PHILIPPINE BANKING SYSTEMHISTORY OF PHILIPPINE BANKING Began in 16th 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.BankingThe 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 SheetBalance 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 = AssetsL = LiabilitiesO = Owners Equity/ Net Worth

Commercial banks balance sheet asset include: Cash Loans Investments Demand deposits Borrowings Trade Securities Capital Account Time depositsQuantitative Instruments of Monetary ControlDesignated 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 ControlUsed for discriminating between different uses of credit1. 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 InstitutionsThese 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 InstitutionsThe 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 InstitutionsThese 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 BANKSCommercial 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 LOANS1. As to maturitya. 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 securitya. 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 borrowersa. 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 purposea. 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 DEPOSITS1. As to source of deposita. Private Sectorb. Government Sector2. As to terms of withdrawala. Demand depositb. Savings depositc. Time depositKINDS OF ACCOUNTSA. 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 Services1. 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.