History of Philippine Financial System

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The 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 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 Español-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. The Philippine National Bank (PNB), created during the American colonial period on July 22 1916, is among the top banking institutions in the Philippines and considered as one of the country's economic pillars. It is the country’s first universal bank, and functioned as the de facto Central Bank of the Philippines until the 1940's. It was given a special power to issue circulating notes. It is also the first to offer automated tellering services in the country through the self-service tellering machine (ATM's). In 1942, PNB closes its doors because of the coming of the Japanese imperial forces. In 1935, the National Loan and Investment Board (NLIB) was created to coordinate and manage the various government trust funds such as the Postal Savings Fund and the Teacher's Retirement Fund. In 1939, the NLIB was abolished and its functions were transferred to a new body, the Agricultural and Industrial Bank (AIB). AIB continued operations until the outbreak of World War II. After the war, in 1947, the AIB was abolished and the Rehabilitation Finance Corporation was formed. On October 29, 1946, an “Act Creating the Rehabilitation Finance Corporation” also called the Republic Act No. 85 was introduced. Its primary purpose was to provide credit facilities for the rehabilitation and development and expansion of agriculture, and industry, the reconstruction of property damaged by war, and the broadening and diversification of the national economy, and to promote the establishment of private development banks in provinces and cities. This later becomes the “Development Bank of the Philippines”.

Financial crises in the late 70’s and early 80’s have significant impact on the entire Philippine economy. A number of policy reforms were made to strengthen the financial system. The financial community has undertaken recovery efforts since 1986. Until the economic crisis of mid 80’s, the largest commercial bank in the Philippines was the government-owned Philippine National Bank. It accounted for 25% to 30% of commercial...
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