Basic Business Finance

The Philippine Financial System

The Philippine Financial System

1. Learning Objectives
a. Understand financial institutions and their participation in the financial
system.
2. Sources of funds can either be internal or external.
a. Internal source of funds come from existing stockholders.
b. Firms that require funds from external sources can obtain them in three
ways:
i. Through bank or other financial institution
ii. Through financial markets
iii. Through private placements
• Involves the sale of new security issue typically bonds or
preferred stock directly to an investor or group of investors.
3. Financial Institutions

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The Philippine Financial System

a. Financial institutions: intermediaries that channel the savings of

individuals, businesses, and governments into loans or investments.
i. Key suppliers and demanders of funds are individuals, businesses,
and governments.
ii. In general, individuals are net suppliers of funds, while businesses
and governments are net demanders of funds.

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The Philippine Financial System

The Philippine Financial System: A Historical View

1. Can be viewed along with the major political milestones of the country:
a. Spanish period;
b. American period;
c. Japanese occupation;
d. Post war and Independence period
e. New society period
2. Spanish period
a. “Junta Administradora de Obras Pias” commonly called “Obras Pias”
represented the first organized financial institution in the Philippines.
i. Performs religious functions which drew capitalization from the
legacies of wealthy individuals.
ii. Most of the funds were lent to traders to finance the galleon trade
with Acapulco, Mexico.
iii. Operations ended in 1820 and totally non-existent in 1851.

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b. The first important bank in the country – which happens to be the first
bank in the Far East is “Banco Espanol-Filipino de Isabel II”.
i. The Spanish government aware of the progress in the country,
granted a charter to establish a commercial bank in 1828.
ii. Commenced operations in 1851 and engaged in general banking
functions and financed in a limited way the country’s foreign trade.
iii. The bank still exists today bearing the name of Bank of the
Philippine Islands.
c. The opening of Suez Canal in 1869 expanded Philippine-European trade.
i. British capital expanded in the country which paved way to the
establishment of agencies with headquarters in foreign countries
such as Chartered Bank of India, Australia and China; Hongkong
and Shanghai Banking Corporation.
d. At the end of the Spanish regime in 1898, four banks (three commercial
and one savings) – were operating in the country.
3. The American Period

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a. Banks operating during the Spanish period continued operations in the

country.
b. During this period, more foreign banks were opened including the
International Banking Corporation, American Bank, etc.
c. Banking business is primarily dominated by foreign interests until the
passing of Act 2612 in 1916 which called for the establishment of the
Philippine National Bank.
d. After World War I, more foreign and domestic banks were attracted to
operate in the country which includes the China Banking Corporation
(1920); the People’s Bank and Trust Company (1926).
e. The establishment of the Commonwealth in 1935 paved way for more
banking institutions entering the Philippine scene.
f. During the American Period, definite steps were taken to supervise and
regulate the banking operations to provide a measure of safety to bank
depositors, creditors and banks.

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i. Act No. 52 passed by the first Philippine Commission provided for

the regular examination and inspection of banks by the Bureau of
Treasury.
• Objective was to safeguard the interests of depositors and
stockholders.
ii. In 1929, the Bureau of Banking was created, assuming the power of
supervision over the banking institutions from the Bureau of
Treasury.
g. Before the outbreak of World War II, 17 banks (11 domestic and 6 foreign).
4. The Japanese Occupation
a. The operations of the 17 existing banks upon the entry of the Japanese
Imperial forces in January 2, 1942 went to a standstill.
b. Because of the important role of banks in business transactions, banking
operations were resumed in January 3, 1942 but was limited only to
Filipino owned and Japanese banks.

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c. Domestic banks owned by foreign nationals were treated as enemy property

and placed under liquidation by the ruling military government.
d. The Southern Development Bank (Nampo Kaihatsu Kindo) acted as a fiscal
agent of the Japanese government in the country.
5. Postwar and Independence Period
a. Rehabilitation of the banking system after the Second World War was made
possible by Executive Order No. 49 issued on June 6, 1945.
i. Discharged banks from any liability for deposits made during the
Japanese Occupation and made them only liable for pre-Occupation
deposit balances less voluntary withdrawals.
b. Executive Order No. 48 issued on June 6, 1945
i. Authorized the bank commissioner to allow any bank which was
solvent and in a position to operate to reopen immediately.
ii. Re-opening of pre-war banks

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c. Rehabilitation of the rest of domestic banks had to wait until 1946 through
the passing of Commonwealth Act 726 which appropriated PhP10 million
for their rehabilitation.
d. This period witnessed the reopening and emergence of banks, such as the
Rehabilitation Finance Corporation organized primarily to provide financial
aid in the rehabilitation of the country and to help in the broadening and
the diversification of the Philippine economic structure.
i. RCF’s charter was later amended and gave way to a much larger and
expanded development banking institution, the Development Bank
of the Philippines.
e. Banking Laws
i. General Banking Act (R.A. No. 337)
• Contained the first major rules and regulations governing the
operation, particularly of commercial and savings and
mortgage banks
ii. Rural Banks Act in 1952

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iii. Savings and Loan Associations Act in 1963

iv. Central Bank of the Philippines was created under R.A. No. 265
inaugurated in 1949 to administer both monetary and the banking
systems of the Republic.
v. End of 1969: thirty eight commercial banks (with 542
branches/extension offices); thirteen savings banks (with 38
branches); twenty nine private development banks; 469 rural banks
and 87 savings and loan associations serviced the country both on
national and regional scale.
6. The New Society Period
a. Seventies
i. Commerce and trade flourished bringing about a more complex
economic environment.
ii. Services offered by banks has to go beyond the traditional function
of accepting deposits and lending to borrowers.

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iii. Financial reforms were made to make the banking sector stronger
and more responsive.
• Highlights:
✓ Presidential Decree (PD) 71: amended almost entirely
the General Banking Act which redefined basic
banking terms, reclassified financial intermediaries
into banks and non-banks and defined their
expanded functions as well as guidelines on their
operations.
o Broadened the Central Bank authority
to include non-bank financial
intermediaries thus covering the entire
credit system.
b. Eighties: the Universal Banking

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i. A new concept of banking was introduced: expanded commercial

banking or universal banking (one stop banking or department store
banking).
c. Nineties: the New Central Bank (Bangko Sentral ng Pilipinas)
i. On June 14, 1993, President Ramos signed RA 7653 entitled “the
New Central Bank Act” which called for the establishment of an
independent central monetary authority.

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Components of the Philippine Financial System

1. Banks
2. Non bank financial institutions
3. The Banking Sector
a. Classification:
i. An expanded commercial bank or a universal bank and commercial
bank;
ii. Thrift banks, (savings and mortgage banks, stock savings & loan
associations);
iii. Regional unit banks (rural banks) through the Rural Banks Act of
1952 and cooperative banks;
iv. Government Banking Institutions or Specialized government banks
(Development Bank of the Philippines, Land Bank of the Philippines,
Philippine Amanah Bank);

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v. Offshore Banking Units (OBUs): branches, subsidiaries or affiliates

of foreign banks.
b. In accordance with Section 3 and other related sections of the General
Banking Law of 2000, the major classifications of banks operating in the
Philippines have been modified as follows (Circular No. 271 dated January
8, 2001):
i. Universal Banks (UBs)
ii. Commercial Banks (KBs)
iii. Thrift Banks (TBs)
iv. Rural Banks (RBs)
v. Cooperative Banks (Coop Banks)
vi. Islamic Banks (IBs)
c. In the case of a foreign bank which has more than one branch and/or other
office in the Philippines, all such branches/offices shall be treated as one
unit.
4. Non-bank financial institutions

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a. Private non-bank financial institutions

i. Investment houses
ii. Financing companies
iii. Securities/dealers/brokers
iv. Pawnshops
v. Credit cooperatives
vi. Retirement/provident/pension fund managers
vii. Insurance companies
b. Government non-bank financial institutions
i. Government Service Insurance System (GSIS)
ii. Social Security System (SSS)
5. .Other Related Agencies
a. Bangko Sentral ng Pilipinas
b. Philippine Deposit Insurance Corporation
c. Department of Finance
d. Bureau of Treasury

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e. Bureau of Internal Revenue

f. Insurance Commission
g. Securities and Exchange Commission
h. Philippine Stock Exchange

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