AN OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM

Learning Outcomes

At the end of this chapter, the students should be able to:

1. Discuss the development of the Philippine financial system

2. Define what is financial system and its functions in the economy
3. Identify the participants in the financial system and their roles
4. Explain the structure of the Philippine Financial System
5. Classify Banking institutions from Non-bank Financial Institutions
6. Enumerate importance of Financial system

DEVELOPMENT OF THE PHILIPPINE FINANCIAL SYSTEM

The first credit institutions established in the Philippines were the Obras pias which
literally mean pious works. These were started by father Juan Fernandez de Leon in 1754. Their
funds came from pious Catholics, together with those who made their wills before undertaking
dangerous expedition. These institutions consisted of foundations which invested their money in
the trade and channeled their profits to charitable works. Most of the obras pias funds were lent
out to traders to finance the Galleon Trade. Such credits institutions had been under the control
of the friars, and eventually became commercial or marine insurance companies.

The last of the obras pias came to an end in 1820.ten years later, Francisco Rodriguez
organized the Rodriguez Bank. However, this was more of a loan association than a bank. Most
of the clients of the bank were American and British merchants. When the owner died, the
bank’s funds were turned over to the Queen of England.

The first Philippine bank. In 1851, the first Philippine bank as established, this was the
Banco Espanol-Filipino de Isabela II. Actually, the bank had been were granted a charter in
1528.but it started transacting business when several Philippine ports were opened to foreigners.
Nevertheless, foreign trade outside Manila was not very substantial. Thus, the bank handled
mostly domestic transactions.

With the opening of Suez Canal in 1869.philippine trade expanded. European markets
became accessible to Philippine producers and this induced the country’s agricultural
development. The banco Espanol-Filipino funded crops for exports and established
correspondent relations in Spain and France to help the European trade.

The growth of trade with Europe began to attract British capital to the Philippines. As a
result, the Chartered Bank of Indian, Australia, and China set up a Manila branch in 1873.Two
years later, the Hongkong and Shanghai Bank also put up its branch in Manila in 1883,Both
banks opened branches in Iloilo to Finance the sugar industry.

The British banks dominated the economy during the Spanish colonial rule. Likewise,
British merchants controlled the economy. Their ships, connections with China and Europe,
credit resources, and technique and machinery for large scale crop production gave them an
advantage over the other merchants from 1820s to 1900s. However, American business interests
started to expand during this period.
 In the case of Spain, it was able to put up the first savings bank in 1882 despite British
domination in the banking industry. This is Monte de Piedad. Its funds came from the obras pias.
One year later, another Spanish bank, Banco Peninsula de Ultramirano, set up a branch in
Manila.

Financial institutions during American rule. At the time the United States acquired the
Philippines in 1898 through the Treaty of Paris, its business interests were not as strong as those
of British and Chinese. However, with “free trade” between the United States and the Philippines
as provided by the Payne-Aldrich Act of 1902, American economic control in the Philippines
substantially increased. In addition, the weakening of the British commercial activities in Asia
because of its involvement in World War I (1914-1918), gave the Americans the opportunity to
promote their business interest in the Philippines.

In 1902, the International Banking Corporation of New York set up an office in the
country. However, in 1915 the bank was acquired by National City Bank of New York. At
present this bank is one of the top five banks in the United States and the whole world. It is now
called the First National City Bank. Through the International Banking Corporation, Americans
were able to generate more business interests in the Philippines. Other branches of American
banks were established such as the Guaranty Trust and American Bank.

Other banks were organized such as the Postal Savings Bank in 1904, and the First
Agricultural Bank of the Philippine Government in 1906. However in 1916 the assets and
liabilities of the agricultural bank were transferred to the newly-organized Philippine National
Bank (PNB). The Catholic Church set up the Philippine Trust Co. in 1916 while a group of
Manila-based American businessmen established the People’s Bank and Trust Co. in 1926. The
Chinese were likewise active in moneylending at very high interest rates. The Chinese banks
were formed in the 1920s: China Banking Corporation in 1920 and the Mercantile Bank of China
in 1926.

With the coming of the Japanese Imperial forces in 1942, the PNB closed its doors .a few
months later, the Japanese occupation forces ordered the PNB to reopen for business, and it was
supervised by Japanese military advisers during the war years. The southern Development bank,
a Japanese Bank, put up a branch in the country to perform the role of a central bank. War notes
were then printed and circulated as money. This caused the worst inflation so far in the country.

Postwar Financial Institutions

In 1946, the Rehabilitation Finance Corporation was established to provide credit

facilities for the rehabilitation of agriculture, commerce, and industry, and the reconstruction of
war-damaged properties. Some years later, it became the Development Bank of the Philippines.

Another very important milestone in the development of the Philippine financial system
during this particular period was the creation of the Central Bank of the Philippines in 1948. Its
operations, however, started the following year.

By 1947, there were four branches of foreign commercial banks in the country and seven
local banks. Of these seven local banks, only one was owned by Filipinos. Most of the non-
commercial banks emerged after World War II and during the 1960s up to 1970s. the rural
banking system was organized in 1952. At the end of 1978, there were thirty five commercial
banks – including the four branches of foreign banks – with a nationwide network of 2,830
banking units.

Present
 The Bangko Sentral ng Pilipinas (BSP) is the Central Bank of the Republic of the
Philippines. It was established on January 3, 1949 as the country`s central monetary authority.
The Bangko Sentral ng Pilipinas was established on July 3, 1993 pursuant to the provisions of
the 1987 Philippine Constitutions and Republic Act No. 7653, the New Central bank Act of 1993
to replace the Central Bank of the Philippines. BSP enjoys fiscal and administrative autonomy in
the pursuit of its mandated responsibilities.

Reference:

Fajardo, Feliciano R., Manansala, Manuel M. and Altarez, Emilio C. Financial Institutions 3 rd
Edition. Manila: National Book Store, 1994

What is Financial system

A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges that permit the exchange of funds. Financial systems exist on firm, regional, and
global levels. Borrowers, lenders, and investors exchange current funds to finance projects,
either for consumption or productive investments, and to pursue a return on their financial
assets. The financial system also includes sets of rules and practices that borrowers and lenders
use to decide which projects get financed, who finances projects, and terms of financial deals.

The purposes of the financial system are:

 To provide the funds from savings units to the deficit units.

 To provide a medium of exchange

 To provide a mechanism for risk sharing

 To provide a channel through which the central bank can influence the economy, in
general and the financial system, in particular.

MULTINATIONAL FINANCIAL SYSTEM

- Refers to the collective financial transfer mechanisms that facilitate the movement of
money and profits between and among financial system participants throughout the
world. These mechanisms include transfer of prices on goods and services traded in
internally and internationally; intercompany loans and leading and lagging payments,
fees, and royalty charges wherever they are located in the world; and dividend
payments.

FUNCTIONS OF FINANCE AND FINANCIAL MANAGERS

1. Fund acquisition - a way of getting deposits and necessary funds to finance projects and
investments

2. Fund allocation – determining to which uses, projects, or investments the acquired funds
will be used

3. Fund distribution – the process by which necessary funds are given to the uses, projects,
or investments that need funds

4. Fund utilization – using the funds for its intended purpose.

FINANCIAL SYSTEM PARTICIPANTS

1. HOUSEHOLDS / CONSUMERS
Are generally described as the group that receives income, majority of which typically
comes from wages and salaries. Such income is spent on goods and services, and part is
saved.
2. FINANCIAL INSTITUTIONS
Are the firms that bridge the gap between surplus units or investors / lenders and deficit
units or borrowers.
3. NON-FINANCIAL INSTITUTIONS
Are businesses other than financial institutions or intermediaries that includes trading,
manufacturing, extractive industries, construction, genetic industries and all firms other
than the financial ones.
4. GOVERNMENT
Means national, provincial, municipal or city governments and barangays or towns
comprising the Philippines as a whole. Laws and policies have been formulated to ensure
the desired levels of investment, employment, production, income, and consumption.
5. CENTRAL BANK
The BSP and all other central banks of the different countries are mandated to ensure that
their respective countries have a stable and healthy financial system
They oversee the operations of their entire FS and mandate the rules, regulations, and
monetary policies that will help them maintain a healthy and stable economy.
6. FOREIGN PARTICIPANTS
Refer to the participants from the rest of the world – households, governments, financial
and non-financial firms, and central banks.

BRIEF DESCRIPTION OF THE FINANCIAL INSTITUTIONS

I. Bangko Sentral ng Pilpinas

II. Banking Institutions

A. Private Banking Institutions

1. Universal Bank (UB) or Expanded Commercial Banks (EKB)

Is any commercial bank, which performs the investment house function in
addition to its commercial banking.
It may invest in the equities of allied and non-allied enterprises. Allied enterprises
may either be financial or non-financial.
2. Commercial Bank or Domestic Bank (KB)
Is any commercial bank that is confined only to commercial bank functions such
as accepting drafts and issuing letters of credit, discounting and negotiating
promissory notes, drafts and bill of exchange, and other evidences of debt,
accepting or creating demand deposits, receiving other types of deposit
substitutes, buying and selling foreign exchange, and gold or silver bullions,
acquiring marketable bonds and other debt securities, and extending credit
subject to such rules that the Monetary Board may promulgate.
3. Thrift Bank (TB)
Shall included savings and mortgage banks, stock savings and loan associations
and private development banks.
Their function is to accumulate the savings of depositors and invest them together
with their capital, loans secured by bonds, mortgages in real estate and insured
 improvements thereon, chattel or household finance, whether, secured or
unsecured, or in financing for home building and home development; in readily
marketable and debt securities; in commercial papers and account receivables,
drafts, bill of exchange, acceptance or notes arising out of commercial
transactions; and in such other investments and loans which the Monetary Board
may determine as necessary in the furtherance of national economic objectives.
a. Stock Savings and Mortgage Bank (SSMB) is any corporation organized for the
purpose of accumulating the savings of the depositors and investing them, together
with its capital, in readily marketable bonds and debt securities; checks, bills of
exchange, acceptance or notes arising out of commercial transactions or in loans
secured by bonds, mortgages or real estate and insured improvements thereon and
other forms of estate and insured improvements thereon and other forms or security
or in loans for personal or household finances whether secured or unsecured, and
financing for home building and home development.
b. Private Development Bank (PDB) is a bank that exercises all the powers and assumes
all the obligations of thee savings and mortgage bank as provided in the General
Banking Act except as otherwise stated. The PDB helps construct, expand and
rehabilitate agricultural and industrial sectors. The DBP is the government
counterpart of the PDB and helps them augment their capitalization as provided under
R.A. 4093 as amended.
c. Stock Savings and Loan Association (SLA) is any corporation engaged in the
business of accumulating the savings of its members or stockholders and using such
accumulated funds, together with its capital for loans and investment in securities of
the government and its instrumentalities, provided that they are primarily engaged in
servicing the needs of households by providing personal finance and long term
financing for home building and development.
4. Rural Bank (RB)
Is any bank authorize by the Central Bank to accept deposits and make credit
available to farmers, businessmen and cottage industries in the rural areas.
Loans may be granted by the rural banks on the security of land without Torrens
title where the owner of the property can show five (5) years or more of peaceful
continuous and uninterrupted possession of the land in the estates or other lands in
the concept of ownership.
This will include portions of friar land estates and other lands administered by the
Bureau of Lands that are covered by sale contracts and purchases and have paid at
least five (5) years installment thereon, without the necessity of prior approval
and consent of the Director of Lands portions of other estates under the
administration of the Department of Agrarian Reform.
5. Cooperative Banks
These are banks established to assist the various cooperatives by lending those
funds at reasonable interest rates.
B. Government Banks or Specialized Government Banking Institutions
1. Development Bank of the Philippines (DBP)
They provide loans for developmental purposes, gives loans to the agricultural
sector, commercial sector and the industrial sector.
2. Land Bank of the Philippines
It is a government bank, which provides financial support in the implementation
of the Agrarian Reform Program (CARP) of the government.
3. Al-Amanah Islamic Investment Bank
Republic Act No. 6048 provides for the charter of the Al-Amanah Islamic
Investment Bank. This Act authorizes the bank to promote and accelerate the
socio-economic development of the Autonomous Region of Muslim Mindanao by
performing banking, financing and investment operations, and to establish and
 participate in agriculture, commercial and industrial ventures based on the Islamic
concept of banking.
III Non-bank Financial Institutions

A. Private Non-bank Financial Institutions

1. Investment House
It is any enterprise, which engages in underwriter securities of other corporations.
It also generates income from sale of investment securities.
2. Investment Banks
They provide advice to firms issuing stocks and bonds or considering mergers with
other firms.
They also engage in underwriting, in which they guarantee a price to a firm issuing
stocks or bonds and then make a profit by selling the stocks or bonds at a higher
price.
3. Financing Company
It is any business enterprise where the primary purpose is to extend credit facilities
to consumers and to industrial, commercial or agricultural entities either by
discounting or factoring commercial papers or accounts, or by buying installment
contracts, leases, chattel mortgages, or other evidences od indebtedness, or by
leasing motor vehicles, heavy equipment and industrial machineries and business
and office equipment, appliance and other movable properties.
4. Securities Dealer
Any person or entity engaged in the business of buying and selling securities for
his own or its client`s account thereby making a profit from the difference between
the purchase prices and selling price of securities.
5. Savings and Loan Associations (S&Ls)
They served individual savers and residential and commercial mortgage
borrowers, accumulate the funds of many small savers and then lend this money to
home buyers and other types of borrowers.
Also, they have more expertise in analyzing credit, setting up loans, and making
collections than individual savers so they can reduce the transaction costs and
increase the availability of real estate loans.
6. Mutual funds
These are corporations which accept money from savers and then use these funds
to buy stocks, long-term bonds, or short term debt instruments issued by
businesses or governments units.
These organizations pool funds and thus reduce risks by diversification
They also achieve economies of scale, which lower the costs of analyzing
securities, managing portfolio, and buying and selling securities.
7. Pawnshops
It refers to person or entities engaged in the business of lending money with
personal property, jewelry, and other durable goods as collateral for the loans
given.
8. Lending Investor
Any person or entity engaged in the business of effecting securities transactions,
giving loans and earns interest for them.
9. Pension funds
These are retirement plans funded by corporations or government agencies for
their workers and administered primarily by the departments of commercial banks
or by life insurance companies.
They invest primarily in bonds, stocks or mortgages, and real estate.
10. Insurance Companies
 They take savings in the form of annual premiums, then invest these funds in
stocks, bonds, real estate and mortgages, and finally make payments to the
beneficiaries of the insured parties.
11. Credit Unions
These are cooperative associations whose members have a common bond, such as
being employees of the same firm. Members` savings are loaned only to other
members, generally for auto purchases, home improvement loans, and even home
mortgages
B. Government Non-bank Financial Institutions
1. Government Service Insurance System (GSIS)
Provides retirement benefits, housing loans, personal loans, emergency and
calamity loans to government employees.
2. Social Security System (SSS)
Provides retirement benefits, funeral benefits, housing loans, personal loans and
calamity loans to employees who are working in private companies and offers.
3. Pag-ibig
Provides housing loans to both government and private employees