Philippine Financial System

• Individuals and businesses are directly involved in the complex financial system to buy goods and services or borrow money.

The Philippine Financial System

• It includes banks, credit unions, pawnshops, money markets, investment houses, financing companies, securities dealers, the World Bank, IMF, Asian Development Bank, transnational banks, Bangko Sentral ng Pilipinas and government agencies.
• These all influence the economy and are associated with laws affecting money, credit, and banking
• The financial system has institutions with modern facilities and plays a role in social and economic development, seen in financial centers like New York, London, Singapore, and Hong Kong.
• It is a network generating, circulating, and controlling money and credit, providing intermediation between credit suppliers and users.
• The system provides loans and stimulates social and economic development
• Developed countries became prosperous due to financial institutions supporting their industrialization.
• Financial institutions are needed where individuals have surplus incomes to invest or lend for interest.
• Middlemen and specialists are required to facilitate the meeting of lenders and borrowers and satisfy their business interests.
• Financial institutions enable parties to transact business conveniently, economically, and safely without direct dealing between lenders and borrowers.
• Transferring funds through financial institutions improves consumption patterns and resource allocation and transforms idle resources into tools of production, creating employment, income, and consumption.

Elements of the Financial System

• Financial claims comprise the money and the right to receive money based on financial instruments' terms
• Debts: Loans repaid with interest
• Equities: Investments like shares of stock that earn dividends
• Financial institutions are private or government organizations with assets mainly from claims or incomes derived from dealing with claims.
• Financial intermediaries create and issue claims against themselves to acquire claims against others.
• Institutions act like middlemen between money suppliers and users.
• Financial Institutions provide services, such as financial information and advice, portfolio management, buying/selling claims, and assisting in finding loan sources.
• Financial markets expedite financial claim transactions, such as the Manila Stock Exchange, aiding money market operations and bringing the forces of demand and supply of financial claims.
• The Monetary Board is the policy-making body of Bangko Sentral ng Pilipinas.
• Laws on money, credit, and banking are legislated by Congress and presidential decrees.
• Government agencies impact the financial system, with Bangko Sentral aiming for internal and external peso stability.
• The national government regulates the economy, making financial system control necessary.
• Laws and policies ensure desired levels of investment, employment, production, income, and consumption.

Functions of Financial Institutions

• Transfer funds from savers to users.
• Assistance is needed on large volumes with barriers like risk, inconvenience, cost, and illiquidity.
• Investigation and credit analysis ensure borrowers use funds efficiently, protecting lenders and institutions.
• Financial institutions match the supply and demand for funds through brokerage, making funds available and economical.
• Some institutions purchase securities in large quantities and then sell in smaller lots.
• Institutions provide liquidity, increasing the liquidity of financial assets through organized markets.
• Investors can find a buyer for debt or ownership claims through institutions' brokerage functions
• Institutions accept savings in return for claims against their assets, allowing clients to liquidate their claims with the institution's current funds.

Development of the Philippine Financial System

• The Obras Pias was the first credit institution in the Philippines, started by Father Juan Fernandez de Leon in 1754.
• Funds came from Catholics and those making wills, investing in trade, and channeling profits to charitable works.
• Obras Pias funds were lent to traders for the Galleon Trade.
• They were under friar control and became commercial banks or marine insurance companies.
• The last Obras Pias ended in 1820.
• The Rodriguez Bank was organized by Francisco Rodriguez ten years later, mostly serving American and British merchants.
• When the Rodriguez Bank owner died, funds were turned over to the Queen of England.
• The Banco Español-Filipino de Isabela II was the first Philippine bank established in 1851, with a charter granted in 1528.
• The bank started transacting business when Philippine ports opened to foreigners and handled mostly domestic transactions.
• The Suez Canal opening in 1869 expanded Philippine trade, inducing agricultural development.
• The Banco Español-Filipino funded exports and established relations in Spain and France to help European trade.
• The British capital led to the Chartered Bank of India, Australia, and China setting up a branch in Manila in 1873.
• The Hong Kong and Shanghai Bank established a Manila branch two years later.
• In 1883, both banks opened branches in Iloilo to finance the sugar industry.
• British banks and merchants dominated the economy as of the Spanish colonial rule.
• Spain established the first savings bank, Monte de Piedad, in 1882 despite British domination.
• Its funds came from the obras pias, and the Banco Peninsula de Ultramirano set up a branch in Manila one year later.

Financial Institutions During American Rule

• The United States acquired the Philippines in 1898 through the Treaty of Paris

• American economic control increased substantially due to “free trade” between the United States and the Philippines as provided by the Payne-Aldrich Act of 1902

• Weakening of British commercial activities in Asia because of World War I (1914-1918) gave the Americans the opportunity to promote their business interests.

• The International Banking Corporation of New York set up an office in the country in 1902.

• In 1915, the bank was acquired by the National City Bank of New York and is now known as the First National City Bank.

• The Postal Savings Bank (1904), the First Agricultural Bank (1906), Philippine National Bank (PNB) (1916), Philippine Trust Co. (1916), People Bank and Trust Co. (1926), China Banking Corporation (1920), and the Mercantile Bank of China (1926) were established as banks in this area.

• In 1942, during Japanese occupation, the PNB closed, then reopened under Japanese supervision.

• The Southern Development Bank, a Japanese bank, established a branch serving as central bank, printing war notes that caused inflation.

History of Philippine Money

• Gold was used for barter rings, jewelry, and Piloncitos, which were a local form of coinage.

Spanish Era (1521-1897)

• Cobs or Macuquinas were the earliest coins from Mexico and other Spanish colonies.
• Spanish dos mundos circulated in the Philippines from 1732-1772 and were known as "two worlds."
• Barrillas, crude bronze or copper coins worth about one centavo, were struck due to the shortage of fractional coins.
• Coins from Spanish colonies were counter-stamped to legalize their circulation.
• Silver pesos with Alfonso XIII were the last coins minted in Spain.
• The pesos fuertes were the first paper money circulated in the country.

Revolutionary Period (1898-1899)

• The Philippine Republic of 1898 issued coins and paper currency backed by natural resources.
• Two-centavo copper coins, one peso, and five peso notes were circulated.
• They were signed by Pedro Paterno, Mariano Limjap, and Telesforo Chuidian and were withdrawn and declared illegal with General Aguinaldo's surrender to the Americans.

The Japanese Occupation (1942-1945)

• War notes were issued in high denominations with no backup reserves, known as "Mickey Mouse" money, which lead to inflation.
• Guerrilla Notes or Resistance Currencies were issued by different provinces to show resistance.