKinsey said financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. —Ian Nicolas P. Cigaral