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 Philippines had a relatively
sophisticated banking system; however, the level of financial intermediation was low
relative to the size of the economy. In the late 1970s and early 1980s, a number of policy
reforms were initiated to strengthen the system, but financial crises in 1981 and 1983
short-circuited their full effect. The financial community has undertaken recovery efforts
since 1986.
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". Banco
Espaol-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. It was the largest
commercial bank in the Philippines until the economic crisis of the mid-1980s and was
the government-owned Bank which was created in 1916 to provide agricultural credit for
export crops.
The Philippine government controlled three specialized banks in 1991: the
Development Bank of the Philippines, the Land Bank of the Philippines, and the Philippine
Amanah Bank. The Development Bank of the Philippines, established in 1946 and initially
designed to facilitate postwar rehabilitation, provided long-term finance. It supplied 47
percent of long-term loans and 15 percent of the medium-term loans. More than 70
percent of its loans were allocated to industry. The Land Bank of the Philippines,

established in the early 1970s, financed the government land reform program. The
Philippine Amanah Bank, organized in the mid-1970s, served Muslims in the southern
Philippines. Offshore banking units have been allowed to do business in the Philippines
since 1977. Also since 1977, certain domestic banks have been allowed to take foreigncurrency deposits and engage in foreign-currency lending.
In 1988 there were twenty privately-owned domestic banks and four branches of
foreign banks engaged in commercial banking. Since the passage of the General Banking
Act of 1948, foreign investment in banking has been limited to 40 percent of domestic
bank equity. Total assets of the commercial banking system in 1988 were about P330
billion.
The Philippine financial system manifested its strength over the past
decade, including the period of recent global financial crisis. After significant dislocations
in prior crises in the 1980s and 1990s as well as the 1997 Asian Financial Crisis, the
system saw a steady improvement in the balance sheet of the banking industry, the
issuance and listing of corporate bonds, and the underwriting of insurance contracts. The
economic and political crisis that occurred in the aftermath of the assassination of
Marcos's political rival, Benigno Aquino, also resulted in a virtual collapse of much of the
banking industry, particularly the smaller institutions. The larger banks suffered
substantial losses from the drastic devaluations of the peso between 1983 and 1985.
Commercial bank loans increased slightly in 1984, but then fell almost 30 percent in the
following two years--from P116 billion to P83 billion--before turning upward again.
Inflation during that 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 bank.
The Aquino government undertook a rehabilitation program for the Philippine
National Bank and Development Bank 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. The domestically owned commercial banking sector,
however, became more concentrated. From the mid-1950s to the early 1980s, the 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.

The financial systems performance has been positively reviewed by third
parties. Stress tests conducted on banks also confirm the strength of the banking
systems capitalization even with extreme test parameters. For inclusive finance
advocacy, local supervisory initiatives have also been repeatedly acknowledged by
international institutions. These external validations of the improvements in the financial
sector culminated in the sovereign ratings or outlook upgrades from some the major
ratings firms.
Sources: http://manilynnataba.weebly.com/financial-system.html
http://www.photius.com/countries/philippines/geography/philippines_geography_finance.h
tml
The Library of Congress Country Studies; CIA World Factbook