Governments, including the Philippines, should allow greater participation of foreign banks and non-bank intermediaries to make their banking systems more competitive, a World Bank report said.

In its recently published "Global Financial Development Report: Rethinking the Role of the State in Finance," the WB said foreign banks often bring new technologies and new products to banking sectors.

But the Lernex index, a summary measure of competition across 83 countries, found that foreign bank entry might not enhance competition if it is associated with mergers and acquisitions.

"Similarly, the presence of a liquid stock market or other financial intermediaries that can provide financing to firms is likely to foster competition in the banking sector, because banks will have to compete to provide financial services to firms," the report said.

It also said that government ownership of banks can also spur competition should they push other banks to lower prices.

But if government banks dominate the system and other banks are crowded out, competition falls, it said.

The report also said the entry and exit policies and underlying information and institutional environment are some key drivers of bank competition that could enhance access to credit.

The report said the government has an important role to enhance competitiveness of the banking sector by promoting policies and practices that facilitate bank entry and exit. — BM, GMA News