MODULE TWO

SOURCES OF CREDIT

After this lesson, the reader must be able to:

1. Identify the different sources of credit

John Stuart Mill, in his Principles of Political Economy, throwing important light on the subject
of credit light on the subject of credit said, among others, the following:

“…though credit though credit is but a transfer of capital from hand to hand, it is generally and
naturally, a transfer to hands more competent to employ the capital more effectively in production.
If there was no such thing as credit, as if from general insecurity or want of confidence, it were
scantily practised, many persons who possess more or less capital, but who from their occupations,
or from want of the necessary skill and knowledge, cannot personally supervise its employment,
would derive no benefit from it: their funds would either be idle, or would be, perhaps, wasted and
annihilated in unskilled attempts to make them yield a profit. All this capital is now lent at interest,
and made available for production."

Continuing further, he said:

“Capital... forms a large portion of the productive resources of any commercial country; and is
naturally attracted to those producers or traders who, being in the greatest business, have the means
of employing it to most advantage; because such are both the most desirous to obtain it, and able
to give the best security. Although, therefore, the productive funds of the country are not increased
by credit, they are called into a more complete state or productive activity. As the confidence on
which credit is grounded extends itself, means are developed by which even the smallest portions
of capital, the sums which each person keeps by him to meet contingencies, are made available for
productive uses."

Such statements serve to draw our attention and serve to emphasize the fact that saving and
investment are done by different groups of people. Purchasing power must be transferred from
those who have less need to those who need it more those who are engaged in productive activities
and, as such, are charged with a responsibility of the highest order, that is, the wise use of such
scarce resource.

Credit which is made available through the savings of the various sectors of the economy, in
essence, helps its allocation to its best uses. However, for a credit economy to thrive and attain
healthy growth and development, it is necessary that, not only should adequate safeguards be
instituted for the wise and proper use of credit, but equally import ant is that it should be made
available at the time a need for it arises, in amounts needed, and of course, at a cost considered
reasonable and fair to the user.

Financial Intermediaries

While lenders and borrowers may be brought together through credit instruments and credit
markets, in many instances credit transactions are consummated through credit institutions which
serve as intermediaries between lenders and borrowers in these markets. Credit institutions, in
general, perform the following functions: (1) to pool the savings of the lending customers, (2) to
invest these funds financially on the basis of careful investigation and analysis of credit, (3) to
diversify risk to a degree unattainable for individual investors, (4) to transform short term into long
term funds through an expedient and careful staggering of maturity dates, and (5) to perform
insurance and trust e functions.

However, not all credit institutions perform all the above-enumerated functions. Savings banks
and commercial banks, for instance, are often limited by legal restrict- ions from buying industrial
stock.

The following are among the most important sources of credit in this country.

Financial Institutions

The number of financial institutions is numerous just as they are varied in kinds and in scope
ranging from pawnshops to such credit institutions as investment houses.

Financing Companies.

As defined under the "Financing Company Act" (Republic Act No: 5980), financing compa- nies
are corporations or partnerships, (except those regulated by the Central Bank of the Philippines,
the Insurance Commissioner and the Cooperatives Administration Office, now the Bureau of
Cooperatives and Community Development), which are primarily organized for the purpose of
extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by leasing motor
vehicles, heavy equipment and industrial machinery, business and office machines and equipment,
appliances and other movable property.

"Credit" shall mean any loan, mortgage, deed of trust, advance, or discount, any conditional sales
contract, any contract to sell, or sale or contract of sale of property or service, either for present
or future delivery, under which, part or all of the price IS payable subsequent to the making of
such sale or contract; any rental-purchase contract; any option, demand, lien, pledge, or other
claim against, or for the delivery of, property or money, any purchase, or other acquisition out of
the foregoing, and any transaction or series of transactions having a similar purpose or effect.
Assignment of Credit

In the case of assignments of credit or the buying of instalment papers, accounts receivable, and
other evidences of indebtedness by financing companies, the purchase discount, exclusive of
interest and other charges, shall be limited to fourteen percent (14%) of the value of the credit
assigned or the value of the installment papers, accounts receivable and other evidences of
indebtedness purchased based on a period of twelve (12) months or less, and to one and one-sixth
percent (1-1/6%) for each additional month or fraction therefore in excess of twelve months,
regardless of the terms and conditions of the assignment or purchase.

In the case of assignment of credit or the buying of installment papers, accounts receivable and
other evidences of indebtedness pertaining to appliances, furniture, and office equipment, the
purchase discount, exclusive of interest charges, shall be limited to eighteen percent (18%) of the
value of maturity of the credit assigned or receivable purchased, based on a period of twelve
months or less, and to one and one-half per cent (1-1/2%) for each additional month or fraction
thereof in excess of twelve months, regardless of the terms and conditions of the assignment or
purchase. In the case of factoring accounts receivable or other evidences of indebtedness, the
discounting rate that can be charged, exclusive of interest and other charges, shall not exceed two
per cent (2%) of the value of the credit assigned or receivable purchased for every thirty days,
regardless of the terms and conditions of the factoring companies.

Philippine Finance Companies.

In response to the needs of business and industry in particular and of some individuals in general,
a number of corporations have been organized in this country aimed purposely to provide a wide
complement of corporate financing services, such as: machinery and equipment financing and
leasing; accounts receivable and inventory financing; land development and real estate financing;
commercial, industrial, and agricultural loans; motor vehicle financing sales and installment
financing; small and medium business financing, import- export financing; money market
placements and many others.

Financing companies usually rely on stockholders' funds and cash generated from their money
market activities. In general, finance companies are authorized to finance consumer durables under
installment payment plans. They usually extend short-term credits to manufacturers and merchants
for inventory and similar others.
In an effort to regulate the activities of these corporations in such a way that their operations will
be placed on a high plane worthy of trust and respect, a number of them have grouped themselves
into an association which shall superintend their ranks in keeping with a code of ethics which they
have formulated, known as the Philippine Association of Finance Companies.
Investment Houses

Investment houses, invariably termed as investment banks, are concerned chiefly with the transfer
of capital from those that have more funds than they actually could use to those who need them
for utilization in long-term projects or activities. Investment banking is a recent addition to the
financing network. It belongs to the non-bank sector of the system and gathers funds for its lending
operations from sources other than deposits. Not being a bank in the real sense of the term, it is
not allowed to collect deposits. The establishment and operation of investment houses in this
country are governed by Presidential Decree No. 129, as amended by Presidential Decree No. 590,
otherwise known as the Investment Houses Law. Investment houses shall be organized in the form
of stock corporation and shall have a minimum paid-in capital of twenty million (P20, 000,000)
pesos. They shall coordinate their credit policies with the ge- neral credit policies of the Monetary
Board of the Central Bank of the Philippines.

Investment houses shall be subject to such regulations of the Central Bank or non-bank financial
intermediaries as may be promulgated pursuant to Section 2-B of Republic Act No. 337 (General
Banking Act), as amended. The regulations may include, but not limited to (a) minimum size of
fund acceptance and receipts, (b) methods of marketing and distri- bution, (c) terms of placement
and maturities, and (d) uses of funds as may be modified by the Monetary Board insofar as they
apply to investment houses.

The Monetary Board may, at its discretion, determine whether investment houses may be permitted
to perform quasi-banking functions as defined in Section 2-D, subsection (b) of Republic Act No.
337, as amended. Whenever, the Monetary Board authorizes an investment house to engage in
quasi-banking functions, the Board may subject investment houses to further regulations, which
may include, but not necessarily be limited to: (a) liquidity reserve requirements (b) capital-to-risk
assets ratios; (c) interest rate ceilings; and (d) such other constraints as the Board may deem
necessary.

Investment Houses in the Philippines.

The emergence of investment houses (investment banking) in the financial system ushered in a
new era in capital resources intermediation. Investment houses added new dimensions to the
already growing sophistication of capital mobilization.
The appearance of investment houses or quasi-banks in the funds market indicates that the country
is indeed on the march to progress. As may be gleaned from previous discussions, they are what
are termed as money middlemen since they act as middlemen between individuals' or institutions
with money to invest and people or institutions who need funds to put up a business enterprise or
to expand an existing industry.
Investment houses do this by underwriting, investing in loans and equity, engaging in money
market operations, and issuing its own promissory notes. In addition, investment houses develop
industrial projects, industry studies, and offer advisory services. Through its varied functions,
investment houses convert available savings from investments and facilitate the flow of needed
capital. The generated funds are directed to corporate expansion and growth and consequently to
productive projects contributory to economic development.

Underwriting.

Through its underwriting services, a role given solely to investment houses, the sale and
distribution of government securities are guaranteed.

Underwriting by an investment house may either be on a "best-effort" or "firm" basis. On a best-

effort basis, an investment house sells corporate securities up to a volume that is actually sold
publicly. After a certain period of time, securities that remain unsold are returned to the issuing
company and the investment house pays the commission for selling the shares of stocks. On a firm
basis however, the issuing company is assured that all shares it is offering for sale will be bought.
This is because the investment house guarantees the share of the total number of stocks being
offered and for which it has contracted to sel. If any of the shares offered for sale are not bought,
the investment house will have to buy them.

Money Market

To enhance its fund resources, investment houses engage in money market operations. It acts as
dealer or broker who may directly buy short-term financial notes or securities for the account of a
client or act as an intermediary between the buyer and seller of money market instruments.

Through this service, an investment house performs a very important money market function: it
establishes a purchase price and an offering price. This assures a buyer that he is buying money
market instrument at the lowest price obtainable and the seller that he is selling at the best price
available.

Local investment banking activities started in 1960 with the establishment of the House of
Investment following the enactment of the Investment Company Act in 1963. The Private
Development Corporation of the Philippines (PDCP) was subsequently put up followed by the
establishment of Ban- com Development Corporation (BDC) and the CCP Securities Corporation,
now the Ayala Investment and Development Corporation (AIDC).

Commercial Banking
The establishment of the "Obras Pias" during the period of Spanish rule is not without significance.
It could be rightly considered as the precursor of the banking system of this country. Obras Pias
were the first credit institutions which were organized in this country as early as the latter part of
the 16th century. Pious Catholics, obsessed with the desire to gain indulgence by way of doing
charitable work, furnished the capital of the Obras Pias.

The year 1851 marked an important event in our economic history since it was in that year that the
first commercial bank was established - the "Banco Español-Filipino" which has evolved to the
present Bank of the Philippine Islands. This was followed by the establishment of the Chartered
Bank of India, Australia and China in 1873 and the Hongkong Shanghai Banking Corporation in
1875.

Since then, more commercial banks were established in this country. However, the operations of
many of them were temporarily suspended during the Japanese occupation, but revitalized when
liberation came. Post-war banking in this country was highlighted by the creation of the
Rehabilitation Finance Corporation which absorbed the government-owned Agriculture and
Industrial Bank and provided financial aid in rehabilitating the country and in broadening the
economic structure.

Commercial Banking Corporation

In line with the provision of the General Banking Act, a commercial banking corporation shall be
any corporation which accepts or creates demand deposits subject to withdrawal by check.

A commercial banking corporation, in addition to the general powers incident to a corporation,

shall have all such powers as shall be necessary to carry on the business of commercial banking,
by accepting drafts and issuing letters of credit, by discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of debts; by receiving deposits; by buying and selling
foreign exchange and gold or silver bullion, and by lending money against personal security or
against securities consisting of personal property or first mortgages on improved real estate and
the insured improvements thereon. No loan on the security of real estate shall have a maturity in
excess of fifteen years, except loans for home building or home development which may have
maturities up to twenty years. Loans on real estate security of over one year maturity for real estate,
personal, and commercial purposes, or for the refinancing of similar loans, shall not exceed fifty
per cent (50%) of the total savings and time deposits of the bank.
Aptly observed, commercial banks are institutions which extend credit out of funds which they
own, borrow, or create. The most characteristic feature of commercial banks, which distinguishes
them from other private credit institutions, is their ability to create money. Commercial banks hold
the checking accounts of their customers. These accounts are payable on demand and subject to
transfer by check. Since demand deposits are money, the commercial banks can create money by
creating claims (demand deposits) against themselves in favor of borrowers or of sellers of
securities.

Other credit institutions, aside from the government owned, cannot create money because they do
not hold checking accounts. Savings banks, for instance, depend on their investment operations
almost entirely on the savings of their depositors. When they lend or invest, they do not add to
total purchasing power because the purchasing power of their lending customers is temporarily
reduced. In other words, savings banks act as intermediaries only, but not as supplier of additional
money. Commercial banks act in both capacities.

Total Liabilities

Except when the Monetary Board may otherwise prescribe, the total liabilities of any person,
company, corporation or firm, to a commercial banking corporation, for money borrowed,
excluding (a) loans secured by obligations of the Central Bank of the Philippine Government, (b)
loans fully guaranteed by the government as to the payment of principal and interest, (c) loans to
the extent covered by hold-out on, or assignment of, deposits maintained in the lending bank and
held in the Philippines, (d) loans and acceptances under letter of credit to the extent covered by
marginal deposits, and (e) other loans or credits which the Monetary Board may, from time to
time, specify as non-risk assets, shall at no time exceed fifteen per cent (15%) of the unimpaired
capital and surplus of such bank. The total liabilities of any borrower may amount to a further
fifteen percent (15%) of the unimpaired capital and surplus of such banking corporation provided
the additional liabilities are adequately secured by shipping documents, wharehouse receipts or
other similar documents transferring or securing title covering readily marketable, non-perishable
staples which staples must be fully covered by insurance, and must have a market value equal to
at least one hundred and twenty-five per cent (125%) of such additional liabilities.

Line of Credit

Not infrequently, businessmen, in anticipation of a need for funds in the future, may apply with
their banks for a line of credit. With the approval of such a re quest, businessmen can know in
advance how much they can borrow, should the need arise from a particular bank with the support
of a collateral.
As a policy, the bank will approve a line of credit only to the amount it feels it can safely ex tend
to the applicant on the basis of its knowledge of the firm's business and strength, such as: the size
of the company, its past and anticipated earnings, current and anticipated business conditions and
other important related factors in the grant of credit.
A line of credit may thus be described merely as an "advance commitment by the bank to lend up
to a certain indicated maximum." While the line is open, the company must keep the bank informed
of its operations and financial conditions and must continue to maintain its deposit account there.
Also, to keep the line open, it is necessary that the company must use some of it, for it is logical
that it can ill afford to maintain unused loan commitments indefinitely. A company engaged in the
manufacture of shoes which has a line of credit of P300, 000 may actually borrow only of P100,
000 or less, if that is all that it needs, although it knows that its request for an additional amount
will be honored at any time in the future as long as conditions do not undergo any drastic change.
Thus, if the financial position of the company deteriorates, the amount may either be reduced
sharply or cancelled by the bank. Clearly then, a line of credit is not a contractual obligation on
the part of the bank that it should honor at all times and by all means. At best, it represents merely
a moral commitment on the part of the bank based on certain assumed conditions.

As a general practice, the bank requires all loans made under the line of credit to be repaid off
within the period of one year and, moreover, the borrower must remain free of debt for at least 30
days.

Viewed from the part of the businessmen, a line of credit serves as some sort of reserve which
helps strengthen their financial standing.

Loan Agreements

It is quite a common practice among big business concerns to enter into formal loan agreements
with their banks.

The agreement consists of a stipulation of the maxi- mum amount which the business entity can
borrow, the interest rate that will be imposed on all loans that are made under the agreement as
well as the requirements which the borrowing entity must meet. Such agreement binds the bank to
grant loans to the borrowing entity at any time during the life of the agreement contingent on the
ability of the borrower to meet the conditions stipulated in the agreement.

The loan needs of some business entities are so uncertain, not to say at the same time very irregular,
that the use of line of credit is deemed impractical. Hence, the need for loan agreements. As in a
line-of-credit customer, the business firm must maintain a deposit balance with its bank.
Loan agreements may provide for (a) revolving credit, (b) a term loan, or (c) a stand-by
commitment.

Under revolving credit, a business enterprise may finance its current needs by borrowing from
the bank on ashort-term basis, up to a certain specified maximum amount. The borrower is
privileged to borrow, repay and borrow again during the specified period, generally from two to
five years.

For purposes of illustration, let us assume that the bank has approved a request for a revolving
credit by a manufacturing concern covering a period of three years in the amount of P750,000.00.
The said manufacturing concern could obtain loans from the bank for as many times it may deem
necessary during the period of three years provided that the total amount of the loans does not
exceed P750, 000.00. If the interest imposed by the bank in accordance with the loan agreement is
10% then, all loans would be made subject to the said rate.

Term loans are granted by commercial banks to finance the acquisition of facilities, such as ma-
chinery and equipment by manufacturers; for the purchase of furnishings of hotels, restaurants,
theaters, and others; and also for office equipment of professionals. Such loans are intended for
working capital purposes and not for permanent capital. The conditions of the term loans are
enumerated in a formal agreement between the bank and the bor- rower with a maturity of usually
not less than two (2) but not more than ten (10) years with the obligations repayable in installments.

There is a school of thought which expresses the belief that the term loan is actually a more realistic
arrangement compared to the older practice of granting short-term loans which are renewed from
time to time per understanding between the bank and the borrowers.

In the practical case of a stand-by commitment, the corporation is conferred the right of securing
a term loan under certain specified terms for current needs or for some other purposes within the
time agreed upon.

Savings and Mortgage Banking

The growth and development of savings banking in this country is quite phenomenal. From the
establishment in. 1882 of the first savings bank, the Monte de Piedad (originally called the Monte
de Piedad y Caja de Ahorros de Manila), there has been observed a mushrooming in the number
of such banks which continue to serve as an effective arm of the financial system by helping to
accumulate the deposits of average wage-earners and channeling them in productive activities
which, in part, explains the increasing pace in the country's economic development.

Savings and Mortgage Bank, defined

A savings and mortgage bank shall be any corporation organized for the purpose of accumulating
the savings of depositors and investing them, together with its capital, in bonds or in loans se-
cured by bonds, real estate mortgages, and other forms of security, or in loans for personal finance
and long-term financing for home building and home development.
Loans and Investments.

The loans and investments of savings and mortgage banks shall be limited to the following:

a. Loans with the security of their own savings deposit obligation or of mortgage and chattel
mortgage bonds which they have issued, or with the security of savings deposit obligations
of other banks doing business in the Philippines:

Provided, That clean loans for personal and household finance may be granted, which shall
not exceed the borrower's deposit in the bank plus his four months salary or regular income
in the case of permanent employee or wage earner, subject to such regulations as the
Monetary Board may prescribe:

b. Medium-term loans of the following types:

(1) Loans for the encouragement of cattle, carabao, and other livestock breeding, with
maturities up to three years. Such loans shall be repaid in regular installments and shall
have as principal security a lien on the animals, the bank being empowered, however, to
re quire, in addition, real estate and other securities to its satisfaction: Provided, however,
That the livestock need not secure the loan if the borrower constitutes a lien or mortgage
on real estate property seventy per cent (70%) of the appraised value of which equals or
exceeds the amount of the loan granted. The amount of any such loan shall not exceed fifty
percent (50%) of the commercial value of the animals at the time the loan is made, but
similar additional loan up to fifty per cent (50%) may be made as the value of the stock
increased.
(2) Equipment loans, with maturities up to five years, for the acquisition of fertilizers and any
instruments, machinery and other movable equipment, used in the production, processing,
transformation, handling or transportation of agricultural and industrial products. Such
loans shall constitute a first lien on the assets acquired with the proceeds of the loan, the
bank being empowered, however, to require as additional security a lien or mortgage on
other properties of the debtor: Provided, That the lien on the equipment or the assets
acquired out of the proceeds of the loan need not be constituted if the borrower executes a
mortgage on real estate property seventy percent (70% ) of the appraised value of which
equals or exceeds the amount of the loan granted.
 c. Mortgage loans, with maturities up to ten years, for the conservation, enlargement,
improvement of productive properties, or the acquisition of machinery, or other fixed
installations. Such loans shall be secured by a first mortgage.

d. Real estate mortgage loans with maturities of not more than twenty years, for the following
purposes only:
(1) For the construction, acquisition, expansion or improvement of rural and urban
properties;
(2) For the refinancing of similar loans and mort gages; and
(3) For such other purposes as may be authorized by the Monetary Board.

e. High-grade bonds and other evidences of indebted- e. ness, and loans against such
obligations;

f. Drafts, bills of exchange, acceptances, or notes arising out of current commercial

transactions which are endorsed or accepted by any solvent bank operating in the
Philippines. The aggregate investments in this class shall not exceed ten per cent (10%) of
the total assets of the bank.

g. Collateral trust bonds or notes, or obligations by such bonds or notes, secured by a first
mortgage or by a participating interest in a first mortgage on improved urban or rural real
estate in cities and municipalities of the Philippines, provided that such bonds and notes
shall not exceed fifteen percent (15%) of the net worth of the bank, the total equity
investment of the bank in any single enterprise shall remain a minority holding in that
enterprise, except where the enterprise is not a financial intermediary, and the equity
investment in other banks, if allowed by the Monetary Board, shall be subject to the same
limitations imposed on similar investment of commercial banks and shall be deducted from
the investing bank's net worth for the purposes of computing the prescribed ratio of net
worth to risk-assets. Equity investments shall not be permitted in non-related activities.

Any savings and mortgage bank, existing or doing business on the date of the approval of the Act
(General Banking Act was approved on July 24, 1948) and engaged in the business of lending
money against the pledge of jewelry, precious stones, and articles of similar nature, may continue
to engage in such business. The beneficiary of this provision of law is the Monte de Piedad which
has been lending money to its customers against jewelry that may be pledged with the bank which,
briefly stated, is an acquired right and as such cannot be diminished or removed without adversely
affecting the rights of said bank.

Rural Banks
A rural bank (the term "rural" meaning ""open country") is just another name for agricultural bank.

As conceived and established under the Rural Bank's Act (Rep. Act No. 720, as amended), a rural
bank is designed to provide the credit needs of borrowers in the rural areas within their easy reach
and access and at reasonable terms.

The birth of rural banks marked an important development in our banking system. In fact, its
establishment and operation carry with it far-reaching significance. Be it recalled that during
earlier years, the very few banks in this country struck awe, if not apprehension, in the hearts of
many of those unfamiliar with their true functions. Those with credit needs were forced to go either
to the provincial capital where a bank existed, usually a branch of the Philippine National Bank,
which rendered the task quite difficult such that many were forced to approach the nearest money-
lender who charged usurious rates of interest.

Briefly observed then, the establishment and operation of rural banks served two-fold objectives:
First, they provide the answer to the credit needs of borrowers in rural areas. Second, they help
minimize if not totally prevent said borrowers from becoming victims of usurious money lenders.
And a third objective, which is not quite apparent, may be cited: To provide the people of the rural
communities, with the means of facilitating and improving their productive activities and,
moreover, to encourage cooperatives.

Financial Assistance

In order to insure balanced economic growth and expansion in the rural areas, rural banks subject
to the limits and conditions imposed by the Monetary Board may devote a portion of their loanable
funds to meeting the normal credit needs of small business enterprises and of essential rural
enterprises or industries. Thus, rural banks are found engaged in the grant of medium and long-
term loans primarily intended for the purpose of meeting the normal credit needs of any small
farmer or farm family owning or cultivating in the aggregate not more than fifty hec- tares of land
dedicated to agricultural production as well as the normal credit needs of cooperatives and small
merchants.

Loans may be granted by rural banks on the security of lands without Torrens title where the owner
of private property can show five years or more of peaceful, continuous and uninterrupted
possession in the concept of an owner; or of portions of land estates or other lands administered
by the Bureau of Lands that are covered by sales contracts and the purchasers have paid at least
five years installment thereon, without the necessity of prior approval and consent by the Director
of Lands; or of portions of other estates under the administration of the Land Authority or other
government agency which are likewise covered by sales contracts and the purchasers have paid at
least five (5) years installment there on, without the necessity of prior approval and consent of the
Land Authority or corresponding governmental agency; or of homesteads or free patent lands
pending in the issuance of titles but already approved.
Apart from such financial assistance, the rural banks also extend technical assistance to small
business enterprises or farm operators on the proper utilization of credit for production and
marketing in coordination with supervisory and other involved government agencies.

Rural Banks in Economic Development

The rural banking system has involved itself in the task of accelerating the tempo of economic
development through its efficient and effective role in providing adequate and timely credit support
to the government programs, like the agrarian reform, food production, cooperative movement,
cottage and small-scale industries development through its integrated approach.

The rural banking system is also playing other roles in the country's economic development. Under
its program, it aims to achieve the maximum utilization of wealth through dispersal from the urban
to rural areas and maintain agro- industrial development of the country and continuing economic
expansion in the countryside.

Other Sources

Equally important and of recent origin, as a source of credit, are private development banks.

In line with the declared policy of Congress to pro- mote and expand the economy of the country
pursuant to the socio-economic program of the Government, as well as to expand industrial and
economic growth, private development banks were conceived and their existence made a reality
under Republic Act No. 4093.

Organized as a stock corporation with a paid-up capital of not less than P4, 000,000.00 for class
A, P2, 000,000.00 for class B, and P1, 000,000.00 for class C, 75% of its loanable funds shall be
invested in medium and long term loans for economic development purposes. In no instance,
however, shall a private development bank invest more than 25% of the loanable funds in short
term loans for miscellaneous purposes. Thus, as could be observed, the structure of the loans of
the private development banks suggest that the system, unlike savings, commercial and rural
banks, are essentially engaged in development financing where the periods of re payment are much
longer. It is probably for this reason that the Development Bank of the Philippines was given
authority to match the capital of private development banks on a one to-one basis. To augment and
supplement the capital of any private development bank, the Development Bank of the Philippines
shall be permitted to extend to the private development banks a loan or loans from time to time
repayable in ten years with interest at the rate that may be agreed upon against security which may
be offered by the private development bank or any stockholders of the private development bank.
The Veterans Bank, on the other hand, in accordance with its charter, is authorized to grant loans
for the establishment, rehabilitation, expansion or development of any agricultural, commercial,
or industrial enterprise, or personal services including public utilities, as well as make loans on, or
to discount notes and/or receipts secured by, harvested stored crops. However, no loans on the
security of such harvested and stored crops shall exceed 80% of the market value thereof on the
date of the loans. The crops so mortgaged shall be insured by the mortgagor for the benefit of the
Veterans Bank for their entire market value at the discretion of the Board of Directors. In the event
that the value of the crops given as security diminish, the mortgagor shall furnish the Veterans
Bank with additional security or refund such part of the loan as the Bank may deem necessary.
Such loans are for short term maturity, that is, they shall not exceed one year, subject to extension,
in the discretion of the Board of Directors.

The Veterans Bank is also empowered to grant loans to agriculturists in instalments, on standing
crops of the natural products of the Philippines such as palay, copra, sugar, tobacco, corn, abaca,
and maguey of not exceeding 70% of the estimated value of such crops. Before granting such
loans, the Veterans Bank may require additional security in the nature of mortgage on landed estate
duly registered in the name of the debtor, or chattel mortgage including those upon live-stock,
machineries and agricultural implements or personal bonds with sufficient surety or sureties
satisfactory to the bank. Moreover, the bank is authorized to make advances or discount paper for
agricultural, manufacturing, industrial or commercial purposes.

The aggregate amount of loans for any single industry shall at no time exceed 20% of the Bank's
lending capacity.

Land Bank

As provided under Section 74 of Republic Act No. 3844, the Land Bank of the Philippines, better
known as the Land Bank for short, is intended to finance the acquisition by the Government of
landed estates for division and resale to small landholders as well as the purchase of the
landholdings by the agricultural lessee from the landowner.

The Land Bank, whose powers and functions are to be exercised and directed by the Board of
Trustees, subject to the approval of the Monetary Board of the Central Bank, may issue bonds,
debentures, and other evidences of indebted- ness at such terms, rates and conditions as the Bank
may determine up to an aggregate amount not exceeding, at any one time, five times its unimpaired
capital and surplus. Such bonds and other obligations shall be secured by the assets of the Bank
and shall be fully tax-exempt both as to principal and income. Said income shall be paid to the
bondholder every six months from the date of issue. These bonds and other obligations shall be
fully negotiable and unconditionally guaranteed by the Government of the Republic of the
Philippines and shall be redeemable at the option of the Bank at or prior to maturity, which in no
case shall exceed 25 years.

These negotiable instruments of indebtedness shall be mortgageable in accordance with

established banking procedures and practices to government institutions at not to exceed 60% of
their face value to enable the holders of such bonds to make use of them in investments in
productive enterprises.

The bonds issued by the Land Bank may be used by the holders thereof and shall be accepted in
the amount of their face value for any of the following purposes:

1. Payment for agricultural lands or other real proper- ties purchased from the Government;

2. Payment for the purchase of shares of stock of all or substantially all of the assets of government-
owned or con- trolled corporations;

3. Surety or performance bonds in all cases the Gov ernment may require or accept real property
as bonds; and

4. Payment of reparation goods.

Contrary to what the average student would like to believe, the Land Bank does not only help
finance the acquisition of farm lands by tenants from their landlords under the Agrarian Reform
Program of the government but moreover it is likewise engaged in another worthy undertaking-
helping implement the "Study Now, Pay Later Plan" instituted by Presidential Decree No. 932,
otherwise known as the Educational Assistance Act of 1976.

Sales Finance Companies

The sales finance company is a private corporate venture in the financing of distribution through
the purchase of vendors' installment sales contracts. Although its most familiar activity is in the
financing of automobile purchases by consumers, much of its business volume is in financing the
purchase of automobiles by dealers from the manufacturers. As may be observed, sales finance
companies do not confine themselves to the transportation industry but at the same time furnish
capital to vendors of all types of goods sold on installment. In more recent times, they have also
somewhat diversified their business by making consumer cash loans.

Aptly pointed out, the sales finance company is a general business corporation financed by private
capital. It is granted no special prerogative or privilege by the state. It merely exercises the general
business right of buying notes contracts, leases, chattel mortgages, and other evidences of
indebtedness arising out of one or more of the steps of distribution and sale of durable
commodities. Apart from engaging in automobile transactions, sales finance companies do have a
substantial volume of business in their commodities, such as refrigerators, income-producing
machinery, household and personal goods, home improvements and other utilitarian articles.

With respect to their business which relates to automobile transactions, among the practices
adopted by sales finance companies for their protection are:

a. The finance companies, during the life of the trans- action retain legal title to the merchandise
which is the underlying security of the note, conditional sales contract, or chattel mortgage.
b. The finance companies' investment in the purchase of such paper is planned so that the amount
of money due from a dealer or consumer at any given time will be less than the resale value of the
merchandise if repossession of the chattel should become necessary.
c. The finance companies place fire, theft, and collision insurance under standard policies
protecting the equity of parties at interest, and the cost is included in the service charge of the
finance companies.

Factoring

Factors perform the financial service known as factoring, which consists of the purchase of
accounts receivable outright without recourse to the seller for credit losses. The factor notifies the
customer of the assignment of the accounts receivable and collects in its own name. Factoring is
being used by an increasing number of firms in more lines of business. Factors extend their services
to such varied industries as textiles, coal, glass, lumber, paper, petroleum products, electronics,
and plastics.

The factor’s commission is based on the averaged size of the invoices, the company’s sales
volume, and the amount of credit investigation required.

OTHER SOURCES OF CREDIT

 Individual Money Lenders

− Individual money lender who may lend his surplus to those in need so that it will bring
some income to him; no collateral is required on the part of borrowers to secure the
loan of whatever sum money.
− The money lender may be constrained to collect a very high rate of interest over and
above the legal one in order to protect his personal interest and thus become what is
known as “loan-shark” The unlicensed money-lender, who is often referred to as a
“loan-shark”, does a thriving business in the grant of loans at very exorbitant rates of
interest.
 Retail Store
− Easily the biggest source of merchandise credit in the Philippines is the retail store,
more particularly known as the “sari-sari” store. This becomes evident when one takes
into account the number of such sari-sari stores in every barangay of our communities.
These stores cater to the everyday needs of the consumers, which explain their large
numbers. Such stores are run by Filipinos and aliens alike, although after May 15, 1954,
in accordance with the provisions of the Retail Trade Nationalization Law, no alien is
permitted to engage in this type of business.

 Pawnshops
− The present-day pawnshops owe their origin from the Montes Pietatis which were
established by Franciscans (Friar Minor as they were invariably called then) in Italy.
The terms mons referred to any form of capital accumulation and pietatis from the Latin
“pietas” meaning pious. As such, montes pietatis consisted of charitable funds from
which loans came from, which were exempted from interest, but secured by pledges.
Such loans were granted to the poor.
− (According to Lien Sheng Yang, a Harvard professor of Chinese history, pawnshop is
the “oldest credit institution in China.” In the Philippines, pawn broking is also one of
the oldest credit institutions and is believed to have been introduced by the Spanish
friars when we were under the Crown of Spain. It may be interesting to point out, in
this connection, that the oldest saving bank, the Monte de Piedad, was granted the
privilege of lending money against pledge of jewelry.)

 Commercial Banks
− Commercial banks are engaged in the grant of loans not only to businessmen, but also
to individuals for personal purposes. Generally speaking, in the case of personal loans,
borrowers are required to furnish the bank with the written guarantee of two or more
responsible persons that the contract will be faithfully performed. These guarantors of
the credit of the borrower are called “co-makers”. Legally, they can be held for
principal and interest due, in the event that the borrower for whom they acted as
guarantors fails to discharge his obligations incurred with the bank. As a common
banking practice, a charge of 6 to 12% of the entire loan is deducted in advance to
represent the interest.

 Commercial Paper House

− The commercial paper house is a financial institution that brings together the buyer and
seller of short-term commercial paper, that is, the lending institution and the borrowing
business enterprise. The commercial paper includes notes, bankers’ acceptances, trade
acceptances, and foreign exchange bills. A commercial paper house also buys issues
outright at a discount and resell the notes at a slightly higher price to investors. Most
of the paper bought by a commercial paper house takes the form of unsecured single -
name promissory note.
 Savings Bank
− Since savings banks accumulate the small savings of depositors, such accumulated
funds are in turn invested in bonds or in loans secured by bonds, real estate mortgages,
and other forms of security. In its broadest meaning, the term savings banks include
mortgage banks as well as savings and loan associations. Savings and loan associations
are established on the principle of cooperation.

 Rural Banks
− In the rural areas of the Philippines, rural banks provide the chief source of credit
especially for those engaged in agriculture who need these facilities badly. Such type
of banks were unknown in this country prior to the enactment of RA 720, known as the
Rural Banks Act.
− The growth and development of these banks attest to the pressing need of the people in
the rural areas for loanable funds. Undoubtedly, the existence of rural banks in the
towns and communities has greatly minimized the existence of usurious practices of
some money lenders, which has victimized our poor people who cannot avail
themselves of the credit facilities which may be offered by commercial and savings
banks because of certain requirements imposed by them.

 Development Banks
− Like those of rural banks, development banks from an important part of our banking
system extending the necessary fund for purposes of hastening development. They have
been largely responsible for the birth and development of certain industries that are
now quite common on the Philippine scene.

 Investment Banks
− Investment banks, at times termed as investment houses, bridge the gap between those
who have idle funds not knowing where to invest them and those in dire need of such
funds. As sources of credits, they help raise the needed funds that are not easily
procurable elsewhere for use because of the sizeable amounts involved and the length
of time for their use.
− The funds provided by investment banks are important not only to entrepreneurs, but
to government as well, which requires huge expenditures to support the various
economic projects that are part of its program.

 Savings and Loan Associations

− Another source of credit are savings and loan association which may be described as
“that corporation engaged in the business of accumulating savings of their members as
stockholders, and using such accumulations, together with their capital in the case of
stock corporations, for loans and / or investments in the securities of productive
enterprises or in securities of the Government, or any of its political subdivisions,
instrumentalities or corporations.
  Finance Companies
− As an industry, it shares with government the universal goal of achieving a strong and
healthy financial system. Given a conducive regulatory environment, finance
companies can effectively mobilize resources needed for productive investments. They
have developed into a major source of funds for consumer, sales and commercial
financing. Finance companies may be divided into three categories:
1. The installment sales finance companies-discount consumer installment notes
arising through the sale of merchandise
2. The consumer finance companies-engaged in lending cash directly to the consumer
3. Commercial finance companies-which through various types of loans serve
business and industry Credit Unions
Credit unions are corporate organizations which lend savings of members to some of the
members of the group. However, in order that credit unions can be successfully operated, they
should consist of closely knit, cohesive, natural groups of employees with low labor turnover.

Advantages
1. Low cost of operation, ordinarily, the office space for such purpose is donated by the
management
2. Losses are very small in view of the fact that there exists an intimate relationship among
all the members of the credit union
3. Rates charged for interest by credit unions are very much lower than those charged on
similar loans by commercial lenders
4. Member-borrowers also become entitled to the receipt of patronage dividends when the
same is distributed by the credit union

 Insurance Companies
− The business of insurance companies is to enter into insurance contracts with those who
wish to provide for such contingencies as death or fire. They receive premiums and pay
out money on the occurrence of the particular contingencies covered by the contracts.
Insurance companies cannot, therefore, be regarded as financial institutions per se, like
banks. They are, however, important participants in the money and capital markets,
because they must accumulate insurance premiums to build up funds to meet policy
claims, and they must meanwhile employ these funds in loans and investments. Thus,
their financial functions are a necessary consequence of their proper business of
insurance.

 Other Sources
 GSIS - Government Service Insurance System
 SSS - Social Security System
 IGLF - Industrial Guarantee Loan Fund / Agricultural Guarantee Loan Fund
 Pag-Ibig Fund - intended to boost housing development in the country
 KKK (Kilusang Kabuhayan at Kaunlaran) - established as a priority program under EO
715 on August 6, 1981 is intended to involve the whole citizenry and calls for the
mobilization of the people to direct their creative energies and resources toward
productive participation in development