DEVELOPMENT OF CREDIT * The organizations of rural banks and
agricultural credit associations were
Pre-Spanish Time
The Philippines had been trading with
foreign countries such as China, Japan,
Sumatra, India, Arabia, Siam, Borneo, Java,
the Moluccas, and other East Indian islands
when the Spanish conquerors arrived. The
barter system then was used to conduct trade
with the foreigners. The Filipinos exchanged
their native products, such as cotton, pearls,
betel nuts, sinamay fiber, and the like with the
foreigners, for porcelain, silk, and ivory.
Filipino traders were famous for their honesty
and excellent credit records.
Spanish Time
During the initial years of Spanish rule,
free trade was encouraged. The goods of the
Far East were marketed to America through
Manila and then through Acapulco, Mexico.
Manila was still then the center of trade and
commerce in the Orient. Subsequently, however
the Spain adopted a policy of trade restrictions
in the prevailing concept of mercantilism in
Europe. A product of mercantilistic policy in the
Philippines was the Galleon Trade. Most of
those who participated in the galleon trade
secured their loans from the pias.
American Era
Agriculture remained undeveloped
under the Spanish regime. The American
government, however gave priority to its
development. The American administrators
introduced a better banking and credit system
to promote economic development, especially
in the rural areas. Among the credit programs
of the government was the organization of
the first agricultural bank in 1908 for the
benefit of the farmers. In 1915 the Rural
Credit Law was enacted to complement the
agricultural cooperatives, particularly credit
associations in every town all over the country.
* Rice and Corn Fund was established
providing 1 million for loans to the
farmers` credit cooperatives.
* Philippine National Bank was
established in 1916.
encouraged by the government.
* Only seven credit associations and two
rural banks were actually organized.
* The failure of the credit program was
caused by a combination of several
factors:
1. Farmers did not have steady income due to
the destruction of their crops by natural
calamities.
2. They were exploited by the landlords who
give them unfair share in the harvest. Thus, it
was really possible for them to pay their loans.
3. The negative attitudes of the borrowers
toward their debts influenced their refusal to
settle their financial obligations.
4. They considered their loans as another form
of dole outs and therefore they did not feel the
responsibility of paying the government
lending institutions.
Under the Republic
The scars of World War II were still
conspicuous when the Philippines became a
republic on July 4, 1946. It was a period of
reconstruction and rehabilitation. The national
economy and the people greatly needed money
for business and economic development. In
response to the credit needs of the country,
the Rehabilitation Finance Corporation was
established on October 29, 1946.
In 1958, the Rehabilitation Finance
Corporation became the Development Bank
of the Philippines. A very significant
improvement in the financial system was the
establishment of the Central Bank of the
Philippines in 1949. Since then, monetary
policies have been fashioned to improve
production, employment, and quality of life of
the people, especially in the rural sectors
where poverty has been more widespread. In
later years the government encouraged the
organization of savings and loan associations,
and rural and cooperative banks.
 CREDIT
Credit is a term derived from the Latin
word credo – meaning, to believe, to trust. As
applied to this subject, credit means securing
something of value, whether tangible or
intangible, in return for a promise to pay at
some determined future date.
The first principle therefore of credit is: Do not
give Credit to anybody you do not trust. Trust
is the fundamental element of credit.
Credit Instrument: Promissory Note
Co-Maker : Same liability with the maker
Others define credit as follows:
1. Credit is purchasing power (Mill)
2. The essence of credit is confidence on the
part of the creditor in the debtor`s willingness
and ability to pay his debt. (Holdsworth)
3. Credit may be called a “short sale” of money
(Johnson)
4. Credit is a “sale of trust”
5. The exchange of an actual reality against a
future probability (Le Vasseur)
6. Credit may be defined as the power time in
return for investment or services at a future
date. (Bullock)
7. Credit is the personal reputation a person
has, in consequence of which he can buy
money, or goods, or labor, by giving in
exchange for them a promise to pay at a
future time. (Mac Leod),
8. Credit is the power to obtain goods or
services by giving a promise to pay money (or
goods) on demand or at a specified date in the
future. (Johnson)
9. A credit is the present right to a future
payment. (Mac Leod)
6% - Legal Rate in the Philippines
6.25% Monetary
*Higher rate when it comes to private
institution
* Delayed/Overdue Payment = Penalty >
Interest (to teach them a lesson)
* Unsecured Loan - Clean Loan / Character
Loan
Advantages of Credit
1. Credit facilitates and contributes to the
increase in wealth by making funds available
for productive purposes.
2. Credit saves time and expense by providing
a safer and more convenient means of
completing transactions.
3. Credit helps expand the purchasing power
of every member of the business community –
from producers to the ultimate consumer.
4. Credit enables immediate consumption of
goods thereby providing for an increase in
material well-being.
5. Credit helps expand economic opportunities
through education, job training and job
creation.
6. Credit spreads progress to various sectors
of the economy.
7. Credit makes possible the birth of new
industries.
8. Credit helps buying become more
convenient for customers.
Disadvantages of Credit
1. Credit, at times, encourages speculation.
2. Credit also tends to contribute to
extravagance and carelessness on the part of
people who obtain it. Since the person who
obtains credit is not using his own money but
is using the money of other person, he is
therefore charged with an obligation of the
highest order. Many do not understand such
social responsibility. As such many fail to
appreciate that trust.
3. Because of credit, many entrepreneurs
resort to over expansion. Failure to generate
expected income can only cause a collapse
which affects the nation`s economy.
4. Owing to the observation that business can others, and which involves big amounts
be expanded or contracted rapidly through the of money.
use of credit, businessmen are not only
h. Real Estate credit, when credit is
susceptible but eventually succumb to an air
secured purposely for construction,
of confidence or pessimism. Credit causes one
acquisition, expansion, or improvement
businessman to be dependent upon others. In
of real estate properties, it is termed as
order to extend credit, he must have faith in
real estate credit.
other businessmen and also in the future.
Thus, it follows that if credit relations become 2. Short-term credit is a loan that is payable
strained, man business recession may set in. in less than one (1) year while long-term credit
is a loan whose maturity is from five (5) years
or more and intermediate credit is a loan that
CLASSES AND KINDS OF CREDIT matures only in more than a year but less
than five years.
1. The classes and kinds of credit according to
its purposes are: 3. The following can be used as collateral:
land, stocks, bonds, machines, houses, crops,
a. Commercial credit, which includes the
and other valuable properties.
promise to pay off businessmen for the
funds they borrowed in the purchase of 4. Loans, whether secured or unsecured, are
goods for productive or profitable risk inherent although the former is less risky.
ventures. These are the merchants, Although secured loans are backed by
distributors, and manufacturers. collateral, creditors prefer to have cash rather
than property or set that still needs to be
b. Agricultural credit, which includes
converted into cash.
the promise to pay off farmers and farm
organizations for the funds they 5. The following are considered private sectors
borrowed in the acquisition of farm of the economy: individuals, partnerships,
inputs. corporations, and other private institutions.
Public credit includes all grants of credit to
c. Investment credit, the promise to pay
the government whether national, provincial,
off individuals or business firms for the
or municipal, and its instrumentalities while
loans they obtained in buying capital
private credit refers to all grants of credit to
goods.
non-government.
d. Consumer credit, constitutes all the
obligations to pay off people for the
money they borrowed for consumption
purposes.
e. Speculative credit, a type of credit
that is used for dealing in securities or
goods with the intention of making a
profit through favorable price changes.
f. Export credit, in some form and to
some extent is always involved in all
sorts of transactions for which cash is
not paid on or before the shipment of
goods out of the country.
g. Industrial credit, is intended for
financing the needs of industries like
logging, fishing, manufacturing, and