CHAPTER 1

AN OVERVIEW OF THE PHILIPPINE

FINANCIAL SYSTEM
1. Nature of the Philippine Financial System
2. Elements of the Financial System
3. Functions of the Financial System
4. Development of the Philippine Financial
System
5. The Structure of the Philippine Financial
System
NATURE OF THE PHILIPPINES
FINANCIAL SYSTEM
What is a 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.
Understanding the Financial System
Like any other industry, the financial system can be
organized using markets, central planning, or some
mix of both.
Financial markets involve borrowers, lenders, and
investors negotiating loans and other
transactions.
In these markets, the economic good traded on both
sides is usually some form of money:
 current money (cash),
 claims on future money (credit),
 or claims on the future income potential or value of
real assets (equity).
These also include derivative instruments.
Derivative instruments, such as commodity
futures or stock options, are financial instruments
that are dependent on an underlying real or
financial asset's performance.
In financial markets, these are all traded among
borrowers, lenders, and investors according to the
normal laws of supply and demand.
Financial Market Components
Multiple components make up the financial
system at different levels.

The firm's financial system is the set of

implemented procedures that track the
financial activities of the company. Within a
firm, the financial system encompasses all
aspects of finances, including accounting
measures, revenue and expense schedules,
wages, and balance sheet verification.
On a regional scale, the financial system is the system
that enables lenders and borrowers to exchange funds.
Regional financial systems include banks and other
institutions, such as securities exchanges and financial
clearinghouses.

The global financial system is basically a broader

regional system that encompasses all financial
institutions, borrowers, and lenders within the global
economy. In a global view, financial systems include
the International Monetary Fund, Central Banks,
Government Treasuries and Monetary Authorities, the
World Bank, and major private international banks.
ELEMENTS OF A FINANCIAL
SYSTEM
Different searches provide different answers, but
let’s go with this one.
The financial system primarily concerns itself with
borrowing and lending.
 Lenders and borrowers
 Financial intermediaries (clearing houses, etc.)
 Financial instruments - savings, loans,
investments…
 Financial markets - where trading or exchange
of money occurs.
 Money creation - this is done by BSP in our country.
The amount of currency printed and minted every
year is dictated by the size of the economy and the
need to replace notes and coins that are no longer
fit for use. All notes and coins—every peso every
Filipino has—are backed up by the BSP's assets.
 Price discovery - The price discovery process is the
process of determining the price of an asset in the
marketplace through the interactions of buyers and
sellers. Basically, what’s agreed upon by the
parties. How much one is willing to pay for
something versus how much one is willing to sell
something, and they meet at a certain point.
FUNCTIONS OF A FINANCIAL SYSTEM

From Indastra Global: A financial system functions as an

intermediary and facilitates the flow of funds from the areas
of surplus to the areas of deficit. It is a composition of various
institutions, markets, regulations and laws, practices, money
managers, analysts, transactions, and claims & liabilities.
So, the function of a financial system would be to facilitate
that flow of funds.
• Savings
• Liquidity (stocks, bonds, debentures, etc.)
• Payment (check, credit card, bills payment, etc.)
• Risk (insurance)
• Policy (interest rates, inflation)
DEVELOPMENT OF THE PHILIPPINE
FINANCIAL SYSTEM
Financial System is like the heart of the human beings, if
it stops working then the person is dead in the same way
that if the financial system stops working, then the
economy would collapse. It is inherent in every society the
law of supply and demand. There will always be those who
have surplus resources and others will have deficit.
Financial System is crucial to the allocation of these
resources.
 In the Philippines settings, Financial System is composed
of banking institutions and nonbank financial
intermediaries, play special roles in economic
development of the country.
OVERVIEW OF THE BANKO SENTRAL NG
PILIPINAS (BSP)
Bangko Sentral ng pilipinas was established on
July 3, 1993 pursuant to the provisions of the
1987 Philippine Constitution and the New Central
bank Act of 1993. BSP is autonomous in its fiscal
and administrative functions from the National
Government as it pursues its mandated
responsibilities.
As its primary objective, BSP’s monetary policy is
to promote a “low and stable inflation conducive
to a balance and sustainable economic growth.”
FUNCTIONS OF THE BSP

Under the New Central Bank Act, the BSP performs the
following functions, all of which relate to its status as the
Republic’s central monetary authority.

a. Liquidity management. The BSP formulates monetary

policy aimed and influencing money supply consistent
with its primary objective to maintain price stability.
b. Currency issue. Exclusive power to issue the national
currency. All notes and coins issued by the BSP are fully
guaranteed by the Government and are considered legal
tender for all private and public debts.
c. Financial supervision. Supervise banks and exercises
regulatory powers over nonbank institutions performing
quasi-banking functions.
d. Management of foreign and currency reserves.
Seeks to maintain sufficient international reserves to
meet any foreseeable net demands for foreign
currencies in order to preserve the international stability
and convertibility of the Philippine peso.
e. Determination of exchange rate policy. Determines
exchange rate policy of the Philippines. Currently, the
BSP adheres to a market-oriented foreign exchange rate
policy. Other activities. The BSP functions as banker,
financial advisor and official depository of the
Government, its political subdivisions and
instrumentalities of Government-owned and controlled
corporation (GOCCs).
f. Other activities.
The BSP functions as banker, financial advisor
and official depository of the Government, its
political subdivisions and instrumentalities of
GOCCs.
BSP ORGANIZATION

The monetary Board exercises the powers and

functions of the BSP, such as the conduct of
monetary policy and supervision of the financial
system. Its chairman is the BSP Governors, with
five full-time members from the private sector
and one member from the Cabinet.
 Name
Tenure
Armando M. Tetangco Jr. 2005-2017
Nestor A. Espinilla Jr.
2017- 2019
Benjamin E. Diokno
2019-2022
Eli M. Remolona
2023-Present
CLASSIFICATION OF FINANCIAL SYSTEM

 THE BANKING SECTOR

For the purpose of uniformity, simplicity, and equality
of treatment, R.A. 7653 entitled “The new Central
Bank Act,” classified bank institutions into the
following categories:
 An expanded commercial bank or a universal bank
and commercial banks;
 Thrift banks, composed of savings and loan
associations
 Private Development Banks
 Regional Units Banks, composed of rural banks.
 Expanded commercial or universal
banks
Expanded commercial or universal banks
constitute twelve (12) financial institutions,
considered as one-stop commercial banks
performing com-banking functions and
nonrelated banking activities.
 Commercial banks
Commercial banks represent the largest single group
of the country’s banking and financial intermediaries
that operate on a branch banking organizational
structure with all head offices located in Metro Manila,
and the largest network of branches and extension
offices distributed throughout the country. Commercial
banks offer the greatest variety of banking services
among financial institution, such as accepting demand,
savings, time and foreign fund remittances; money-
market transaction; administering trust funds; and a
host of other services that truly make them the
department stores of finance.
 Rural banks.
The passage of the Rural Bank Act in 1952 saw
the emergence of regional unit or rural banks
that specialize in the extension of small loans
for agricultural purposes, as well as for retail
traders. All

Rural banks are privately owned, although the

receives equity counterparts, loans and
technical assistance from the Central Bank.
 Thrift banks (Ex. BPI Savings Bank)
It includes savings and mortgage banks, private
development and savings and loan associations. Savings
bank serve primarily as thrift institutions drawing funds
from household and individual and savers and investing
such funds, together with its capital, in bonds, or in
loans secured by bonds, real estate mortgage and other
forms of security. Just like any thrift bank, both stock
savings and loan association and private development
banks conduct deposit and lending operations with the
general public. Moreover, private development banks
also go into providing intermediate and long-term
credits for domestic investments with the aid of the
Development Bank of the Philippines.
SPECIALIZED GOVERNMENT BANKS

The three specialized banks

 Development Bank of the Philippines (DBP)
The DBP was established mainly to provide long-
term industrial and agricultural credit.
 Land Bank of the Philippines (LBP)
Established to serve as instrument for carrying out
part of the country’s land reform program.
 The Philippine Amanah Bank
Provides banking facilities at reasonable term to
Muslims provinces of Mindanao.
OFFSHORE BANKING UNITS (OBUS)

These are branches, subsidiaries or affiliates of

foreign banks which are authorized to transport
offshore banking business in the country.
Basically, offshore banking deals with banking
transactions in foreign currencies involving the
receipt of funds principally from foreign external
sources and the use of such funds, as a
provided for in Circular No.1034 authorizing the
establishment of an offshore system in the
Philippines.
The evolution of the Philippines
financial system in the Philippines can
be viewed from the major political
milestone of the country namely:
The Spanish Period
The “Obras Pias,” established in 1594, represented the
first organized financial institution in the Philippines.
Capitalization came from legacies of wealthy individuals,
who bequeathed their states to Church or to lay
confraternities before going to expeditions. Most of the
funds went to traders involved in the galleon trade with
Acapulco, Mexico.
On August 22, 1882, the first savings bank in the country
was founded by Father Felix Huertas and named “Monte
de Piedad y Cajade Ahorros de Manila.” A branch of Banco
Peninsula Ultramarino of Madrid was also opened within a
short span of four years. Thus, at the end of Spanish
regime in 1898, four banks -three commercial and one
savings-were doing business in the Philippines.
The American Period
Banks established during the Spanish regime continued to
operate upon the coming of the Americans to the
Philippines at the turn of century. Soon, they were joined by
branches of the International Banking Corporation and the
Guaranty Trust Company. Other foreign and domestic banks
were opened during the American Era.
 American Bank in 1901 which operated for four years
 the Wai Hung Bank and the Abrue,
 Newberry and Reyes Bank, both founded in 1902
 and similarly short-lived, the first provincial banks, Bank
of Pangasinan (1904-1906) and the Bank of Zamboanga
(1904-1908).
 The Misaka Bank opened in 1906 to serve the local
Japanese community.
In 1906, the Postal savings Bank was created
as a division of the Bureau of Post to promote
the habit of thrift among the people and to
bring banking to the rural areas.
Two years later, the government-owned
Agricultural Bank was established, but with a
meager capital of only P1 million capital if
failed to render effective service to the
farmers. With the passage of Act No. 2612,
funds were transferred to the Philippine
National Bank.
Banking businesses in the Philippines during
the period was dominated by foreign interests
until the passage of Act No. 2612 in 1916,
which called for the establishment of the
Philippine National Bank. In addition to its
privilege of note issue, the Philippine National
Bank was organized to grant and extend long-
term credit agriculture and industry.
It was also during the American Period when
definite steps were taken to supervise and
regulate the business of banking in order to
provide a measure of safety to banks depositors
and creditors as well as the bank themselves.
In 1900, the first Philippine Commission passed act
No. 52 providing the regular examination and
inspection of banks of the Bureau of Treasury.
In 1929, the Bureau of Banking was created,
assuming the power of supervision over these
institutions from the Bureau of Treasury.
The Japanese Occupation
The entry of Japanese Imperial forces in Manila on
January 2, 1942 placed the operation of the 17
existing banks at a standstill. Due to the pivotal
role of banks in business transactions, the
Japanese responsibility of fostering growth-
inducing monetary and exchange conditions, the
scope of Central Bank authority was broadened to
include not just the banking system but the
nonbank financial intermediaries as well, thus
covering the entire credit system.
The Eighties: Universal Banking
Banking reforms of 1980 effected a revision in the Philippine
banking structure including administrative regulations.
The three categories of banks were retained but a new concept of
banking called expanded commercial banking or universal banking
was introduced.

Universal Banking is the conduct of a variety of financial services

such as
 trading of financial instrument;
 foreign exchange activities;
 underwriting new debt and equity issues;
 investment management; insurance;
 as well as extension of credit and deposit gathering.

Universal banks have long dominated banking in most in

continental Europe.
The Advantage of Universal Banking: Risk
Diversification and Expanded Business
Opportunities
A Universal Bank can spread its costs over a
broader base of activities and generate more
revenue by offering a bundle of products.
Diversification, in turn, reduces risk.
 Insurance companies, investment banks and
other suppliers of financial services are moving
toward building financial conglomerates;
 Technology firms (such as Microsoft) are
hammering away at banks’ network building the
electronic gateways into financial services.
Post-Marcos Era
Mrs. Corazon C. Aquino assumed presidency in 1986, after
successful People power Revolution that ended two
decades of the Marcos Rule. Aquino found it necessary to
offset P130 billion in bad loans granted by the
government’s two major financial institutions, the
Philippine National Bank and the Development Bank of
the Philippines, “to those who held positions of power and
conflicting interest under Marcos.” This led to formulation
of the Asset Privatization Trust, whose primary goal was to
dispose of government-owned and government-controlled
properties. The assets sold resulted to proceeds of P14.3
billion in 1991, and another P6 billion worth of assets were
added to the net total. Political instability during the
period meant the economy was also “unstable,” thus
dampening activity and growth.
Reforming the Banking Law
The opening of the Philippines economy further
saw light under Joseph Estrada’s abbreviated
presidency. Before being replaced, Estrada
continued fervently the strides made by the
Aquino and Ramos administration in the reforming
the major components of the Philippine economy.
 Initiative in raising the required capital of banks
reinforced the resource base of the banking
industry. This resulted to the bank mergers, a
known example would be the PCI and the
Equitable banks merging into PCI equitable, that
paved the way to other banks to take the same
option, or seek capitalization elsewhere.

 Issues on e- banking and e- commerce exerted a

great deal of pressure on the government, thus
important bills on banking, securities and
electronic commerce were advocated.
 The reforms in the General Banking Act will allow
full foreign ownership of ailing banks, improve
transparency and keep the Philippine Banking
System abreast with the new Global Banking
System.

 The Securities Regulation Code aims at

strengthening the regulation and supervision of
securities market.

 Another important legislation involves a bill on

electronic commerce, which sets the legal
framework for business that operate over the
internet.
Focusing on the Challenge of Globalization
The world is definitely changing, and with it are
challenges that face presents businesses, financial
institution and the economy as a whole. One of the
main area of which growth is expected is in the
Small and medium-Scale Enterprise (SMEs).

 That is why support from the banks and other

financial institutions is being encouraged by the
Macapagal-Arroyo government.
 This is also the reason why government financial
institutions (GFIs) are implementing a more
“open” view in credit and financing.
 The SME Unified Lending Opportunities for
National Growth (SULONG) project which seeks
to further empower SMEs through standardized
lending program.

 The SULONG program will provide a faster way

for companies to obtain short- and-long term
funds by simplifying and standardizing lending
procedures and regulations implemented by the
government and financial institutions.
The Government Financial Institutions
(GFI) participants include:
 Development Bank of the Philippines
 Land Bank of the Philippines
 Small Business Guarantee and Finance Corporation
 Philippine Export and Import Credit Agency
 Social Security System
 Quedan and Rural Credit Guarantee corporation,
 National Livelihood Support Fund
 People’s Credit and Finance Corporation
 The Department of Trade and Industry for the entire
project
The regulatory powers of the BSP will also be
strengthened as the New Central Bank. Act is
amended.
 Amendatory provisions include the expansion of
the supervisory and enforcement powers of the
BSP to the trust entity affiliates of banks,
allowing the BSP to conduct examinations at
least once in every calendar year and the
implementation of stricker criteria for placing
banks under liquidation and receivership.
 Another provision is the increase in the penalties
of bank violation. The amendments all concur
with the efforts
 The BSP also signed a Memorandum of
Agreement with Philippine Deposit
Insurance (PDIC) with the purpose of
stablishing a framework by which vital and
relevant information are shared to best
achieve their complementary mandates.
 In addition to this, the BSP is moving to
restore its power to inquire into accounts
suspected to be in violation of banking
laws, exempted from banking secrecy law
when deposits are above a certain amount
 The Philippines follows lead of other
industrialized countries in adapting E-
banking as a viable way to increase the
volume of transactions between banks,
businesses, and individual clients.

 The diversified products and services offered

by the banks at present can also be carried
out on-line, which lowers information and
transaction costs, and provides
unprecedented convenience.
Strengthening the Banking System
BSP, in response to the growing need for
financial and banking reforms, has affected
policies and strategies that will enable the
Philippines to cope with globalization and the
emergence of e-banking.
Some of the steps to ensure that the banking
system will grow stronger are:
a. Change in the regulatory framework for banks,
Regulatory standards are being aligned with
international norms and internationally-accepted
best practices. Transparency, on the part of both
market participants and regulators, is being
emphasized to promote better bank governance
and more effective market discipline.
b. General guidelines for those banks planning to
offer e-banking services to ensure that banks
have rigorous internal controls and
comprehensive risk management systems that
adequately take into account that risks
involved in these new banking activities.
c. Mergers and acquisition and through greater
participation of foreign financial institutions.
The Social Security System
In most countries, social security means
receiving a check when one is too old to work
or in times of social distress.

In the Philippines, it means much more. The

Philippines Social Security (SSS) does not only
hand out pension checks, it has become an
instrument of social justice, as a means of
financial protection and as catalyst for
economic growth.
The Social Security System administers social
security protection to workers in the private sector.
On the other hand, the Government service
Insurance System (GSIS) take care of workers in the
public sector.

The SSS administer two programs namely:

1. The Social Security Program; and
2. The employee’s compensation (EC) Program.

Social security provides replacement income for

workers in time of death, disability, sickness,
maternity, and old age.
ITS KEY TASK
Throughout history, the key task of SSS has been
to provide social security to its members in times
of economic need and social distress. But in the
recent years due to its institution of a viable social
insurance program, SSS has enabled itself to take
on another challenge to boost country’s
socioeconomic programs.

The SSS was organized in 1957 with seed money

only P500,000. Since then, it has developed into
one of the most advanced, stable and mature
social security systems in Asia.
As of December 2001, membership was counted at
Employers - 633,306
Employees - 19,352,845
Self-employed - 4,170,027

Numbers have increase considerably from the 16

million total in 1995. Investments and assets also
increased, as it reached P164 billion pesos in 2001,
which included investment in housing, equities,
and real estate.
SSS: 21st Century Service
 The main thrust of companies today is speeding up
the way business is done.
 The technology that has pervaded today’s world
makes it possible for companies to deliver products,
services and information as fast as the click of a
button, or maybe a trip to a computer terminal.
 SSS, in moving forwards the achievement of its goals
for the new millennium has instituted new ways by
which to reach its members from almost anywhere in
the country, and even the world, by making itself
present in the web. Its site, www.sss.gov.ph, provides
information, facts and figures, new updates, access to
member information and even downloadable forms.
Private Nonbank Financial Intermediaries
1. Investment houses
2. Investment companies
3. Finance companies
4. Securities dealers
5. Securities brokers
6. Private insurance companies
7. Pawnshops and pawnbrokers
8. Nonstock savings and loan association
9. Mutual and building loan association
10. Credit unions
11. Trust and pensions funds managers
Private Nonbank Financial Intermediaries
1. Investment houses
Constitute the largest group, in terms of resources,
among the private nonbank financial intermediaries.
They have been exclusively vested with the
guaranteed underwriting function and also offer a
wide array of financial services such as planning and
consultancy, portfolio management, raising of equity
and loan capital and obtaining funds from external
sources. Among the biggest investment house in the
country today is the Private Development
Corporation of the Philippines.
2. Investment companies
Which are primarily engaged in investing, reinvesting
or trading in securities are of two types: open-end and
closed-end companies. The former, otherwise known
as mutual funds, generally sell their shares of stock,
which are redeemable at any time, on a day-to-day
basis. They are called the open-end companies
because there is no fixed amount of paid-in capital,
depending on the flows of sales and redemptions.

On the other hand, the close-end companies have

relatively fixed amounts of outstanding capital, since
there are no provisions for the issuance or redemption
of shares on a day-to-day basis.
3. Finance companies
Are either partnership or corporations which are
organized to extend credit lines to consumers and
to industrial, commercial or agricultural enterprise
by discounting and factoring commercial papers
and accounts receivables or by buying or selling
contracts, bases, chattel mortgages and other
evidences of indebtedness, or by lending motor
vehicles, heavy equipment and industrial
machinery, office machines, appliance and the
like.
4. Securities dealers
Are companies which buy and sell securities of
others or which acquire securities to resell or offer
them for sale to the public. They buy and sell
securities for their own account and do not
receive commission but derive income or loss
from trading which is differential in the buying and
selling prices of the securities.
5. Securities brokers
Are those engaged in the business of affecting transactions
in securities for the account of others. They earn their
income from commission received.

6. Private insurance companies

Are under the direct supervision and regulation of the Office
of the Insurance Companies and are other authorized to
conduct life, fire, marine, health and accident insurance.

7. Pawnshops and pawnbrokers

Are business establishment engaged in lending money on
personal property delivered as security, pledge or
collateral.
8. Nonstock savings and loan association
Are associations, which primarily provide short-term
loans to members and whose main sources of
income are savings and time deposits.

9. Mutual and building loan association

Are mutually owned stock companies that specialize
in extending long-term mortgage loans to members.
These associations help members acquire their own
house by mobilizing regular savings, capital stock
proceeds from members, retained earnings and
borrowings.
10. Credit unions
Are cooperatives composed of small producers
and consumers who voluntarily join together to
form their business enterprises that they
themselves own, control and patronize. They
extend short-term credit for provincial and
productive purposes and under the direct
supervision and regulation of the Bureau of
Cooperatives, Department of Local Government
and Community Development.
11. Trust and pensions funds managers
Are institutional and personal administrators of
funds created or constituted for the benefits of
others. Employees welfare funds are constituted by
employers wherein benefits are payable to
employee wherein benefits are payable to
employees upon retirement, death, cessation from
work and others.
Monetary Policy
Measure or actions taken by the Central Bank or regulate
the supply of money in the economy constitute what is
called monetary policy.

Monetary policy actions of the BSP are aimed and

influencing the timing, cost and availability of money and
credit, as well as other financial factors, for the purpose
of stabilizing the price level. If the BSP believes that
money supply is in excess of desired level, then it can
take action to reduce the money supply. This is referred
to as contractionary monetary policy. On the other hand,
if -based on the BSP’s assessment-the liquidity situation
is tight and there is a need to expand money supply, its
implements and expansionary monetary policy.