Professional Documents
Culture Documents
In a civilized society, especially in a modern economy, every individual has an active participation
in the operations of the financial system. When a student pays his tuition fee, housewife purchases
goods, a teacher receives his salary, or a businessman obtains a loan from a bank, there is involvement in
the financial system.
The financial system is composed of various banks, insurance companies, pawnshops, credit
unions, money market, central bank, and monetary laws and policies. These are the most familiar ones.
But there are many other financial institutions that constitute the financial system. The most dominant
and powerful financial institutions are the World Bank, International Monetary Fund, Asian Development
Bank, and the multinational or transnational banks. Although these are involved in global banking or
finance, they greatly influence the operations of our financial system. Hence, they also control our
national economy.
Aside from the fundamental function of money as a medium of exchange of goods and services,
it has a very vital role in the economy. The fair allocation and proper use of money greatly contributes to
economic growth in terms of investment, employment, and income. On the other hand,
mismanagement of the money supply by the government results to inflation and unemployment. For
this reason, the Bangko Sentral ng Pilipinas has been equipped with certain monetary tools for attaining
monetary stability and economic growth.
This chapter presents the importance of finance, functions of the financial institutions, structure
of the Philippine financial system, financial reforms, among others. In addition, it provides general
information on money, credit and central banking. Brief notes on the WB, IMF, ADB, and global banking
are discussed to give students a wider view of the entire Philippine financial system.
The financial system is a network of various institutions, together with government agencies,
laws and policies, which generates, circulates and controls money and credit. It provides a link between
the lenders and borrowers of money. Aside from granting loans to individuals like farmers, fishermen,
consumers, producers, and businessmen, the financial system also finances the socioeconomic programs
of the country. The government borrows money from the Bangko Sentral or from the public to fund its
various projects.
Some people have surplus money. Clearly, it is not advisable for them to keep their wealth in
their houses. It is better that such money should be invested not only to earn interest but also to provide
capital for investors or producers. This is good for the whole economy. Needless to say that the various
financial institutions like banks and investment houses have the facilities in channeling the surplus
money of individuals into more profitable or productive ventures.
In a primitive society, moneylenders can directly deal with borrowers however, in a larger
market, middlemen are needed to facilitate the meeting of lenders and borrowers. But in a modern
economy, financial specialists are needed not only to expedite financial transactions but also to maximize
economic interests of both lenders and users of funds. Precisely, this is the main job of banks and other
financial institutions. There is no more need for the lenders to meet and deal personally with the
borrowers. Both parties transact their business with the financial institutions which acts as the
middleman or intermediary. This is far more convenient, economical and safe for the lenders of the
money.
And if all individuals with excess money entrust their financial resources in stable financial
institutions, there is a mobilization of larger capital information. Such financial capital plays a very vital
role in investment. Perhaps, there is no more need to borrow from foreign governments. As stated in
previous chapters, investment is the key to economic progress. It is investment which creates more
employment, production and income. These are the factors which accelerate economic development of
any country.
The general function of financial institutions is to facilitate the transfer of funds from the savers
to the users. This requires assistance from financial institutions because the volume of savings is large.
Moreover, certain barriers are created in the process of transferring funds, like risk, inconvenience and
cost of transfer, and liquidity problems. The specific functions of financial institutions are:
1. Matching supply and demand for funds. Financial institutions are money brokers. They bring the
lenders and borrowers of funds. For their convenience and economy, financial institutions
specialize in matching the supply of savings with the demand for loans.
2. Investigation and credit analysis. Loan applications are properly evaluated. This requires credit
investigation and analysis of the applicants’ capacity and willingness to pay. Such standard
operating procedure is being undertaken to ensure the efficient use of credit, and to protect the
savings of individuals as well as to minimize the risk of non-payment of loans.
3. Provisions of liquidity. Not a few individuals with excess money are reluctant to transfer their
money to borrowers. They may need cash anytime before their debtors will pay them. There are
certain financial instruments which cannot be converted immediately into cash. For example,
bonds. Those who have invested their savings in bonds may not be able to find buyers if and
when they decide to liquidate their bondholding. However, through the facilities of financial
institutions, the liquidity (readily convertible into cash) of financial assets have been increased.
Through the brokerage functions of financial institutions, an investor can find a buyer for his
ownership claims. Those who put their savings in banks can easily and immediately get back
their money.
4. Provides payments system. Through the medium of money, goods and services can be easily
transferred from one person to another person. The Bangko Sentral ng Pilipinas is responsible for
developing an efficient payment system in order to facilitate the exchange of goods and services.
In a modern society, checks and credit cards are being used for convenience and safety. Some
monetary specialists have been developing the idea of a cashless society to improve the
exchange system.
The Philippine financial system is not only made up of banking institutions but also non-bank
financial institutions. Here is a classification of the various financial institutions which constitute the
structure of the Philippine financial system:
Financial Reforms
In 1980, a series of laws were introduced amending the General Banking Act, Savings and Loan
Associations Act, Private Development Banks Act, Charter of the Development Bank of the Philippines,
Investment Houses Act, and the Central Bank Act. These packages of reforms in the financial system are
part of the recommendations of IMF-CB group in 1972. Also, said group was responsible for the
organization of an offshore banking system in 1977. This has allowed the multinational banks to operate
their business in our country. Small commercial banks were encouraged to merge their resources with
foreign banks.
The objectives of the 1980 financial reforms are: (1) to attain greater efficiency through
increased competition and scale of economies; and (2) to obtain greater availability and use of long term
funds. To achieve such objectives, the following reforms became necessary for implementation:
- Introduction of universal banking
- Removal of most ceilings on interest rates of deposits and loans
- Increase of the powers and functions of quasi-banks
- Elimination of all functional distinctions between private development banks and
saving banks
- Minimization of the difference between banks and quasi-banks
MONEY
Money has been considered as one of the most outstanding inventions in the entire history of
mankind. Without money, production and distribution of goods and services would be very slow.
International markets would not likely prosper. Clearly, with the use of money, it is much easier to let the
factors of production perform their jobs. It expedites the exchange of goods and services within the
country and outside the country.
Indeed, money has gained the enviable reputation of being the most popular economic good.
Nobody hates money. Our material dreams cash only be realized through the availability of money. Our
material dreams can only be realized through the availability of money. To poor people, money is
equivalent to survival. Of course, it can not be denied that too much money creates corruption or evil
practices among individuals of weaker values.
However, in the section of the book, the role of money in a modern economy is given more
importance. Money can either improve or deteriorate the whole economy depending on how it is used
and distributed. In fact, our major economic problems like inflation and unemployment are associated
with money. Because of this vital role of money in our economy, economic and financial managers of our
government should be more careful and competent in the use of our available scarce financial resources.
Functions of Money
Medium of exchange. This means we can exchange our money with goods and services. For
example, if you want to own a textbook on economics, all you have to do is exchange your money with
the book. In other words, you buy the book. This appears very simple. But not during the time when
there was no money. Transfer of goods and services from persons to persons was done through barter.
This refers to the exchange of goods and with goods or services. For instance, if you are a labourer you
are paid with goods like rice, corn, or chickens. Of course, at present, there are still primitive societies
which still use barter as a means of acquiring goods and services. Even in the Philippine rural
communities, many farm workers are being paid with palay for their services.
In some instances, our government exchange our raw materials and farm products with the products of
the industrial countries.
However, by and large, barter has several weaknesses like the lack of double coincidence. For
example, a man with horse likes to exchange his animal with a cow. He has to look for another man who
has a cow, and who likes a horse to replace his cow. Needless to say that this is time consuming. Other
defects of barter are inconvenience and burdensome. Obviously, a modern economy can not co-exist
with the barter system. With the invention of money as a medium of exchange, goods and services can
be produced and obtained at a faster pace and effort. This accelerates production, marketing, and
consumption. Hence, more and better economic activities. Ultimately, these lead to greater economic
growth of the country.
Standard of value. Money measures the value of the product or service. Such economic values
are stated in the monetary terms as prices. We say that the value of a notebook is P10 or the value of
tuition fee is P1,000 per semester. Clearly, without money it is very difficult to have a standard of value.
How can you correctly measures the values of goods and services in terms of other goods and services?
For instance, we say that the value of this notebook is 5 kilos of calamansi or 2 kilos of rice.
The function of money as a standard of value is more important that its function as a medium of
exchange. Exchange of goods or services can only take place if the value of the good or service has been
established. In fact, economic values of goods and services are being evaluated even if there are no
exchanges. For example, the value of your land keeps on increasing even if you have no intention of
selling it.
Store of value. Money which is not spent constitutes savings. It is retained for a number of days,
weeks or even years. It does not lose its value or purchasing power – except during inflation. Some
people keep their money for speculative motives. Others have a planned purpose in the near or distant
future like buying a house and lot or a car.
However, during inflation many people are discouraged to keep or save their money. They prefer
to buy jewelry, appliances or real estates. A great increase in prices of goods and services automatically
decrease the value of money or its purchasing power. Under the Philippine experience, if you have saved
P1000 ten years ago, its value at present has greatly diminished. In this case, money is no longer a store
of value. On the other hand, for those who have dollar savings are indeed very lucky. The value of the
dollar relative to the peso has tremendously gone up. Thus, it can be said that the dollar is a store of
value.
With the discovery of the properties of metals, man invented a superior kind of monetary
medium such as gold, silver, copper, tin and iron. These kinds of money were used by ancient civilizations
in the form of useful implements, such as knives, hoes, axes, pots, vases, bars, wire, and fishhooks. The
first known coins – those of Lydia in Asia Minor – were composed of gold and silver, and believed to have
been struck about the year 700 B.C. In the case of money, it first appeared in China about the beginning
of the eight century. However, issues similar to paper money were used even long before the invention
of paper by China during the second century B.C.
In the Philippines, the earlier coins were the gold “piloncito” of pre-Spanish times, and the
famous Spanish "Pieces of Eight” of pirate lore used in the Galleon Trade. Our early paper money
included a treasury note in 1877 and a hand signed note of 1896 of the Banco Español-Filipino, the first
government bank during the Spanish time. At present we have the Central Bank Security Printing Plant,
Mint, Gold Refinery Complex. It prints paper money, bank notes, checks, and other related security
instruments; it mints coins (including LRT token coins); and it refines gold and silver.
Monetary Standard
The monetary standard of a country is synonymous with its standard money. The latter, together
with all paper and credit substitutes tied to and convertible into standard money constitutes the
monetary system. This also includes the whole government mechanism, especially Bangko Sentral and
the Banking System.
The monetary system of a country is usually described in terms of its standard money. If the
standard monetary unit is gold, the country is said to have a gold standard. If the standard money is
silver, it is silver standard. If the standard money is the inconvertible paper or managed currency, it is
inconvertible paper standard or managed currency standard.
In view of the shortcoming of the gold/ silver standard and the gold/silver exchange standard,
the inconvertible paper money has been used as the monetary standard. There is no need for gold or
silver reserves to ensure its general acceptability. The government designates such money as legal tender
which means legal means of payment. In the Philippines, our standard monetary unit is the peso.
One good feature of the inconvertible paper standard is that money supply – through the various
monetary tools of Bangko Sentral – can be expanded or contracted to suit the needs of the economy. In
case there is excess money supply in relation to the number of goods and services, the Bangko Sentral
contracts it. On the other hand, said bank expands money supply if there is a need for it. Such monetary
control is hard to apply in the case of gold or silver standard. Another advantage, the production of
paper money is more economical than commodity or metallic (gold/silver) money. Nonetheless, the
inconvertible paper money is not without limitations. Overprinting of money by any government leads to
inflation. This was done by the Japanese government during the last world war, and some poor countries
are doing it. Another shortcoming of the inconvertible paper standard is in case monetary officials are
not competent to manage the monetary system.
Money Supply
Money supply refers to money in circulation. It is the money which is used in purchasing goods
and services. These forms of money are cash, checks, and other liquid financial instruments. Money
supply is composed of:
1. Currency circulation (paper money and coins issued by the Central Bank
2. Demand deposit or checking account (checks)
3. Savings and time deposits.
4. Large negotiable certificates of deposits (CDs) at commercial banks
Monetary Theory
Monetary theory analyses the role of money in the economic system. Needless to state that
money is useful in production, marketing and consumption of goods and services. A monetary theory
explains the causes of the rise or fall of prices.
Monetary theory is simply the theory of the value of money. Value of money refers to its
purchasing power. That is, the number of goods and services it can buy. Obviously, when prices increase,
the value of money decreases. There is a popular monetary theory which is the quantity theory of money
of the classical economists. Such theory is explained in the following equation of exchange:
MV=PQ
M is the quantity of money or money supply
Q is the number of goods and services
P is the average price level of goods and services.
V is the income velocity of money or the number of times money is spent in one year.
The classical economists believed that velocity is stable. Therefore, if money supply (M)
increases with velocity being stable, total spending on goods and services will increase (PQ). So
according to the classical economists, money is the key determinant of aggregate demand or total
demand. Based on this theory, an increase in money supply leads to an increase in purchases of goods
and services. Such condition stimulates more investments, and then employment and production.
Eventually, it will be economic prosperity.
Credit
Credit is a vital tool of economic development for both individuals and countries. A poor man
who has been granted credit (like bank loan), has the opportunity to improve his social and economic
conditions as long as he uses his credit properly. For example, he puts up a small retail store, a piggery
project, or any other income-producing ventures. The same economic opportunity applies to poor
countries. If they utilize wisely their foreign loans, then they can possibly improve their social and
economic conditions.
Credit is not only favorable to the borrowers but it also benefits other individuals, and
eventually, the whole economy and society. For instance, a big businessman puts up a large factory
whose funds came from bank loan. Naturally, said businessman hires hundreds of employees, not to
mention the incomes received by those who constructed the factory and those who supplied the
materials of the factory. In short, the investment of the businessman which has been capitalized by
credit has generated substantial employment and income for many people. Such condition produces
more multiplier and accelerator effects on the whole economy.
Nevertheless, the most important point in the administration of credit is its social impact. The
poorest of the poor should be given the opportunity to receive the benefits of a credit system. It is this
depressed group which needs credit most. A credit program which is not for the poor is certainly devoid
of social justice. It only widens the gap between the rich and the poor. Such program only succeeds in
destroying the real foundation of the economy and that of society.
Bases of Credit
The word “credit” has been derived from a Latin word creditum. It means trust. Credit refers to
the ability to acquire something of value like goods, services, money, or securities at the present time in
return for a promise to pay at a certain future time. It involves risk. The possibility that the borrower can
not fulfil his promise due to circumstances beyond his control always exists.
In granting credit to borrowers, there are bases in evaluating their ability to pay and willingness
to pay:
Character. This refers to the personal integrity of the borrower. His determination to pay can be
evaluated by his past business record. Character also includes personal habits, attitudes, or vices of the
borrower.
Capacity. This has something to do with the managerial ability of the borrower. Could he use
wisely and efficiently his loan? Factors like responsibility, maturity and business competence of the
borrower determine his capacity to pay.
Capital. This refers to the resources owned by the borrower such as priorities. With such
properties, the ability of the borrower to obtain credit has become greater.
Collateral. Usually, the title of the land is required as a security of the loan. This is a safety
measure for the payment of the loan. Buildings, machines and other valuable properties are used as
collaterals.
Condition. Conditions in the community, industry, or the whole economy affect the ability of
borrowers to pay their loans. For example; peace and order, inflation, profitability of a project, etc.
Advantages of a Credit Economy
1. Allows business firms to acquire cash loans by using their machines or buildings as security,
instead of selling a part of their physical properties to obtain money. They can also sell bonds to
generate more funds for their investment ventures.
2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit.
3. Government projects or programs can be funded through bonds or loans.
4. Credit accelerates production, employment, income, and consumption.
5. Permits low-income consumers to enjoy the consumption of goods and services sooner, like
house and lot, appliances, and other consumer products.
1. Heavy borrowings by the governments may likely lead into inflation. It requires competent and
dedicated monetary authorities, and the cooperation of top government officials to use properly
local and foreign loans.
2. Borrowing by the government may result to extravagance and inefficiency. This has been noted
by development economists on the credit performance of the developing countries.
3. Business errors in the use of credit funds have unfavourable chain effects on the whole economy.
Failure of some firms to settle their debts with other companies affect the latter to pay their
bank loans. In turn, the banks cannot pay their depositors.
4. Excessive loans from other countries by the government may likely be a burden to future
generation, unless such loans are wisely invested in the economy for the benefits of masses.
5. In some cases, credit reduces future consumption of debtors.
Credit does not exempt even the rich. In fact, it is the rich who use more credit facilities because
of their ability to pay, and their special personal connections with the officials of the various financial
institutions. There was a rich man who was able to purchase a hacienda through bank credit. Obviously,
the rich become richer because they are given more opportunities to obtain loans for business or
production purposes.
The investment of the rich would have been more significant if their benefits reach the poorest
of the poor. Profits are still attainable without abandoning their social responsibility. Credit resources
should be used not only to benefit the users but also society and the economy. This should be the
guiding principle of the credit system in granting loans to applicants. Considering the scarcity of our
financial resources, our government should be more careful and wise in the allocation of such resources.
The objective of the credit system of the government is to improve the social and economic
conditions of the poor, especially in the rural areas and urban slums where conditions are more
miserable. The chains of economic slavery should be broken. The poor need money for putting up
income-producing projects or business like poultry, sari-sari store, piggery, or tricycle. However, most of
them cannot borrow from financial institutions for lack of acceptable properties as collaterals. With such
institutional barriers in obtaining bank credit, the poor are clearly excluded from the credit system. Thus,
the credit program of the government for the poor has become a farce.
Banking
Banking is not just encouraging people to put their surplus or idle money in banks, and then lend
this to those who need funds for production or for business. With the growth of the modern economy,
banks have developed various functions like financing imports, trust services, money marketing,
underwriting of securities, among other things. Thus, banking has no precise definition.
Evidently, banking plays a very important role in the economy. It is a strong force in mobilizing
the savings of the people, and the use of these resources for investments. As mentioned earlier,
investments generate employment, production and income. Consequently, such conditions accelerate
economic progress, provided there is a fair distribution of the financial resources among the various
economic
Lending activities were recorded in the Temples of Babylon as early as 2,000 B.C. During the
medieval times, Italian cities were active in banking activities in support of the expanding domestic and
foreign trade. However, many believed that the goldsmiths of England started modern banking. In the
Philippines, the obras pias became the forerunners of banking institutions. These were funds donated by
rich citizens and religious individuals for charitable and religious projects. However, these were also used
as loans to top government, military and religious officials who were active participants in the Galleon
Trade. In 1851, the first government bank, Banco Español-Filipino de Isabella II, was established by
Governor Antonio de Urbiztondo. This is now the Bank of the Philippine Islands. Later on, British and
American banks put up their branches in our country.
The banking system can create money through a continuous chain of deposits and loans. A single
bank can not create money. For instance, an initial deposit of P100 can ultimately become P500. This is
possible as long as there are no withdrawals. The creation of money is destroyed once a withdrawal is
made. Here is an illustration:
Jenalyn has deposited P100 in Bank A. Naturally, the bank does not keep the money. It has to
lend it in order to earn an income in the form of interest. Assuming the reserve requirement of the
Bangko Sentral is 20 percent. Bank A can only grant loan of P80. Supposing Veronica borrowed the P80
and purchased a book from REX Book Store. The owner of the Book Store deposited the P80 in Bank B.
The bank can only lend P64 due to the legal reserve requirement imposed by the Bangko Sentral.
Mindaluz got the P64 and bought a school bag from National Book Store. The proprietor deposited the
P64 in Bank C. The same process goes on and on until ultimately total deposits become P500, total legal
reserves become P100, and total loans become P400. Table 10.1 illustrates the multiple expansion of
bank deposits. It shows only five banks.
Universal Banking
The introduction of universal banking in our country in 1980 was the product of WB-IMF mission in
1979. This is an expanded commercial banking. Our present financial system failed to supply the
long-term credit needs of the country. It has been noted that short-term finance is not supportive of our
economic development program. Hence, the concept of universal banking has been adopted to make the
financial system more responsive to the needs of the economy. It objectives are:
A universal bank is a multipurpose bank. A client gets every facility of a commercial bank, investment
house, development bank, financing company, and even a leasing company. The following facilities are
available in a universal bank:
- Short-term credit
- Money marketing
- Letters of credit
- Direct guarantee letters
- Intermediate or long-term financing
- Discounting or purchase of receivables
- Stocks and other securities underwriting and stock dealership
- Direct equity participation
- Capital leasing
- Pension fund management and other trust services
- Checking accounts, drafts and others
Central Banking
The development of central banking has been a gradual and slow process. The oldest central
banks emerged in Europe. The Riksbank of Sweden organized in 1656 is the oldest but the Bank of
England (1694) is considered the first real central bank. It has become the model of central banking for
other countries. Our own central bank has been created by law in 1984 but it started operating in 1949.
The Central Bank of Guatemala became the model in designing the structure of Central Bank governor.
The Central Bank Charter of 1948, together with its amendments, has been replaced by the New
Central Bank Act of 1993. This Acts provides in its declaration of policy that the State shall maintain a
central monetary authority that shall function and operate as an independent and accountable body
corporate in the discharge of its mandated responsibilities concerning money, banking and credit. Such
central monetary authority shall enjoy fiscal and administrative autonomy. It shall be known as the
Bangko Sentral ng Pilipinas with a capital of P50 billion.
The policy-making body of the Bangko Sentral ng Pilipinas is the Monetary Board. In addition,
the powers and functions of the Bangko Sentral shall be exercised by the Monetary Board. Such body is
composed of seven members appointed by the President of the Philippines for a term of six years. The
governor of the Bangko Sentral is the Chairman of the Monetary Board. One member from the Cabinet
(Secretary of Trade and Industry) also represents the government. The other five members come from
the private sector who serve on full-time basis. Under the original Central Bank Act, only three members
came from the private sector. This was later on amended which gave only two positions in the Monetary
Board for the private sectors.
The primary objective of the Bangko Sentral ng Pilipinas is to maintain price stability conductive
to a balanced and sustainable growth of the economy. It shall also promote and maintain monetary
stability and the convertibility of the peso. It is the responsibility of the Bangko Sentral to provide policy
directions in the areas of money, banking and credit. It shall have supervision on the operations of banks
and regulatory powers on the operations of non-bank financial institutions.
In the exercise of its authority, the Monetary Board shall perform the following:
1. Issue rules and regulations for the effective discharge of the responsibilities and exercise of the
powers vested upon the Monetary Board and the Bangko Sentral;
2. Direct the management, operations, and administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and regulations for this purpose;
3. Establish a human resource management system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to
establish professionalism and excellence at all levels of the Bangko Sentral in accordance with
sound management principles; and
4. Adopt an annual budget for the effective administration and operation of the Bangko Sentral in
accordance with applicable laws and regulations.
1. It is a bank of issue. A central bank has a complete monopoly of note issue (money), although
there are still very few central banks which do not have such power.
2. It is the banker, agent and adviser of the government. The central bank conducts the banking
accounts of the government agencies and instrumentalities. It provides foreign currencies to the
government for the importation of goods and services, and for the payment of foreign debts. It
lends money to the government, buys and sells securities, and manages national debts. In
addition, the central bank informs the President and the Finance Secretary about the financial
and monetary conditions of the country.
3. It is the custodian of cash reserves banks. A legal reserve requirement is imposed by the central
bank on the deposit liabilities of banks. They are required to deposit at the central bank a certain
percentage of their bank deposits as a means of regulating money supply. During inflation, the
reserve requirement is higher than during inflation.
4. It is the custodian of the nation’s reserves of international currency. During the years (until 1914)
when many countries were under the gold monetary standard, a central bank had to keep
adequate gold reserves to be able to pay its paper money which could be presented for
payment. At present, international reserves refer to gold and acceptable international
currencies. In the Philippines, the acceptable foreign exchange are the U.S. dollars, the Swiss
francs, the Japanese yen, the German mark, and the British pound. Such reserves are needed to
finance the importation of goods and services.
5. It is a bank of rediscount and lender of last resort. The central bank assists banks in distress.
However, it lends money to banks as a last resort. This means such distressed banks have
exhausted all other available sources of credit. This function is associated with rediscounting in
which the central bank lends money to banks in distress on the basis of their promissory notes
or those of the loan applicants. The central bank charges interest on its loans to banks. It is called
rediscounting because the documents of indebtedness of applicants which are presented to the
central bank are promissory notes that were discounted by the bank when it granted loans to
the applicants. The same promissory notes will be discounted again by the central bank. When a
loan is discounted, it means the interest is deducted in advance from the loan.
6. It is bank of central clearance and settlement. Clearing of checks and settlement of interbank
balances is performed by the central bank. This is much easier and more economical. In the
Philippines, checks issued and cashed by banks within Metro Manila are cleared by the
Philippine Clearing House Corporation, a private corporation. The processing, sorting and
clearing of checks are computerized. However, in the case of checks between provincial banks
and Metro Manila banks, clearing is performed by the Manila Clearing/ Regional Clearing Unit of
the Bangko Sentral ng Pilipinas on a manual scheme. Checks are placed in the boxes of individual
banks. All checks in the boxes are payables by the banks whose names appear on the boxes.
Checks within the various regions of the country are being cleared by the Regional Clearing Units
of the Bangko Sentral.
7. It controls credit. The central bank regulates money supply to maintain prices stability. It has
monetary tools to control credit: (a) increasing or decreasing interest rates, (b) increasing or
decreasing the legal reserve requirement, (c) buying or selling of government bonds, (d)
restricting imports, (e ) selecting projects for funding, and (f) persuading all those who are
concerned to support the prevailing monetary policies.
Monetary Policies
Monetary policy is a major economic policy. The other equally important economic policy is
fiscal policy which is discussed in the next chapter. Policies are general rules or guides for actions. In the
case of monetary policies, these are rules in achieving monetary goals of the Bangko Sentral such as
monetary stability, and balanced and sustainable economic growth. Likewise, the Bangko Sentral has
monetary tools which it can use in attaining its monetary goals. Professor James Boughton defined
monetary policy as the process whereby the monetary authority attempts to achieve a desired set of
goals by controlling either the money supply, the cost and availability of credit, or the allocation of credit
to its various uses. In short, monetary policy is a rule about the distribution and use of money for the
purpose of realizing a desirable economic goal or set of goals.
In view of the shortcomings of the present financial system, the Bangko Sentral has launched a
crusade for sound and responsive banking. The BS’s criteria for sound and responsible banking are:
prudence, service to community, and commitment to development efforts like mobilizing savings and
investing them. In line with this policy, the Bangko Sentral has encouraged bank consolidation for
efficiency, strength and economy of operations. The emphasis now is domestic financial mobilization,
thus the need for bringing about more prudent banking and greater safety for the money of the
depositors. However, it has been alleged that many of our major monetary policies came from the
recommendations of the WB-IMF. These are the prescriptions made by the said banks for our country to
qualify for more foreign loans.
Limitations of Monetary Policies
Monetary policies are not effective during depression. Businessmen refuse to apply for bank
loans during depression even if banks offer very low interest rates. The reason is that the expected
profits or returns of investment are even lower than interest rates. This situation was experienced during
the Great Depression in the United States. Another limitation of monetary policies is the delay involved
in analyzing the monetary and financial problems, the formulation of appropriate policies, their
implementation, and financially the impact of such monetary policies. Considering the usual inefficiency
of public administration in the less developed countries, delays are even much longer.
Moreover, it is noted that most less developed countries have unorganized and fragmented
money markets and credit institutions. This makes it difficult for central banks to control money supply
and interest rates in response to the particular needs of their economies. For instance, in the Philippine,
unlicensed money lending is widespread. The Bangko Sentral can not regulate such activities. In addition,
many banks in the less developed countries are branches of multinational banks owned by the United
States, France, Japan, Great Britain, and other rich countries. Naturally, such banks are interested in the
monetary policies of their own countries.
Regarding policies on economic stability and economic growth, the ability of a central bank of a
poor country to achieve such goals is uncertain. All poor countries just depend on their export earnings
for their economic progress. But such incomes are unpredictable and uncontrollable. Natural calamities
can easily wipe out our expected export earnings. Another, a great decline in the demand or prices of
our products in the world markets can easily ruin our national financial condition. Precisely, this is the
reason why most poor countries can not pay their foreign debts. Poor countries need dollars to purchase
oil and raw materials for their factories, and machines for economic development.
It is rather unfortunate that the financial system of not a few poor countries is not responsive to
the real needs of their peoples. Professor Michael Todaro noted the dual monetary system of most less
developed countries. That is, one for the rich and another for the poor. However, such systems favors
more the interest of the rich who are classified as safe borrowers. These are the foreigners and the local
elite. Thus, the poor- which is the largest group – have very little access to credit resources. As a result,
their only available option is to seek the loan sharks who usually charge very high interest. This makes
the poor even more miserable, not to mention the pain on their human dignity.
Global Banking
Multinational Banks (transnational banks) are international financial institutions which conduct
their businesses in many countries of the world. These are special types of multinational corporations
whose field of specialization is global banking or international finance. Their customers are primarily the
multinational corporations, governments (mostly the poor countries), and rich individuals.
The roots of global banking had a colonial beginning. Colonial empires like England, France and
Spain established the branches or extension offices of their banks in their colonies in order to facilitate
trade. In fact, branches of British banks were established in the Philippines during the Spanish time.
England started the factory system of production. It is also the pioneer in global banking to support its
leadership in international trade.
The growth of multinational corporations stimulated the rapid expansion of transnational banks.
Such banks finance global manufacturing and the business of the multinational corporations. Another
factor for the expansion of global banking is the growth of the Eurodollar market. This refers to the
practice of accepting US dollars for deposits and lend these to borrowers outside the United States.
As many countries struggle to boost their sluggish economies, balance-sheet growth remains a
challenge for their banking systems, given declining business volumes and lower demand for credit from
retail and corporate clients in some jurisdictions. Underscoring the decline, the threshold for inclusion in
this year’s ranking fell 3.7% to $736.5 billion, while 37 banks exceeded $1 trillion in assets, down from 40
last year.
Once again, Chinese banks take the top four spots, placing a total of 15 institutions in our ranking. The
top four are all state-owned banks that facilitate Beijing’s economic policy through massive
infrastructure projects and other initiatives; their balance sheets grew approximately 3% on average in
2022. The remaining 11 Chinese banks posted negative growth in aggregate, possibly reflecting China’s
slowing growth rate: GDP expanded only 3% last year, well below its 5.5% stated target for 2022.
Global banking is a major element of our financial system. International financial institutions are
making good profits in our country. Their business has improved further with the collapse of some of our
local banks. They have penetrated our financial system through their branches, representative offices.
Offshore banking units, or equity investments. During the postwar period, there was a conscious effort
to limit the participation of foreign banks. However, after the declaration of martial law in 1972,
transnational banks have been encouraged to do their businesses in the Philippines. With the
introduction of universal banking which requires a minimum capital of P1.5 billion, and the policy of the
Bangko Sentral for bank merger, foreign banks have been able to invest in many of our local banks. It has
been claimed that such policies of the Central Bank were the recommendations of WB-IMF survey.
Our country is classified as an agricultural economy, less developed country, or poor country.
Clearly, it does not have enough funds for social and economic development programs. If it has to
depend only on domestic financial resources, it takes many years to be able to accomplish our national
development objectives. Thus, to expedite our economic development, we have to rely on outside
financial credit. We need funds for our roads and bridges, schools, hospitals, irrigation, electrification,
communication, transportation, and other essential social and economic projects. A poor country can
not possibly accomplish all of these at the same time or in a few years. Considering the rapid population
of most poor countries, it is not really possible for them to attain economic prosperity without sincere
assistance from the rich countries.
Among the international financial institutions, the World Bank, International Monetary Fund,
and Asian Development Bank have been established mainly for the purpose of assisting the less
developed countries. The emphasis of their assistance program is agricultural and rural development.
Their lending policies enable such institutions to change the economic and political designs of borrowing
countries. Those who refuse get no loans. Such conditions have generated not a few criticisms against
the WB, IMF, and ADB. Many accuse such institutions as the tools of Western economic imperialism or
servants of the multinational corporations.
A group of 44 Allied Nations conferred at Bretton Woods, New Hampshire, USA on July 1, 1994
to draft the Articles of Agreement (charters) of two complementary international financial institutions:
the International Monetary Fund (IMF) and the International Bank for reconstruction and Development
(IBRD) popularly known as the World Bank (WB). In 1945, the charters had been signed, and the World
Bank is owned by its member governments. It has three financial affiliates: International Development
Association (IDA) which is the “soft loan window” of the World Bank, Multilateral Investment Agency
(MIGA) which encourages foreign investment, and the International Finance Corporation (IFC) which
extends loans to the private industrial sector. WB, IFC and IDA constitute the World Bank Group.
All powers of the World Bank are vested in the Board of Governors. The Board is composed by
one governor appointed by each member country. There are 173 member countries. Usually, the
governor is a prime minister, finance secretary, or central bank governor. The Board of Executive
Directors manage the operations of the World Bank. The President of the World Bank is the chairman of
the Board of Executive Directors. By tradition, the WB president is always an American. This is only
understandable because the United States owns more than 16.53 percent of the capital stock of the
World Bank.
Objectives of WB
1. To assist in the reconstruction and development of member countries whose economies were
destroyed or disrupted by war, and to encourage the development of the productive facilities
and resources of the less developed countries.
2. To promote private foreign investments by means of guarantees or participation in loans, and to
supplement private investment by providing suitable conditions and finance for productive
purposes.
3. To promote long-range balance growth of international trade and the maintenance of
equilibrium in the balance of payments by encouraging international investment for the
development of the productive resources of the member countries, thus increasing productivity,
the standard of living, and conditions of labor in their territories.
4. To arrange the loans made or guaranteed by it in relation to international loans through other
channels sothat the more useful and urgent projects will be given first priority.
5. To conduct its operations with due regard to the effect of international investment on business
conditions in the member countries, and to bring out a smooth transition from a wartime to a
peacetime economy during the immediate postwar years.
The IMF was conceived at the same time and in the same manner as the WB. There are also 173
member countries. Membership in the IMF is a prerequisite to membership in the World Bank. Both WB
and IMF occupy the same headquarters. The biggest stockholders of the IMF are also the biggest
stockholders of WB.
The highest authority of the IMF is the Board of Governors. The managing director is the chief of
the IMF staff and chairman of the executive directors. By tradition, the managing director is always a
European who is acceptable to the United States. The IMF member countries are classified into various
groupings like Group 10 which constitutes the ten industrial countries, Group of 24 which is the Third
World counterpart of Group of 10, and the Group of 77 which takes up the recommendations of the
Group of 24 about monetary problems. Each member country is given a quota which determines the
amount of foreign exchange that it may draw from IMF, and its voting power. Bigger quota means higher
percentage of votes. The subscription of each member country is equal to its quota. This is payable in
gold or US dollars (25 percent of its quota). Such quota is based on the economic strength of member
countries. The industrial countries which are the richest countries have the largest subscriptions. The
quota share of the Philippines is 0.49 percent of the total shares of all IMF member countries.
Objectives of IMF
In 1966, thirty one nations from four continents organized the Asian Development Bank in order
to accelerate the social and economic progress of the Asian and Pacific region. Since then, ADB has
grown in size and strength, and it has become the channel of development assistance to the region
which covers 30 percent of world’s population with per capita income of only $370.
The bank started its operation in 1996 in Manila as its headquarters. There are 52 member
countries – 36 from the region and 16 from outside the region. The regional member consists of 33 less
developed countries and 3 developed countries. The 16 non-regional members are highly developed
countries from Europe and North America. The biggest stockholder is Japan followed by the United
States, China and India. It has been noted that the president of ADB has always been a Japanese.
The Asian Development Bank is dedicated to the task of assisting in the economic development
of its less developed member countries, and of fostering economic growth and cooperation in the region
of Asia and the Far East, together with the South Pacific. To attain its goal, the bank has the following
functions:
1. To promote investment in the region of private and public capital for development purposes.
2. To utilize the resources at its disposal in granting loans to the less developed member countries
in the region.
3. To meet requests from the members in the region for assistance in the coordination of their
development policies and plans.
4. To provide technical assistance in the preparation, financing, and execution of development
projects and programs.
5. To cooperate with the United Nations, its organs and subsidiary bodies, and with public
international organizations as well as national entities (private and public) which are concerned
in the investment of development funds in the region.
6. To undertake such other activities and provide such other services as may promote its purpose.
The main emphasis of WB, IMF and ADB is agricultural and rural development for the poor
countries. A large portion of their development assistance program has been allocated not on food
production but on crop production for commercial purposes. It is noted that the major policy of IMF is to
promote free international trade and free flow of international capital. Such policy clearly favors the
interest of the industrial countries which own the multinational corporations. Some economists believe
that IMF loans to poor countries are not really intended to be paid but to bribe or blackmail the
borrowing countries into becoming more subservient to the policies of the IMF.
It has been likewise noted that the Philippines has become a favorite client of WB-ADB because
our government has been receptive to foreign investments, and we have abundant and very cheap
agricultural and manpower resources. John Bushell, top US Department of Treasury official, said:
From the US national point of view, these banks encourage development along lines
compatible with our own economy. They stress the role of market forces in the effective allocation of
resources and the development of outward-looking trading economies… Our participation in the
international development banks will also provide more assured access to essential raw materials and a
better climate for US investment in the developing world. Most of the total lending is to countries where
we have strong interests.
Through Thick and Thin: Philippines - World Bank Partnership Since 1945
The first World Bank-supported project in the Philippines was the Binga Power Project in 1957
which funded the construction of a hydroelectric power station in Benguet to meet the growing demand
for electricity in Luzon following the Second World War.
After this first project, WB support funded a dozen projects in the ‘60s, these include renewable energy
projects (such Angat Power Project in Bulacan Province and Maria Cristina Falls Hydro Power Expansion
Project in Iligan City, Lanao del Sur), irrigation (Upper Pampanga River Irrigation Project, including
Pantabangan Dam), and water supply (Manila Water Supply Project). Most of these projects are still
operational until today.
Today, the Binga Dam continues to supply around 140 megawatts of power for the country’s grid
while the Angat Dam currently provides around 90% of Metro Manila’s raw water supply requirements.
In Mindanao, the Maria Cristina Hydroelectric power plant continues to power households,
communities, and major industries agribusiness, flour milling, cement, and steel.
In the Philippines, the University of the Philippines Los Baños College of Agriculture is considered as the
country’s premier institution of higher learning and research in plant breeding, post-harvest, crop
protection, food and animal sciences, and farming systems. World Bank is proud to have contributed to
its establishment with the Education Project - College of Agriculture loan in 1964 for the construction of
the College’s physical facilities and equipment.
The Bank supported the country’s push for greater decentralization and capacity building
through the Local Government Finance and Development Project (LOGOFIND) to assist local government
units (LGUs) in expanding and upgrading basic infrastructure, services, and facilities and in strengthening
their capacities in municipal governance, investment planning, revenue generation, and project
development and implementation.
The Bank also supported the LGU Urban Water and Sanitation Project to help clarify the role of
local government units in the provision of water supply services; providing guidance to the LGUs in the
development and implementation of viable and sustainable water supply projects. The Bank also
supported reforms in water distribution in Metro Manila, leading to the 24-hour availability of drinking
water supply in the metropolis.
Following the signing of the peace deal between the government and the MNLF, the Bank
funded the Szopad Social Fund Project in 1998 to increase the access of the population in the poor and
most conflict-affected areas of the Special Zone for Peace and Development (SZOPAD) to basic economic
and social infrastructure, services, and employment opportunities, through speedy financing of
subprojects for local development initiatives. This project marked the start of the Bank’s engagement in
peace and development in the country, leading to the establishment of the ARMM Social Fund Project in
2002, Mindanao Trust Fund in 2005, and the Bangsamoro Normalization Trust Fund in 2021.
To help the country manage the facilities left by the Americans, the Bank funded the Subic Bay
Freeport Project to attract private investors to the Subic Bay Freeport (SBF). The development goals of
the project were to: a) improve existing infrastructure; b) improve access to the area for industrial,
commercial and passenger traffic; c) maintain the SBF asset base, including protection of the
environment; and d) strengthen the capacity of the Subic Bay Metropolitan Authority (SBMA) to manage
and administer the facility.
https://www.worldbank.org/en/news/feature/2021/07/28/through-thick-and-thin-philippines-world-bank-partnership-since-1945
https://gfmag.com/banking/worlds-biggest-banks-2023/
https://www.bsp.gov.ph/Statistics/Financial%20Statements/Commercial/assets.aspx