Chapter 1: Introduction

FMGT65/FMGT70 – MONETARY POLICY AND CENTRAL BANKING

What is finance?
Finance – it is the study of how individual,
institutions, governments and businesses acquire,
spend and manage money and other financial assets.
Financial environment – It includes the financial system,
institutions, markets and individuals that make the
economy operate efficiently.
Financial institutions – These are organizations or
intermediaries like banks, insurance, companies and
investment companies. They engage in financial activities
to aid the flow of funds from savers, to borrowers or
investors.
Financial markets – These are physical or electronic
forums that facilitate the flow of funds among investors,
businesses and governments.
Investments – It involves the sale or marketing of
securities, the analysis of securities and the management
of investment risk. Investors include savers and lenders as
well as equity investors. Investors can be corporate or
personal.
Financial Management – It involves financial
planning, asset management and fundraising
decisions to enhance the value of businesses. This
involves decision-making relating to the efficient use
of financial resources in the production and sale of
goods and services. The goal of the financial manager
in a profit seeking organization is to maximize the
owner’s wealth.
The Financial Systems
and their Financial Functions
The monetary system is responsible for creating and
transferring money. The monetary system creates
money which serves as a medium of exchange. This
money can be used by individuals and businesses to
buy goods and services.
The Financial Systems
and their Financial Functions
The financial institutions accumulate or gather
savings. When deposits are accumulated, they can be
used for loans and investments.
The financial markets are financial instruments and
securities created and sold in the primary securities
market.
The Financial Systems
and their Financial Functions

The evolution of the financial system in the

Philippines can be viewed along the major political
milestones of the country:
THE SPANISH PERIOD
The Obras Pias represented the first organized
institutions in the Philippines which began to be
established in 1854.
 The “Banco Espanol-Filipino de Isabel II” is the first
bank in the Far East. The bank engaged in general
banking functions and financed, in a limited way, the
country’s foreign trade.
THE SPANISH PERIOD
 The opening of Suez Canal in 1869 greatly expanded
Philippines-European trade.
British capital began to be attracted to the
Philippines and in 1873, the Chartered Bank of India,
Australia and China, with headquarters in London,
put up an agency in the Philippines.
THE SPANISH PERIOD
 In 1875, another owned bank, the Hong Kong and
Shanghai Banking Corporation, established a branch
in the Philippines.
Both banks engaged in general banking business but
they were more exchange banks than commercial
banks since they confined most of their activities to
buying and selling of drafts and bills of exchange.
THE SPANISH PERIOD
 On August 2, 1882, the first savings bank in the
country was founded by Father Felix Huertas and
named “Monte de Piedad y Caja de Ahorros de
Manila”.
A branch of Banco Peninsula Ultramarino of Madrid
was also opened only within a short span of 4 years.
THE AMERICAN PERIOD
 Foreign and domestic banks opened during this era
included the American Bank in 1901 which operated
for 4 years, the Wai Hung Bank and the Abrue,
Newberry and Reyes Bank, both founded in 1902,
are similarly short-lived.
The S. Misaka Bank opened in 1906 to serve the
local Japanese community.
THE AMERICAN PERIOD
In 1906, the Postal Savings Bank was created as a
division of the Bureau of Posts to promote the habit
of thrift among the people and to bring banking to
the rural areas.
In 1908, the Government-owned Agricultural Bank
was established with a capital of 1 million pesos but it
failed to render effective service to the farmers due
to its meager capital.
THE AMERICAN PERIOD
Banking business in the Philippines during the period
was dominated by foreign interests until the passage
of Act No. 2612 in 1916, which called for the
establishment of the Philippine National Bank.
THE AMERICAN PERIOD
In addition to its privilege of note issue, the
Philippine National Bank was organized to grant and
extend long-term credit to agriculture and industry.
THE AMERICAN PERIOD
After World War I, several foreign and domestic
banks were also attracted to operate in Manila.
 Yokohama Specie Bank (1918)
 Asia Banking Corporation (1919)
 Chinese-American Bank of Commerce of Peking and China
Corporation (1920)
 People’s Bank, Trust Company and Mercantile Bank of China
(1926)
 National City Bank of New York (1930)
THE AMERICAN PERIOD
 After the establishment of the Commonwealth in
1935, more banking institutions entered the
Philippine scene.
 The Bank of Taiwan was granted authority to put up
a branch in Manila in 1937, and in the same year the
Netherlands Indishe Handles Bank branch opened in
Manila.
THE AMERICAN PERIOD
 Before the outbreak of World War II, 17 banks (11
domestic and 6 foreign) were operating in the
country with 17 offices in Manila, 22 branches in the
provinces and 54 provincial agencies.
THE AMERICAN PERIOD
 It was also during this era when definite steps were
taken supervise and regulate the business of banking
in order to provide a measure of safety to depositors
and creditors as well as the banks themselves.
 In 1900, the first Philippine Commission passed Act
No. 52 providing for the regular examination and
inspection of banks by the Bureau of Treasury.
THE AMERICAN PERIOD
 In February 1929, the Bureau of Banking was
created, assuming the power of supervision over
these institutions from the Bureau of Treasury.
THE JAPANESE PERIOD
 During this era, domestic banks owned by foreign
nationals and branches of foreign banks were treated
as enemy property and placed under liquidation by
the ruling military government.
THE JAPANESE PERIOD
The Southern Development Bank (Nampo Kaihatsu
Kindo) opened a branch in Manila in 1942 and acted
as fiscal agent of Japanese Government in the
Philippines. It also performed some of the functions
of a central bank, issuing military notes, taking
custody of the clearing branches of the banks and the
receiving deposits from the banks.
THE POSTWAR AND
INDEPENDENNCE PERIOD
 Rehabilitation of the banking system was made
possible by Executive Order No. 49 issued on June 6,
1945 which discharged banks from any liability for
deposits made during the Japanese Occupation and
made them liable only for Pre-Occupation deposit
balances less voluntary withdrawals.
THE POSTWAR AND
INDEPENDENNCE PERIOD
 Rehabilitation Finance Corporation (RFC), which was
organized primarily to provide financial aid in the
rehabilitation of the country and to help in the
broadening and the diversification of the Philippine
economic structure.
THE POSTWAR AND
INDEPENDENNCE PERIOD
 The RFC’s charter was amended and gave way to a
much larger and expanded development banking
institution, the Development Bank of the
Philippines.
ESTABLISHMENT OF THE CENTRAL BANK
OF THE PHILIPPINES
 The Central Bank of the Philippines, created under
R.A. No. 265, was inaugurated in 1949 to administer
both the monetary and banking systems of the
country.
FUNCTIONS OF CENTRAL BANK
It was established principally to manage the
country’s currency system.
It consist in controlling the economy’s supply of
money and credit, acting as the country’s sole bank
of issue, and as the depository and fiscal agent of the
Philippine government and its instrumentalities.
FUNCTIONS OF CENTRAL BANK
 The central bank relies on a number of monetary
policy tools such as charges in rediscount rates,
variations on legal reserve requirements, sales and
purchasers of the Government securities, selective
credit and other regulations it may deem necessary
to attain its objective.
ENACTMENT OF BANKING LAW
 In 1948, the General Banking Act (R.A. No. 337)
which contained the first major rules and regulations
governing the operation, particularly of commercial
and savings and mortgage banks, was passed.
 In 1952, the Rural Bank Act was approved.
 In 1963, the Savings and Loans Association Act,
setting the stage for the development of another
type of banking institution.
ENACTMENT OF BANKING LAW
 In 1972, the growing demands upon the banking
system when the constitution of the New Society
called for constructive reforms and reorientation of
the Philippine political, economic and social set up.
 In 1980, the Banking Reforms effects a revision in
the Philippine Banking structure including the
administrative regulations.
THE NEW CENTRAL BANK
 On June 14, 1993, Pres. Fidel V. Ramos signed into
law R.A. 7653 entitled “The New Central Bank Act”,
pursuant to the requirements of the 1987
Constitution for the establishment of an independent
central Monetary Authority.
CLASSIFICATION OF THE FINANCIAL
SYSTEM
 The Banking Sector
For purpose of uniformity, simplicity, and
equality of treatment, R.A. 7653 entitled “The New
Central Bank Act”, classified banks institutions into
the following categories:
a. An expanded, commercial bank or a universal bank and
commercial bank;
b. Thrifts banks, composed of savings and Mortgage banks,
stocks savings and loan associations;
c. Private development banks;
d. Regional unit banks, composed of rural banks.
 Specialized unique government banks, such as
Development Bank of the Philippines and the Land
Bank, are not covered by this classification but shall
be subject to the supervision and regulation by the
Central Bank pursuant to the provisions of Section 25
of Republic Act. No. 265.
THE BANKING SECTOR
A. Expanded Commercial Bank or Universal Bank
It is considered as a one stop com-bank performing
com-banking functions and non-related banking
activities.
THE BANKING SECTOR
B. Commercial Banks
 It represents the largest single group of the
country’s banking and financial intermediaries
operating on a branch-banking organizational
structure with all head offices located in
Metropolitan Manila and the largest network
branches and extension offices distributed
throughout the country.
THE BANKING SECTOR
B. Commercial Banks
 It offers the greatest variety of banking services among
financial institutions such as: accepting demand, savings,
time and foreign currency deposits, handling local foreign
currency deposits, handling local, and foreign fund
remittances, money market transactions like administering
trust funds; and a host of other services that truly make
them the department stores in finance.
THE BANKING SECTOR
C. Rural Banks
 The passage of the Rural Banks Act in 1952 saw the
emergence of regional unit or rural banks which
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.
THE BANKING SECTOR
D. Thrift Banks
 It includes savings and mortgage banks, private
development banks and stocks savings and loan
associations.
 Saving 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
securities.
THE BANKING SECTOR
 Thrift banks include:
1. Savings banks – banks organized primarily to accumulate
savings deposits and invest them for specific purposes.
2. Private development banks – organized primarily to cater
to the capital needs and demand for investment credit on
medium to long-term loans.
3. Cooperative banks – duly registered associations of
persons who undertake ventures in accordance with
universally accepted cooperative principles.
THE BANKING SECTOR
 Thrift banks include:
4. Islamic banks – banks established to promote and
accelerate socio-economic development of our Muslim
brothers (esp. in ARMM) based on the Islamic concept of
banking.
5. Microfinance banks – bank established to provide a broad
range of financial services for micro enterprises.
THE BANKING SECTOR
 Thrift banks include:
4. Islamic banks – banks established to promote and
accelerate socio-economic development of our Muslim
brothers (esp. in ARMM) based on the Islamic concept of
banking.
5. Microfinance banks – bank established to provide a broad
range of financial services for micro enterprises.
THE BANKING SECTOR
 Thrift banks include:
4. Islamic banks – banks established to promote and
accelerate socio-economic development of our Muslim
brothers (esp. in ARMM) based on the Islamic concept of
banking.
5. Microfinance banks – bank established to provide a broad
range of financial services for micro enterprises.
THE BANKING SECTOR
E. Specialized Banks
 The three specialized government banks, composed
of the Development Bank of the Philippines (DBP),
the Land Bank of the Philippines (LBP), and the
Philippine Amanah Bank, play special roles in the
economic development of the country.
THE BANKING SECTOR
E. Specialized Banks
 The DBP was established mainly to provide long
term industrial and agricultural credit.
 The Land Bank was established to serve as an
instrument for carrying out part of the country’s land
reform program.
 The Amanah Bank is designed to provide banking
facilities at unique and reasonable terms to the
Muslim provinces of Mindanao.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
1. Investment houses constitute the largest group, in terms
of resources, among the private non-bank financial
intermediaries.
2. Investment companies, which are primarily engaged in
investing, reinvesting or trading in securities.
• open – end companies – no fixed amount of paid-in
capital; redeemable at any time; on day-to-day basis.
• close – end companies – relatively fixed amount of
outstanding capital; no provisions for the issuance or
redemption of shares on a day-to-day basis.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
3. Finance companies are organization (partnership or
corporation) that are organized to extend credit lines to
consumers and to industrial, commercial, agricultural
enterprises.
4. The securities dealers are companies which buy and sell
securities of others or which acquire securities to resell or
offer them for sale to the public.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
5. Securities brokers are those engaged in the business of
affecting transactions in securities and earn their income
from commissions received.
6. Private insurance companies are under the direct
supervision and regulation of the Office of the Insurance
Commission and are authorized to coduct life of non-life
insurance business.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
7. Pawnshops or pawnbrokers are business establishments
engaged in lending money on personal property delivered as
security, pledge or collateral.
8. Non-stock savings and loans associations are
associations, which primarily provide short-term loans to
members and whose main sources of income are savings
and time deposits.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
9. Mutual and Building Loan Associations are mutually
owned stock companies that specialize in extending long-
term mortgage loans to members.
10. Credit unions are cooperative composed of small
producers and consumers who voluntarily join together to
form their business enterprises which themselves own,
control and patronize.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
11. Trust and pensions fund managers are institutional and
personal administrators of funds created or constituted for
the benefit of others.
• employee welfare funds are constituted to employers
wherein benefits are payable to employees upon
retirement, death, cessation from work and other.
• trust funds are created by trustors, or estates of absent
persons, minors or by courts, thereby creating a trust
relationship between the owner (trustors) of the fund or
property and the manager (trustee) for the benefit of a third
person called the beneficiary.
PRIVATE NON-BANK FINANCIAL
INTERMEDIARIES
12. Lending Investors pertain to individuals or entities
engaged exclusively in the business of extending secured or
unsecured direct loans to individual and enterprises.