MASACAL, Nawal Faisal M.

June 14, 2019

ACT 171

“HISTORY OF PHILIPPINE FINANCIAL SYSTEM”

Financial system keeps the economy working. The proper circulation of funds in an economy is
necessary for the economic development of the country. Financial system is described collectively the
financial markets, participants, and the instruments and securities that are traded in the said markets.

In the Philippines, the financial system is composed of banking institutions and non-bank
financial institutions such as commercial banks, thrift banks, credit unions and more. The Bangko Sentral
ng Pilipinas and the Securities and Exchange Commission maintained the regulatory and supervisory
control.

The evolution of the Philippine financial system can be viewed from the major political milestone
of the country. The first credit institution in the country was built during the Spanish period named as the
Obras Pias. It is a banking institution started by Father Juan Fernandez de Leon in 1754 and ended in
1820. Since it is ran by friars, it generally focused on charity works and religious activities. The first
Philippine Bank, Banco Español-Filipino de Isabela II, was established in 1851 and was named after the
mother of the Spanish king back then, Isabella II. The bank is known as the Bank of Philippine Islands at
the present, and therefore is the oldest standing bank in the Philippines and in the whole Southeast Asia.

Other foreign and domestic banks were established during the American colonization. During
1906, the Postal Savings Bank was created on the division of Bureau of Post to promote the habit of thrift
among people and bring banking in rural areas. The first Philippine Commission pass Act No. 52
providing for the regular examination and inspection of banks of the Bureau of Treasury. And in 1929,
the Bureau of Banking was created assuming the power of supervision over this institutions from the
Bureau of Treasury.

In the late 19th century, Philippine entered into Universal Banking which helped the country
spread its costs over a broader base of activities and generate more revenues by offering bundle of
products. Diversification in turn, reduces risk. The universal banking sector in the Philippines has been
stable since then.

From its inception in 1948 until 1980, the Central Bank extensively regulated the commercial
banking system and engaged in considerable rediscounting activity. Interest rates were set
administratively, usually below the market clearing rate. In 1980, at the instigation of the World Bank and
the IMF, several measures were passed to increase competition in the financial sector, achieve greater
efficiency, and increase borrowers' access to long-term funds. Large banks with a net worth of at least
P500 million could engage in expanded commercial banking, or "unibanking," combining commercial
and investment banking activities.

Interest-rate ceilings had led to an excess demand for loans and credit rationing. The Malacanang
Palace interfered in loan decisions regarding state-owned banks, weakening the quality of bank portfolios.
However, before the interest rate reform could be initiated and before the expanded commercial bank
reform had an impact on the banking industry, a series of crises hit the Philippines, throwing the country's
financial system into disarray.
 The economic and political crisis that occurred in the aftermath of the assassination of Marcos's
political rival, Benigno Aquino, resulted in a virtual collapse of much of the banking industry, particularly
the smaller institutions. The two largest financial intermediaries, the Philippine National Bank and
Development Bank of the Philippines, became insolvent, and a number of financial institutions failed,
including the three largest investment houses, three commercial banks, the majority of the more than
1,000 rural banks, and the largest savings bank.

The Aquino government undertook a rehabilitation program for the Philippine National Bank and
Development Bank of the Philippines. In 1986 nonperforming assets of the two institutions were
transferred to the government, reducing the value of the assets of the Philippine National Bank by 67
percent and that of the Development Bank of the Philippines by 87 percent.

In the current, the Philippine financial system is primarily bank-based rather than capital market-
based. The banking sector, whose total assets accounted for more than 80 percent of the total resources of
the financial system4 and of GDP in 2010, plays the primary role in financial intermediation and is the
main source of credit in the economy.

References:
https://www.slideshare.net/nicerence/business-finance-41674729
http://manilynnataba.weebly.com/financial-system.html
https://www.slideshare.net/09008477344/philippine-financialsystem
https://photius.com/countries/philippines/geography/philippines_geography_finance.html