History of Philippine Financial System

Financial System is like the heart of the human beings, if it stops working then the person is dead in the same way that if the financial system stops working, then the economy would collapse. It is inherent in every society the law of supply and demand. There will always be those who have surplus resources and others will have deficit. Financial System is crucial to the allocation of these resources. In the Philippines settings, Financial System is composed of banking institutions and nonbank financial intermediaries, including commercial banks, specialized government banks, thrift banks and rural banks.

It is also composed of offshore banking units, building and loan associations, investment and brokerage houses and finance companies. The Bangko Sentral ng Pilipinas and the Securities and Exchange Commission maintained the regulatory and supervisory control. The first credit institution in the Philippines, “The Obras Pias” was started by Father Juan Fernandez de Leon in 1754 and ended in 1820. It was in 1851 that the first Philippine Bank was established, the “Banco Espanol-Filipino de Isabela II”.

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Banco Espanol-Filipino de Isabela II 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 established on August 1, 1851 and named after the mother of then Spanish King Alfonso XII. Her mother’s name was Isabella. The bank only came into being after 23 years after Spanish Monarch Ferdinand VII decreed that a public bank was to be established in the Spanish colonized country of the Philippines. The bank began its operations in 1852 and was given the honor of being the first to issue paper money.

In 1906 “First Agricultural Bank of the Philippines” was established and in 1916 all of its assets and liabilities were transferred to the newly organized Philippine National Bank. The Philippine National Bank (PNB), created during the American colonial period on July 22 1916, is among the top banking institutions in the Philippines and considered as one of the country’s economic pillars. It is the country’s first universal bank, and functioned as the de facto Central Bank of the Philippines until the 1940’s. It was given a special power to issue circulating notes.

It is also the first to offer automated tellering services in the country through the self-service tellering machine (ATM’s). In 1942, PNB closes its doors because of the coming of the Japanese imperial forces. In 1935, the National Loan and Investment Board (NLIB) was created to coordinate and manage the various government trust funds such as the Postal Savings Fund and the Teacher’s Retirement Fund. In 1939, the NLIB was abolished and its functions were transferred to a new body, the Agricultural and Industrial Bank (AIB). AIB continued operations until the outbreak of World War II.

After the war, in 1947, the AIB was abolished and the Rehabilitation Finance Corporation was formed. On October 29, 1946, an “Act Creating the Rehabilitation Finance Corporation” also called the Republic Act No. 85 was introduced. Its primary purpose was to provide credit facilities for the rehabilitation and development and expansion of agriculture, and industry, the reconstruction of property damaged by war, and the broadening and diversification of the national economy, and to promote the establishment of private development banks in provinces and cities. This later becomes the “Development Bank of the Philippines”.

Financial crises in the late 70’s and early 80’s have significant impact on the entire Philippine economy. A number of policy reforms were made to strengthen the financial system. The financial community has undertaken recovery efforts since 1986. Until the economic crisis of mid 80’s, the largest commercial bank in the Philippines was the government-owned Philippine National Bank. It accounted for 25% to 30% of commercial bank assets in the 1970’s and early 1980’s. As the result of the accumulation of nonperforming assets by 1987 the asset share of the Philippine National Bank had fallen by half.

The privatization started in 1989 when 30 per cent of its shares were offered to the public and it was listed on the stock exchange. In 1992, PNB became the first Philippine bank to reach P100 billion in assets. Later that year, privatization continued with a second public offering of its shares. In 1995, PNB moved to its headquarters to the PNB Financial Center, Central Boulevard (now Diosdado Macapagal Boulevard), Pasay City. In 1996, the Securities and Exchange Commission approved the Bank’s new Articles of Incorporation and by-laws and the change in the status of PNB from a government-based to a private corporation with he control of the government reduced to 46 per cent. In 1988, there were twenty privately-owned domestic banks and four branches of foreign banks engaged in commercial banking. Control of banking and credit was limited to Filipinos with the passage of the General Banking Act in 1948. Since the implementation of the said act, foreign investment in banking has been limited to 40 percent of domestic bank equity. In 1991, the Philippine government controlled three specialized banks. Those were the Development Bank of the Philippines, the Land Bank of the Philippines and the Philippine Amanah Bank.

DBP is the seventh-largest bank in the Philippines in terms of assets and the second largest government-owned bank next to Land Bank. Land Bank was established on August 8, 1963 as part of the Agricultural Land Reform Code, or Republic Act No. 3844 to help with land reform, especially the purchase of agricultural estates for division and resale to small landholders and the purchase of land by the agricultural lessee. The Philippine Amanah Bank was established by President Ferdinand Marcos in 1973 by virtue of Presidential Decree No. 264 with an initial capital of 100 million pesos.

Its charter originally allowed it to open in the provinces of Basilan, Cotabato, Lanao del Norte, Lanao del Sur, Palawan, Sulu, Tawi-Tawi, Zamboanga del Norte and Zamboanga del Sur, where there are large, if not predominant, Muslim populations. Its charter was amended in 1974, allowing it to open branches in Maguindanao and Sultan Kudarat. In 1989, the bank was re-chartered and re-capitalized pursuant to Republic Act No. 6848, and was subsequently renamed the Al-Amanah Islamic Investment Bank of the Philippines, with a capital of one billion pesos.

The bank was sold to another government-owned bank, the Development Bank of the Philippines, in 2008. In 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. In 1929, the Department of Finance, through the Bureau of Banking, took over bank supervision. By 1933, a group of Filipinos had conceptualized a central bank for the Philippines. By June 1948, President Elpidio Quirino, who succeeded President Roxas, affixed his signature on Republic Act (RA) No. 265, the Central Bank Act of 1948.

On January 3, 1949, the Central Bank of the Philippines was formally inaugurated with Miguel Cuaderno, Sr. as the first governor. The main duties and responsibilities of the Central Bank were to promote economic development and maintain internal and external monetary stability. The Central Bank extensively regulated the commercial banking system and engaged in considerable rediscounting activity. Interest rates were set usually below the market clearing rate. Commercial bank lending tended to be short-term and granted to known and established clients. The system had periods of instability with several bank runs and a few failures.

In 1980, at the instigation of the World Bank and the IMF, several measures were passed to increase competition in the financial sector, achieve greater efficiency, and increase borrowers’ access to long – term funds. Large banks with a net worth of at least P500 million could engage in expanded commercial banking, or “unibanking”, combining commercial and investment banking activities. In 1988 there were eight unibanks, including the Philippine National Bank. Further liberalization had occurred in 1983 when interest rate shifted from being administered to being market-determined.

Most agree that better economic outcomes are achieved when interest rates are market-determined. Market-determined rates allow investors and savers to base their decisions on market conditions and the scarcity of capital and also provide policymakers with clearer signals of market conditions. A series of crises hit the Philippines making the financial system into disorder. The economic and political crisis that occurred after the assassination of Benigno Aquino, resulted in a virtual collapse of much of the banking industry, particularly the smaller institutions.

A severe recession in 1984-85 saw the economy shrink more and perceptions of political instability during the Aquino administration further damped economic activity. The largest banks suffered substantial losses from the drastic devaluation of the peso between 1983 and 1985. Commercial bank loans increased slightly in 1984 but then fell almost 30% in the following two years before turning upward again. Inflation during the three-year period was almost 80 percent. The two largest financial intermediaries, the

Philippine National Bank and Development Bank of the Philippines, became insolvent and a number of financial institutions failed, including the three largest investment houses, three commercial banks, the majority of the more than 1,000 rural banks, and the largest savings banks. The Aquino government undertook a rehabilitation program for the Philippine National Bank and the DevelopmentBank of the Philippines. In 1986 nonperforming assets of the two institutions were transferred to the government, reducing the value of the assets of the Philippine National Bank by 67 percent and that of the Development Bank of the Philippines by 87 percent.

The relative importance of these two banks in the financial sector diminished dramatically. He domestically owned commercial banking sector, however, became more concentrated. From the mid-1950s to the early 1980s, five largest private domestic commercial banks accounted for about 35 percent of total assets of the private domestic commercial banks. By 1988, that ratio had risen to around 55 percent. The combined assets of the five private domestic commercial banks, the Philippine National Bank, and the two largest foreign branch banks accounted for two-thirds of total commercial bank assets, up from 56 percent in 1980.

In 1990 the six largest commercial banks earned an estimated P7. 9 billion in after-tax profits, an increase of 42 percent over 1989, which in turn was a 32 percent increase over 1988. A 1991 World Bank memorandum noted that the extent of bank profits indicated a “lack of competition” and a “market structure for financial services characterized by oligopoly. ” Oligopoly is a situation in which a particular market is controlled by a small group of firms.

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History of Philippine Financial System. (2017, Feb 22). Retrieved from https://graduateway.com/history-of-philippine-financial-system/