CHAPTER 1

INTRODUCTION TO THE PHILIPPINE FINANCIAL SYSTEM

History of Philippine Banking

 Philippine Banking began in 16th Century with the establishment of Obras Pias (Pious Work) by laymen associated
with religious orders.
o Funded from the legacies and donations of wealthy individuals, Obras Pias were then the sole source of
commercial credit.
o Its fund is invested in:
 Mortgage financing loans
 trade with Acapulco
 Maritime Insurance
o Its profits were channeled to:
 Construction of churches
 Government Buildings
 Other charitable and religious projects
 August 1, 1851 – First state bank in the Philippines known as Banco Espanol – Filipino de Isabel II.
 Obras Pias provide 50% of the Bank’s Capital
 In 1873 – British-Orient banks opened branches in the country as a result of the expanded
Philippine –European trade that followed the opening of the Suez Canal in 1869.
 In 1872 – Chartered Bank of India, Australia and China opened in Manila.
 In 1875 – Later opened in Iloilo and Cebu
 Monte de Piedad y Caja de Ahorros - First mutual savings in the country, it is a unique combination of
Savings bank and Pawnshops opened in 1882. Obras Pias provide the initial capital and it
was renamed to Monte de Piedad and Savings Bank.
 January 1, 1912 – Banco –Filipino de Isabel II was changed to Bank of the Philippine Islands.
 Central Bank of the Philippines – it was created three years after the American regime ends.
o Reasons:
 To establish a managed a monetary system in the Philippines.
 Sole authority to issue the republic’s new paper money
 Regulate and supervise the country’s banking system

 Banking – is the service performed by that financial institution known as bank.

o Service Includes:
 Receiving  Transferring
 Collecting  Paying
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  Lending  Dealing
 Investing  Exchanging
 Handling Money ( Safe deposit, custodianship, agency, trusteeship)
 Bank is primarily concerns of:
o Safekeeping of funds through the acceptance of deposits of money
o Provision of credit through lending money.
 Banking Institution provides the services in varying degrees:
o Commercial Bank (Regular commercial banks and expanded commercial banks
or universal banks)
o Thrift Bank (Stock savings and loan associations, savings and mortgage banks and
private development banks)
o Rural Bank or Regional Unit Bank
o Specialized Government Bank (Development Bank of the Philippines, Land Bank of the
Philippines and Philippine Amanah Bank
 Financial institution which are not considered as banks:
o Investment houses o Building and loans association
o Financing Companies o Pawnshops
o Nonstick savings and loan associations o Mutual funds
 Banking Responsibility:
o To prudent use of the funds entrusted to them
o Relationship to the client is based on confidence and trust involving the highest degree of good faith and
loyalty to the welfare of their depositors.
 Commercial Banks – covers the widest range of functions among all financial intermediaries.
o Limited only to that institution which accepts demand deposits subject to withdrawal by check.
o Extended to many kinds of loans:
 Lend not only to individual but also to all business firms.
 Financial institution and governments
 Deal with foreign exchange
 Rent out boxes which important papers, jewelries and things of value are kept.

o Correspondent Banks :
 Act as insurance Agent
 Finance and facilitate international trade
 Excess funds are kept in other banks which they do business

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 Thrift Bank:
o Savings and Mortgage Bank, stock savings and loan associations, and private development banks which,
in addition to accepting savings and time deposits perform the following:
 Grant Loans
 Grant loans
 Invest in readily marketable bonds & other debt securities
 Commercial papers and accounts receivable
 Drafts and bills of exchange
 Issues of domestic letters of credit.
 Rural Banks
o Regional banks operating primarily to serve the needs of people in the rural areas.
o Its Functions
 Grant short-term loans to farmers, merchants and cooperatives to finance their requirements in
the pursuit of their business which are principally aimed at country sude development.
 Accept savings and time deposits to accumulate funds for local development.
 Serves as channels for disbursement and collections of supervised credit programs.
 Act as correspondents for other financial institutions.
 Specialized Government Banks
o Those created by the government for specific purposes under special charters.
 The Development Bank of the Philippines – 1946
 The Land Bank of the Philippines – 1963
 The Philippine Amanah Bank – 1974
 Demand Deposits (DD)
o Also known as current accounts or checking accounts
 Time Deposit (TD)
o Are accounts with a maturity date higher interest rates. Pre-termination of time deposit is permissible, where
accounts can be withdrawn before its maturity date.
 Ordinary Savings Account – means has no maturity date and has a lower interest rate than time deposits. This can
be referred to as a person’s “callable” account.

 Bangko Sentral ng Pilipinas

o Responsible for maintaining price stability conductive to a balanced and sustainable growth economy.
o Keeps the prices of goods and services steady and at reasonable levels so the economy can run
unhampered.

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 o Provides the policy directions in the areas of money, credit and banking.
o Supervises the operations of banks to promote the soundness and safety of banking as provided by R.A.
7653.
o Created the section 2 of the R.A. 7653 better known as “ The New Central Bank Act”, were it traces its roots
and fundamental structure form its predecessors when fully operated on July 3, 1993.
 Functions of BSP:
o The Money Manager – Manage the amount of money available to the public to keep prices from increasing
more than usual. It thus this to preserve the value of our money so that the earnings and savings are not
eroded by abnormal increases in prices of goods and services.
o The Supplier of Money – the only authorized legally to issue paper money notes and coins and the amount s
consistent with the country’s economic programs.
o The Banker’s Bank – can grant loans to and accepts deposits only from banks. It accepts loans to banks for
commercial, production and similar purposes as in exports and agricultural activities. They can lend cash to
banks in times of National or Local emergencies or financial problems directly threaten the stability of banks.
o The Supervisors of all Banks – they regularly monitor and examine the operations of Banks, as well as their
compliance with banking rules and regulations. Also, they have the option to assign a conservator to
temporarily manage that bank’s operations until it can get back to its feet.
o The Main Bank of the Government – the official depository of the government. Some of the tax collections
and proceeds of the sale of the government securities and foreign loans are deposited.
 The BSP Monetary Board – the policy making bodies of the bank. Were the GOVERNOR who is concurrently the
Chairman of the Board, with five full-time members from the private sectors and one member of the Cabinet.
 Bank’s Three Major Operating Sectors:
o The Banking Service Sector: serves the banking needs of all banks through the combined needs of all
banks through the combined efforts of these BSP Departments and offices.
 Bank Operations Services – needs of branches of banks outside Manila;
 Department of Loans and Credit Lends – extends credit to banks.
 Asset Management Department – takes care of disposition of BSP material Asset.
 Int’l Operations Department – manage the BSP Foreign transactions and their needs.

o The Supervision and Examination Sector – takes care of enforcing banking laws and monitoring compliance
so as to promote a banking system that is safe and sound.
o The Resource Management Sector – serves the personnel, security and transport, computerization, building
and facilities and other administrative needs.
o Offices under the office of the Governor –
 The Treasury Department manages the Bank’s treasury holdings;

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  The Department of Economic Research – monitors the economic statistics to draw-up the proper
monetary policies;
 The Public Information, Relations and Special Events Office (PIRSEO) – serves as public relations
needs of the Bank;
 The Internal Audit Office – checks each BSP Office if their jobs are being done with accordance to
the mandates.
 The BSP aims:
o To be a world-class monetary authority and the catalyst for a globally competitive economy and financial
system that delivers a high quality of life for all Filipinos as its vision.
 The BSP’s Vision:
o Is committed to promote and maintain the price stability and provide productive leadership in bringing about
a strong financial; system conductive to a balanced and sustainable growth of the economy.
 The BSP’s Mission:
o It shall conduct a sound monetary policy and effective supervision over financial institutions under its
jurisdiction.
 BSP Three Main Pillars:
o Price Stability – refers to a condition of low and stable inflation. Main responsibility is to formulate and
implement policy in the areas of money, banking and credit, with primary objective of preserving price
stability. By keeping the inflation low, the BSP helps ensure strong and sustainable economic growth and
better living standards.
 Monetary policy – refers to the measures or actions taken by BSP to help keep inflation low and
stable. The BSP used “Inflation Targeting” as one of monetary approach.
o Financial Stability – the BSP supervises banks, quasi-banks and their subsidiaries as well as affiliates by
ensuring the compliance with rules and regulations. This would be the assurance of business is in safe and
sound manner. It also regulates non-bank financial institutions, including non-stock savings and loan
associations as well as pawnshops, under special laws. It used the “Risk-Based Supervisory Approach”
practices a consolidated supervision in the case of banking groups. It requires the banks to adopt the
Philippine Financial Reporting Standards (PFRS) based in International Accounting and Financial Reporting
Standards (IAFRS)
o Efficient Payments and Settlement System – transactions settled in cash, check, stored value cards
involving small amounts, as well as transactions in interbank loans, purchases and sales of government
securities, foreign currency sales and purchases as well as high value customers payment require critical
area of supervision by the BSP. It is known as “ Philippine Payments and Settlement System or PhilaSS”, It
is the real time gross settlement system operated and maintained by the BSP.
 The Monetary Board:
o Article II, Republic Act. No. 7653 better known as The New Central Bank Act:
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  The powers and functions of the Bangko Sentral shall be exercised by the Bangko Sentral
Monetary Board which composed of 7 members appointed by the President of Philippines for a
Term of 6 years. They are:
 The Governor – who will be the Chairman of the Board.
 Member of the Cabinet – maybe designated by the President of the Philippines.
 5 members from Private Sectors – all of them serves as full time. The 3 of the members
will have 6 years and other 2 is 3 years of service.
 The Members of the Monetary Board must be:
 Natural Born Citizen of the Philippines;
 At least 35 years of age with the exception of the Governor who should at least 40 years
of age;
 With good moral Character of unquestionable Integrity of known probity and patriotism;
 With recognized competence in Social and Economic Disciplines.
 The members of the Monetary Board coming from Private sector shall not hold any Public Office or
any Public employment during their tenure. No person shall be a member of the Monetary Board if
he has been connected directly with a multilateral banking or Financial Institution or has a
substantial interest in any private bank in the Philippines, within 1 year prior to his appointment;
likewise, no member of the Monetary Board shall be employed in any such institution within 2 years
after the expiration of his term except when he serves as an official representative of the Philippine
Government. Reasons for Demotion of any members:
 Subsequently disqualified under the provision of Section 8 of this Act;
 Physically or mentally incapacitated for the last 6 months.
 Guilty of any acts or operations which are fraudulent in nature or illegal character which
opposed the aims and interest of BSP.
 Members with no longer posses the qualifications.

 Instrument of Monetary Control – These are techniques used by BSP to determine the country’s total money supply.
The 2 instruments:
o Quantitative Instrument:
 Open Market Sales – refers to the purchase and sale of government securities.
 Discount Rate Policy – when member banks barrow from legal reserves, the reserves of the banks
are increased by the amount equal to the barrowings.
 Reserve Requirements – Bank Reserves shall be proportional to the Bank’s deposits liabilities and
shall ordinarily take form of a deposit in the BSP. It applied to all banks uniformly without
discriminations.
o Qualitative Instrument:

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  Stock Market Credit / Open Market Operations – setting minimum requirement on the purchase of
Stock. The minimum requirement is the down payment a purchaser of stocks must pay` to buy the
stock on credit.
 Moral Suasion – describes as informal method used by BSP to persuade its member banks to
behave in a particular manner.
 Other Laws related to Philippine Military System:
o Philippine Coinage Act 1903 o Dollar Exchange Standard
o U.S. Coinage Act of 1903 o Mickey Mouse Notes
o Gold Reserve Act of 1934 o Manage Currency System
 Characteristics of Philippine Currency – the BSP has the sole power and authority to issue currency, within the
territory of the Philippines. NO other persons or entity, public or private, may put into circulation notes, coins or any
other object or document which in the opinion of the Monetary Board, might circulate as currency, nor reproduce or
imitate the facsimiles of BSP notes without prior authority from BSP.
o Features of Philippine Notes and Coins:
 Denominations – includes face value of each coins and paper bill.
 Dimensions – Sizes of coins and paper bills.
 Designs and Inscriptions – the graphics or text imprinted in each money.
 Color – variations of color in each denomination for easy recognition.
 Weight – includes paper weight and metal weight of alloy for coins.
 The said note shall bear the signatures of the President of the Philippines and Governor of Bangko Sentral.
 All expenses incurred in the printing of notes and the making of coins shall be for the account of the Bangko Sentral.
 The Bangko Sentral shall exchange, on demand and without charge, Philippine currency of any denominations for
Philippine notes and coins in any denomination requested.
 Notes and Coins whose identification is impossible shall be replaced by the Bangko Sentral. Coins which shows
signs of filings, clippings or perforation, and notes which have lost more than 2/5 of their surface, lost serial number
and all the signature inscribed thereon shall be subject for replacement, without compensation to the bearer.
 Interconvertibility of Currency – the replacement of notes and coins with other denominations for the same values.
 The BSP may call the denomination which more than 10 years for coins and 5 years for notes with a period of 1 year
from the time of call.
 The Philippine Financial System: Its Elements
o Includes processes and procedures used by the organization’s management to exercise financial control
and accountability. Measures Includes:
 Recording
 Verification and timely recording of transactions that affects:
 Revenue, expenditures, assets and liabilities.

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 o Major Role:
 Is to set a meeting point between available economic agents and those with financial needs. This
vital for making sounds decisions based on cash flow and available resources, monitoring funds or
comparing actual income and any expenses versus budgeted amount.
o The 3 Inclusions:
 Financial Institutions – consist of private and government organizations whose main assets are
incomes or claims derived in the performance of financial services. These may includes financial
intermediaries acting as middlemen between supplier and users of funds.
 Financial Markets – are institutions which bring together parties of buying and selling financial
claims.
 Financial Claims – includes right to received money based on financial instrument presented.

 Private Banking Institutions:

o These companies perform the service of safekeeping of funds through the acceptance of money deposits,
and provision of credit through lending of money. These are: Commercial Banks, Thrift banks and Rural
Banks.

 Government Banking Institutions:

o The roles of government in banking system in the country are to supplement the credit facilities of the
private institutions. These banks are: Philippine National Bank, Development Bank of the Philippines, Land
bank of the Philippines and Philippine Amanah Bank.
o Philippine National Bank is authorize:
 To purchase, discounts or negotiate promissory notes, drafts, bills of exchange and other
evidences of debts issued or drawn for agricultural, export, industrial, commercial and other similar
purposes with collaterals which may be required by the bank.
 To grant loans or to discount notes secured by harvested and stored crops or agricultural crops.
 To grant medium-term or long term loans.
 To make loans to any branch, subdivision or the agency of the government.
o Development Bank of the Philippines was established in 1946 as the rehabilitation Finance Corporation to
attend to the requirements of the rehabilitations and development after World War II. Today, it is tasked with
the development and expansion of agricultural industry and promoting the establishment of private
development banks.
o Land Bank of the Philippines was organized in 1963 to provide and timely adequate financial support to the
Agrarian Reform Program.

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 o Philippine Amanah Bank was establish to promote and accelerate the socio-economic development in
Mindanao especially in the predominantly Muslim province and economically depressed areas in Cotabato,
Lanao del Sur, Lanao del Norte, Zamboanga del Sur, Zamboanga del Norte, and Sulu.
 Private Non-Bank Financial Institutions
o Investment Houses – companies that engage in underwriting securities of other Corporations.
o Investment Companies – financial institutions that raise funds in the capital market by selling their own
issues of securities, mainly common stocks, to individual investors.
o Financing Companies – extend credit facilities to consumers and to industrial, commercial, or agricultural
enterprises.
o Securities dealers / broker – intermediaries in the marketing process, as brokers, dealers or underwriters.
o Non-stock savings and loan associations – corporations engaged in the business of accumulating the
savings of its members.
o Building and loan associations – called mutual building and loan associations, these are corporations whose
capital stock is be paid by the stockholders in regular, equal periodical payment, and whose purpose is to
accumulate savings of Stock Holders.
o Pawnshops – entity engaged in the business of lending money on personal property delivered as security
for loans.

 Addt’l source of credit for small borrower:

o Trust Corporations – act as trustees or administrators of any property or trust and deposits.
o Insurance Companies – provide mechanism for distributing equitably losses among a large number of
persons who are subject to particular risks.
o Fund Managers – can be bank or non-bank financial institutions performing quasi-banking functions engage
the administration and management of property or money or an agent or representative of the owner of a
third persons.
o Lending Investor – received funds from one group of persons regardless of number, through traditional
deposits, issuance of debt and equity securities; and make available or lend these funds to another persons
or entity.
o Venture Capital Corporation - was organized under Presidential decree No, 1688 on 1980 to assist small
and medium scale industries.
 Government Non- Bank Financial Institutions
o Huge financial resources of the government financial Institutions (GFIs) and their desire to promote socio-
economic development to the community and people.

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 Government Service Insurance System (GSIS) was entrusted with the administration of Life
Insurance Fund. It is extended life insurance coverage and benefits to the members and has
supported financially a wide range of economic development projects both government and private.
Administers the following:
 Retirement Insurance Fund
 State Insurance Fund/Employees/ Compensation
 General Insurance Fund / Property Insurance
 Barangay Officials Life Insurance Fund
 Social Security System (SSS)
 Grants to its members, those the private sector, benefits such as sickness, disability,
death and old-age pension. Additional benefits have been incorporate d into the scheme,
including hospitalization benefits, employees ‘compensation benefits, and maternity
benefits.

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