MODULE 1:

BANK AND BANKING PERSPECTIVES

MODULE INTRODUCTION

This module discusses the brief history, definition and nature of banks. It also presents various
Philippine legislations that were made for the banking system to reach its current state today. Further,
the types of banks were explained. Lastly, the bank’s economic significance were described for the readers
to appreciate why the state needs to supervise banks. All these discussions are meant to help in
understanding the succeeding modules or topics regarding the different aspects of banking theories and
practices.

TOPIC OUTCOMES

By the end of this module, the students will be able to:

 Determine the history, definition, nature, and type of banks
 Understand the different aspects of banking theories and practices that will be discussed in the
succeeding chapters

CONTENT

The Philippine Banking History

The banking history in the Philippines has started way back when we have experienced colonization by a
conglomeration of races. Our banking history has withstood even so with the influences of these foreign
races. Conveniently, we can distinguish the highlights in our history of the banking system into 4 distinct
periods:

1. Spanish Period
 Due to the thriving galleon trade, the Obras Pias was established during the 16th century
and was considered as the first financial institution In the Philippines. The religious
Catholics decided to lend funds for its capital and have its resources loaned out with
interest. In 1820, its operations stopped and was completely inexistent in 1851.
 The Banco Español-Filipino started its operations on 1851 and performed general banking
operations while partly financing foreign trade. It also had the privilege to issue notes on
October 17, 1854. Up to this day, the bank still operates under the name “Bank of the
Philippine Islands”.
 In 1869, the opening of Suez Canal led to convenience of trade with the European
countries.
 In 1873, the Chartered Banks of China, India and Australia were able to establish their
branches in the Philippines. And in 1875, they were followed by a branch of Hongkong
and Shanghai Banking Corporation. All these banks were more classified as exchange
banks rather than commercial banks because, aside from providing general banking
services, they were also engaged is buying and selling drafts and bills of exchange.
 In 1882, Monte de Piedad started operating as a savings bank.
 Banco Peninsular Ultramarino of Madrid was established a branch in the Philippines in
1853 but stopped its operations four years later.
  There were only the Spanish Civil Code and the Code of Commerce regulating the banking
business. And since the supervision and regulations for banks were negligible, by the end
of the Spanish regime, there were only FOUR (4) banks in operation: THREE (3)
Commercial banks and ONE (1) savings bank.

2. American Period
 In 1906, the Postal Savings Bank was created as part and parcel of the Bureau of Posts to
inculcate the habit of thrift in the minds of people, particularly those in the low income groups
 Before the granting of the Philippine National Bank’s charter in 1916, foreign banks
dominated the Philippines. This was capitalized at P20,000,000 and was granted privilege to
issue its own notes and engaged in extending short-term notes to merchants and long-term
loans to agriculture and industry. However, it was re-organized in 1934 and had its capital
reduced to P10,000,000.
 After WWI, more banks were established:
 1919 – Yokohama Specie Bank
 1920 – China Banking Corporation
 1926 – Peoples Bank and Trust Company; Mercantile Bank of China
 1937 – Nederlandsch Indische Handelsbank
 The first private bank named Philippine Bank of Commerce was established in 1938 with
genuine Filipino capital.
 During these times, foreign banks were still dominant in the Philippine banking system having
both branches and main offices operate in the country. Due to this, the First Philippine
Commission passed “Act 52” which carried out examinations and inspections of banks to
safeguard the interest of stockholders and depositors.
 In 1929, the Bureau of Banking was created and had the power to supervise banks through
the Bank Commissioner – relieving the Insular Treasurer of such duties
 During 1930, a milestone in the banking history was made due to the establishment of the
Manila Clearing House organized by domestic banks.

3. Japanese Period
 During the Japanese occupation, only Filipino and Japanese-owned banks were allowed to
operate.
 Nampo Kaihatsu Ginko or better known as the Southern Development Bank established a
branch in Manila during 1942. It acted as a fiscal agent of the Japanese government in the
Philippines and was like a central bank who handled the issuance of military notes and clearing
interbank balances.

4. Postwar Period
 After the liberation of the Philippines, the banks that started operating in the Japanese
occupation were unable to reopen for business because they were not able to meet their
obligations in Philippine currency.
 The following regulations and issuances were given out to assist the struggling banking
industry
i. Executive Order 96 invalidated all Japanese occupation deposits.
ii. Executive Order 48 enabled the reopening of pre-war banks
iii. Commonwealth Act 725, approved in 1945, provided P10,000,000 funds for the
reopening and rehabilitation of domestic banks in March 1946.
  In January 2, 1947, by virtue of the Republic Act 85, the Rehabilitation Finance Corporation
was created to perform the functions of the Agricultural Industrial Bank. It aimed to
rehabilitate the battle-scarred country and improve economic development.
 The Republic Act No. 337, or better known as the “General Banking Act” was signed into law
in 1948. It provided decisive regulations for all banking institutions as to organization.
 In 1949, the Republic Act No. 265 or the “Central Bank Act” was passed to create the Central
Bank of the Philippines. Its establishment can be justified with these two problems:
i. Adjustment of the transition from a colonial raw material producing economy to that of
an agro-industrial economy; and
ii. There was no centralization of the banking business as the banks were independent of
one another.
 Throughout the years after its establishment, there were presidential decrees issued to
amend RA No. 265:
 Presidential Decree No. 72 was issued in 1972 and adopted recommendations from Joint
IMF-CB banking Survey Commission. It accentuated that the Central Bank’s main objective
must focus on the maintenance of both domestic and international monetary stability
and that its authority should include the supervision and regulation of the whole financial
system
 Presidential Decree No. 1801 – designated the Central Bank of the Philippines as the
central monetary authority

The Philippine Banking Today

The New Central Bank Act of 1993 or Republic Act No. 7653 provided the establishment of the
Bangko Sentral ng Pilipinas (BSP) as an independent monetary authority whose primary objective is the
maintenance of price stability and has the much needed fiscal and administrative autonomy that the
previous Central Bank did not have. BSP has the power to supervise and regulate over the operations of
banks, finance companies, and non-bank financial institutions performing quasi-banking functions. It also
gives discounts, loans and advances to banking institutions experiencing serious financial struggles. As of
September 14, 2020, according to the updated directory on its official website
(https://www.bsp.gov.ph/SitePages/FinancialStability/DirBanksFIList.aspx), the following are BSP’s
supervised/regulated banks, non-banks and offshore banks:

 46 Universal and Commercial Banks

 48 Thrift Banks
 443 Rural and Cooperative Banks
 7 Non-banks with Quasi-banking functions
 28 Non-banks without Quasi-banking functions
 1 Offshore Bank

It is evident that over the years, the banking system in the Philippines has truly strived and
flourished to be where it is now. This statement is justified by the various established banks and financial
institutions that are not only seen in commercial and urbanized locations but also in rural or remote areas
of our country. Our banking system also adapted to the challenge of technological advancements as
clients highly demand for convenience with greater safety. This demand set forth the concept of e-
banking, the delivery of banking services through the internet or other electronic networks. E-banking is
regulated by four main BSP prescribed prudential guidelines:
 1. Circular No. 240 (2000)
2. Memorandum to All Banks (June 19, 2000)
3. Circular Letter (August 8, 2000)
4. Circular No. 269 (2000)

E-money are the devices and instruments used to provide and access the e-banking services.
These tools can be divided into three groups:

1. Access devices – enable the withdrawal and depositing of cash, transfer of funds and payment of
bills from their bank accounts without any physical transaction
2. Card-based products – also called as Stored-Value Card; prepaid cards in which funds are stored
in electronic form on an integrated circuit or computer chip embedded in the cards
3. Prepaid software products or network money – These involve funds kept in electronic form and
are transmitted through communications networks to its partakers.

Other Significant Laws

 Republic Act No. 8971 or the “General Banking Law of 2000” – passed into law on May 23, 2000
 Provides the regulation of the organization and operations of banks, quasi-banks, and trust
entities. Among the important features of the law are the following:
1. Greater foreign participation in the system, thus indicating competition. Foreign banks are allowed
to acquire up to 100% of the voting stock of an existing bank within seven years after the effectivity
of the Act.
2. Three-year moratorium on the establishment of commercial banks to hasten the ongoing
consolidation process in the banking system.
3. Stricter rules governing bank exposure to directors, officers, stockholders, and related interests
(DOSRI). The definition of DOSRI is expanded to include investments of the bank in enterprises
owned or controlled by said DOSRI. The Monetary Board is also given the power to define the term
“related interests”.
4. Grant of authority to the Monetary Board to adopt internationally accepted standards relating to
risk-based capital adequacy
5. Application of fit-proper rule test for a director or officer to hold said position in a bank. In this
regard, the Monetary Board is empowered to disqualify, remove, or suspend a director or officer
for acts or omissions that render him unfit for the position.
6. Grant authority to the BSP to regulate electronic banking to ensure adequate protection of banks’
depositors and other clients

 Republic Act No. 9160 or the “Anti-Money Laundering Act of 2001” – passed into law on
September 29, 2001; it was amended by RA 9194, RA 10167
 There are five salient features of the Anti-Money Laundering Law:
1. Criminalizing, meaning, that money laundering is now a crime in the Philippines
2. Establishment of a system of covered transaction reporting. RA 9160 identifies the forms of
business institutions or “covered institutions” which are required to submit reports about
suspicious or “covered transactions” to authorized persons
3. Creation of an Anti-Money Laundering Council that will administer the implementation of RA 9160
4. Amendment of the Bank Secrecy Law which has been blamed for making our country a potential
haven for money laundering. The RA 9160 is to ensure that the country is not used for money
laundering. However, it continues to protect and preserve the integrity and confidentiality of bank
accounts
 5. The institution of procedures and arrangements that facilitate cooperation between the
Philippines and foreign governments in the investigation, tracking, and prosecution of money
launderers.

 Circular No. 237 – approved on April 19, 2000 by the Monetary Board
 Consolidates and clarifies all existing rules and regulations on mergers and consolidations of
banks and other financial institutions as well as improving the incentive package.
 Done to foster banks, bring about more and better financial services at lower cost, and
promote stability and efficiency in the Philippine banking sector
 MERGER – absorption of one or more corporations by another existing corporation which retains
its identity and takes over the rights, privileges, franchises, and properties, and assumes all the
liabilities and obligations of the absorbed corporation(s) in the same manner as if it has itself
incurred such liabilities or obligations. The absorbing corporation continues its existence while the
life or lives of the other corporation(s) is/are terminated.
 CONSOLIDATION – union of two or more corporations into a single new corporation (consolidated
corporations). All the constituent corporations thereby cease to exist as separate entities. The
consolidated corporation shall thereupon and thereafter possess all the liabilities and obligations
of each of the constituent corporations in the same manner as if it had itself incurred such liabilities
or obligations.

 Deregulation/Provisions in the General Banking Law

The following sections are from the website, “The LawPhil Project; Arellano Law Foundation.
Philippine Laws and Jurisprudence Databank”
(https://lawphil.net/statutes/repacts/ra2000/ra_8791_2000.html )

 Section 11. Foreign Stockholdings. - Foreign individuals and non-bank corporations may own
or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall
apply to Filipinos and domestic non-bank corporations. The percentage of foreign-owned
voting stocks in a bank shall be determined by the citizenship of the individual stockholders
in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow
the citizenship of the controlling stockholders of the corporation, irrespective of the place of
incorporation.
 Section 72. Transacting Business in the Philippines. - The entry of foreign banks in the
Philippines through the establishment of branches shall be governed by the provisions of the
Foreign Banks Liberalization Act.
The conduct of offshore banking business in the Philippines shall be governed by the
provisions of the Presidential Decree No. 1034, otherwise known as the "Offshore Banking
System Decree."
 Section 73. Acquisition of Voting Stock in a Domestic Bank. - Within seven (7) years from the
effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks
Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one
hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of
the Republic of the Philippines.
Within the same period, the Monetary Board may authorize any foreign bank, which prior
to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%)
of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks
Act, to further acquire voting shares such bank to the extent necessary for it to own one
hundred percent (100%) of the voting stock thereof.
 In the exercise of the authority, the Monetary Board shall adopt measures as may be
necessary to ensure that at all times the control of seventy percent (70%) of the resources or
assets of the entire banking system is held by banks which are at least majority-owned by
Filipinos.
Any right, privilege or incentive granted to a foreign bank under this Section shall be
equally enjoyed by and extended under the same conditions to banks organized under the
laws of the Republic of the Philippines.
 Section 74. Local Branches of Foreign Banks. - In the case of a foreign bank which has more
than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for
the purpose of this Act, and all references to the Philippine branches of foreign banks shall be
held to refer to such units.

Perspective on Bank or Banking

A bank may be defined as “an institution which deals primarily in the receipt of deposits and the
loaning out of funds” (Leuterio and Estepa, 2009). Historically, banks have been considered as a service
provider concerned with the safekeeping of money and assisting credit transactions. But as emphasized
in Section 3 of the New General Banking Law, “Banks shall refer to entities in the lending of funds obtained
in the form of deposits.” Using this definition, it is evident that the creation of deposits involves the bank’s
other purpose – provision of loans.

Nature of Banking Business

The nature of the banking business can be viewed as “banks making money from other people’s
money”. To clarify this statement, keep in mind that the banking business involves credit. Elements like
trust, confidence, risk and uncertainty are part of the credit transactions made in banks. Thus, people give
their trust and confidence whenever they deposit their idle funds to banks for safekeeping. Part of these
deposits are provided back to the public in the form of loans which also demands the same two elements.
By granting loans, banks receive interests which serve as their income from the banking business.
Conclusively, banks have generated an asset and liability. It can be seen as a debtor to the
depositors and must always be prepared to return their deposits as demanded. It is also considered as a
creditor to the people they have granted loans to, because the latter must pay the bank when their loans
are due.

Principles of Banking

The banking business revolves around the two basic principles stated below. These principles are
more related to the operations of commercial banks rather than the other types available in the banking
system.

1. Partial Reserve System – this states that “a certain amount deposited will support several times
as much in credit”. This concept started when goldsmiths, who used to safeguard tons of precious
metals like gold, began to lend portions of gold to those who need it while keeping certain
portions to meet the demands of the depositors. This concept also justified the idea that a greater
portion could be utilized as loans while only a few can be used as back up of deposits. As of today,
central banks have imposed legal reserve requirements on deposit liabilities of banks. As the
requirement increases, the bank’s lending capacity decreases and vice versa. Hence, the
obligation of a partial reserve system to manage the bank’s credit operations.
 2. A greater amount of deposits results from the proceeds of loans – This is because a borrower may
choose to have his loan proceeds turned into a deposit after the processing and approval of his
loans application. This way, the bank has created an asset and liability. Therefore, no cash is
involved not unless the borrower-turned-depositor draw checks against the bank.

Types of Banks

Banks are divided into different classifications to aide the supervision and regulation of the
government. These classifications are according to ownership, place of incorporation, structure, function
and management.

1. As to ownership:
a. Privately owned – it is organized and capitalized by private citizens for their profit; called
“closed corporations” since the ownership resides in one family (However, due to the nature
of the banking business, it is considered a quasi-public corporation)
b. Publicly owned – organized by the state and sometimes has a minimum of private ownership.
The charter is granted by the enactment of a special law to govern its operations.

2. As to place of incorporation
a. Domestic – incorporated under the laws of the Philippines; follows that majority of the stocks
are owned by Filipinos in conformity with the Philippine Corporation Code
b. Foreign – incorporated under the laws of another country, although the bank might be doing
business in the Philippines; its organization follows the pattern of incorporation in the country
to which the owners owe allegiance without prejudice to the supervision and control imposed
by the Philippine laws on banks and financial institutions, and others which have anything to
do with corporate entities.

3. As to structure
a. Stock Corporation – when the corporation sell shares of stock to the general public to raise
capital. The shares sold must have a par value. The purpose of organizing is for profit.
b. Non-stock Corporation – the organization is on a membership basis. The purpose of such
organization is for mutual benefits and service rather than for profit.

4. As to function and line of development

a. Commercial Banks – receives demand deposits and gives out short-term loans; also attends
to numerous services that is possible due to the process of departmentalization
b. Trust Companies – deals in fiduciary activities; was originally a legal function and was handled
by a legal officer or lawyer
c. Savings Bank – primarily receives for safekeeping funds from persons who have no immediate
need for cash and invests these funds in long-term investments
d. Rural Bank – primarily caters to the needs of small farmers, small businesses, small cottage
industries, and cooperative associations; operation and organization is governed by Republic
Act 720
e. Development Bank – takes care of giving loans to be used for developing the economy and
may therefore engage in medium and long-term lending; organization and operation of
private development banks shall be under the control and supervision of the Development
Bank of the Philippines
 f. Cooperative Bank – organized to furnish the credit needs of duly registered and operating
cooperative associatiions of different kinds; example: Philippine National Cooperative Banks
g. Investment Bank - assists government bodies and newly organized corporations to raise funds
for capital through the sale of stocks and bonds; handles a business of high risk and therefore
necessitates a large amount capital; underwrites the sale of securities and also conducts an
economic survey to determine the market for securities; example Private Development
Corporation of the Philippines
h. Central Bank – the bank of banks; does not directly deal with the public; usually the
supervisory and regulatory agency, which makes all banks “tow the line”. The Bangko Sentral
ng Pilipinas is the Philippines’ central that is rather unique since it is purely government-
owned and operated.

5. As to management
a. Unit Bank – ownership is concentrated on one corporation which does banking business
independent of others; has one place of business and its own board of directors
b. Group banking – when a majority portion of the stocks of two or more banks are held by a
holding company; preventive measures had to be taken to discourage group banking, if not
to entirely discard it, because of the element of monopoly.
c. Branch banking – where there is a head office and two or more branches; the single corporate
entity “fans out” its banking services to different strategic locations
d. Chain banking – when one or more persons control the activities of the banks; has not gained
adherents due to the difficulties in operating the same on economical basis and also because
of its instability or lack of continuance in existence.

Economic Significance of Banks

The banks facilitate the dealings for credit transactions. They also act as intermediaries between
debtors and creditors in the flow of credit funds. Usually, depositors give their idle funds to banks not just
for security purposes but also as a safe form of investment. These funds are then lent to borrowers who
may use it for establishing or sustaining businesses that are also significant players in our economy.

It is also notable that banks gain economic significance because they can create money out of the
proceeds of loans. Such power can give a great impact either positively if banks use it for the betterment
of the economy’s commercial, inductrial and agricultural well-being, or negatively if banks decide to abuse
it for personal gain.

In terms of foreign trade, banks also play a major role for the smooth transactions between the
international buyers and sellers. Banks are responsible for handling the letters of credit and acceptances
that are necessary in international trade transactions.

Why the state supervises banks

Since banks can give remarkable influence in a country’s economy, the state must supervise and
regulate its operations. According to M. Leuterio and C. Estepa (2009), the following are the specific
reasons as to why the state should supervise and control banks:

1. “The banks are entrusted with other people’s money.” If they mismanage the public’s money or
make other fraudulent actions, it may result to banking failure and people’s loss of trust.
 2. “The state wants to assure that the banks will perform their functions in the best interest of their
clients through the honest and efficient conduct of their functions.”
3. “The banks may either abuse their power or use them prudently.” The state prevents the bank’s
exploitation of power that may lead to greater economic disaster.
4. “The banks, furthermore, are quasi-public corporations and as in all other corporations of this
calling, the state must exert its restraining influence to safeguard the welfare of its constituents.”

END OF CHAPTER TEST

MULTIPLE CHOICE. Directions: Write the corresponding letter of your answer on the space provided.

1. During which period in the Philippine banking history was the first private bank with genuine
Filipino capital established?
a. Spanish Period
b. American Period
c. Japanese Period
d. Postwar Period

2. By the end of this period, there were very few banks left operating due to the poor supervision
and regulation of banks.
a. Spanish Period
b. American Period
c. Japanese Period
d. Postwar Period

3. This banking principle states that banks may grant loans and lend a portion of their funds from
the deposits of their depositors.
a. Banks create an asset and liability at the same time
b. Partial Reserve System
c. Loans produce more deposits
d. None of the above

4. An “e-money” that allow people to perform or acquire banking services (withdraw, deposit,
transfer funds or pay bills) without physically transacting in a branch.
a. Card-based products
b. Network money
c. Prepaid software products
d. Access devices

5. Which legislation provides the regulation of the organization and operations of banks, quasi-
banks, and trust entities?
a. RA No. 7653; New Central Bank Act
b. RA No. 8791; General Banking Law of 2000
c. RA No. 9160; Anti-Money Laundering Act
d. RA No. 265; Central Bank Act

6. Which law provided the establishment of an independent monetary authority with the much
needed fiscal and administrative autonomy that the central bank did not have?
 a. RA No. 7653; New Central Bank Act
b. RA No. 8791; General Banking Law of 2000
c. RA No. 9160; Anti-Money Laundering Act
d. RA No. 265; Central Bank Act

7. A type of bank that primarily caters to the needs of small farmers, small businesses, small
cottage industries, and cooperative associations.
a. Central Bank
b. Development Bank
c. Rural Bank
d. Savings Bank

8. This type of bank deals with fiduciary activities, such as executor of a last will and testament and
guardian of minor’s interest?
a. Trust Company
b. Investment Bank
c. Commercial Bank
d. Unit Bank

9. It is a type of bank that is established to cater the needs of cooperative associations to meet the
various financial issues related with their operations.
a. Commercial Bank
b. Cooperative Bank
c. Central Bank
d. Rural Banks

10. What type of bank, as to management, has its ownership concentrated on one corporation
which does the banking business independent of others?
a. Unit Bank
b. Group Banking
c. Branch Banking
d. Chain Banking

ESSAY. Briefly discuss the following:

1. Describe the economic significance of banks (5pts)

2. Explain why our government should supervise and control banks (5pts)
References:

Bangko Sentral Ng Pilipinas - Directories and Lists. (n.d.). Bangko Sentral ng Pilipinas.
Retrieved January 29, 2021,
from https://www.bsp.gov.ph/SitePages/FinancialStability/DirBanksFIList.aspx

Leuterio, M. M., & Estepa, C. B. (2009). Banking: Theory and Practice. Anvil Publishing, Inc.

Republic Act No. 8791. (n.d.). The Lawphil Project - Arellano Law Foundation,
Inc. https://lawphil.net/statutes/repacts/ra2000/ra_8791_2000.html