Philippine Financial System

& Financial
Instruments

CHAPTER 2
Learning Objectives:
• To examine the structure and current state of the
Philippine banking industry, reviews the history of financial
reforms,
• To discuss the measures taken by the authorities to
strengthen the banking sector prior to and after the
Asian crisis,
• To identify the remaining weaknesses and factors that
contribute to the vulnerability of the Philippine banking
industry, and makes some recommendations on how
to address them.
• To explain the role of the Social Security
System, Government Service Insurance System
, Home Development Mutual Fund.
• To identify the private non-bank financial
intermediaries.
 History of Reforms
The evolution of the Philippine financial system
can be viewed from the major political
milestones of the country namely:

1) The Spanish period

2) The American period
3) The Japanese Occupation
4) The post war and Independence period
5) The New Society period
6)The Post-Marcos era
7) The Ramos-Estrada and Arroyo
administrations.
The Spanish
Era
The Obra Pias established in 1594, represented the
first organized financial institution in the
Philippines. Capitalization came from legacies of
wealthy individuals from the Church. Most of the
funds went to traders involved in the “galleon
trade” with Acapulco, Mexico.
August 2, 1882, the first savings bank in the country
was founded by Fr. Felix Huertas and named
“Monte de Piedad y Caja de Ahorros de
Manila”
The American Period
1901 – American Bank was opened which operated for 4
years
1902 – Wai Hung Bank and the Abrue Newberry and Reyes
Bank were opened
1904 to 1906 – the first provincial bank was opened, the
Bank of Pangasinan.The Bank of Zamboanga which
was operated until 1908
1906 – S: Misuka Bank was opened to serve the local
Japanese community.
- the Postal Savings Bank was created as a division of the
Bureau of Post to promote the habit of thrift among the people
and to bring banking to the rural areas.
1916 – through Act No. 2612, the Philippine
National Bank was established and was
organized to grant and extend long-term
agriculture and industry credit.
1929- The Bureau of Banking was created
assuming the power and supervision over this
institution from the Bureau of Treasury.
The Japanese
Occupation
January 2, 1942 – the entry of Japanese
Imperial forces in Manila

1942 – The Southern Development Bank was

opened a branch in Manila and acted as fiscal
agent of Japanese Government in the
Philippines
Post- Marcos
Era
Mrs. Corazon Aquino assumed presidency in
1986. She found it necessary to offset P130 B
in bad loans granted by the government’s 2
major financial institutions, the PNB and
DBP (Development Bank of the Philippines).
 FINANCIAL SYSTEM
• Facilitate the allocation and deployment of
economic resources, both across the time and
space, in an uncertain environment
• Provides a payment system for the
exchange of goods and services
• Provides price information that helps
coordinate decentralized decision-making in
various sectors of the economy
 FINANCIAL SYSTEM
…an information system, comprised of one or
more applications, that is used for any of the
following: collecting, processing, maintaining,
transmitting, and reporting data about
financial events; supporting financial planning
or budgeting activities; accumulating and
reporting cost information; or supporting the
preparation of financial statements.
 OVERVIEW OF THE PHILIPPINE FINANCIAL
SYSYTEMS
• The current Filipino financial system has been
in place for the last 73 years and is constantly
and consistently growing
• Currently ranks as the 47 th
largest economy in the world
• Member of the World Trade
Organization and World Bank
• Has consistently been a strong market
in Asia
 CURRENCY
• The Central Bank of the Philippines (CB) is the sole
authority empowered to issue currency in the country.
• The monetary unit used in the Philippines is the peso (P).
• The CB seeks to ensure the integrity of the currency and
enforces the highest degree of protection for the country’s
currency. It provides the highest standard of service to
banks and to the public. It makes sure that the demand for
currency notes and coins is met effectively and efficiently.
 STOCK EXCHANGE

Corporate stocks may usually be

offered to the public without
difficulty because legal
requirements are relatively
uncomplicated.
 STOCK EXCHANGE
The prospectus must be approved, however, by
the Securities and Exchange
Commission.
If a stock qualifies, it will be registered, and
permission to trade in the stock market when
becomes routine. Public bond issues must also
be cleared with the Securities and Exchange
Commission.
 FINANCIAL INSTITUTIONS
• Institution which collects funds from the
public and places them in financial
assets, such as deposits, loans,
and bonds, rather than tangible property
• Private (shareholder-owned) or public
(government-owned) organizations that
act as a channel between savers and
borrowers of funds.
 Financial Institutions in the
Philippines

• Metropolitan Bank & Trust Co.

• Banco de Oro Unibank, Inc.
• Bank of the Philippine Islands
• Land Bank of the Philippines
• Development Bank of the Philippines
• Rizal Commercial Banking Corp.
• Philippine National Bank
• Bank of Commerce
• Citibank N.A.
• China Banking Corp.
• Union Bank of the Philippines
 Financial Institutions in the
Philippines
• Allied Banking Corp.
• HK & Shanghai Banking Corp.
• Security Bank Corp.
• United Coconut Planters Bank
• Philippine Trust Co.
• Standard Chartered Bank
• Philippine Bank of Communications
• Asia United Bank
 Intro to Money & the Financial
System
• 5 Core Principles of Money & Banking
– Time has value
– Risk requires compensation
– Information is the basis for decisions
– Markets set prices and allocate
resources
– Stability improves welfare
 Banking Institutions
Universal banks or expanded
commercial banks

• considered as one-stop commercial banks

• Perform com-banking functions and non

related banking activities.
 Commercial banks
• represent the largest single group of the
country’s banking and financial intermediaries
• operate on a branch banking organizational
structure
• all heads offices located in Metropolitan
Manila
• the largest network of branches and
extension offices distributed throughout the
country.
 Commercial and universal banks
• under Republic Act No. 8791
• also known as the General Banking
Act of 2000,
• share roughly the same powers.
 Powers of a commercial bank

• accept drafts and issue letters of credit;

• discount and negotiate promissory notes, drafts,
bills of exchange, and other evidences of debt;
• accept or create demand deposits; receive other
types of deposits and deposit substitutes
• buy and sell foreign exchange and gold or
silver bullion;
• acquire marketable bonds and other debt
securities; and extend credit.
 Powers of a universal bank

A universal bank has the same powers as a

commercial bank with the following
additional powers:

• the powers of an investment house as

provided in existing laws and
• the power to invest in non-allied
enterprises.
 Thrift banks
• include savings and
mortgage banks,

• private development banks

and

• stock savings and

loan associations.
 Savings banks
• serve primarily as thrift institutions
drawing funds from household and
individual savers and investing such
funds, together with its capital, in
bonds, or in loans secured by bonds,
real estate mortgages and other
forms of security.
Powers of a thrift bank
• A thrift bank has the power to accept
savings and time deposits,
• act as a correspondent with other
financial institutions
• act as a collecttion agent for
government entities,
• issue mortgages, engage in real
estate transactions
 Powers of a thrift bank
• extend credit
• may also maintain checking accounts,
• act as a depository for government
entities and local government units
and
• engage in quasi-banking and money
market operations subject to the
approval of the Bangko Sentral.
 • Rural banks

• specialize in the extension of small loans for

agricultural purposes, as well as for retail
traders.

• All rural banks are privately owned,

• although they receive equity

counterparts, loans and technical
assistance from the Central Bank.
Specialized government banks

play special roles in the

economic development of the
country.
Specialized government banks
• Development Bank of the Philippines
(DBP) – to provide long-term industrial
and agricultural credit.

• Land Bank of the Philippines (LBP) – to

serve as instrument for carrying out part of
the country’s land reform program.

• Philippine Amanah Bank – provides

banking facilities at reasonable terms to
Muslim provinces of Mindanao.
Development Bank of the Philippines

• It is the seventh-largest bank in the

Philippines in terms of assets,
• and is the second-largest government-
owned bank, next only to Landbank.
• It is also one of the largest government-
owned and/or controlled corporations
(GOCCs) in the Philippines.
 Land Bank of the Philippines
• Has a special focus on serving the needs of
farmers and fishermen
• fourth largest bank in the Philippines in terms
of assets and is the largest government-
owned bank
• It services many rural sector clients in areas
where banking is either limited to rural
banks or is non-existent.
 Al-Amanah Islamic Investment Bank of the
Philippines

• established to promote and accelerate the

socio-economic development of the
Autonomous Region of Muslim Mindanao by
performing banking, financing and
investment operations and by establishing
and participating in agricultural, commercial
and industrial ventures based on the Islamic
concept of banking.
 Offshore banking units
(OBU’s)
• these are branches, subsidiaries or affiliates of
foreign banks which are authorized to transport
offshore banking business in the country.
• It deals with banking transactions in foreign
currencies involving the receipts of funds
principally from foreign external sources
• and the use of such funds, as provided for in
Circular No. 1034 authorizing the establishment of
an offshore banking system in the Philippines.
 Non Bank Financial
Institutions
Social Security System
•
(SSS)
administers social security protection to
workers in the private sector.
• It provides replacement income for workers in
times of death, disability, sickness, maternity, and
old age.
The SSS administrative two programs:
1. Social Security Program
2. Employees Compensation (EC) Program
 Non Bank Financial
Institution

Government Service
Insurance System
(GSIS)
takes care of workers in the
public sector.
 Powers and Authority
• engage in the business and operation of all
kinds of insurance and reinsurance and all
other forms of undertakings to indemnify
any person or property against loss,
damage, or liability, including third party
liability, arising from unknown or
contingent events;

• reinsure with and accept reinsurance

from insurance companies in the
Philippines and abroad;
 Powers and Authority
• issue policies denominated in any foreign
currency;
• issue surety and/or performance bonds
both in Philippine peso and/or in any
foreign currency;
• insure all insurable assets serving as
collaterals for loans extended by
government financial institutions; and
• apportion among the governments any
disposable surplus that it may declare
from the operations of the Fund.
 FUNCTIONS : GSIS
• Identify and provide promptly all government
property and projects with the proper risk analysis and
adequacy of insurance cover thru effective strategies
and operational tactics;
• Adopt at all times the correct rates, terms and
conditions, clauses and warranties on all tariff and
non-tariff business;
• Settle all justifiable claims judiciously and within
specified timeframes and quality standards;
• Reinsure the appropriate amounts with stable and
credible reinsurers at the proper time; and
• Collect all monies due the Government Insurance
Fund when these become due and demandable.
 Home Development Mutual Fund
(HDMF)
Who can be member of Pag-IBIG
Fund?
Mandatory
• With the signing of Republic Act No.
7742
• all SSS and GSIS members earning
P4,000 and above monthly are
mandatorily covered by Pag-IBIG fund.
 Home Development Mutual Fund
(HDMF)
Voluntary
• Membership to the fund is also open to:
– Private and government workers earning less than P
4,000 a month but who wish to join anyway;
– Self-Employed workers such as professionals and
businessmen;
– Overseas contract workers (OCW);
– Residents and immigrants in the United States and
Canada;
– Informal income group such as cooperative
members;
– Non-working spouses.
 Nonbank Financial
• I n s
Investment ho u se s
titutions
• Financial company
• Securities dealers *
• Investment companies
• Fund managers
• Lending investors
• Pawnshops
• Venture capital corporations
• Thrift Mutual building
• Loan institutions associations
• Nonstock savings and loans associations
• Investment House – is any enterprise which primarily engage,
whether regularly or on an isolated basis, in the underwriting of
securities of another person or enterprise, including securities of
the government.

• Underwriting of Securities – is the act or process of

guaranteeing by an Investment House the distribution and sale
of securities issued by another person or enterprise.

• Securities – shares, participation or interests in a corporation

or in a commercial enterprise or profit making venture and
evidenced by a certificate, contract, instrument, whether
written or electronic in character.
• Financial Company – lends money to business and consumers to
meet short-term working capital and long-term investment needs.

• An investment company is a company whose main business is

holding securities of other companies purely for investment
purposes. The investment company invests money on behalf of its
shareholders who in turn share in the profits and losses.

• Consumer finance in the most basic sense of the word refers to

any kind of lending to consumers. However, in the United States
financial services industry, the term "consumer finance" often refers
to a particular type of business, sub prime branch lending (that is
lending to people with less than perfect credit).
• Money lending has been part of the Philippine
economy .
• Loans are offered in many forms and under
different terms and conditions depending on
various factors such as, who the parties are, e.g.,
their status and financial position, and the amount,
purpose or duration of the loan.
• A pawnbroker offers monetary loans in
exchange for an item of value to the given
pawn broker. The word pawn is derived from
the Latin pignus, for pledge, and the items
having been pawned to the broker are
themselves called pledges or pawns, or
simply the collateral.
 PDIC (Philippine Deposit
Insurance Corporation)
• Created for the purpose of insuring
bank deposits
• an attached agency of the
Department of Finance
• assesses and collects insurance
assessments from member-banks to
insure member-banks’ deposit
accounts
 SEC (Securities and Exchange
Commission)
• the chief regulating body in the
securities industry
• protect investors by preventing and
prosecuting fraud, insider trading, and
other deceptive and fraudulent
practices in the stock market
Thank You everyone..