THE PHILIPPINE FINANCIAL SYSTEM

HISTORY OF PHILIPPINE BANKING

Banking in the Philippines began in the 16th century with the establishment of Obras Pias
(pious works) by laymen associated with religious orders. It is funded from the legacies and
donations of wealthy individuals, the Obras Pias was the sole source of commercial credit.

Among the first banks that engaged in the early 19 th century was the Rodriguez Bank,
which was more of loan association than a regular bank.

The need for extensive bank services and facilities led the Board of Authorities (Junta de
Autoridades) in Manila was established on August 1, 1851 as the first state bank in the
Philippines; the Banco Español-Filipino de Isabel II. The Obras Pias provided 50 percent of the
bank's capital.

The Hongkong and Shanghai Banking Corporation established its Manila branch in
1875. The first mutual savings in the country, the Monte de Piedad y Caja de Ahorros - a unique
combination of savings bank and pawnshop was opened in 1872, and was provided initial
capital by the Obras Pias. The bank was then renamed Monte de Piedad and Savings Bank.

The Banco Español-Filipino de Isabel II changed its name to Bank of the Philippine
Islands (BPI) on January 1, 1912.

During the American occupation, seven domestic private banks came into existence.
Branches of Japanese as well as Chinese banks were also opened during the early part of the
period. The Postal Savings Bank was put up in 1906. The first agricultural bank was established
in 1908 but its assets and liabilities were transferred to the Philippine National Bank (PNB)
which was organized in 1916.

Three years after the American regime ended, the Central Bank of the Philippines (CBP)
was created, establishing a managed monetary system in the Philippines.

BSP Supervised Banks/Statistics

The BSP monitors and compiles various indicators on the Philippine banking system. The Philippine
banking system is composed of universal and commercial banks, thrift banks, rural and cooperative
banks.

Universal and commercial banks represent the largest single group, resource-wise, of financial
institutions in the country. They offer the widest variety of banking services among financial institutions. In
addition to the function of an ordinary commercial bank, universal banks are also authorized to engage in
underwriting and other functions of investment houses, and to invest in equities of non-allied
undertakings.

The thrift banking system is composed of savings and mortgage banks, private development banks,
stock savings and loan associations and microfinance thrift banks. Thrift banks are engaged in
accumulating savings of depositors and investing them. They also provide short-term working capital and
medium- and long-term financing to businesses engaged in agriculture, services, industry and housing,
and diversified financial and allied services, and to their chosen markets and constituencies, especially
small- and medium- enterprises and individuals.

Rural and cooperative banks are the more popular type of banks in the rural communities. Their role is
to promote and expand the rural economy in an orderly and effective manner by providing the people in
the rural communities with basic financial services. Rural and cooperative banks help farmers through the
stages of production, from buying seedlings to marketing of their produce. Rural banks and cooperative
banks are differentiated from each other by ownership. While rural banks are privately owned and
managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives.

The BSP likewise releases selected statistics on non banks with quasi-banking functions . This group
consists of institutions engaged in the borrowing of funds from 20 or more lenders for the borrower's own
account through issuances, endorsement or assignment with recourse or acceptance of deposit
substitutes for purposes of relending or purchasing receivables and other obligations.

POLICY AND LEGAL FRAMEWORK OF THE FINANCIAL SYSTEM

The Central Bank Act of 1949 was the legal basis of the banking system until 1993.
Government assumed a substantial role through bank supervision and regulation of various
financial institutions by the Central Bank, and the participation of government policy of
developing the financial systems involved the restriction of competition. It allowed financial
institutions to operate, thus, controlling competition. Government wanted specialized financial
intermediaries to achieve economies of scale and develop the financial markets. When the
economic crisis of the early 1980's demonstrated the weakness of this policy, government
adopted financial reforms toward gradual liberalization of the financial system. Consequently,
idea of universal banking was introduced.

The Central Bank's roles that used to cover central banking, wholesale banking, and
policy making functions were reshaped. The reform caused CB's role only on central banking
functions. CB relinquished its whole banking functions to the Development Bank of the
Philippines (DBP) and its monetary policy making function was transformed to an independent
Central Monetary Authority, based on the New Central Bank which was passed in 1994. This
new law implemented these changes and credited the Central Monetary Authority (CMA).

Chronology of Events: Central Banking in the Philippines

1900 Act No. 52 was passed by the First Philippine Commission placing all banks
under the Bureau of Treasury. The Insular Treasurer was authorized to
supervise and examine banks and banking activities. 
   
February 1929 The Bureau of Banking under the Department of Finance took over the task of
banking supervision.

   
February 1948 President Manuel Roxas submitted to Congress a bill “Establishing the
Central Bank of the Philippines, defining its powers in the administration of the
  monetary and banking system, amending pertinent provisions of the
Administrative Code with respect to the currency and the Bureau of Banking,
and for other purposes.
   
15 June 1948 The bill was signed into law as Republic Act No. 265 (The Central Bank Act)
by President Elpidio Quirino.
   
3 January 1949 The Central Bank of the Philippines (CBP) was inaugurated and formally
opened with Hon. Miguel Cuaderno, Sr. as the first governor.

The broad policy objectives contained in RA No. 265 guided the CBP in the
implementation of its duties and responsibilities, particularly in relation to the
promotion of economic development in addition to the maintenance of internal
and external monetary stability.
   
   
3 July 1993 Republic Act No. 7653 was passed establishing the Bangko Sentral ng
Pilipinas (BSP), replacing CBP as the country's central monetary authority.
   
14 February 2019 Republic Act No. 11211 was passed amending RA No. 7653. The charter
amendments bolster the capability of the BSP to safeguard price stability and
financial system stability.
   

BSP : AS THE CENTRAL MONETARY AUTHORITY

 Under the laws of the Philippines, Bangko Sentral ng Pilipinas (BSP) is defined as the
central monetary authority (CMA) which provides policy direction in the areas of money, credit,
and banking. In general, it has three major functions:; for policy-making, it formulates various
monetary policies for different financial institutions; for supervision, it has the control over
banking systems; and for regulatory function, it regulates the activities of non-banking financial
institutions.
Its main objectives are monetary stability, both internal and external stability as well as
economic growth of the country. It is organized precisely to pursue certain socioeconomic goals
which concern national interests or public welfare.
BSP is the only bank authorized to manufacture and issue money. Anyone without the
authority given by the Bangko Sentral is guilty of counterfeiting, i.e, making of fake and bogus
currency. It has the monopoly of money supply to control inflation and deflation in order to
stabilize prices of basic goods and services. It is charged with a responsibility of the highest
importance which is to formulate and implement monetary policies designed to control and
regulate money supply and the volume of the credit

Supervision includes not only the issuance of rules and regulations but also the overseeing
of operations of a financial institution. Regulation is basically undertaken by the BSP through
review and analysis of reports submitted by a financial institution to a government agency
concerned.

ROLE OF FINANCIAL INSTITUTIONS

The financial system is a network of various financial institutions which generate and
circulate money and credit. It provides intermediation between the suppliers and the users of
money and credit. As an integral part of an economic system, it provides loans to poor families,
small producers, big businessmen, and industrialists. It further stimulates the social and the
economic development of the country.

In the Philippines, the financial institutions can be classified into banking and non-bank
financial institutions.

TYPES AND FUNCTIONS OF FINANCIAL INSTITUTIONS

The financial institutions in the Philippines as classified as follows:

 A bank is an entity duly authorized the Monetary Board (MB) of the Bangko Sentral ng
Pilipinas that may engage in the lending of funds obtained from the public through the receipts
of deposits of any fund and all entities regularly conducting such operations. Bank serves as
depository of idle funds and serves as major sources of loanable funds. Deposits received by
the banks and immediately lent out by the banks. This way the banks make money out of other
people's money.

THE FUNCTIONS OF THE BANKS

There are various functions that the bank may serve to the public. To mention a few,
these are the most basic important activities that banking institutions are doing:

1. Depository Function

a. Savings Deposit (interest earning)

Savings deposits are accepted for safekeeping in anticipation for future or

emergency needs. It is evidenced by a passbook and is withdrawn through the
presentation of a properly accomplished withdrawal form together with the passbook. It
earns interest depending on the required minimum balance of the bank. Without a
savings account passbook, a depository may be issued an ATM card which one can use
in withdrawing his deposited money from any automated teller machines of the various
branches of the bank or any automated teller machines of Bancnet or Megalink, or
Express net, where the bank is a member of this grouping.

b. Demand Deposit (current account or checking account deposit or commercial

account deposit)

This deposit does not earn interest because of the funds mobility and it can be
withdrawn anytime by presenting a check.

c. Time Certificate of Deposit

It is evidenced by a certificate maturing at a definite future time. Placement on

this kind of deposits has a term of either 30 days, 60 days, 90 days, 180 days or even
360 days. They are considered short-term investments. It earns interest depending on
the term of deposits. The higher the term, the higher the interest rate will be given to this
type of deposits.
 2. Trust Function

As a trustee, the bank is expected to administer the funds properly under the
custody with skill, care, prudence, and diligence necessary under the circumstances.

3. Collection and Remittance Function

A bank can act as a collection agent. And, in return for its services rendered, it
collects a service from the clients. The bank is also engaged in concentration banking
which does the function of collecting the company's receivables from its clients who are
located far and distant places. This minimizes the cost of collection on the part of the
client-company and, thus, increases the deposit bases of the bank.

4. Loans and Discount Function

The bank extends loans to the prospective loan applicants. The most substantial
source of credit is channeled through this department. Borrowers of the bank may not
only be individuals and private businesses but also government. The types of loan
accommodation of the bank may be in the form of agricultural, commercial, or industrial
loans or may even be personal and salary loan especially for the working people who
receive the monthly salary or income. The collection of these different loans is performed
by the Collection Unit or department of the Bank, as the case may be.

A. BANKING FINANCIAL INSTITUTIONS

Banking financial institutions may be classified as follows:

1. Expanded Commercial Banks (Universal Banks)

The expanded commercial banks (Universal Banks)) shall have the authority in
addition to ordinary commercial banking powers, to invest in the equity of non-allied
undertakings (not related to banking) and to own up to 100% of the equity of a financial
intermediary other than a commercial bank authorized to provide commercial banking
services, in accordance with the applicable laws and regulations. The existing minimum
capitalization is 4.95billion.
2. Ordinary Commercial Banks

A commercial bank shall have the minimum capitalization of Php2.40 Billion for
an ordinary bank in addition to the general powers as shall be necessary to carry on the
business of commercial banking.

3. Thrift Banks

These banks are established to encourage thriftiness, industry, frugality, and

accumulation of savings among the people. Thrift banks are sub-classified as follows:

a. Savings and Mortgage Banks.

These banks are organized for the purpose of accumulating the savings of
individuals and investing them together with their capital in readily marketable bonds
and debt securities, commercial papers (IOU's) and account receivables.

b. Private Development Banks

These are banks organized to expand, develop, construct, and rehabilitate our
agriculture and industry.

c. Stock Savings and Loan Associations

This shall include any corporation which engaged in the business of accumulating
the savings of depositors together with its accumulated capital and give these out for
loans and for investment in securities of the government and any of its political
subdivisions and instrumentality.

4. Rural Banks

They are organized to promote and expand the rural economy in an orderly and
effective manner by providing farmers and small businessmen with means of facilitating
and improving their productive facilities.
 5. Cooperative Banks

The establishment of cooperative bank is in line with the special provisions of the
Cooperative Code of the Philippines, RA 6938. Any registered cooperative may
organize themselves as a cooperative bank.

6. Offshore Banks

Offshore banking means doing business with non-resident, that is, the clients are
not based in the Philippines. However, our government allows the offshore banking
units (OBUs) to do business with Philippine-based clients. Examples are as follows:

1. BNP Paribas
2. Taiwan Cooperative Bank

THE ECONOMIC SIGNIFICANCE OF BANKS

Banks are initially conceived to facilitate trade transactions particularly credit transactions.
They facilitate processes between the debtor and creditors because they serve as
intermediaries in the flow of credit funds. They likewise promote the use of otherwise idle funds
deposited into individual and corporate accounts for the use of productive enterprises. The
financial cycle, in turn, inactivates trade and industry, to ultimately fund the overall economic
machinery.

Banks assume a significant role in the national economy because of their inherent
capacity to create new money from loan proceeds. Bank's abuse of their powers disrupts the
progress of the economy. On the other hand, if the bank judiciously invests its entrusted funds
and performs according to expectations, it contributes immensely to national development
through the financial returns of commercial, industrial and agricultural activities.

Banks provide technical assistance and express advice to investors, thereby giving the
country the leverage it needs to compete with other economies of the world.
 As to foreign trade, banks are major links between international buyers and sellers,
between importers and exporters. Their influence allows the unhampered flow of foreign trade
and this is evident where the particular bank is doing business with other important networks
like world renown international banks. Foreign trade is very necessary for a country because
through this transaction a country can earn foreign exchange for its domestic and international
needs. Many other reasons may be advanced to underscore the economic significance of banks
but those mentioned may well sum up as the most important.

B. NON-BANK FINANCIAL INSTITUTIONS

These are financial institutions that neither grant commercial loans nor take in deposits.
These are classified by the BSP as those financial institutions with quasi-banking functions and
those without quasi-banking functions. "Quasi-banking" literally means activities that are almost
related to banking but they are not banks.

These institutions are as follows:

1. Investment Houses

An investment house is a financial institution that sells a company's shares of

stock to the general public. This practice is called underwriting.

2. Financing Companies

Finance companies are those which are engaged in granting short and
intermediate term installment loans to consumers; factor or finance business receivable;
and finance the sale of business and farm equipment, tools, and machineries. Funds are
raised by finance companies by issuing stocks and bonds, borrowing from banks, and
selling their commercial papers (IOUs) just like any other corporations.

3. Investment Companies
 Investment companies are financial institutions that obtain funds from a large
number of investors by selling shares. The funds generated by this activity are placed in
pools under the care of professional managers. Securities like stocks and bonds and T-
bills are then purchased and invested for the benefit of all shareholders.

4. Securities Dealers and Brokers

A security dealer is a firm that purchases securities and holds those for later sale
at a profit. The firm accepts a significant risk in buying securities in anticipation of profits.
Sometimes, it suffers a loss when prices of stocks decrease and earns profit when stocks
are sold at higher prices.

A security broker acts as a go-between buyer and seller of securities, bringing

the two groups together so financial intermediation process/transaction can take place. In
return for services rendered, the broker charges a commission that reflects the cost of
searching the market for suitable buyers and sellers of securities or stocks. Most of these
dealers and brokers of stocks are situated in Philippine Stock Exchange (PSE) in Manila.
But some of these have branches in the big cities of the Philippines where securities are
traded actively. Example of this is the MMG Holding Corporation located at J.P. Laurel, in
Davao City.

5. Venture Capital Corporation

A venture capital corporation is a financial intermediary that pools the resources

of its partners and uses these funds to help entrepreneurs or would-be entrepreneurs
start up a new business. This fund is normally intended as a starting capital for additional
working capital. A venture capital firm raises funds mainly from pension funds, retirement
pays, insurance companies, and non-profit institutions. Example is the Heritage and
Capital Corporation, Magsaysay St., Davao City and Mindanao Capital Corporation at
Quirino Ave., Davao City.

6. Non-Stock Savings and Loan Associations

A non-stock saving and loan association is a non-stock, and non-profit

corporation engaged in the business of accumulating the savings of its member to serve
the needs of households by providing a short-term loans for personal purposes and long-
term financing for house building, improvement, and development. An example of this
kind of association is the Air Material Wing Savings and Loan Association, Inc.
(AMWSLAI) of the military and police of the active and non-active (retired) members of
these organizations.
 7. Pawnshops

A pawnshop is owned by a person or group of persons or entity engaged in the

business of lending money to various individuals and professionals to be secured by a
personal property as collateral for loans. These securities may be in the form of jewelries,
appliances like TV, refrigerator, washing machines, or even cellphones. A pawnshop may
be organized as a single proprietorship, partnership, or a corporation. These are so many
of these in the country.

8. Insurance Companies

The type of financial intermediary that helps people protect against possible
financial or property loss is called Insurance Company. The insurance company, or
misuser, is a risk-sharing firm that agrees to assure financing responsibility for losses that
may result from an insured risk.

9. Lending Investors

A lending investor is a non-bank financial intermediary primarily engaged in the

granting of direct loans to the public. But it is not allowed to do the following activities:

a. Engage in pawn broking activities (as defined under R.A. No. 114), i.e.
granting loans cannot receive goods as pledge.
b. Perform financing activities like leasing, discounting, or factoring of
commercial papers or receivables and evidences of indebtedness (those
defined under R.A. No. 5980)

Factoring means activity of managing the trade debts of another firm.

Visit to:

http://www.sec.gov.ph/lending-companies-and-financing-companies/list-of-lending-companies/

10. Government NBFIs

These consist of Government Service Insurance System (GSIS) and the

Social Security System (SSS), and Home Development Mutual Fund (HDMF or Pag-
ibig). The GSIS provides insurance services to government employees while the SSS
caters to the insurance needs of employees of private firms. Both government NBFIs are
primarily concerned with providing retirement insurance to members. The HDMF or Pag-
ibig caters both the private and government employees.

In conclusion, these NBFIs provide financial services that are otherwise, not
provided by banking institutions. Their growth and staying power gives due to their
importance.
Lending Companies and Financing Companies
LENDING COMPANIES
Definition

A corporation engaged in granting loans from its own capital funds or from funds sourced from not more
than nineteen (19) persons.

It shall not be deemed to include banking institutions, investment houses, savings and loan associations,
financing companies, pawnshops, insurance companies, cooperatives and other credit institutions already
regulated by law.

The term shall be synonymous with lending investors.

(Section 3, Republic Act No. 9474 or the Lending Company Regulation Act)
It shall only be established as a stock corporation with the words “Lending Company”, “Lending Investor”
or any other word descriptive of its primary activity of granting loans to the public, except words commonly
used to identify financing companies, included in its corporate and trade name.

No lending company shall conduct business unless granted an authority to operate by the Securities and
Exchange Commission (“SEC”).

(Sec. 4, R.A. No. 9474  and Rule 3 of its Implementing Rules and Regulations [“IRR”])
Powers

A lending company may grant loans in such amounts and reasonable interest rates and charges as may
be agreed upon between the lending company and the debtor:

Provided, That the agreement shall be in compliance with the provisions of R.A. No. 3765 (Truth in
Lending Act) and R.A. No. 7394 (Consumer Act of the Philippines);
Provided, further, That the Monetary Board, in consultation with the SEC and the industry, may prescribe
such interest rate as may be warranted by prevailing economic and social conditions.
(Sec. 7, R.A. No. 9474)
FINANCING COMPANIES
Definition

Corporations primarily organized for the purpose of extending credit facilities to consumers and to
industrial, commercial, or agricultural enterprises,

(1) by direct lending or by discounting or by factoring commercial papers or accounts

receivable, or

(2) by buying and selling contracts, leases, chattel mortgages, or other evidences of
indebtedness, or

(3) by financial leasing of movables as well as immovable property.

It does not include banks, investment houses, savings and loan associations, insurance companies,
cooperatives, and other financial institutions organized or operating under other special laws.

(Sec. 3(a), R.A. No. 8556 or the Financing Company Act, as amended)
It shall be organized in the form of a stock corporations, subject to the following requirements:

(a) At least forty percent (40%) of the voting stock of the corporation shall be owned by
citizens of the Philippines;

(b) A minimum paid-up capital as required by SEC issuances regarding financing companies;
and

(c) The corporate name of financing companies shall contain the term “financing company”,
“finance company”, “finance and investment company” or any other title or word(s)
descriptive of its operations and activities as a financing company.

(Sec. 6, R.A. No. 8556)

Rights and Powers

(a) Engage in quasi-banking and money market operations with the prior approval of
the Bangko Sentral ng Pilipinas (“BSP”);

(b) Engage in trust operations subject to the provisions of the General Banking Act upon
prior approval by the BSP;

(c) Issue bonds and other capital instruments subject to pertinent laws, rules and
regulations;

(d) Rediscount their paper with government financial institutions subject to relevant laws,
rules and regulations;

(e) Participate in special loan or credit programs sponsored by or made available through
government financial institutions; and

(f) Provide foreign currency loans and leases to enterprises that earn foreign currency by
exports or other means subject to existing laws, rules and regulations promulgated by the
BSP.

Such rights and powers may be included in the financing company’s Articles of Incorporation after
submission of the appropriate license/authority issued by the government agency involved.

(Sec. 9, R.A. No. 8556)