PHILIPPINE BANKING SYSTEM

HISTORY OF PHILIPPINE BANKING

- Began in 16
th
century with the establishment of Obras Pias (pious works) by
laymen associated with religious orders.
- August 1, 1851, the first state bank in the Philippines was established: the Banco
Espanol-Filipino de Isabel II
- 1872, The Chartered Bank of India, Australia and China opened a branch in
Manila, and later in Cebu and Ilo-ilo.
- In 1873, British-Orient banks opened branches in the country as a result of the
expanded Philippine-European trade.
- The Hongkong and Shanghai Banking Corporation established its Manila branch
in 1875.
- The Monte de Piedad y Caja de Ahorros was the first mutual savings in the country
opened in 1882.
- The Banco Espanol-Filipino de Isabel II changed its name to Bank of the Philippine
Islands on January 1, 1912.
- During the American Occupation, seven domestic private banks came into
existence. Branches of Japanese as well as Chinese banks were also opened
during the early part of the period.
- The Postal Savings Bank was put up in 1906.
- The first agricultural was established in 1908 but its assets and liabilities were
transferred to the Philippine National Bank which was organized in 1916.
Banking
The service performed by that financial institution known as a bank, which is
primarily concerned with the safekeeping of funds through the acceptance of deposits
of money, and the provision of credit through lending of money.
The following are the banking institutions that provide the services in varying
degrees:
Commercial Banks
cover the widest range of functions among all financial intermediaries.
Commercial banks extend many kinds of loans; they lend not only to individuals but to
all types of business firms, including other financial institutions and government. They
deal in foreign exchange and rent deposit boxes in which important papers, jewels and
other things of value are kept. Commercial banks accept several forms of deposits.
These forms are demand deposits, time deposits and savings deposits. Demand
deposits are also known as current accounts or checking accounts. Time deposits are
accounts with maturity date and at higher interest rates. An ordinary savings account
has no maturity date and has a lower interest rate than time deposits. This can be
referred to as a persons callable account.


Thrift Banks
are savings and mortgage banks, stock savings and loan associations, and
private development banks which, in addition to accepting savings and time deposits,
perform the ff. functions: grant loans; invest in readily marketable bonds and other debt
securities, commercial papers and accounts receivable, drafts and bills of exchange;
issue domestic letters of credit.
Rural Banks
are regional banks operating primarily to serve the needs of people in the rural
areas.
Specialized government banks
are those created by the government for specific purposes under special
charters. These are the Development Bank of the Philippines, the Land Bank of the
Philippines and the Philippine Amanah Bank.
a. The Development Bank of the Philippines established in 1946. Its
lending activities are concentrated on development projects such as in
agriculture, industry and low-cost housing. It also undertakes
investment banking function.
b. The Land Bank of the Philippines organized in 1963 to provide
timely and adequate financial support to the Agrarian Reform
Program. Its lending activities are geared primarily towards helping
farmers acquire land under the agrarian reform program, as well as
finance the cultivation of these lands and marketing of the produce.
c. The Philippine Amanah Bank established in 1974 to promote and
accelerate the socio-economic development of Mindanao, especially in
the predominantly Muslim provinces. It provides credit, commercial,
development and savings banking facilities at reasonable terms.

Banking Theories
Commercial Loan Theory This theory suggests that bank must be liquid.
Shiftability Theory This holds that the liquidity of the bank depends on its ability
to shift its assets to someone else at a predictable price.
Anticipated Income Theory This states that there is no such thing as self-
liquidating loans.

Commercial Banks Balance Sheet
Balance Sheet The statement of the asset and liabilities of an entity at a given
point of time.

Simple commercial bank accounting is:
A L = O
A = Assets L = Liabilities O = Owners Equity/ Net Worth

Commercial banks balance sheet asset include:
Cash
Loans
Investments
Demand deposits
Borrowings
Trade Securities
Capital Account
Time deposits
Quantitative Instruments of Monetary Control
Designated to regulate or control the total volume of bank credit in the economy.
Techniques used by the Bangko Sentral to determine the countrys total money
supply. The following are the quantitative instruments used:
1. Open Market Operations(OMO) This is the purchase and sale of government
securities made by Bangko Sentral ng PIlipinas.
2. Discount Rate Policy Bangko Sentral can affect the total volume of
borrowings by increasing or decreasing the rate of interest charged to bank
members, known as discount rate.
3. Reserve Requirements are the amount of funds that a depository institution
must hold in reserve against specified deposit liabilities. The reserve
requirements shall be applied to all banks uniformly and without
discrimination.

Qualitative Instruments of Monetary Control
Used for discriminating between different uses of credit
1. Stock Market credit Setting a minimum margin requirement on the purchase
of stock. The margin requirement is the down payment a purchaser of stock
must pay to buy stock on credit.
2. Moral suasion This describes variety of informal methods used by the
Bangko Sentral to persuade its member banks to behave in a particular
manner. This includes publications of speeches given by the member of
Monetary Board, letters sent to all member banks, programs of credit
restraints, conferences and guidelines.

Depository Institutions
These are companies that accept deposits, make loans, transfer funds, obtain
needed currency supplies, and manage investments. These institutions also extend
loans to corporations and individuals who desire to accumulate cash or invest excesses
for several reason:
They anticipate needs to pay for future purchases of goods and services.
They are concerned that they might need money unexpectedly.
Their income exceeds their expenses.
Depository Institutions include: commercial banks, savings and loan associations,
savings bank and credit unions.
Commercial Banks take all types of deposits in the form of savings,
checking and time deposit accounts. These banks can be:
Unit banking commercial banking organization operating a single
banking office which is not controlled by another corporation.
Branch banking - A single banking corporation that offers a full line of
banking services in two or more offices.
Chain Banking - held together through ownership of two or more banks
by the same individuals.
Correspondent banking banks holding demand deposit in other banks.
Bank holding companies owns the controlling interest in one or more
banks.
Savings and Loan Associations were founded to secure a large pool of funds
to support home financing and home ownership. They accept deposits
only from local individuals who chose to join the associations by
becoming depositors.
Savings Banks are smaller than commercial banks and oriented more
toward their local geographic areas. These banks are mutual associations
managed by self- perpetuating board of trustees.
Credit Unions accept deposits from members of a group lending only to
their depositors for short-term personal needs.
Non-Depository Institutions
The non-depository financial institutions that are most important to financial
managers include insurance companies, investment companies, and mortgage bankers.
Also called financial intermediaries because they collect funds from those who have
surpluses and channel the funds efficiently to those who have deficits.
Insurance Companies are financial intermediaries that collect regular,
relatively small payments called insurance premium from many policy holders in order
to make relatively large payments.
Investment Companies are financial intermediaries that pool relatively small
amounts of investors money to finance large portfolios of investment. These companies
can be set up in two ways: Close-end investment company issues a fixed number of
shares , which it sells to public to raise money to purchase instruments. Open-end
investment companies issue shares whenever someone wants to buy them.
Other Financial Institutions
These acts as agents, advisors, especially in more sophisticated financial matters.
Investment Banks buy new securities from the issuing company and resells them
to the public thru the process of underwriting.
Venture Capitalists are individuals or institutions that buy original stock issues of
new companies, expecting to make enough profits on one successful issue.
Brokerage Houses buy and sell securities for clients while completing all the
documentation each transaction requires.
Securities Exchanges are voluntary association of brokerage houses that are
formed to provide organized, indoor market place for trading securities.

FUNCTIONS OF COMMERCIAL BANKS
Commercial banks extend functions of collection, paying, loaning, receiving and trust.
Collection function. Commercial banks administer collection items of clients.
Collection items are those credited to the accounts of the depositor after presentation to
the party whom they are drawn and funds had been collected.
Paying function. The basic reason why a bank needs cash on hand or within its
vault is in order to honor withdrawals of its clients. Paying teller is the person
administering cash and performing paying function over the counter. Paying checks are
those drawn for the same bank. Cashing checks are for checks drawn on another bank but
are accommodated by the bank as per request by its client.
Loaning Function. An advance of money or a credit in exchange for a written
promise to pay in accordance with the terms of agreement.
Liquidity of loans can be measured as follows:
a. Self-liquidating loans may include short-term loans with chattel mortgages.
b. Loans on securities which covers marketability of securities for investments.
c. Eligible loans are assured of liquidity by requiring notes, drafts, checks,
acceptances which may be rediscounted; or issuance of post-dated checks.
KINDS OF LOANS
1. As to maturity
a. Demand Loan (callable loan) does not have fixed maturity date.
b. Time loan has a specified maturity date which is a minimum of thirty
(30) days to ninety (90) days or more.
2. As to security
a. Secure loan collateral is required for availment of loan.
b. Unsecured loan does not have specific property as pledge to a bank.
3. As to borrowers
a. Loans to customers are those approved for regular bank depositors.
b. Loans to others are those extended to business or non-customers.
4. As to purpose
a. Real Estate loans are for house and lot acquisition, house improvement
or lot purchase.
b. Agriculture loans are for tenant-farmers for farm implements
acquisition and development.
c. Consumer loans are for household needs which may be installment
account, charge account, revolving or lay-away plan.
d. Industrial loans are for business acquisition of fixed asstes, raw
materials or building development.
Receiving Function. Deposits are banks liabilities to depositors. It is the totality of
money entrusted by a depositor to a bank to be utilized according to banking
practice. These deposits received by commercial banks can be primary or
derivative deposits.
Primary deposits are those currency, cash or check deposits.
Derivative deposits are those added to bank assets and are not
liabilities such as payment for loans, discounts and investments.
KINDS OF DEPOSITS
1. As to source of deposit
a. Private Sector
b. Government Sector
2. As to terms of withdrawal
a. Demand deposit
b. Savings deposit
c. Time deposit
KINDS OF ACCOUNTS
A. Individual account a single-named account where the person whose name
appears on the passbook and has sole right to withdraw funds.
B. Survivorship account two or more persons are named therein and both are
authorized to withdraw funds. Signature of anyone can be valid for withdraw.
C. Joint account two or three names of depositors and their signatures are all
required during withdrawal of funds.
D. Partnership or corporation account account by business partners or board
members of a corporation or partnership.

Trust function. Serve in a fiduciary capacity for the administration or disposition
of assets and for the performance of acts for beneficiaries of trust arrangements.
The bank acts as the trustee, clients is the trustor, beneficiary is designated by the
trustor.

Personal Trust Services
1. Employees benefit trust - The administration of workers job-related benefits.
2. Living trust - Ensures a convenient means of providing a reasonable income
for a persons family without immediate transfer of property.
Revocable trust one which the trustor has the right to
revoke the agreement after its ` creation.
Irrevocable trust provides for complete and final
transfer of assets to the beneficiary
Trusteeship under will an agreement for people who
prefer their estate be maintained and administered for
the benefit of the heirs rather than turning over to the
heirs directly.
3. Escrow Arrangement - When 2 or more persons or entities agree to appoint
the bank as escrow agent for:
Money
Securities
Instruments
Properties

4. Custodianship Involves the safekeeping and preservation of securities and
other important documents, and occasionally performing ministerial acts for
the client as provided under the Custodianship Agreement.
5. Insurance trust - An irrevocable trust set up with a life insurance policy as the
asset, allowing the grantor of the policy to exempt asset away from his or her
taxable estate.
6. Property administration an agency arrangement whereby the bank
undertakes management and administration or real properties of a client in
accordance with the terms of Trust Agreement.
7. Guardianship bank is appointed guardian by a court of competent
jurisdiction to care for the person or property or both of a minor or
incompetent person.
8. Educational trust A trust build up program designed for future education
of assigned beneficiaries.
9. Trust loans these loans were funded by various trust accounts, and are
generally secured by a hold-out on, assignment or pledge of deposits,
mortgage, bond issued by the trustee, real estate and chattel.
Trust Services for Corporations
This is a trusteeship under indenture, which involves holding of mortgage
against which bonds are issued by the corporation and the enforcement and
accountability of all provisions relating to the mortgage.