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TOPIC 3: THE PHILIPPINE FINANCIAL SYSTEM Prepared by: V.A.Lopez

3. THE PHILIPPINES FINANCIAL SYSTEM

3.A. HISTORY OF PHILIPPINE FINANCIAL SYSTEM
3.A.1 THE SPANISH PERIOD

1754
>>Obras Pias was the first organized financial institution in the Philippines.
>> It was started by Father Juan Fernandez de Leon in 1754 and ended in 1820.
>> The capital of Obras Pias came from pious Catholics and their profits were intended to maintain
hospitals, orphanages, other charitable endeavours, and to those involved in the Galleon Trade
with Acapulco, Mexico.

August 1, 1851
>>The first Philippine bank was established. It was called the Banco Español -Filipino de Isabel II.
*It is now known as Bank of the Philippine Islands.
>> It is the oldest standing bank in the Philippines and in the whole of Southeast Asia.
>> It was named after the mother of then Spanish King Alfonso XII. Her mother's name was Isabella.
>> Began its operations in 1852 and was given the honor of being the first to issue paper money.

The Philippine peso was established in May 1, 1852.

1854
>>Banco Español-Filipino de Isabel II was given the sole mandate under a Spanish Royal Decree of
1854 to issue banknotes called “Pesos Fuertes” granted on October 17, 1854.
*royal decree confirmed Banco Español-Filipino's by-laws, wherein the notes were in limited
circulation and were usually used for bank transactions. [see 1886]

1861 to 1864
>>Coin production commenced in 1861 and, in 1864, the Philippines decimalized, dividing the peso
into 100 centimos de peso.

November 17, 1869

>>The opening of the “Suez Canal”, a ten-year construction.
* Often called the "crossroads of Europe, Africa and Asia" because the route was used to transport
goods to and from all three continents.
>> The opening of the Suez Canal in Egypt is one of the most important artificial sea-level
waterways in the world, to which paved the way for the Philippines' direct commercial relations
with Spain instead of via Mexico.
>> Time from the Philippines to Spain and vice versa was shortened to 30 days from more than two
months, this positively affected the development of agricultural exports, which brought economic
prosperity to native indios or the so-called ilustrados (Filipinos with money and education).

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TOPIC 3: THE PHILIPPINE FINANCIAL SYSTEM Prepared by: V.A.Lopez

>> Paved the way for Filipino ilustrados to send their children to universities in Europe. The rise of
the ilustrados was inevitable and they became the new patrons of the arts that led to the
secularization of arts in the 19th century.

1873 >>When the British capital began to be attracted towards the Island.

1875 >>A British owned a bank called the Hong Kong Shanghai Banking Corp. (HSBC) established
its first branch in Binondo, Manila, thus becoming the first foreign bank in the Philippines.

August 2, 1882
>>The first savings Bank in the country was founded by Father Felix Huertas and named it Monte
de Piedad y Caja de Ahoros de Manila.
>>Banco Peninsular Ultramarino de Madrid was also opened.

1886 >>The peso circulated alongside Mexican coins. [refer to 1854]

*no longer limited to bank transactions only

1898 >>The Spanish regime ended and there were 4 banks (3 commercial banks and 1 savings bank)
doing business in the Philippines:
1- Banco Español Filipino de Isabel II (now the Bank of Philippine Islands or BPI);
2- Hong Kong and Shanghai Banking Corp. (popularly known nowadays as HSBC);
3- Monte de Piedad y Caja de Ahoros de Manila;
4- Banco Peninsular Ultamarino de Madrid.

NOTE: Under the Spanish regime, there were no significant Filipino interests, initiatives, or capital
in banking.

3.A.2 THE AMERICAN PERIOD

1900 >>The First Philippine Commission passed Act No. 52, which placed all banks under the
Bureau of the Treasury and authorizing the Insular Treasurer to supervise and examine banks and
all banking activity.

1901 >>Banks from the United States of America started established local branches that would
cater to growing American economic interests and capital inflow into the country.

1902 >>Wai Hung Bank and Abreu as well as the Newberry and Reyes Bank were both founded.

1904 >>First provincial banks were established;

1) Bank of Pangasinan(1904-1906); and
2) Bank of Zamboanga(1904-1908)

1906 >> S. Misaka Bank

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TOPIC 3: THE PHILIPPINE FINANCIAL SYSTEM Prepared by: V.A.Lopez

FIRST AGRICULTURAL BANK OF THE PHILIPPINES was established in 1906 and in 1916 all of its
asset and liabilities were transferred to the newly organized PNB.

1916 >> Republic Act 2612 (An Act Creating the Philippine National Bank) February 4, 1916.

Major sections of Act No. 2612 concerning the operation of the Bank include the following:
“All the assets and liabilities of the Agricultural Bank of the Philippine Government would be
transferred to the National Bank. Such a transfer of the Agricultural Bank’s assets would be deemed
as partial payment of the shares of the National Bank subscribed by the Philippine Government.”
(Sec. 6).

“To make loans on harvested and stored crops, with such loans not exceeding 70 percent of the
market value of the crops.” (Sec. 14b)

“To make loans to the producers on standing crops of rice, hemp, copra, sugar, tobacco, etc. For
the grant of such loans, the National Bank might require additional security in the nature of
mortgages on real estate or upon livestock, machinery and agricultural implements.” (Sec. 14).

“The National Bank was authorized to receive deposits of funds from the insular, provincial and
municipal governments, Postal Savings Bank, associations, corporations and private persons. It was
obligatory for the insular, provincial and municipal governments to make their deposits with the
Bank.” (Sec. 19).

1918 >>Other foreign banks subsequently made their presence in the Philippines. In 1918, the
Manila branch of the Yokohama Specie Bank was given a license to do business in the Philippines.

1920 >>China Banking Corporation

* The first privately-owned local commercial bank in the Philippines. It was incorporated on July
20, 1920 and started its operations on August 16, 1920.

1926 >>Mercantile Bank of China

February 1929 >>Bureau of Banking was created. The Department of Finance, through the Bureau
of Banking, took over bank supervision.

1930 >>National City Bank of New York (popularly known today as CITIBANK)
* Charles E. Mitchell was elected president in 1921 and in 1929 was made chairman of National
City Bank of New York, a position he held until 1933. Under Mitchell the bank expanded rapidly
and by 1930 had 100 branches in 23 countries outside the United States. One was in the Philippines.

1937 >>Bank of Taiwan; and

Netherlands Indische Bank

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NOTE: During the American colonial era, the Philippine banking system was largely dominated by
foreign bank branches whose capitals were devoted to financing commerce and trade, rather
than the development of the country’s natural resources. It should also be mentioned that the
Bank of the Philippine Islands, which then possessed the privilege of issuing currency notes, was
the only significant bank controlled by local interests. To break the foreign banking monopoly and
remedy the lack of credit facilities, the Philippine National Bank (PNB) was established in 1916
with the Philippine Government as the majority stockholder.

3.A.3 THE JAPANESE OCCUPATION

January 2, 1942 >>Arrival of the Japanese Imperial Forces in Manila. The operations of 17 existing
banks were stopped. Japanese military government called for the resumption of the banking
business, but limited only to Filipino owned and Japanese banks.

1942 >>Southern Development Bank (Nampo Kaihatsu Kindo) opened a branch in manila and
acted as fiscal agent of the Japanese government in the Philippines and performed some functions
of the central bank.

-POSTWAR AND INDEPENDENCE PERIOD-

June 6, 1945 >>Rehabilitation of the Banking system was made possible by Executive Order No.49.
*discharged banks for any liability for deposits made during the Japanese Occupation and made
them liable only for pre-Occupation deposit balances less voluntary withdrawals.

1949 >> Inaugurated the Central Bank of the Phil.

1948 >> Enactment of Banking Laws. (R.A NO.337-General Banking Act.)
1592 >>Rural Bank Act was approved.
1963 >>Saving and Loan Association Act approved.

3.A.4 THE EIGHTIES: UNIVERSAL BANKING POST-MARCOS ERA

Banking Reforms of 1980 >>affected a revision in the Philippine banking structure including the
administrative regulations. Some of the significant changes made were:
1) The concept of Universal Banking (or expanded commercial banking) was introduced. Thus,
the creation of the Universal banks was one of the most important features of the 1980 banking
reforms.
2) The numerous types of banks were pared down to five, namely:
a) Universal banks (or banks with expanded commercial banking functions)
b) Ordinary commercial banks
c) Thrift banks
d) Rural banks
e) Specialized government banks
3) The minimum capital requirement is the main factor determining the types and number of
functions a bank can take.

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What is a Universal Bank?

>> performs both investment and commercial banking functions and may engage in allied or non-
allied financial undertakings. It may wholly own non-financial business enterprises and other types
of financial institutions other than a universal or commercial bank.

3.A.5 THE NINETIES: THE NEW CENTRAL BANK

Republic Act 7653 (New Central Bank Act of 1993)
>> Under Republic Act No. 7653, the New Central Bank Act, "no other person 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
Bangko Sentral notes without prior authority from the Bangko Sentral."

Central Bank of the Philippines

>> The supreme monetary authority of the Philippines. It issues the Philippine peso, maintains
foreign currency reserves and is charged with maintaining monetary stability. It is also the lender
of last resort for Philippine banks. It was established in 1949 and re-chartered in 1993.

The administration that followed the transition government of President Corazon C. Aquino saw
the turning of another chapter in Philippine central banking. In accordance with a provision in the
1987 Constitution, President Fidel V. Ramos signed into law Republic Act No. 7653, the New Central
Bank Act, on 14 June 1993. The law provides for the establishment of an independent monetary
authority to be known as the Bangko Sentral ng Pilipinas, with the maintenance of price stability
explicitly stated as its primary objective. This objective was only implied in the old Central Bank
charter. The law also gives the Bangko Sentral fiscal and administrative autonomy which the old
Central Bank did not have. On 3 July 1993, the New Central Bank Act took effect.

3.B. BANGKO SENTRAL NG PILIPINAS AND ITS FUNCTION

3.B.1 OBJECTIVES
The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable
economic growth. The BSP also aims to promote and preserve monetary stability and the
convertibility of the national currency.

3.B.2 RESPONSIBILITIES
The BSP provides policy directions in the areas of money, banking and credit. It supervises
operations of banks and exercises regulatory powers over non-bank financial institutions with
quasi-banking functions.

Under the New Central Bank Act, the BSP performs the following functions, all of which relate
to its status as the Republic’s central monetary authority.

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 Liquidity Management. The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to maintain price stability.

 Currency issue. The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the Government and are considered legal
tender for all private and public debts.

 Lender of last resort. The BSP extends discounts, loans and advances to banking institutions
for liquidity purposes.

 Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-
bank institutions performing quasi-banking functions.

 Management of foreign currency reserves. The BSP seeks to maintain sufficient

international reserves to meet any foreseeable net demands for foreign currencies in order
to preserve the international stability and convertibility of the Philippine peso.

 Determination of exchange rate policy. The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy
such that the role of Bangko Sentral is principally to ensure orderly conditions in the market.

 Other activities. The BSP functions as the banker, financial advisor and official depository of
the Government, its political subdivisions and instrumentalities and government-owned and
-controlled corporations.

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