Core Concepts:

Money, Banking and

Credit
(1st Philippine Edition)

AUTHORS

LOVELL M. ABELLO

ROSARIO G. FUDOTAN

CO-AUTHORS

RAMON T. QUITO

LIMUEL P. PAVICO

CONSULTANT

CRISANTO A. COCAL, BSC, Ll. B.

Certified Public Accountant
Attorney-at-Law
Certified Real Estate Broker
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Authors’ Page
LOVELL M. ABELLO, BSA, MBA, DBA (candidate), Ll. B. (in-progress)
Certified Public Accountant
Registered Professional Teacher (LET) – Major in Business Technology
Certified Real Estate Broker
Career Service Professional
Diplomate in IFRS (with high distinction) – IAT, Canada
Certified Bookkeeper (with distinction) – ICB, United Kingdom
Registered Cost Accountant – ICMA, Australia
Passed International Certification Exam for Certified Accounting Technicians – IAT, Canada and ICMA, Australia
Chair, Accountancy and Finance Department – Angeles University Foundation
Author: Readiness Assessment Tests in Business Technology for the LET (National Book Store, Inc., 2008); Readiness
Assessment Tests in Professional Education (National Book Store, Inc., 2008); Manual in Introductory
Economics (RMC Publishing Haus, 2009)

ROSARIO G. FUDOTAN, BSC, MBA, Ph. D.

Certified Public Accountant
Former Dean, College of Business and Accountancy – Angeles University Foundation
Former Chair, Accountancy Department – University of Sto. Tomas
Professor, College of Business and Accountancy – Angeles University Foundation

RAMON T. QUITO, BSA, MBM, DBA (candidate)

Certified Public Accountant
Dean, College of Business Administration – Systems Plus Computer College (Balibago, Angeles City)
Book Consultant: Manual in Introductory Economics (RMC Publishing Haus, 2009)

LIMUEL P. PAVICO, BSBA, MM, DBA (in-progress)

Career Service Professional
Chair, Management and Entrepreneurship Department – CIT Colleges (Paniqui, Tarlac City)
Professor, College of Business and Accountancy – Tarlac State Universty (Tarlac City)
Author: Manual in Introductory Economics (RMC Publishing Haus, 2009)
LET Reviewer
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Foreword

This course deals with the elementary ideas in relation to money, banking, financial
systems and credit. To sum up, the main purpose of this course is to provide students with
the basic financial background necessary to understand the corporate segment of the
economy.

The Authors
November, 2009
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Table of Contents – In Brief

Page #

Authors’ Page 2

Foreword 3

Table of Contents 4

Core Concepts: Money 5

Banking Concepts and the Financial System 16

Core Concepts: Credit 50

Core Concepts: Money

Money and Its Global Evolution

Money is the standard medium of exchange in business transactions. It refers to the

currency and coins which are in circulation and legal tender (Valix and Peralta, 2008).
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The history of money covers thousands of years. The Sumer civilization developed a
large scale economy based on commodity money. The Babylonians and their neighboring
city states later developed the earliest system of economics as we think of it today, in
terms of rules on debt, legal contracts and law codes relating to business practices and
private property.

The Code of Hammurabi, the best preserved ancient law code, was created circa 1760 BC
in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier
collections of laws include the codex of Ur-Nammu, king of Ur (circa 2050 BC), the
Codex of Eshnunna (circa 1930 BC) and the codex of Lipit-Ishtar of Isin (circa 1870
BC). These law codes formalized the role of money in civil society. They set amounts of
interest on debt/fines for wrong doing and compensation in money for various infractions
of formalized law.

The term ‘Shekel’ refers to an ancient unit of weight and currency. The first usage of the
term came from Mesopotamia circa 3000 BC. referring to a specific mass of barley which
related other values in a metric such as silver, bronze, copper etc. A barley/shekel was
originally both a unit of currency and a unit of weight - just as the British Pound was
originally a unit denominating a one pound mass of silver.

The use of proto-money, may date back to at least 100,000 years ago. Trading in red
ochre is attested in Swaziland. Shell jewellery in the form of strung beads also dates back
to this period, and had the basic attributes needed of early money, such as being scarce in
inland areas, and not easily counterfeited. Also they were worked to be made into
something using a technique or workmanship, into an attractive object, that may have
been considered then, valuable.

The Barter System

In the absence of a medium of exchange, all of these transactions suffer from the basic
problem of barter — which requires an improbable ‘coincidence of wants’ or events.
Overcoming this without money requires some system of in-kind ‘credit’ or ‘gift
exchange’, restricting trade to those who know one another. An individual possessing a
material object of value, such as a measure of grain, could directly exchange that object
for another object perceived to have equivalent value, such as a small animal, a clay pot
or a tool. The capacity to carry out transactions was severely limited since it depended on
a (as already mentioned) coincidence of wants. The seller of food grain had to find a
buyer who wanted to buy grain and who also could offer in return something the seller
wanted to buy. There was no common medium of exchange into which both seller and
buyer could convert their tradable commodities. There was no standard which could be
applied to measure the relative value of various goods and services.

Commodity Money

Because bartering has several problems, most notably the coincidence of wants problem,
but even if a farmer growing fruit and a wheat-field farmer need what the other produces
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a direct barter swap is impossible for seasonal fruit that would spoil before the grain
harvest. A solution is to indirectly trade fruit for wheat through a third, ‘intermediate’,
commodity: the fruit is exchanged for this when it ripens. If this intermediate commodity
doesn't perish and is reliably in demand throughout the year (e.g. copper, gold, or wine)
then it can be exchanged for wheat after the harvest. The function of the intermediate
commodity as a store-of-value can be standardized into a widespread commodity money,
reducing the coincidence of wants problem. By overcoming the limitations of simple
barter, a commodity money makes the market in all other commodities more liquid.

Where trade is common, barter systems usually lead quite rapidly to several key goods
being imbued with monetary properties. In the early British colony of New South Wales,
rum emerged quite soon after settlement as the most monetary of goods. When a nation is
without a fiat currency it commonly adopts a foreign fiat currency. In some prisons where
conventional money is prohibited, it is quite common for cigarettes to take on a monetary
quality, and throughout history, gold has taken on this unofficial monetary function.

Standardized Coinage

From early times, metals, where available, have usually been favored for use as proto-
money over such commodities as cattle, cowry shells, or salt, because they are at once
durable, portable, and easily divisible. The use of gold as proto-money has been traced
back to the fourth millennium BC when the Egyptians used gold bars of a set weight as a
medium of exchange, as the Sumerians had done somewhat earlier with silver bars. The
first stamped money (having the mark of some authority in the form of a picture or
words) was introduced approximately 650 BC in Lydia.

Coinage was widely adopted across Ionia and mainland Greece during the 6th century
BC, eventually leading to the Athenian Empire's 5th century BC, dominance of the region
through their export of silver coinage, mined in southern Attica at Laurium and Thorikos.
A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the
Athenian military fleet. Competing coinage standards at that time were maintained by
Mytilene and Phokaia using coins denominated in Electrum, Aegina in silver.

It was the discovery of the touchstone which led the way for metal-based commodity
money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one
to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal,
which is also hard to come by, dense, and storable. As a result, monetary gold spread
very quickly from Asia Minor, where it first gained wide usage, to the entire world.

Using such a system still required several steps and mathematical calculation. The
touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied
by the weight to find the amount of gold alone in a lump.

To make this process easier, the concept of standard coinage was introduced. Coins were
pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of
the coin, no use of the touchstone was required. Coins were typically minted by
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governments in a carefully protected process, and then stamped with an emblem that
guaranteed the weight and value of the metal. It was, however, extremely common for
governments to assert the value of such money lay in its emblem and thus to
subsequently debase the currency by lowering the content of valuable metal.

Gold and silver were commonly used to mint coins, other metals could be used. For
instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging
in foreign trade. In the early seventeenth century Sweden lacked more precious metal and
so produced ‘plate money’, which were large slabs of copper approximately 50 cm. or
more in length and width, appropriately stamped with indications of their value.

Metal based coins had the advantage of carrying their value within the coins themselves;
on the other hand, they induced manipulations: the clipping of coins in the attempt to get
and recycle the precious metal. A greater problem was the simultaneous co-existence of
gold, silver and copper coins in Europe. English and Spanish traders valued gold coins
more than silver coins, as many of their neighbors did, with the effect that the English
gold-based guinea coin began to rise against the English silver based crown in the 1670s
and 1680s. Consequently, silver was ultimately pulled out of England for dubious
amounts of gold coming into the country at a rate no other European nation would share.
The effect was worsened with Asian traders not sharing the European appreciation of
gold altogether. Gold left Asia and silver left Europe in quantities European observers
like Isaac Newton, Master of the Royal Mint observed with unease.

Stability came into the system with National Banks guaranteeing to change money into
gold at a promised rate; it did, however, not come easily. The Bank of England risked a
national financial catastrophe in the 1730s when customers demanded their money be
changed into gold in a moment of crisis. Eventually London's merchants saved the bank
and the nation with financial guarantees.

Another step in the evolution of money was the change from a coin being a unit of weight
to being a unit of value. a distinction could be made between its commodity value and its
specie value. The difference is these values is called ‘seigniorage’.

Representative Money

The system of commodity money in many instances evolved into a system of

representative money. This occurred because banks would issue a paper receipt to their
depositors, indicating that the receipt was redeemable for whatever precious goods were
being stored - usually gold or silver money. It didn't take long before the receipts were
traded as money, because everyone knew they were ‘as good as gold’. Representative
paper money made possible the practice of fractional reserve banking, in which bankers
would print receipts above and beyond the amount of actual precious metal on deposit.
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So in this system, paper currency and non-precious coinage had very little intrinsic value,
but achieved significant market value by being backed by a promise to redeem it for a
given weight of precious metal, such as silver. This is the origin of the term "British
Pound" for instance; it was a unit of money backed by a Tower Pound of Sterling Silver,
hence the currency Pound Sterling. For much of the nineteenth and twentieth centuries,
many currencies were based on representative money through use of the gold standard.

Fiat Money

Fiat money refers to money that is not backed by reserves of another commodity. The
money itself is given value by government ‘fiat’ - Latin for ‘let it be done’ or decree,
enforcing legal tender laws, previously known as ‘forced tender’, whereby debtors are
legally relieved of the debt if they offer to pay it off in the government's money. By law
the refusal of ‘legal tender’ money in favor of some other form of payment is illegal.

Governments through history have often switched to forms of fiat money in times of need
such as war, sometimes by suspending the service they provided of exchanging their
money for gold, and other times by simply printing the money that they needed. When
governments produce money more rapidly than economic growth, the money supply
overtakes economic value. Therefore, the excess money eventually dilutes the market
value of all money issued - this is called inflation.

In 1971 the US finally switched to fiat money indefinitely. At this point in time many of
the economically developed countries' currencies were fixed to the US dollar, and so this
single step meant that much of the western world's currencies became fiat money based.

Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing
Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a
commodity and with no central authority mandating its use or defending its value, the old
currency continued to circulate within the politically isolated Kurdish regions of Iraq. It
became known as the ‘Swiss Dinar’. This currency remained relatively strong and stable
for over a decade. It was formally replaced following the Second Gulf War.

Credit Money

Credit money often exists in conjunction with other money such as fiat money or
commodity money, and from the user's point of view is indistinguishable from it. Most of
the western world's money is credit money derived from national fiat money currencies.

In a modern economy, a bank will lend to borrowers in excess of the reserve it carries at
any time, this is known as fractional reserve banking. In doing so, it increases the total
money supply above that of the total amount of the fiat money in existence. While a bank
will not have access to sufficient cash (fiat money) to meet all the obligations it has to
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depositors if they wish to withdraw the balance of their checking accounts (credit
money), the majority of transactions will occur using the credit money (checks and
electronic transfers).

Strictly speaking a debt is not money, primarily because debt can not act as a unit of
account. All debts are denominated in units of something external to the debt. However,
credit money certainly acts as a substitute for money when it is used in other functions of
money: medium of exchange and store of value.

Warehouse Receipts

Warehouse receipts became a very successful form of representative money in ancient

Egypt during the reign of the Ptolemies around 330 BC. Farmers deposited their surplus
food grains for safe-keeping in royal or private warehouses and received in exchange
written receipts for specific quantities of grain. The receipts were backed and redeemable
for a usable commodity. Being much easier to carry, store and exchange than bags of
grain, they were accepted in trade as a secure and more convenient form of payment,
acting as a symbolic substitute for the quantities of food grain they represented. The
warehouse receipt itself had no inherent value. It was only a symbol for something of
value.

The invention of representative money had profound effect on the evolution of both
money and society. It directly led to the creation of a new social organization, banking.
The network of royal and private banks that were created during the reign of the
Ptolemies constituted a national grain or giro-banking system. Grains were deposited in
‘banks’ for safekeeping. Warehouse receipts were accepted as a form of symbolic money
because they were ‘fully backed’ by the grains in the warehouse.

More important but less obvious, the introduction of banking by the pharaohs made
possible the creation of money. Until then new money could be grown as a crop, raised as
an animal or discovered as metal in the earth. Now it could be created by writing a
warehouse receipt. At first these receipts were issued only when additional grain was
deposited and cancelled whenever the grain was withdrawn from the warehouse. But it
required only a small step in imagination for the bankers to realize that they could also
create new grain receipts on other occasions. If someone applied to the bank for financial
assistance, the bank did not need to provide it in the form of grain. It could simply create
and give to the borrower a new warehouse receipt that was indistinguishable from those
issued when grain was deposited. Although the new receipts were not backed by
additional deposits of grain, they were still backed by the total value of grain on deposit
at the warehouse and, therefore, readily accepted in the market as a medium of exchange,
so long as the public had trust and confidence in the overall financial strength of the grain
bank.

This stage marks a crucial transition from money as a thing to money as a symbol of
trust. In the case of commodity money, trust was placed in the inherent value of the metal
or grain which constituted the form of payment. In the case of the warehouse receipt,
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trust was extended from the commodity to the social organization that held the grain and
issued the receipts. This shift required a psychological willingness on the part of the
individual to accept a symbol in place of a physical object and a social willingness on the
part of the collective to evolve organizations and systems of account that could gain and
hold the public trust.

These ancient ‘girobanks’ went even further. They introduced standardized accounting
methods and bank accounts for their depositors. Deposits could be recorded as numerical
entries in their books of account. Large transfers of money from one account holder to
another could be done without even exchanging warehouse receipts, simply by changing
the account balances in the bank’s record books. The number in the record book became
a symbolic form of representative money, an ancient forerunner of modern electronic
forms of money.

Tallies

The acceptance of symbolic forms of money opened up vast new realms for human
creativity. A symbol could be used to represent something of value that was available in
physical storage somewhere else in space, such as grain in the warehouse. It could also be
used to represent something of value that would be available later in time, such as a
promissory note or bill of exchange, a document ordering someone to pay a certain sum
of money to another on a specific date or when certain conditions have been fulfilled. In
the 12th Century, the English monarchy introduced an early version of the bill of
exchange in the form of a notched piece of wood known as a tally stick. Tallies originally
came into use at a time when paper was rare and costly, but their use persisted until the
early 19th Century, even after paper forms of money had become prevalent. The notches
were used to denote various amounts of taxes payable to the crown. Initially tallies were
simply used as a form of receipt to the tax payer at the time of rendering his dues. As the
revenue department became more efficient, they began issuing tallies to denote a promise
of the tax payer to make future tax payments at specified times during the year. Each tally
consisted of a matching pair – one stick was given to the tax payer at the time of
assessment representing the amount of taxes to be paid later and the other held by the
Treasury representing the amount of taxes be collected at a future date. The Treasury
discovered that these tallies could also be used to create money. When the crown had
exhausted its current resources, it could use the tally receipts representing future tax
payments due to the crown as a form of payment to its own creditors, who in turn could
either collect the tax revenue directly from those assessed or use the same tally to pay
their own taxes to the government. The tallies could also be sold to other parties in
exchange for gold or silver coin at a discount reflecting the length of time remaining until
the taxes was due for payment. Thus, the tallies became an accepted medium of exchange
for some types of transactions and an accepted medium for store of value. Like the
girobanks before it, the Treasury soon realized that it could also issue tallies that were not
backed by any specific assessment of taxes. By doing so, the Treasury created new
money that was backed by public trust and confidence in the monarchy rather than by
specific revenue receipts.
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Trade Bills of Exchange

Bills of exchange became prevalent with the expansion of European trade toward the end
of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine,
tin and other commodities was heavily dependent on credit for its rapid expansion. Goods
were supplied to a buyer against a bill of exchange, which constituted the buyer’s
promise to make payment at some specified future date. Provided that the buyer was
reputable or the bill was endorsed by a credible guarantor, the seller could then present
the bill to a merchant banker and redeem it in money at a discounted value before it
actually became due. These bills could also be used as a form of payment by the seller to
make additional purchases from his own suppliers. Thus, the bills, an early form of credit
– became both a medium of exchange and a medium for storage of value. Like the loans
made by the Egyptian grain banks, this trade credit became a significant source for the
creation of new money. In England, bills of exchange became an important form of credit
and money during last quarter of the 18th century and the first quarter of the 19th century
before banknotes, checks and cash credit lines were widely available.

Goldsmith Bankers

The highly successful ancient grain bank also served as a model for the emergence of the
goldsmith bankers in 17th Century England. These were the early days of the mercantile
revolution before the rise of the British Empire when merchant ships began plying the
coastal seas laden with silks and spices from the orient and shrewd traders amassed huge
hoards of gold in the bargain. Since no banks existed in England at the time, these
entrepreneurs entrusted their wealth with the leading goldsmith of London, who already
possessed stores of gold and private vaults within which to store it safely, and paid a fee
for that service. In exchange for each deposit of precious metal, the goldsmiths issued
paper receipts certifying the quantity and purity of the metal they held on deposit. Like
the grain receipts, tallies and bills of exchange, the goldsmith receipts soon began to
circulate as a safe and convenient form of money backed by gold and silver in the
goldsmiths’ vaults.

Knowing that goldsmiths were laden with gold, it was only natural that other traders in
need of capital might approach them for loans, which the goldsmiths made to trustworthy
parties out of their gold hoards in exchange for interest. Like the grain bankers, goldsmith
began issuing loans by creating additional paper gold receipts that were generally
accepted in trade and were indistinguishable from the receipts issued to parties that
deposited gold. Both represented a promise to redeem the receipt in exchange for a
certain amount of metal. Since no one other than the goldsmith knew how much gold he
held in store and how much was the value of his receipts held by the public, he was able
to issue receipts for greater value than the gold he held. Gold deposits were relatively
stable, often remaining with the goldsmith for years on end, so there was little risk of
default so long as public trust in the goldsmith’s integrity and financial soundness was
maintained. Thus, the goldsmiths of London became the forerunners of British banking
and prominent creators of new money. They created money based on public trust.
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Banknotes

The history of money and banking are inseparably interlinked. The multiplication of
money really took off when banks got into the business. Inspired by the success of the
London goldsmiths, some of which became the forerunners of great English banks, banks
began issuing paper notes quite properly termed ‘banknotes’ which circulated in the same
way that government issued currency circulates today. In England this practice continued
up to 1694. Scottish banks continued issuing notes until 1850. In USA, this practice
continued through the 19th Century, where at one time there were more than 5000
different types of bank notes issued by various commercial banks in America. Only the
notes issued by the largest, most creditworthy banks were widely accepted. The script of
smaller, lesser known institutions circulated locally. Farther from home it was only
accepted at a discounted rate, if it was accepted at all. The proliferation of types of money
went hand in hand with a multiplication in the number of financial institutions.

These banknotes were a form of representative money which could be converted into
gold or silver by application at the bank. Since banks issued notes far in excess of the
gold and silver they kept on deposit, sudden loss of public confidence in a bank could
precipitate mass redemption of banknotes and result in ‘bankruptcy’.

The use of bank notes issued by private commercial banks as legal tender has gradually
been replaced by the issuance of bank notes authorized and controlled by national
governments. The Bank of England was granted sole rights for the issuance of banknotes
in England after 1694. In the USA, the Federal Reserve Bank was granted similar rights
after its establishment in 1913. Until recently, these government-authorized currencies
were forms of representative money, since they were partially backed by gold or silver
and convertible into metal under certain circumstances.

Demand Deposits

The primary business of the grain and goldsmith bankers was safe storage of savings. The
primary business of the early merchant banks was promotion of trade. The new class of
commercial banks made accepting deposits and issuing loans their principal activity.
They lend the money they received on deposit. They created additional money in the
form of new bank notes. They also created additional money in the form of demand
deposits simply by making numerical entries in the ledgers of their account holders. The
money they created was partially backed by gold, silver or other assets and partially
backed only by public trust in the institutions that created it.

Gold-backed Banknotes

The term ‘gold standard’ is erroneously thought to refer to a time when currency notes
were fully backed by and redeemable in an equivalent amount of gold. The British pound
was the strongest, most stable currency of the 19th Century and often considered the
closest equivalent to pure gold, yet at the height of the gold standard there was only
sufficient gold in the British treasury to redeem a small fraction of the currency then in
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circulation. In 1880, US government gold stock was equivalent in value to only 16% of
currency and demand deposits in commercial banks. By 1970, it was about 0.5%. The
gold standard was only a system for exchange of value between national currencies,
never an agreement to redeem all paper notes for gold. The classic gold standard
prevailed during the period 1880 and 1913 when a core of leading trading nations agreed
to adhere to a fixed gold price and continuous convertibility for their currencies. Gold
was used to settle accounts between these nations. With the outbreak of World War I,
Britain was forced to abandon the gold standard even for their international transactions.
Other nations quickly followed suit. After a brief attempt to revive the gold standard
during the 1920s, it was finally abandoned by Britain and other leading nations during the
Great Depression. Prior to the abolition of the gold standard, the following words were
printed on the face of every US dollar: ‘I promise to pay the bearer on demand, the sum
of one dollar’ followed by the signature of the US Secretary of the Treasury. Other
denominations carried similar pledges proportionate to the face value of each note. The
currencies of other nations bore similar promises too. In earlier times this promise
signified that a bearer could redeem currency notes for their equivalent value in gold or
silver. The US adopted a silver standard in 1785, meaning that the value of the US dollar
represented a certain equivalent weight in silver and could be redeemed in silver coins.
But even at its inception, the US Government was not required to maintain silver reserves
sufficient to redeem all the notes that it issued. Through much of the 20th Century until
1971, the US dollar was ‘backed’ by gold, but from 1934 only foreign holders of the
notes could exchange them for metal.

The Philippine Money

Pre-Hispanic Era

Trade among the early Filipinos and with traders from the neighboring islands was
conducted through barter. The inconvenience of barter later led to the use of some objects
as medium of exchange. Gold, which was plentiful in many parts of the islands,
invariably found its way into these objects that included the ‘piloncitos’, small bead-like
gold bits considered by the local numismatists as the earliest coin of the ancient Filipinos,
and gold barter rings.

Spanish Era (1521-1897)

Three hundred years of Spanish rule left many indelible imprints on Philippine
numismatics. At the end of the Spanish regime, Philippine money was a multiplicity of
currencies that included Mexican pesos, Alfonsino pesos and copper coins of other
currencies. The cobs or ‘macuquinas’ of colonial mints were the earliest coins brought in
by the galleons from Mexico and other Spanish colonies. The silver dos mundos or pillar
dollar is considered one of the world’s most beautiful coins. The barilla, a coarse bronze
or copper coin worth about one centavo, was the first coin struck in the country.
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Coins from other Spanish colonies also reached the Philippines and were counter
stamped. Gold coins with the portrait of Queen Isabela were minted in Manila. Silver
pesos with the profile of young Alfonso XIII were the last coins minted in Spain. The
‘pesos fuertes’, issued by the country’s first bank, the El Banco Espanol Filipino de
Isabel II, were the first paper money circulated in the country.

Revolutionary Period (1898-1899)

Asserting its independence, the Philippine Republic of 1898 under General Emilio
Aguinaldo issued its own coins and paper currency backed by the country’s natural
resources.

One peso and five peso notes printed as ‘Republika Filipina Papel Moneda de Un Peso’
and ‘Cinco Pesos’ were freely circulated. Moreover, 2 centimos de peso copper were also
issued in 1899.

The American Period (1900-1941)

The Americans instituted a monetary system for the Philippine based on gold and pegged
the Philippine peso to the American dollar at the ratio of 2:1. The US Congress approved
the Coinage Act for the Philippines in 1903.

The coins issued under the system bore the designs of Filipino engraver and artist,
Melecio Figueroa. Coins in denomination of one-half centavo to one peso were minted.
The renaming of El Banco Espanol Filipino to Bank of the Philippine Islands in 1912
paved the way for the use of English from Spanish in all notes and coins issued up to
1933. Beginning May 1918, treasury certificates replaced the silver certificates series,
and a one-peso note was added.

The Japanese Occupation (1942-1945)

The outbreak of World War II caused serious disturbances in the Philippine monetary
system. Two kinds of notes circulated in the country during this period. The Japanese
Occupation Forces issued war notes in big denominations. Provinces and municipalities,
on the other hand, issued their own guerrilla notes or resistance currencies, most of which
were sanctioned by the Philippine government in-exile, and partially redeemed after the
war.

The Philippine Republic

A nation in command of its destiny is the message reflected in the evolution of Philippine
money under the Philippine Republic. Having gained independence from the United
States following the end of World War II, the country used as currency old treasury
certificates overprinted with the word ‘Victory’.
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With the establishment of the Central Bank of the Philippines in 1949, the first currencies
issued were the English series notes printed by the Thomas de la Rue & Co., Ltd. in
England and the coins minted at the US Bureau of Mint. The Filipinazation of the
Republic coins and paper money began in the late 60’s and is carried through to the
present. In the 70’s, the ‘Ang Bagong Lipunan’ (ABL) series notes were circulated,
which were printed at the Security Printing Plant starting 1978. A new wave of change
swept through the Philippine coinage system with the flora and fauna coins initially
issued in 1983. These series featured national heroes and species of flora and fauna. The
new design series of banknotes issued in 1985 replaced the ABL series. Ten years later, a
new set of coins and notes were issued carrying the logo of the Bangko Sentral ng
Pilipinas.

References
Book(s)

• Davies, Glyn, History of Money from Ancient Times to the Present Day.
• Jevons, W. S. (1875), Money and the Mechanism of Exchange, London: Macmillan.
• Menger, Carl, "On the Origin of Money".
• Szabo, Nick, Shelling Out -- The Origins of Money.
• Valix, Conrado T., Peralta, Jose F., Financial Accounting Vol. 1, 2008 Edition. GIC Enterprises &
Co., Inc.

Website(s)

• Bangko Sentral ng Pilipinas Website. Accessed on November 1, 2009.

• History of Money.-Wikipedia, the free encyclopedia.htm. Accessed on November 1, 2009.
• Philippine Money - Peso Coins and Banknotes The Evolution of Philippine Currency.htm.
Accessed on November 5, 2009.

Other Reference(s)

• United States Mint

• Royal Mint
• American Numismatic Association
• World Bank

Banking Concepts and the Financial

System
Banks and Central Banking

The name bank derives from the Italian word banco (‘desk/bench’), used during the
Renaissance by Florentine bankers, who used to make their transactions above a desk
covered by a green tablecloth. However, there are traces of banking activity even in
ancient times.
 16

In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards called
‘macella’ on a long bench called a ‘bancu’, from which the words ‘banco’ and ‘bank’ are
derived. As a moneychanger, the merchant at the bancu did not so much invest money as
merely convert the foreign currency into the only legal tender in Rome (that of the
Imperial Mint).

The earlierst evidence of money-changing activity is depicted on a silver Drachm coin

from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, circa 350-325
BC, presented in the British Museum in London. The coin shows a banker's table
(trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern
Greek the word ‘Trapeza’ means both a table and a bank.

Banks safeguard money and valuables and provide loans, credit, and payment services,
such as checking accounts, money orders, and cashier’s checks. Banks also may offer
investment and insurance products. As a variety of models for cooperation and
integration among finance industries have emerged, some of the traditional distinctions
between banks, insurance companies, and securities firms have diminished. In spite of
these changes, banks continue to maintain and perform their primary role: accepting
deposits and lending funds from these deposits.

Moreover, technology is having a major impact on the banking industry. Direct deposit
allows companies and governments to electronically transfer payments into various
accounts. Debit cards, which may also be used as ATM cards, instantaneously deduct
money from an account when the card is swiped across a machine at a store’s cash
register. Electronic banking by phone or computer allows customers to access
information such as account balances and statement history, pay bills, and transfer money
from one account to another. Some banks also have begun offering online account
aggregation, which makes available in one place detailed and up-to date information on a
customer’s accounts held at various institutions.

Advancements in technology have also led to improvements in the ways in which banks
process information. The use of check imaging allows banks to store photographed
checks on the computer instead of paper files. Also, the availability and growing use of
credit scoring software allows lending departments to approve loans in minutes, rather
than days.

Other fundamental changes are occurring in the industry as banks diversify their services
to become more competitive. Many banks now offer their customers financial planning
and asset management services, as well as brokerage and insurance services, often
through a subsidiary or third party. Others are beginning to provide investment banking
services (usually through a subsidiary) that help companies and governments raise money
through the issuance of stocks and bonds. As banks respond to deregulation and as
competition in this sector grows, the nature of the banking industry will continue to
undergo significant change.
 17

Banks' activities can be divided into retail banking, dealing directly with individuals and
small businesses; business banking, providing services to mid-market business; corporate
banking, directed at large business entities; private banking, providing wealth
management services to high net worth individuals and families; and investment banking,
relating to activities on the financial markets. Most banks are profit-making, private
enterprises. However, some are owned by government, or are non-profit organizations.

The Philippine Banking History

Philippine banking has an extensive colorful history. In 1828 when, as the Philippines
reaped the benefits of increased trade, King Ferdinand VII of Spain issued a decree
authorizing the establishment of a public bank in the Philippines.

However, it took 23 years before that bank could become a reality. The man behind the
actual organization of the bank was no less than the governor-general of the Philippines
at that time, His Excellency Antonio de Urbiztondo y Eguia.

Gov. de Urbiztondo was a marquis of Solana in Spain who was named governor-general
of the Philippines in 1850. His term of office was characterized by many administrative
innovations.

As the highest-ranking government official in the Philippines, Gov. de Urbiztondo called

for the support of the Junta de Autoridades (a committee comprising of civil and
ecclesiastical officials) in approving the bank's statutes and by-laws. The junta approved
these statutes and by-laws on August 1, 1851, but it was understood that such approval
had to be confirmed by the Spanish Crown. The bank was called El Banco Español
Filipino de Isabel 2, in honor of the reigning queen of Spain – Isabella II, daughter of
King Ferdinand VII, who passed away in 1830.

Jose Maria Tuason and Fernando Aguirre (The first managers of the bank), who took
turns serving as managing director every year. While the members of the bank's highest
policy-making board were essentially civil and ecclesiastical officials, there was also a
businessman whom the Spanish Crown named to represent the business community of
Manila - Antonio de Ayala of the prominent Casa Roxas.

The royal decree that established the creation of El Banco Español Filipino de Isabel II
also gave the bank the exclusive privilege to issue paper money, which antedated the
currency-issuing authority of the post-war Central Bank of the Philippines by about a
hundred years. The present central bank, the official issuer of Philippine currency, started
operations only in 1949; the original bank notes were collectively called ‘pesos fuertes’.

The first bank notes/paper money in the Philippines had the issue date May 1, 1852 and
could be redeemed in Mexican coins in gold or silver. Apart from carrying the name of
the bank as issuer of the currency, the bank notes also bore the portrait of Queen Isabella
II. Coincidentally, the first transaction of the bank was a lending transaction recorded on
May 1, 1852, in which the bank discounted a promissory note from a Chinese client.
 18

Three days later, the bank recorded its first deposit from its first depositor.

On September 3, 1869, the bank officially dropped the name of the queen after she was
ousted from the Spanish throne during a revolution a year earlier. Like her father's reign,
Isabella's rule had been stormy. Hence, since 1869, the bank was known simply as El
Banco Español Filipino. Decades later, the management of the bank decided to move out
to where the business activity was. Binondo, on the northern side of the Pasig river, had
emerged as the new center of business growth and, thus, gained more economic
prominence than Intramuros. The Chinese dominated the retail traffic while British
merchants controlled the export-import business. Rosario Street (now Quintin Paredes)
became the center of retail business while Escolta was the place for the finest of
American and European shops. These were profitable sources of new business for El
Banco Español Filipino after it relocated to No. 4 Plaza Cervantes in Binondo in January
of 1892, on a piece of land acquired from the Dominican Order.

Throughout the years, the bank had a close link with the Spanish Crown that even the
establishment of its first branch had to be approved by authorities in Madrid. In fact, it
took a royal order in 1896 to enable the bank to open branches, although, again, this
authority was still subject to clearance by Spain's minister of the colonies. The bank
originally planned to open its first branch in Central Luzon during the first decade of its
operations, which was sometime in the 1850s. The reason for this was the emergence of
the region as a sugar-producing area. During that time, sugar was exported from this
region, making the product a major source of income for local producers. But the plan to
put up this first branch did not materialize. By the time the bank was ready in 1897,
Central Luzon had been overshadowed by Iloilo and the Panay provinces in terms of
economic prominence. This explains why the bank's first branch was established in Iloilo
instead, on March 15, 1897. Following the signing of the Treaty of Paris in 1898, in
which Spain ceded the Philippines and other territories to the United States, the bank
promptly shed off its Spanish character and converted into a Philippine institution. Years
later, in 1912, as a result of an earlier decision of the stockholders to rename the bank, El
Banco Español Filipino became officially known as the Bank of the Philippine Islands
(BPI), or Banco de las Islas Filipinas. Under the American administration, the bank was
allowed to continue issuing Philippine pesos, although no longer on an exclusive basis.
The period of rebuilding after World War II saw BPI getting actively involved in the
development of industries. Although its conversion to a private bank during the American
regime resulted in the loss of many privileges previously granted to it by the Spanish
Crown, the bank continued to do its share in nation building. In 1969, the Ayala
Corporation, which had been associated with the bank since the start (either through a
partner or a representative sitting on the board), became the dominant shareholder group.
Following this change in the ownership structure, BPI soon became the financial flagship
of the Ayala group of companies. The ascendancy of the Ayala business house among the
bank's shareholder groups led to significant changes in the way the first bank in the
Philippines conducted its business during the latter half of the 20th century. For instance,
the bank fast-tracked its growth by engaging in a merger with Peoples Bank and Trust
Company in 1974. This was followed by the merger with or acquisition of Commercial
Bank and Trust Company (1981), Ayala Investment and Development Corporation
 19

(1982), Makati Leasing and Finance Corporation (1982), Family Bank and Trust
Company (1985), Citytrust Banking Corporation (1996), Ayala Insurance Holdings
Corporation (2000), Far East Bank and Trust Company (2000) and DBS Bank
Philippines (2002). BPI officially became an expanded commercial bank (universal bank)
in 1982, and thus started engaging in non-allied undertakings.

In 2000, BPI became the first bancassurance firm in the Philippines, after it acquired the
insurance companies of the Ayala Group. These companies (under the Ayala Insurance
Holdings Corporation) were FGU Insurance Corporation, Universal Reinsurance
Corporation, Ayala Life Assurance, Ayala Health Care and Ayala Plans. FGU Insurance
was later merged with FEB Mitsui Marine Insurance Company and is now known as the
BPI/MS Insurance Corporation. Also in 2000, the bank introduced its internet bank, BPI
Direct Savings Bank, which launched BPI into 21st century banking.

Until today, BPI has maintained a leadership position in consumer banking, trust banking
and asset management, corporate banking/corporate finance and ‘bancassurance’. With
over 700 branches and around 1,100 automated teller machines, BPI boasts of having the
largest combined network of branches/kiosk units and ATMs, servicing some 3 million
depositors.

For years, international publications and rating agencies have given annual awards to BPI
as one of the best banks in the region. Among these are the Far Eastern Economic
Review, The Banker, Euromoney, Asiamoney, BusinessWeek, The Asset, Global
Finance, Finance Asia, and The Asian Banker. BPI has been consistently cited for its
above-average profitability, sufficient capital/assets, low-cost funding base and
manageable non-performing loan levels. Fitch Ratings noted that BPI has a
comprehensive risk management which is superior to that of its peer banks, and this
serves as an important element in keeping BPI better positioned in Philippine banking in
the years to come.

Philippine Banks

The Philippines has a comprehensive banking system encompassing various types of

banks, from large universal banks to small rural banks and even non-banks. At present,
there are seventeen universal banks, 23 commercial banks, 84 thrift banks, 711 rural
banks, 44 credit unions and twelve non-banks with quasi-banking functions, all licensed
with the Bangko Sentral ng Pilipinas.

Commercial and Universal Banks:

Commercial and universal banks under Republic Act No. 8791, also known as the
General Banking Act of 2000, share roughly the same powers.
 20

Powers of a Commercial Bank:

In addition to having the powers of a thrift bank, a commercial bank has the power to
accept drafts and issue letters of credit; discount and negotiate promissory notes, drafts,
bills of exchange, and other evidences of debt; accept or create demand deposits; receive
other types of deposits and deposit substitutes; buy and sell foreign exchange and gold or
silver bullion; acquire marketable bonds and other debt securities; and extend credit.

List of Local Commercial Banks:

 Asia United Bank

 Bank of Commerce
 BDO Private Bank (subsidiary of Banco de Oro)
 East West Bank
 Export and Industry Bank
 Philippine Bank of Communications
 Philippine Veterans Bank
 Philtrust Bank

List of Foreign Banks with Commercial Banking Operations:

Branches:

 Australia and New Zealand Banking Group (ANZ)

 Bangkok Bank
 Bank of America
 Bank of China
 Bank of Tokyo-Mitsubishi
 Citibank
 Deutsche Bank
 GE Money Bank
 Industrial and Commercial Bank of China
 JPMorgan Chase & Co.
 Korea Exchange Bank
 Mizuho Corporate Bank
 Standard Chartered Bank

Subsidiaries:

 ABN AMRO
 Chinatrust Commercial Bank
 Maybank
 21

Powers of a Universal Bank:

A universal bank has the same powers as a commercial bank with the following
additional powers: the powers of an investment house as provided in existing laws and
the power to invest in non-allied enterprises.

List of Local Universal Banks:

Government-owned:

 Amanah Islamic Investment Bank of the Philippines

 Development Bank of the Philippines
 Land Bank of the Philippines

Privately owned:

 Allied Bank
 Banco de Oro
 Bank of the Philippine Islands
 Chinabank
 Metropolitan Bank and Trust Company
 Philippine National Bank
 Rizal Commercial Banking Corporation
 Security Bank
 Union Bank of the Philippines
 United Coconut Planters Bank

List of Foreign Banks with Universal Banking Operations:

 The Hongkong and Shanghai Banking Corporation

 ING Bank
 Standard Chartered Bank
 Calyon Bank

Thrift Banks:

A thrift bank has the power to accept savings and time deposits, act as a correspondent
with other financial institutions and as a collecttion agent for government entities, issue
mortgages, engage in real estate transactions and extend credit. In addition, thrift banks
may also maintain checking accounts, act as a depository for government entities and
local government units and engage in quasi-banking and money market operations
subject to the approval of the Bangko Sentral.
 22

List of Local Thrift Banks:

Government-owned:

 Philippine Postal Savings Bank

Privately-owned:

 Accord Savings Bank

 Allied Savings Bank (subsidiary of Allied Bank)
 Anchor Savings Bank
 Area Development Bank
 Asiatrust Bank
 Banco Filipino
 Bank of Calape
 Bank of Cebu
 Bankwise
 Bataan Development Bank
 Bataan Savings and Loan Bank
 BPI Direct Savings Bank (subsidiary of Bank of the Philippine Islands)
 BPI Family Savings Bank (subsidiary of Bank of the Philippine Islands)
 Business and Consumers Bank
 Centennial Savings Bank
 Century Savings Bank
 Chinabank Savings (formerly Manila Bank; subsidiary of Chinabank)
 City Savings Bank
 Citystate Savings Bank
 Cordillera Savings and Loan Bank
 Dumaguete City Development Bank
 Dungganon Bank
 EIB Savings Bank (subsidiary of Export and Industry Bank)
 Equicom Savings Bank
 Express Savings Bank
 Farmers Savings and Loan Bank
 First Consolidated Bank
 GSIS Family Bank (subsidiary of the Government Service Insurance System)
 Hiyas Bank
 Iloilo City Development Bank
 Inter-Asia Development Bank
 ISLA Bank
 Kauswagan Bank
 LBC Bank (subsidiary of LBC Express Corporation)
 Legazpi Savings and Loan Bank
 Lemery Savings and Loan Bank
 Liberty Savings and Loan Association
 Life Savings Bank
 Luzon Development Bank
 23

 Malasiqui Progressive Savings and Loan Bank

 Malayan Bank
 Manilabank
 Merchants Savings and Loan Association
 Metro Cebu Public Savings Bank
 Micro Enterprise Bank
 Northpoint Development Bank
 Opportunity Microfinance Bank
 Optimum Development Bank
 Orion Bank
 Pacific Ace Savings Bank
 Palawan Development Bank
 Pampanga Development Bank
 Peñafrancia Savings and Loan Association
 Philam Savings Bank (subsidiary of Philam Life)
 Philippine Business Bank
 Philippine Savings Bank (Metrobank Group)
 Pilipinas Savings Bank
 Planters Development Bank
 Premiere Development Bank
 Progress Savings and Loan Association
 Queen City Development Bank
 Quezon Coconut Producers Savings and Loan Bank
 RCBC Savings Bank (subsidiary of Rizal Commercial Banking Corporation)
 Real Bank
 Robinsons Savings Bank (subsidiary of JG Summit Holdings)
 Sampaguita Savings and Loan Association
 San Pablo City Development Bank
 Sandigan Savings Bank
 Silangan Savings and Loan Bank
 Sterling Bank of Asia
 Tower Development Bank
 UCPB Savings Bank (subsidiary of United Coconut Planters Bank)
 University Savings and Loan Bank
 Village Savings and Loan Association
 Vizcaya Savings and Loan Association
 Wealth Development Bank
 Winbank
 World Partners Bank

List of Foreign Banks with Thrift Banking Operations:

 Citibank (through Citibank Savings)

 GE Consumer Finance (through GE Money Bank)
 HSBC (through HSBC Savings Bank)
 JPMorgan Chase & Co.
 24

 United Overseas Bank

Cooperative and Rural Banks:

Rural and cooperative banks are the more popular type of banks in the rural communities.
Their role is to promote and expand the rural economy in an orderly and effective manner
by providing the people in the rural communities with basic financial services. Rural and
cooperative banks help farmers through the stages of production, from buying seedlings
to marketing of their produce. Rural banks and cooperative banks are differentiated from
each other by ownership. While rural banks are privately owned and managed,
cooperative banks are organized/owned by cooperatives or federation of cooperatives.

A rural bank has the power to provide adequate credit facilities to farmers and merchants
or to cooperatives of such farmers and merchants and, in general, to the people of the
rural communities of which the rural bank operates in.

List of Cooperative Banks:

 Agusan del Norte Cooperative Bank

 Bataan Cooperative Bank
 Camiguin Cooperative Bank
 Capiz Settlers Cooperative Bank
 Cooperative Bank of Agusan del Sur
 Cooperative Bank of Aklan
 Cooperative Bank of Aurora
 Cooperative Bank of Benguet
 Cooperative Bank of Bohol
 Cooperative Bank of Bukidnon
 Cooperative Bank of Bulacan
 Cooperative Bank of Cagayan
 Cooperative Bank of Camarines Norte
 Cooperative Bank of Camarines Sur
 Cooperative Bank of Cavite
 Cooperative Bank of Cebu
 Cooperative Bank of Davao del Sur
 Cooperative Bank of Ilocos Norte
 Cooperative Bank of Iloilo
 Cooperative Bank of La Union
 Cooperative Bank of Lanao del Norte
 Cooperative Bank of Misamis Oriental
 Cooperative Bank of Mountain Province
 Cooperative Bank of Negros Oriental
 Cooperative Bank of Cotabato
 Cooperative Bank of Nueva Ecija
 Cooperative Bank of Palawan
 Cooperative Bank of Pampanga
 25

 Cooperative Bank of Quezon Province

 Cooperative Bank of Surigao del Sur
 Cooperative Bank of Tarlac
 Cooperative Bank of Zambales
 Cooperative Bank of Zamboanga del Norte
 Cooperative Bank of Zamboanga del Sur
 Countryside Cooperative Bank of Batangas
 First Isabela Cooperative Bank
 Ilocos Sur Cooperative Bank
 Leyte Cooperative Bank
 Metro South Cooperative Bank
 National Teachers and Employees Cooperative Bank
 Occidental Mindoro Cooperative Bank
 Samahang Nayon Cooperative Bank of Nueva Vizcaya
 Sorsogon Provincial Cooperative Bank
 Southern Leyte Cooperative Bank

List of Rural Banks:

Agusan del Norte:

 Butuan City Rural Bank

 Green Bank

Agusan del Sur:

 People's Bank of Caraga

 Enterprise Bank

Aklan:

 Rural Bank of Altavas

 Rural Bank of Balete
 Rural Bank of Banga
 Rural Bank of Kalibo
 Rural Bank of Makato
 Rural Bank of New Washington
 Rural Bank of Numancia

Albay:

 Cagsawa Rural Bank

 Ibalon Rural Bank
 {[Rural Bank of Guinobatan]}
 26

Bataan:

 Balanga Rural Bank

 Orani Rural Bank
 Rural Bank of Abucay
 Rural Bank of Bagac

Batangas:

 5 Speed Rural Bank

 Balayan Bay Rural Bank
 Banco Batangan
 Banco ng Masa
 Bangko Kabayan
 Batangas Rural Bank for Cooperatives
 Bolbok Rural Bank
 Classic Rural Bank
 Dynamic Bank
 Empire Rural Bank
 Excel Rural Bank
 Farmers Rural Bank
 First Coconut Rural Bank
 Limcoma Rural Bank
 Lipa Bank
 Lipa Public Bank
 Lobo Rural Bank
 Malarayat Rural Bank
 Mount Makiling Rural Bank
 New Rural Bank of Agoncillo
 President Jose P. Laurel Rural Bank
 Progressive Rural Bank
 Rural Bank of Alitagtag

Benguet:

 Benguet Center Bank

 Diamond Rural Bank
 Highland Rural Bank
 Rural Bank of Baguio

Bukidnon:

 Asian Hills Bank

 Malaybalay Rural Bank
 27

Bulacan:

 Agricom Rural Bank

 Apex Rural Bank
 Baliuag Rural Bank
 Banco Rural de General Tinio
 Bangko Luzon
 Bangko Rural ng Kalumpit
 Rural Bank of San Pascual inc.
 Delmont Bank (Rural bank of San Jose del Monte City)
 East Coast Rural Bank of Hagonoy
 Emerald Rural Bank
 Fil-Agro Rural Bank
 Gateway Rural Bank
 La Consolacion Rural Bank
 Rural Bank of Angat
 Rural Bank of Doña Remedios Trinidad
 Silahis Bank

Camarines Sur:

 Bangko Rural ng Magarao

 Bangko Rural ng Pasacao
 First Naga Rural Bank
 G-7 Bank
 Municipal Rural Bank of Libmanan
 Municipal Rural Bank of Nabua
 Peñafrancia Rural Bank of Calabanga
 Rural Bank of Sipocot, Inc.
 Rural Bank of Pamplona, Inc. - Sipocot Branch
 Rural Bank of Minalabac, Inc. - Sipocot Branch
 Rural Bank of San Fernando
 Rural Bank of Libmanan
 Rural Bank of Cabusao
 Rural Bank of San Jose
 Rural Bank of Pili
 Rural Bank of Milaor
 Rural Bank of Ragay
 Rural Bank of Iriga

Camiguin:

 Mambajao Community Rural Bank

 Philippine Intercity Rural Bank
 28

Capiz:

 Farmer's Bank of Capiz

 President Roxas Rural Bank
 Rural Bank of Mambusao, Inc.

Cavite:

 Advance Rural Bank

 Bangko Mabuhay
 Capitol City Rural Bank of Trece Martires
 Cavite Rural Banking Corporation
 Cebuana Lhuillier Rural Bank
 Central Equity Rural Bank
 Community Bank
 First Reliance Bank
 GMA Rural Bank of Cavite
 Imus Rural Bank
 Masuerte Rural Bank of Bacoor
 Rural Bank of Amadeo
 Rural Bank of Maragondon

Cebu:

 Aspac Rural Bank

 Banco Maximo
 Banco of East Asia
 Banco Rural de Isla Cordova
 Cardinal Rural Bank
 Coastal Bank
 Community Rural Bank of Catmon
 Community Rural Bank of Medellin
 First Agro Industrial Rural Bank
 Frontier Rural Bank
 Lapu Lapu Rural Bank
 Mactan Rural Bank
 Philippine Countryside Rural Bank
 Pilipino Rural Bank
 Plaza Rural Bank

Compostela Valley:

 Money Mall Rural Bank

 Rural Bank of Montevista(Davao), Inc
 29

Cotabato:

 Probank Mlang, Cotabato

 Partner Rural Bank (Main Office), Pigcawayan, Cotabato
 Partner Rural Bank, Kabacan, Cotabato
 Partner Rural Bank, Mlang, Cotabato

Davao del Norte:

 Century Rural Bank

Davao del Sur:

 Community Rural Bank of Magsaysay

 One Network Bank

Davao Oriental:

 Rural Bank of Baganga

Ifugao:

 Lagawe Highlands Rural Bank

Ilocos Norte:

 Banco Dingras
 Ilocandia Community Bank
 Cooperative Bank of Ilocos Norte San Nicolas
 Cooperative Banbk of Ilocos Norte-Laoag City

Ilocos Sur:

 Cordillera Bank

Iloilo:

 Community Rural Bank of San Joaquin

 Rural Bank of Marayo Banate Branch
 Farmers Trader Rural Bank
 First Midland Rural Bank
 Janiuay Rural Bank
 LifeBank
 Progressive Rural Bank
 Rural Bank of Alimodian
 Rural Bank of Anilao
 30

 Rural Bank of Badiangan

Isabela:

 Banco Agricola
 Golden Rural Bank of the Philippines
 Mallig Plains Rural Bank
 Philippine Rural Banking Corporation
 Rural Bank of Alicia
 Rural Bank of Angadanan
 Rural Bank of Benito Soliven
 Providence Rural Bank

Laguna:

 Rural Bank of Bay,Inc.

 Biñan Rural Bank
 Card Rural Bank
 De La O Rural Bank
 Entrepreneur Rural Bank
 First United Farmers Bank
 Key Rural Bank
 Ormon Bank
 PlanBank Rural Bank of Canlubang Planters
 Provident Rural Bank of Santa Cruz
 Rural Bank of Alaminos
 Rural Bank of Lumban
 Rural Bank of Pagsanjan
 Rural Bank of Calauan

Lanao del Norte:

 1st Valley Bank

Lanao del Sur:

 Bagong Bangko Rural ng Malabang

 Maranao Rural Bank

La Union:

 Bannawag Rural Bank

 Community Rural Bank of San Gabriel
 Cooperative Rural Bank of La Union
 LUDB Bank
 Networth Bank
 31

 Rang-ay Bank
 Rural Bank of Agoo
 Rural Bank of Bacnotan
 Rural Bank of Bangar
 Rural Bank of Bauang
 Rural Bank of Caba
 Rural Bank of Luna
 Rural Bank of Naguilian
 Rural Bank of Rosario
 Rural Bank of San Juan
 Rural Bank of Santol
 Rural Bank of Sudipen
 Summit Bank

Leyte:

 First Interstate Bank

 Rural Bank of Dulag
 Rural Bank of Kananga

Maguindanao:

 New Settlers Bank

Metro Manila:

 AMA Bank
 Baclaran Rural Bank
 Banco de Jesus Rural Bank
 Banco San Juan
 Bangko Pasig
 BMS Rural Bank
 Builders Rural Bank
 Country Rural Bank of Taguig
 Enterprise Capital Rural Bank
 Filipino Savers Bank
 Finman Rural Bank
 First Country Rural Bank
 First Macro Bank

 Insular Rural Bank

 Marikina Valley Rural Bank
 Rodriguez Rural Bank
 Rural Bank of Alabang
 32

Misamis Occidental:

 Community Rural Bank of Clarin

 First Community Cooperative Bank of Misamis Occidental
 Panguil Bay Rural Bank of Ozamiz
 Rural Bank of Bonifacio
 Philippine Farmers Bank of Ozamiz
 Allied Bank of Ozamiz
 First Valley Bank of Ozamiz
 One Network Bank of Ozamiz
 Philippine National Bank of Ozamiz
 Philippine Metro Bank of Ozamiz
 RCBC Bank of Ozamiz
 BDO Bank of Ozamiz
 PS Bank of Ozamiz
 ABC Bank of Ozamiz
 CBC Bank of Ozamiz
 MTBC Bank of Ozamiz
 BPI Bank of Ozamiz
 DBP Bank of Ozamiz

Misamis Oriental:

 Bangko Rural ng Tagoloan

 Community Rural Bank of Naawan
 Philippine Farmers Bank
 Rural Bank of Talisayan

Negros Occidental:

 Rural Bank of Marayo

 Community Rural Bank of Magallon
 First Community Bank
 First State Rural Bank
 Nation Bank
 New Rural Bank of Binalbagan
 New Rural Bank of Victorias
 Rural Bank of Bacolod City

Negros Oriental:

 Central Visayas Rural Bank

 Dumaguete Rural Bank
 Rural Bank of Amlan
 Rural Bank of Ayungon
 Rural Bank of Bacong
 33

Nueva Ecija:

 Aliaga Farmers Rural Bank

 Banco Rural de General Tinio
 Bangko Luzon Inc.
 Cabanatuan City Rural Bank
 Citizen's Rural Bank
 Cooperative Bank of Nueva Ecija
 Cuyapo Rural Bank
 FARM Bank
 GM Bank Inc.
 Kabalikat Rural Bank
 Masagana Rural Bank
 Merchant Rural Bank of Talavera
 Millennium Bank
 New Rural Bank of Guimba
 New Rural Bank of San Leonardo
 Producers Rural Bank of San Jose City
 Rural Bank of Laur
 Rural Bank of Lupao
 Rural Bank of Quezon
 Rural Bank of Makati
 Rural Bank of Sto. Domingo
 Small & Medium Enterprise Bank
 Towncall Rural Bank

Nueva Vizcaya:

 Agri Business Rural Bank

 Rural Bank of Aritao

Oriental Mindoro:

 Oriental Tamaraw Rural Bank of Naujan

 Rural Bank of Baco

Pampanga:

 Banco Nuestra Señora del Pilar

 Bank of Florida
 Crown Bank
 Delta Civic Bank
 Guagua Rural Bank
 Guagua Savers Bank
 Rural Bank of Angeles
 Rural Bank of Apalit
 34

 Rural Bank of Bacolor

 Unity Bank

Pangasinan:

 Banco Rural de San Antonio

 Bangko Pangasinan
 Bani Rural Bank
 BHF Rural Bank
 Corfarm Rural Bank of Umingan
 CSF Rural Bank of Bayambang
 Gulf Bank
 Kaluyagan Rural Bank
 Kaunlaran Rural Bank
 Pangasinan Bank
 People's Rural Bank of Binmaley
 Rural Bank of Agno
 Rural Bank of Alaminos
 Rural Bank of Anda
 Rural Bank of Dasol

Quezon:

 Grand-Agri Rural Bank

 Mega Rural Bank
 Polillo Island Rural Bank
 Quezon Capital Rural Bank
 Quezon Traders Rural Bank of Candelaria
 Rural Bank of Alabat
 Rural Bank of Atimonan
 Rural Bank of Candelaria
 Rural Bank of Dolores
 Rural Bank of Sariaya
 Rural Bank of Tagkawayan
 Tiaong Rural Bank

Rizal:

 Binangonan Rural Bank

 Eastern Rizal Rural Bank
 Filidian Rural Bank
 Growers Rural Bank
 Rizal Rural Bank
 Rural Bank of Angono
 Rural Bank of Antipolo
 Rural Bank of Cainta
 35

 Rural Bank of Pilillia

 Rural Bank of San Mateo

Romblon:

 Community Rural Bank of Romblon

Sarangani:

 Rural Bank of DAR Beneficiaries Cooperative

 Rural Bank of Alabel

South Cotabato:

 Peninsula Rural Bank

 People's Rural Bank
 Partner Rural Bank, Surallah, So. Cot.)

Southern Leyte:

 Community Rural Bank of Maasin

Sultan Kudarat:

 Partner Rural Bank, Tacurong City

Surigao del Sur:

 Bangko Carrascal
 Enterprise Bank
 Cantilan Bank, Inc.

Tarlac:

 Bangko Santo Niño

 Camiling Rural Bank

 First Provincial Bank

Zambales:

 Community Rural Bank of San Felipe

 Countryside Rural Bank of Palauig
 Maharlika Rural Bank
 Zambales Rural Bank
 Zambales Unity Bank of San Narciso
 36

Zamboanga del Norte:

 Community Rural Bank of Dapitan City

 Katipunan Rural Bank
 Rizal Rural Bank
 Rural Bank of Dipolog City
 Rural Bank of Siocon
 Rural Bank of Liloy

Zamboanga Sibugay:

 Rural Bank of Kabasalan Inc.

Zamboanga City:

 Rural Bank of Siocon Inc.

 Rural Bank of Zamboanga

Defunct or Merged Banks:

 Citytrust (acquired by Bank of the Philippine Island)

 Far East Bank and Trust Company (acquired by Bank of the Philippine Islands)
 Solid Bank and Trust Company (acquired by Metropolitan Bank and Trust Co)
 G7 Bank
 Insular Savings Bank (acquired by Citibank)
 International Exchange Bank (merged with Union Bank of the Philippines)
 Monte de Piedad Savings Bank (acquired by Keppel Bank)
 Keppel Bank (acquired by GE Capital Finance)
 Philippine Commercial International Bank (merged with Equitable Bank)
 Prudential Bank (acquired by Bank of the Philippine Islands)
 Urban Bank (forced to close then merged with Export and Industry Bank)
 Equitable PCI Bank (merged with Banco de Oro)
 American Express Bank (merged with Banco de Oro)
 Equitable Savings Bank (merged with Banco de Oro)
 Dao Heng Bank (acquired by Banco de Oro)
 1st E Bank (acquired by Banco de Oro)

The Philippine Deposit Insurance Corporation (PDIC)

The PDIC is an attached agency of the Department of Finance. It is a government

instrumentality created in 1963 by virtue of Republic Act 3591 for the purpose of
insuring bank deposits. The latest amendments to RA 3591 are contained in RA 9302
enacted on July 27, 2004 and took effect on August 12, 2004, which provided enhanced
depositor protection through increased deposit insurance coverage up to P250,000 and
strengthened PDIC's risk management capabilities through the restoration of PDIC's
 37

authority to examine member banks with prior approval by the Monetary Board. The new
law also enhanced PDIC's receivership and liquidation powers.

Reserve Requirement

The reserve requirement or ‘required reserve ratio’ is a bank regulation that sets the
minimum reserves each bank must hold to customer deposits and notes. These reserves
are designed to satisfy withdrawal demands, and would normally be in the form of fiat
currency stored in a bank vault, or with a central bank. The reserve ratio is sometimes
used as a tool in the monetary policy, influencing the country's economy, borrowing, and
interest rates.

Central Banking

A central bank is the entity responsible for the monetary policy of a country or of a group
of member states. It is a bank that can lend money to other banks in times of need. Its
primary responsibility is to maintain the stability of the national currency and money
supply, but more active duties include controlling subsidized-loan interest rates, and
acting as a lender of last resort to the banking sector during times of financial crisis
(private banks often being integral to the national financial system). It may also have
supervisory powers, to ensure that banks and other financial institutions do not behave
recklessly or fraudulently.

Richer countries today have an independent central bank, that is, one which operates
under rules designed to prevent political interference. Examples include the European
Central Bank (ECB) and the Federal Reserve System in the United States and the Bangko
Sentral ng Pilipinas (Central Bank of the Philippines). Some central banks are publicly
owned, and others are privately owned. For example, the Reserve Bank of India is
publicly owned and directly governed by the Indian government. Another example is the
United States Federal Reserve, which is a quasi-public corporation. The major difference
is that government owned central banks do not charge the taxpayers interest on the
national currency, whereas privately owned central banks do charge interest.

The Bangko Sentral ng Pilipinas (BSP)/Central Bank of the Philippines

A group of Filipinos had conceptualized a central bank for the Philippines as early as
1933. It came up with the rudiments of a bill for the establishment of a central bank for
the country after a careful study of the economic provisions of the Hare-Hawes Cutting
bill, the Philippine independence bill approved by the US Congress.

During the Commonwealth period (1935-1941), the discussion about a Philippine central
bank that would promote price stability and economic growth continued. The country’s
monetary system then was administered by the Department of Finance and the National
Treasury. The Philippines was on the exchange standard using the US dollar—which was
backed by 100 percent gold reserve—as the standard currency.
 38

In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature passed a

law establishing a central bank. As it was a monetary law, it required the approval of the
United States president. However, President Franklin D. Roosevelt disapproved it due to
strong opposition from vested interests. A second law was passed in 1944 during the
Japanese occupation, but the arrival of the American liberalization forces aborted its
implementation.

Shortly after President Manuel Roxas assumed office in 1946, he instructed then Finance
Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The
establishment of a monetary authority became imperative a year later as a result of the
findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno.
The Commission, which studied Philippine financial, monetary and fiscal problems in
1947, recommended a shift from the dollar exchange standard to a managed currency
system. A central bank was necessary to implement the proposed shift to the new system.

Immediately, the Central Bank Council, which was created by President Manuel Roxas to
prepare the charter of a proposed monetary authority, produced a draft. It was submitted
to Congress in February1948. By June of the same year, the newly-proclaimed President
Elpidio Quirino, who succeeded President Roxas, affixed his signature on Republic Act
No. 265, the Central Bank Act of 1948. The establishment of the Central Bank of the
Philippines was a definite step toward national sovereignty. Over the years, changes were
introduced to make the charter more responsive to the needs of the economy. On 29
November 1972, Presidential Decree No. 72 adopted the recommendations of the Joint
IMF-CB Banking Survey Commission which made a study of the Philippine banking
system. The Commission proposed a program designed to ensure the system’s soundness
and healthy growth. Its most important recommendations were related to the objectives of
the Central Bank, its policy-making structures, scope of its authority and procedures for
dealing with problem financial institutions.

Subsequent changes sought to enhance the capability of the Central Bank, in the light of a
developing economy, to enforce banking laws and regulations and to respond to
emerging central banking issues. Thus, in the 1973 Constitution, the National Assembly
was mandated to establish an independent central monetary authority. Later, PD 1801
designated the Central Bank of the Philippines as the central monetary authority (CMA).
Years later, the 1987 Constitution adopted the provisions on the CMA from the 1973
Constitution that were aimed essentially at establishing an independent monetary
authority through increased capitalization and greater private sector representation in the
Monetary Board.

The administration that followed the transition government of President Corazon C.

Aquino saw the turning of another chapter in Philippine central banking. In accordance
with a provision in the 1987 Constitution, President Fidel V. Ramos signed into law
Republic Act No. 7653, the New Central Bank Act, on 14 June 1993. The law provides
for the establishment of an independent monetary authority to be known as the Bangko
Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its primary
objective. This objective was only implied in the old Central Bank charter. The law also
 39

gives the Bangko Sentral fiscal and administrative autonomy which the old Central Bank
did not have. On 3 July 1993, the New Central Bank Act took effect.

Objectives:

The BSP’s primary objective is to maintain price stability conducive to a balanced and
sustainable economic growth. The BSP also aims to promote and preserve monetary
stability and the convertibility of the national currency.

Responsibilities:

The BSP provides policy directions in the areas of money, banking and credit. It
supervises operations of banks and exercises regulatory powers over non-bank financial
institutions with quasi-banking functions.

Under the New Central Bank Act, the BSP performs the following functions, all of which
relate to its status as the Republic’s central monetary authority.

 Liquidity Management. The BSP formulates and implements monetary policy

aimed at influencing money supply consistent with its primary objective to
maintain price stability.
 Currency issue. The BSP has the exclusive power to issue the national currency.
All notes and coins issued by the BSP are fully guaranteed by the Government
and are considered legal tender for all private and public debts.
 Lender of last resort. The BSP extends discounts, loans and advances to banking
institutions for liquidity purposes.
 Financial Supervision. The BSP supervises banks and exercises regulatory powers
over non-bank institutions performing quasi-banking functions.
 Management of foreign currency reserves. The BSP seeks to maintain sufficient
international reserves to meet any foreseeable net demands for foreign currencies
in order to preserve the international stability and convertibility of the Philippine
peso.
 Determination of exchange rate policy. The BSP determines the exchange rate
policy of the Philippines. Currently, the BSP adheres to a market-oriented foreign
exchange rate policy such that the role of Bangko Sentral is principally to ensure
orderly conditions in the market. Furthermore, Like most countries in today’s
globalized environment, the Philippines follows a market determined foreign
exchange policy. In other words, our government does NOT fix the exchange rate
at a given level but instead allows the interplay of supply and demand for the
currency to determine the exchange rate. Meanwhile, BSP’s participation in the
foreign exchange market (by either buying or selling dollars) is limited only to
ensuring orderly conditions and avoiding unnecessary swings in the exchange
rate. Thus, if the supply of US dollars is much more than the demand, the value of
the dollar will drop in peso terms. This happens, for instance, when Overseas
Filipinos (OF) send more dollars to their families before Christmas, who in turn
exchange their dollars to pesos for their shopping. On the other hand, if many
 40

corporations simultaneously buy dollars to pay for their imports when dollar
supply is low, the value of the dollar will rise versus the pesos.
 Other activities. The BSP functions as the banker, financial advisor and official
depository of the Government, its political subdivisions and instrumentalities and
government-owned and -controlled corporations.

The Bank for International Settlements

The Bank for International Settlements (BIS) is an international organization of central

banks which fosters international monetary and financial cooperation and serves as a
‘bank for central banks’. It is not accountable to any national government. The BIS
carries out its work through subcommittees, the secretariats it hosts, and through its
annual General Meeting of all members. It also provides banking services, but only to
central banks, or to international organizations like itself. Based in Basel, Switzerland,
the BIS was established by the Hague agreements of 1930. It has representative offices in
Hong Kong and Mexico City. The main actors in the establishment of the BIS were the
then Governor of The Bank of England, Montague Norman and his German colleague
Hjalmar Schacht (later became Adolf Hitler's finance minister). The Bank was originally
intended to facilitate money transfers arising from settling an obligation arising from a
peace treaty. After World War I, the need for the bank was suggested in 1929 by the
Young Committee, as a means of transfer for German reparations payments. The plan
was agreed in August of that year at a conference at Hague, and a charter for the bank
was drafted at the International Bankers Conference at Baden Baden in November. The
charter was adopted at a second Hague Conference on January 20, 1930.

The original board of directors of the BIS included two appointees of Hitler, Walter Funk
a prominent Nazi official, and Emil Puhl, both convicted at the Nuremberg trials after
World War II, as well as Herman Schmitz the director of IG Farben and Baron von
Schroeder, the owner of the J.H.Stein Bank, the bank that held the deposits of the
Gestapo.

After the Second World War, in 1944 at the Bretton Woods Conference The BIS became
the crux in a fight that broke out between the Americans, Harry Dexter White, Secretary
of the Treasury Henry Morgenthau, and the British delegation headed by John Maynard
Keynes and Chase Bank representative Dean Atchison, who tried to veto the dissolution
of the bank.

As a result of allegations that the BIS had helped the Germans loot assets from occupied
countries during World War II, the United Nations Monetary and Financial Conference
recommended the ‘liquidation of the Bank for International Settlements at the earliest
possible moment’. This task, which was originally proposed by Norway and supported by
other European delegates, as well as the United States and Morgenthau and White, was
never undertaken.

In July 1944, Atchison interrupted Keynes in a meeting fearing that the BIS would be
dissolved by President Franklin Delano Roosevelt. Keynes went to Henry Morgenthau to
 41

prevent the dissolution of the BIS, or have it postponed, but the next day the dissolution
of the BIS was approved. The British delegation did not give up and the dissolution of the
bank was held up just long enough until after Roosevelt had died. In April of 1945 the
British and Harry S. Truman stopped the dissolution of the BIS.

The BIS was originally owned by both the governments and private individuals, since the
United States and France had decided to sell some of their shares to private investors. BIS
shares traded on stock markets, which made the bank a unique organization: an
international organization (in the technical sense of public international law), yet with
private shareholders. Many central banks had similarly started as such private
institutions, for example the Bank of England was privately owned until 1946. In more
recent years the BIS has forcibly bought back all shares held by private investors, and is
now wholly owned by its member central banks.

Since 2004, the BIS has published its accounts in terms of Special Drawing Rights, or
SDRs, replacing the Gold Franc as the bank's unit of account. As of March 31, 2007, the
bank had total assets of U.S. $409.15 billion, given a dollar/SDR exchange rate of 1.51
for March 30, 2007. Included in that total were 150 tons of fine gold.

As an organization of central banks, the BIS seeks to make monetary policy more
predictable and transparent among its 57 member central banks. While monetary policy is
determined by each sovereign nation, it is subject to central and private banking scrutiny
and potentially to speculation that affects foreign exchange rates and especially the fate
of export economies. Failures to keep monetary policy in line with reality and make
monetary reforms in time, preferably as a simultaneous policy among all 57 member
banks and also involving the International Monetary Fund, have historically led to losses
in the billions as banks try to maintain a policy using open market methods that have
proven to be unrealistic. Central banks do not unilaterally "set" rates, rather they set goals
and intervene using their massive financial resources and regulatory powers to achieve
monetary targets they set. One reason to coordinate policy closely is to ensure that this
does not become too expensive and that opportunities for private arbitrage exploiting
shifts in policy or difference in policy, are rare and quickly removed.

Two aspects of monetary policy have proven to be particularly sensitive, and the BIS
therefore has two specific goals: to regulate capital adequacy and make reserve
requirements transparent.

The Financial System

The term ‘financial system’ is the system that permits the transmission of money between
savers and borrowers. It encompasses a set of complex and closely interconnected
financial institutions, markets, instruments, services, practices, and transactions.

Financial Institutions
 42

A financial institution is an institution that provides financial services for its clients or
members. Probably the most important financial service provided by financial institutions
is acting as financial intermediaries. Generally, financial institutions are highly regulated
by government bodies. The major types of financial institutions are:

 Deposit-taking institutions that accept and manage deposits and make loans
(this category includes banks, credit unions, trust companies, and mortgage
loan companies);
 Insurance companies and pension funds; and
 Brokers, underwriters and investment funds.

Financial institutions act as intermediaries of the capital and debt markets. They are
responsible for transferring funds from investors to companies, in need of those funds.
The presence of financial institutions facilitate the flow of money through the economy.
To do so, savings are pooled to mitigate the risk brought to provide funds for loans. Such
is the primary means for depository institutions to develop revenue.

Financial Markets

A financial market is a mechanism that allows people to easily buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value at low transaction costs and at
prices that reflect the efficient-market hypothesis.

Financial markets facilitate:

 The raising of capital (in the capital markets);

 The transfer of risk (in the derivatives markets);
 International trade (in the currency markets)

Types of Financial Markets:

Financial markets can be divided into different subtypes:

 Capital markets which consist of:

 Stock markets, which provide financing through the issuance of shares or

common stock, and enable the subsequent trading thereof.
 Bond markets, which provide financing through the issuance of bonds
(debt securities), and enable the subsequent trading thereof.

 Commodity markets, which facilitate the trading of commodities.

 Money markets, which provide short term debt financing and investment. The
money market is the global financial market for short-term borrowing and
lending. It provides short-term liquidity funding for the global financial system.
The money market is where short-term obligations such as Treasury bills,
 43

commercial paper and bankers' acceptances are bought and sold. Moreover,
money market consists of financial institutions and dealers in money or credit
who wish to either borrow or lend. Participants borrow and lend for short periods
of time, typically up to thirteen months. Money market trades in short-term
financial instruments commonly called ‘paper’. This contrasts with the capital
market for longer-term funding, which is supplied by bonds and equity.
 Derivatives markets, which provide instruments for the management of financial
risk. The derivatives markets are the financial markets for derivatives. The market
can be divided into two, that for exchange traded derivatives (A futures exchange
or derivatives exchange is a central financial exchange where people can trade
standardized futures contracts; that is, a contract to buy specific quantities of a
commodity or financial instrument at a specified price with delivery set at a
specified time in the future.) and that for over-the-counter derivatives. Tailor-
made derivatives not traded on a futures exchange are traded on over-the-counter
markets, also known as the OTC market. These consist of investment banks who
have traders who make markets in these derivatives, and clients such as hedge
funds, commercial banks, government sponsored enterprises, etc. Products that
are always traded over-the-counter are swaps, forward rate agreements, forward
contracts, credit derivatives, etc.

 Futures markets, which provide standardized forward contracts (an

agreement between two parties to buy or sell an asset at a certain future
time for a certain price agreed today) for trading products at some future
date.
 Forward markets, which is the over-the-counter financial market in
contracts for future delivery, so called forward contracts. Forward
contracts are personalized between parties (i.e., delivery time and amount
are determined between seller and customer). The forward market is a
general term used to describe the informal market by which these
contracts are entered into. Standardized forward contracts are called
futures contracts and traded on a futures exchange.

 Insurance markets, which facilitate the redistribution of various risks.

 Foreign exchange markets, which facilitate the trading of foreign exchange. The
foreign exchange market (FOREX) trades currencies. It allows banks and other
institutions easily buy and sell currencies. The purpose of the foreign exchange
market is to help international trade and investment. In addition, a foreign
exchange market helps businesses convert one currency to another.

Furthermore, capital markets consist of primary markets and secondary markets. Newly
formed (issued) securities are bought or sold in primary markets. Secondary markets
allow investors to sell securities that they hold or buy existing securities. Likewise, a
secondary market, also known as the aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options, and
futures are bought and sold.
 44

Stock Exchanges

A stock exchange is a corporation or mutual organization which provides ‘trading’

facilities for stock brokers and traders, to trade stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as
other financial instruments and capital events including the payment of income and
dividends. The securities traded on a stock exchange include: shares issued by
companies, derivatives, pooled investment products and bonds. To be able to trade a
security on a certain stock exchange, it has to be listed there. Usually there is a central
location at least for recordkeeping, but trade is less and less linked to such a physical
place, as modern markets are electronic networks, which gives them advantages of speed
and cost of transactions. Trade on an exchange is by members only. The initial offering
of stocks and bonds to investors is by definition done in the primary market and
subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the price of stocks.

The Role of Stock Exchanges:

Stock exchanges have multiple roles in the economy, this may include the following:
 45

Raising capital for businesses. The Stock Exchange provide companies with the facility
to raise capital for expansion through selling shares to the investing public.

Mobilizing savings for investment. When people draw their savings and invest in
shares, it leads to a more rational allocation of resources because funds, which
could have been consumed, or kept in idle deposits with banks, are mobilized
and redirected to promote business activity with benefits for several economic
sectors such as agriculture, commerce and industry, resulting in stronger
economic growth and higher productivity levels and firms.

Facilitating company growth. Companies view acquisitions as an opportunity to expand

product lines, increase distribution channels, hedge against volatility, increase its
market share, or acquire other necessary business assets. A takeover bid or a
merger agreement through the stock market is one of the simplest and most
common ways for a company to grow by acquisition or fusion.

Redistribution of wealth. Stock exchanges do not exist to redistribute wealth. However,

both casual and professional stock investors, through dividends and stock price
increases that may result in capital gains, will share in the wealth of profitable
businesses.

Corporate governance. By having a wide and varied scope of owners, companies

generally tend to improve on their management standards and efficiency in order
to satisfy the demands of these shareholders and the more stringent rules for
public corporations imposed by public stock exchanges and the government.
Consequently, it is alleged that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on public
exchanges) tend to have better management records than privately-held
companies (those companies where shares are not publicly traded, often owned
by the company founders and/or their families and heirs, or otherwise by a small
group of investors). However, some well-documented cases are known where it is
alleged that there has been considerable slippage in corporate governance on the
part of some public companies. In the international setting, companies like
Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001),
Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003),
American International Group (2008), Lehman Brothers (2008), and Satyam
Computer Services (2009) were among the most widely scrutinized by the
media.

Creating investment opportunities for small investors. As opposed to other businesses

that require huge capital outlay, investing in shares is open to both the large and
small stock investors because a person buys the number of shares they can afford.
Therefore the Stock Exchange provides the opportunity for small investors to own
shares of the same companies as large investors.
 46

Government capital-raising for development projects. Governments at various levels

may decide to borrow money in order to finance infrastructure projects such as
sewage and water treatment works or housing estates by selling another category
of securities known as bonds. These bonds can be raised through the Stock
Exchange whereby members of the public buy them, thus loaning money to the
government. The issuance of such bonds can obviate the need to directly tax the
citizens in order to finance development, although by securing such bonds with
the full faith and credit of the government instead of with collateral, the result is
that the government must tax the citizens or otherwise raise additional funds to
make any regular coupon payments and refund the principal when the bonds
mature.

Barometer of the economy. At the stock exchange, share prices rise and fall depending,
largely, on market forces. Share prices tend to rise or remain stable when
companies and the economy in general show signs of stability and growth. An
economic recession, depression, or financial crisis could eventually lead to a
stock market crash. Therefore the movement of share prices and in general of
the stock indexes can be an indicator of the general trend in the economy.

The Philippine Stock Exchange

The Philippine Stock Exchange, Inc. ("PSE" or the "Exchange") is a private organization
that provides and ensures a fair, efficient, transparent and orderly market for the buying
and selling of securities.

PSE traces its roots from the country's two former bourses: the Manila Stock Exchange
(‘MSE’) and the Makati Stock Exchange ("MkSE"). Founded in March 1927, the MSE
was the first stock exchange in the Philippines and one of the oldest in Asia. Originally
housed in downtown Manila, the MSE moved to Pasig City in 1992. The MkSE, on the
other hand, was established in May 1963 and became the second bourse to operate in the
country. It was based in Makati City, a budding business district during those days.

While trading the same listed issues, MSE and MkSE remained separate entities for
almost thirty years. December 23, 1992 marked a milestone for the Philippine capital
market when the MSE and MkSE were unified to become the PSE.

At present, PSE maintains two trading floors, one in Makati City and another in its head
office in Pasig City. Even with two trading floors, PSE maintains a "one-price, one-
market" Exchange through the MakTrade System. This is a single-order-book system that
tallies all orders into one computer and ensures that these orders match with the best
bid/best offer regardless of which floor the orders were placed. MakTrade likewise
allows PSE to facilitate the trading of securities in a broker-to-broker market through
automatic order and trade routing and confirmation. It also keeps an eye on any
irregularity in the transactions with its market regulation and surveillance databases.
 47

In June 1998, the Securities and Exchange Commission conferred to the PSE the status of
a Self-Regulatory Organization, which allows the PSE to implement its own rules and
impose penalties on erring trading participants and listed companies.

In 2001, or a year after the Securities Regulation Code of 2000 was enacted, the PSE was
reorganized and transformed from a non-stock, member-governed organization into a
shareholder-based, revenue-generating corporation. Along with this rebirth came the
separation of the Exchange's ownership and trading rights, opening the doors for new
market participants. On December 15, 2003, PSE shares were listed by way of
introduction.

The Philippine Central Depository, established in March 1995, provides the securities
settlement system for both debt and equity instruments of the Exchange. Its computerized
book-entry-settlement system paved the way for a safe and efficient scripless trading.

Assuming the role of settlement coordinator and risk manager for broker transactions as
well as administrator of the trade guaranty fund is the Securities Clearing Corporation of
the Philippines (‘SCCP’). SCCP is the clearing and settlement agency for depository
eligible trades in the Exchange.

Companies are listed in the PSE on the First Board, Second Board or the Small and
Medium Enterprises Board. To help the investing public keep track faster of industry
performance, listed companies are classified into the following sectors: Financial,
Industrial, Holding Firms, Property, Services, and Mining and Oil. More importantly,
PSE has adopted an online daily disclosure system to improve the transparency of listed
companies and ensure full, fair, timely and accurate disclosure of material information
from all listed companies.

Finally, the PSE's website: www.pse.com.ph provides comprehensive market data, stock
quotations, dividend declarations, trading activities, and other pertinent information on
the PSE, trading participants, listed companies and other institutions.

The Global Financial System

The global financial system (GFS) is a financial system consisting of institutions and
regulators that act on the international level, as opposed to those that act on a national or
regional level. The main players are the global institutions, such as International
Monetary Fund and Bank for International Settlements (as discussed previously), national
agencies and government departments, e.g., central banks and finance ministries, and
private institutions acting on the global scale, such as: banks and hedge funds.

The History:

In Europe, financial institutions may have started with the first commodity exchange, the
Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central
and western Europe. The first global financiers the Fuggers (1487) in Germany; the first
 48

stock company in England (Russia Company 1553); the first foreign exchange market
(The Royal Exchange 1566, England); the first stock exchange - the Amsterdam Stock
Exchange 1602).

Milestones in the history of financial institutions are the Gold Standard (1871–1932), the
founding of International Monetary Fund (IMF), World Bank at Bretton Woods, and the
abolishment of fixed exchange rates in 1973.

International Financial Institutions:

The most prominent international institutions are the IMF, the World Bank and the WTO:

 The International Monetary Fund keeps account of international balance of

payments accounts of member states. The IMF acts as a lender of last resort for
members in financial distress, e.g., currency crisis, problems meeting balance of
payment when in deficit and debt default. Membership is based on quotas, or the
amount of money a country provides to the fund relative to the size of its role in
the international trading system. For more information, visit http://www.imf.org/.
 The World Bank aims to provide funding, take up credit risk or offer favorable
terms to development projects mostly in developing countries that couldn't be
obtained by the private sector. The other multilateral development banks and
other international financial institutions also play specific regional or functional
roles. Please visit: http://www.worldbank.org/ for more information.
 The World Trade Organization settles trade disputes and negotiates international
trade agreements in its rounds of talks. For more information, please visit:
http://www.wto.org/.

References
Book(s)

• E.F. Fama (1976): Foundations of Finance, Basic Books Inc., New York (ISBN 978-
0465024995).
• E.J. Elton, M.J. Gruber, S.J. Brown, W.N. Goetzmann (2003): Modern Portfolio Theory and
Investment Analysis, John Wiley & Sons, New York (ISBN 978-0470050828).
• M.M. Groz (1999): Forbes Guide to the Markets, John Wiley & Sons, Inc., New York (ISBN 0-
471-24658-1).
• R.C. Merton (1992): Continuous-Time Finance, Blackwell Publishers Inc. (ISBN 978-
0631185086).
• Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global
Environment. Toronto: McGraw-Hill Ryerson. p. 40. ISBN 0-07-087158-2.
• Steven Valdez, An Introduction To Global Financial Markets, Macmillan Press Ltd. (ISBN 0-
333-76447-1).
• Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Upper Saddle River,
New Jersey 07458: Pearson Prentice Hall. pp. 551. ISBN 0-13-063085-3.
http://www.pearsonschool.com/index.cfm?
 49

locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgr
amId=12881&level=4.
• T.E. Copeland, J.F. Weston (1988): Financial Theory and Corporate Policy, Addison-Wesley,
West Sussex (ISBN 978-0321223531).
• The Business Finance Market: A Survey, Industrial Systems Research Publications, Manchester
(UK), new edition 2002 (ISBN 978-0-906321-19-5).
• Woods, Jr., Thomas (2007). "22:Did Capitalism Cause the Great Depression?". 33 Questions
about American History You're Not Supposed to Ask. New York: Crown Forum. pp. 174-179.
ISBN 978-0-307-34668-1.

Website(s)

• Bangko Sentral ng Pilipinas - About the Bank 5.htm. Accessed on November 2, 2009.
• Bank - Wikipedia, the free encyclopedia.htm. Accessed on November 7, 2009.
• Bank for International Settlements - Wikipedia, the free encyclopedia.htm. Accessed on
November 9, 2009.
• Central bank - Wikipedia, the free encyclopedia.htm. Accessed on October 28, 2009.
• Financial institution - Wikipedia, the free encyclopedia.htm. Accessed on November 10, 2009.
• Fnancial system - Wikipedia, the free encyclopedia.htm. Accessed on November 8, 2009.
• Global financial system - Wikipedia, the free encyclopedia.htm. Accessed on November 10, 2009.
• http://en.wikipedia.org/wiki/Financial_instrument. Accessed on November 5, 2009.
• http://en.wikipedia.org/wiki/Financial_market. Accessed on November 7, 2009.
• http://en.wikipedia.org/wiki/Financial_market. Accessed on October 31, 2009.
• http://en.wikipedia.org/wiki/Foreign_exchange_market. Accessed on November 10, 2009.
• http://en.wikipedia.org/wiki/Forward_contract. Accessed on November 8, 2009.
• http://en.wikipedia.org/wiki/Forward_market. Accessed on November 10, 2009.
• http://en.wikipedia.org/wiki/Futures_exchange. Accessed on November 9, 2009.
• List of banks in the Philippines - Wikipedia, the free encyclopedia.htm. Accessed on November 3,
2009.
• PDIC FAQ 1.htm. Accessed on November 3, 2009.
• Philippine Stock Exchange.htm. Accessed on November 10, 2009.
• Reserve Requirement – Wikipedia the free encyclopedia.htm. Accessed on October 28, 2009.

Other Reference(s)

• Asia Times article explaining modern central bank function in detail.

 50

Core Concepts: Credit

Credit: An Overview

Credit is the provision of resources (such as granting a loan) by one party to another party
where that second party does not reimburse the first party immediately, thereby
generating a debt, and instead arranges either to repay or return those resources (or
material(s) of equal value) at a later date. It is any form of deferred payment. The first
party is called a creditor, also known as a lender, while the second party is called a
debtor, also known as a borrower. Needless to mention, credit is dependent on the
creditworthiness of the entity which takes responsibility for the funds.

Trade and Consumer Credit

The word credit is used in commercial trade in the term ‘trade credit’, to refer to the
approval for delayed payments for purchased goods. Credit is sometimes not granted to a
person who has financial instability or difficulty. Companies frequently offer credit to
their customers as part of the terms of a purchase agreement. Organizations that offer
credit to their customers frequently employ a credit manager.

On the other hand, consumer credit is defined as ‘money, goods or services provided to
an individual in lieu of payment.’ Common forms of consumer credit include credit
cards, store cards, motor (auto) finance, personal loans (installment loans), retail loans
(retail installment loans) and mortgages. In addition, the cost of credit is the additional
 51

amount, over and above the amount borrowed, that the borrower has to pay. It includes
interest, arrangement fees and any other charges. Interest and other charges are presented
in a variety of different ways, but under many legislative regimes lenders are required to
quote all mandatory charges in the form of an annual percentage rate (APR). The goal of
the APR calculation is to promote ‘truth in lending’, to give potential borrowers a clear
measure of the true cost of borrowing.

Credit Instruments

Credit instruments are items that are utilized in the place of currency. Just about all
individuals and businesses make use of some type of credit instrument on a daily basis.
The ability to use a credit instrument instead of currency rests in the fact that debtor and
the recipient agree upon the use of the instrument and there is a reasonable expectation
that the alternate form of payment will be honored.

One of the earliest forms of a credit instrument is the check. Utilized by consumers as a
legitimate means of paying for goods and services received, the value of the check is
underwritten by funds that are placed in a bank account. Upon the presentation by the
recipient of the credit instrument, the bank deducts the specified amount as recorded on
the check by the debtor. While the check is no longer the main credit instrument
employed in many financial transactions, it remains in use by many businesses and
individuals.

The credit card is another example of a common credit instrument. Using a credit card to
pay for a purchase creates a contract between the buyer and the seller. Essentially, the
seller is extending credit to the buyer with the assumption that the company issuing the
card will cover the amount of the purchase. In turn, the issuer of the credit card is
anticipating that the cardholder will eventually pay off the amount of the debt along with
applicable interest and finance charges.

A third type of credit instrument is the promissory note. With this arrangement, debtors
receive funds from lenders with the understanding that the note will be repaid in full at a
future point in time. This type of debtor’s obligation may carry a specific date for
repayment of be open-ended. Promissory notes may be utilized in the lending of funds
between individuals or between two business entities.

About the ‘Truth in Lending Act’ - Philippines

The Truth in Lending Act, also known as ‘Republic Act No. 3765’, act obliging the
disclosure of finance costs associated to credit.

The provisions of such act are as follows:

REPUBLIC ACT No. 3765

 52

AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN

CONNECTION WITH EXTENSIONS OF CREDIT.

Section 1. This Act shall be known as the "Truth in Lending Act."

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to

protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.

Section 3. As used in this Act, the term

(1) "Board" means the Monetary Board of the Central Bank of the Philippines.

(2) "Credit" means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which part or all of the price is
payable subsequent to the making of such sale or contract; any rental-purchase contract;
any contract or arrangement for the hire, bailment, or leasing of property; any option,
demand, lien, pledge, or other claim against, or for the delivery of, property or money;
any purchase, or other acquisition of, or any credit upon the security of, any obligation of
claim arising out of any of the foregoing; and any transaction or series of transactions
having a similar purpose or effect.

(3) "Finance charge" includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as the Board may by regulation prescribe.

(4) "Creditor" means any person engaged in the business of extending credit (including
any person who as a regular business practice make loans or sells or rents property or
services on a time, credit, or installment basis, either as principal or as agent) who
requires as an incident to the extension of credit, the payment of a finance charge.

(5) "Person" means any individual, corporation, partnership, association, or other

organized group of persons, or the legal successor or representative of the foregoing, and
includes the Philippine Government or any agency thereof, or any other government, or
of any of its political subdivisions, or any agency of the foregoing.

Section 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the Board,
the following information:

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);
 53

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

Section 5. The Board shall prescribe such rules and regulations as may be necessary or
proper in carrying out the provisions of this Act. Any rule or regulation prescribed
hereunder may contain such classifications and differentiations as in the judgment of the
Board are necessary or proper to effectuate the purposes of this Act or to prevent
circumvention or evasion, or to facilitate the enforcement of this Act, or any rule or
regulation issued thereunder.

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose
to any person any information in violation of this Act or any regulation issued thereunder
shall be liable to such person in the amount of P100 or in an amount equal to twice the
finance charged required by such creditor in connection with such transaction, whichever
is the greater, except that such liability shall not exceed P2,000 on any credit transaction.
Action to recover such penalty may be brought by such person within one year from the
date of the occurrence of the violation, in any court of competent jurisdiction. In any
action under this subsection in which any person is entitled to a recovery, the creditor
shall be liable for reasonable attorney's fees and court costs as determined by the court.

(b) Except as specified in subsection (a) of this section, nothing contained in this Act or
any regulation contained in this Act or any regulation thereunder shall affect the validity
or enforceability of any contract or transactions.

(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for
not less than 6 months, nor more than one year or both.

(d) No punishment or penalty provided by this Act shall apply to the Philippine
Government or any agency or any political subdivision thereof.

(e) A final judgment hereafter rendered in any criminal proceeding under this Act to the
effect that a defendant has willfully violated this Act shall be prima facie evidence
against such defendant in an action or proceeding brought by any other party against such
defendant under this Act as to all matters respecting which said judgment would be an
estoppel as between the parties thereto.

Section 7. This Act shall become effective upon approval.

 54

Approved: June 22, 1963

References
Book(s)

• Finlay, S. (2009). Consumer Credit Fundamentals. Second Edition. Palgrave Macmillan.

• Ingham, G. (2004). The Nature of Money. Polity Press.
• Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River,
New Jersey 07458: Pearson Prentice Hall. pp. 512. ISBN 0-13-063085-3.
http://www.pearsonschool.com/index.cfm?
locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgr
amId=12881&level=4.

Website(s)

• Credit (finance) - Wikipedia, the free encyclopedia.htm. Accessed on November 9, 2009.

• The Truth in Lending Act explained at Philippine e-Legal Forum_files\Pinoy-Business_com -
Truth in Lending Act (Republic Act No_ 3765)_files\Pinoy-Business_com - Truth in Lending Act
(Republic Act No_ 3765).htm. Accessed on November 9, 2009.