CALANOC, Kent C.

FIN 3207-2

● HISTORY OF FINANCIAL SYSTEM IN GLOBAL AND PHILIPPINE SET UP

The Evolution of the Global and Philippine Financial System

Early Origins and the Birth of Banking:

The history of the global financial system is a complex and fascinating tale that
spans centuries.The roots of the global financial system can be traced back to ancient
civilizations, where early forms of banking and financial intermediation emerged.
According to Mwelwa (2023), in around 2,000 B.C., in ancient Mesopotamia, credit
transactions were recorded on clay tablets in temple ruins. By the 4th century B.C.,
various entities like temples, public bodies, and private firms were involved in
deposit-taking and lending activities. The Greek system influenced banking practices in
Egypt and Rome, and by the 2nd century A.D., transactions were documented by public
notaries. Early forms of credit were recorded at Champagne fairs, where settlements
were made periodically without exchanging money.

The Rise of International Trade:

Moreover, the financial system began to take shape during the period of European
colonial expansion in the 15th and 16th centuries. The establishment of global trade
routes, such as the Silk Road and the Age of Discovery, led to increased cross-border
transactions and the need for financial intermediaries (Khan Academy, n.d.). Merchants
and traders turned to early financial institutions, such as the Medici Bank, to manage
risks associated with long-distance trade and to provide credit.

The Birth of Stock Exchanges and Capital Markets:

The 17th and 18th centuries witnessed the emergence of stock exchanges and
capital markets, which played a pivotal role in the global financial system. The
Amsterdam Stock Exchange, founded in 1602, is widely regarded as the world's first
formal stock exchange. It enabled the trading of shares in the Dutch East India
Company and facilitated the growth of joint-stock companies. This development marked
a significant shift toward a more organized and transparent financial system (Hwang,
2024).

The Rise of Central Banks and Monetary Systems:

As economies expanded and globalization intensified, the need for stable monetary
systems became evident. Central banks were established to manage currency
issuance, regulate interest rates, and maintain price stability. The Bank of England,
founded in 1694, was one of the first major central banks. Its role in providing liquidity
and stabilizing the financial system became a model for central banks worldwide
(Bordo)

The Bretton Woods System and the Era of Globalization:

In the aftermath of World War II, world leaders convened in Bretton Woods, New
Hampshire, to establish a new global financial order. The resulting Bretton Woods
system, implemented in 1944, aimed to promote economic stability and facilitate
international trade. It created the International Monetary Fund (IMF) and the World
Bank, which played key roles in maintaining currency stability and fostering economic
development (Chen, 2022).

Financial Liberalization and Regulatory Reforms:

In the late 20th century, advancements in technology and deregulation led to a wave
of financial liberalization. This period witnessed the growth of complex financial
instruments, such as derivatives and securitization, which aimed to spread risk and
enhance liquidity. However, the financial system also became more interconnected and
vulnerable to systemic risks, as evidenced by the Global Financial Crisis in 2007-2009
(Investopedia, n,d.). As a result, the Global Financial Crisis prompted a reevaluation of
the global financial system and resulted in significant regulatory reforms. Governments
and international organizations implemented measures to enhance financial stability,
increase transparency, and mitigate systemic risks. Stricter capital requirements,
improved risk management practices, and enhanced oversight became central pillars of
the post-crisis financial architecture.

Philippines (source: History of banking in the Philippines. studylib.net. (n.d.)).

Spanish Period

The history of the financial system in the Philippines reflects the country's colonial
past and its journey towards economic independence. During the Spanish colonial
period, the first financial institution called Obras Pias was established in the 16th
century to manage the galleon trade between the Philippines and Mexico. However, it
ceased operations in 1820. The first commercial bank, Banco Espanol-Filipino, started
operating in 1851 and later became the Bank of the Philippine Islands. The accessibility
of European markets through the Suez Canal in 1869 attracted British capital, leading to
the establishment of branches by the Chartered Bank of India, Australia, and China, as
well as the Hongkong and Shanghai Banking Corporation. By the end of the Spanish
regime, there were three commercial banks and one savings bank operating in the
Philippines, with minimal supervision and regulation.

American Period

In 1898, the Philippines gained independence from Spain but soon fell under
American colonial rule. The American period brought significant changes to the financial
system, including the establishment of the Philippine currency and the creation of the
Bureau of Treasury. The American authorities introduced banking regulations and
promoted the development of local banks, leading to the establishment of the Philippine
National Bank in 1916, which became the country's first government-owned bank.

Post-war Era

The Philippines achieved full independence in 1946, and the post-war era marked a
new phase in the country's financial system. The Bangko Sentral ng Pilipinas (BSP) was
established in 1949 as the central bank, tasked with maintaining price stability,
promoting financial stability, and ensuring an efficient payment system. The BSP played
a crucial role in managing monetary policy and overseeing the banking sector, fostering
economic growth and stability.

In subsequent years, the financial system in the Philippines experienced both

challenges and progress. The country faced economic crises, such as the Asian
Financial Crisis in 1997, which exposed vulnerabilities in the banking sector and
prompted reforms. Regulatory measures were implemented to strengthen the banking
system, enhance risk management practices, and improve corporate governance.

Today, the Philippine financial system continues to evolve, adapting to globalization

and technological advancements. It encompasses a diverse range of financial
institutions, including commercial banks, investment banks, insurance companies, and
microfinance institutions. The government continues to implement policies that promote
financial inclusion, encourage investment, and support economic growth.
 ● DEFINE THE CURRENT PHILIPPINE FINANCIAL STRUCTURE

The current financial structure in the Philippines consists of various components,

including banking institutions, non-bank financial intermediaries, and specialized
government banks. The financial system is regulated and supervised by the Bangko
Sentral ng Pilipinas (BSP) and other monetary authorities that make up the financial
system.

The banking sector in the Philippines is composed of universal banks, commercial

banks, specialized government banks, offshore banking units, thrift banks, and rural
banks. In addition to banks, there are other financial institutions such as pawnshops,
building and loan associations, finance companies, investment houses and investment
companies (Lee & Jao, 1982).

As of September 30, 2022, there were forty-five (45) universal and commercial
banks, forty-four (44) savings banks, four hundred (400) rural and cooperative
banks,forty (40) credit unions and 6,267 non-banks with quasi-banking functions, all
licensed by the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) under the
General Banking Act of 2000.
 ● DEFINE AND DISCUSS THE ROLE OF BANGKO SENTRAL NG PILIPINAS,
INSURANCE COMMISSION, SECURITY AND EXCHANGE
COMMISSION,AND COOPERATIVE DEVELOPMENT AUTHORITY IN
DEVELOPING THE FINANCIAL SYSTEM STRUCTURE OF THE PHILIPPINES

Bangko Sentral ng Pilipinas

The Bangko Sentral ng Pilipinas (BSP) is the central

bank of the Philippines, established in 1993 under the New
Central Bank Act. It succeeded the Central Bank of
Philippines, founded in 1949. The BSP operates
independently from the government and focuses on
maintaining financial stability, particularly by ensuring low
and stable inflation through implementing policies related to
money, banking, and credit to maintain price stability. It also
regulates and supervises banks, finance companies, and
non-bank financial institutions to ensure they operate safely and soundly. Moreover, the
BSP issues our national currency by printing bank notes and mints coins backed by its
assets and are considered legal tender.Finally, as the central bank of the Philippines,
its role it to promote financial inclusion and education to promote broad and convenient
access to financial services for all segments of society and educate the public about
financial matters, respectively (Bangko Sentral ng Pilipinas, n.d.).

Insurance Commission

kkjjkokThe Insurance Commission operates as a vital arm of

the Philippine government, falling under the jurisdiction of
the Department of Finance. Its core responsibility revolves
around the supervision and regulation of various financial
sectors including insurance, pre-need plans, and health
maintenance organizations (HMOs). This oversight is
conducted in accordance with the legal framework provided
by Republic Act Nos. 10607 and 9829, which outline the
specific guidelines and standards governing these
industries. Additionally, Executive Order No. 192, issued in
2015, further delineates the Commission's scope of authority and operational directives.

Through these legislative instruments, the Insurance Commission plays a pivotal

role in protecting the policyholders and safeguarding the interests of consumers. Also, it
grants licenses and registrations to insurance companies, pre-need companies, and
HMOs, ensuring the stability and solvency of insurance entities, as well as monitoring
the market conduct of insurance companies and related entities to prevent unfair
practices, such as misrepresentation, fraud, and deceptive sales tactics, fostering a
competitive and fair marketplace for insurance and related services (Insurance
Commission, 2023).

Securities and Exchange Commission

The Securities and Exchange Commission

(SEC) is a government agency tasked with
registering and supervising corporations,
securities, and capital market entities in the
Philippines. It prioritizes investor protection by
ensuring access to accurate information
about securities. The SEC plays a crucial role
in regulating and overseeing the financial
services industry in the Philippines. It
monitors compliance with existing laws, rules,
and regulations related to financing and lending companies. Key functions include
requiring companies to disclose relevant information about their business, the securities
being sold, and the risks involved in investing in those securities to protect investors
from fraud and manipulation. Additionally, the SEC oversees securities markets,
brokers, dealers, and exchanges to promote transparency and investor confidence. In
essence, it plays a crucial role in safeguarding investor interests and facilitating the
growth of the capital market in the Philippines (Securities and Exchange Commission,
2022).

Cooperative Development Authority of the Philippines

The Cooperative Development Authority (CDA) in the

Philippines is pivotal in shaping the financial system,
particularly through its focus on cooperatives. As a
government agency, it spearheads the promotion and
development of cooperatives to foster social justice and
balanced national progress. The CDA formulates, adopts, and
implements integrated and comprehensive plans and
programs for cooperative development, consistent with the
national policy on cooperatives and the overall
socio-economic development plans of the government. It
collaborates with various government bodies such as the Department of Agriculture,
Department of Agrarian Reform, Securities and Exchange Commission, and the Bangko
Sentral ng Pilipinas, to support cooperative growth and aligns its plans with national
socio-economic development goals. It particularly concentrates on strengthening the
financial resources and membership of credit cooperatives, aiming to enhance the
overall financial system's resilience. Furthermore, the CDA advocates for cooperatives'
role in promoting equity, social justice, and economic development, in line with
constitutional and legal recognition of their importance in the country's progress (CDA,
n.d.).

These regulatory bodies, including the BSP, Insurance Commission, SEC, and
Cooperative Development Authority, collectively contribute to the development and
stability of the financial system structure in the Philippines, ensuring the soundness and
integrity of the banking, insurance, securities, and cooperative sectors.

● DEFINE AND DISCUSS THE NATURE AND BASIC FUNCTIONS OF

BANKING INSTITUTIONS AND NON-BANK FINANCIAL INSTITUTIONS

According to RA 8791 (2000), "Banks" shall refer to entities engaged in the lending
of funds obtained in the form of deposits. They act as an intermediary between the
suppliers and users of money. Primarily, banks mobilize public funds and provide safe
custody of savings, offering various types of deposits such as savings and time
deposits. They will use it to grant loans, whether secured or unsecured, invest in debt
securities, extend credit facilities, accept foreign currency deposits, and act as
correspondents for other financial institutions (Gobat, 2017)

The classifications, powers, and authorities of banks in the Philippines are defined
and regulated by the Monetary Board. Banks are categorized into six types: Universal
banks (UBs), Commercial banks (KBs), Thrift banks (TBs), Rural banks (RBs),
Cooperative banks (Coop Banks), and Islamic banks (IBs). Each type of bank has
specific powers and scope of authorities granted by the Monetary Board.

Universal Banks (UBs)

UBs have broader powers than KBs, including those of an investment house,
investment in non-allied enterprises, and ownership of up to 100% equity in other banks
or enterprises.They can undertake investment house functions directly or through
subsidiaries, subject to Securities and Exchange Commission regulations.

Commercial Banks (KBs)

KBs engage in typical commercial banking activities like accepting deposits, extending
credit, buying/selling foreign exchange, and offering various banking services.They may
also invest in allied enterprises, hold real estate, act as financial agents, and engage in
quasi-banking functions.

Thrift Banks (TBs)

TBs primarily focus on providing loans and credit services. They accept deposits,
invest in bonds and debt securities, offer banking services, act as correspondent for
other financial institutions, and perform quasi-banking functions.
Rural Banks (RBs)

RBs serve the credit needs of farmers, fishermen, cooperatives, and other individuals.
They offer loans, accept deposits, act as correspondents, hold real estate, and engage
in foreign exchange transactions.

Cooperative Banks (Coop Banks)

Coop Banks provide financial services primarily to cooperatives and members. They
can perform banking services similar to rural banks and other types of banks with prior
approval from the Bangko Sentral ng Pilipinas (BSP).

Islamic Banks (IBs)

IBs operate under Islamic principles and offer Sharia-compliant financial

services.They provide various banking services such as savings accounts, investment
placements, foreign currency deposits, financing arrangements, and investment in allied
enterprises, subject to Islamic finance principles and regulations.

On the other hand, the non-bank financial institutions (NBFIs) in the Philippines
provide various financial services without holding a full banking license. It falls under
two categories, the NBFI with Quasi-Banking Function and NBFI without Quasi-banking
Function. These institutions facilitate alternative financial services, such as investment
(both collective and individual), risk pooling, financial consulting, brokering, money
transmission, and check cashing, and serve as a source of consumer credit alongside
licensed banks. BSP Circular 592 (2008) provides, "QBs" encompass investment
houses, finance companies, trust entities, and other non-bank financial institutions
(NBFIs) with quasi-banking functions. On the other hand, "NBFIs" comprise a broader
range of entities, including investment houses, finance companies, trust entities,
insurance companies, securities dealers/brokers, credit card companies, non-stock
savings and loans associations, holding companies, investment companies,
government NBFIs, asset management companies, insurance agencies/brokers,
venture capital corporations, foreign exchange dealers, money changers, lending
investors, pawnshops, fund managers, mutual building and loan associations,
remittance agents, and all other non-bank financial institutions without quasi-banking
functions.
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