Bukidnon State University

City of Malaybalay
College of Business
FM103 (Banking and Financial Institutions)

CHAPTER 1
BANK AND BANKING PERSPECTIVES

Historical Perspective of the World

 2000 BC- early banking practices started in the Babylon, credit transactions
engaged evidenced by tablets of clay.
 4th Century BC - temples, public bodies and private firms deal in deposits and
loaning of funds.
 2nd century A.D- transactions were registered by public notaries.
 8th century- bank drafts and checks were in wide use in Assyria.
 Medici family ushered in the 2nd period of Florentine financial power.
 16th Century- ruled by Fugger Family. John’s Laws financial system almost spelled
ruin to France.

Philippine Banking History

Spanish Era
 16th century that OBras Pias, the first financial institution was organized
flourishing galleon trade between the Philippines and Mexico. Its capital came from
pious catholics and funds were loaned out interest.
 Banco Español – Filipino (1828) first established commercial bank performing
general banking functions and partly financed foreign trade. October 17, 1854 it
was given a privilege note of issue. Today its bearing name is Bank of The
Philippine Islands ( Banco delas Islas Filipinas)
 Opening of Suez Canal (1869) led to accessibility of European markets.
 Chartered Bank of India, Australia, and China establishes branches in the
country.
 Monte de Piedad (1882) a savings bank.
 Banco Peninsular Ultramarino in Madrid – put up a branch in the Philippines in
1853.

American Era
-Banks continue to do business and soon joined by the branches of International
Banking Corporation and the Guaranty Trust Company. Postal Savings bank was also
created as parcel to the bureau of post.Banks established after World War I ,Yokohama
Specie bank (1919) , China Banking Corporation (1920), Peoples Bank and Trust
Company and the Mercantile Bank of China (1926).
- Upon establishment of Commonwealth, Netherlands Indische Handels bank opened
(1973) The Philippine bank of Commerce was the first private bank with genuine Filipino
capital (1938). In 1939 Bank of the Commonwealth, Philippine Bank of Communications

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and the government-owned Agricultural- Industrial bank commenced commercial
banking operations.

Japanese Era
-During the Japanese occupation only Filipino and Japanese-owned banks were given
permission to operate. The Southern Development Bank opened a branch in Manila in
(1942) which acted as fiscal agent of the Japanese government in the Philippines.

Postwar Era
- Presidential Directive, Executive Order 96, invalidated all Japanese occupation
deposits. Executive Order 48 paved the way for the reopening of the pre-war banks.
Rehabilitation Finance Corporation was created by virtue of Republic Act 85 0n January 2,
1947 which took over the functions of the Agricultural Industrial Bank. In 1948 General
Banking Act passed into law. It provided the definitive rules of conduct of all banking
institutions. In1949 republic act No. 265 known as Central bank Act was passed. In 1972,
Presidential Decree no. 72 was issued amending Republic act no. 265 in attuned in
changing economics. In 1973 Constitution, Presidential decree no. 1801 designated central
Bank of the Philippines as the central monetary authority which was adopted aimed by the
1987 Constitution.

Philippine Banking Today

Republic Act No. 7653 or the New Central Bank Act of 1993, governs Philippine banking
today. It provides for the establishment of an independent monetary authority to be
known as Bangko Sentral ng Pilipinas (BSP).

The business of banking has changed irreversibly. Developments in technology have more
contributions in these irreversible changes in the banking system. Technology has brought
us E-Banking, the provision of banking services. The devise used to provide e-banking
services are called E-money which can be divided into three groups.

a. Access devices- these allow people to withdraw or deposit cash, transfer funds and
pay bills from their bank accounts without physically going to the banks or writing a
check.
b. Card-based products – these are prepaid cards in which funds are stored in
electronic form on a computer chip embedded in cards.
c. Prepaid software products or network money – involve funds that are stored in
electronic form and are transferred over communication networks among
participants in network.

Republic Act No. 8791 known as General Banking Law of 2000, institutionalized a certain
mass of banking reforms in the Philippines. It provides regulation of the organization and
operation of banks, quasi-banks, and trust entities.

Republic Act No. 9160 known as the Anti-Money Laundering Act of 2001, was passed into
law on 29 September 2001.

On April 19, 2000 the Monetary Board approved the issuance of Circular No. 237,
consolidating and clarifying all existing rules and regulations on mergers and acquisitions.
Bank mergers and consolidations are distinguished as follows:

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  Merger- is the absorption of one or more corporations by another existing
corporation which retains its identity and takes over the rights, privileges,
franchises, and properties and assumes all liabilities and obligations of the absorbed
corporations.
 Consolidation-the union of two or more corporations into a single new
corporation, called the consolidated corporation.

Banks – shall refer to entities engaged in lending of funds obtained in the form of deposits.

Nature Of Banking Business

“Banks makes money out of other people’s money”

Principle of Banking Business

 A certain amount deposited will support several times as much in credit, known as
the partial reserve system.
 A greater portion of deposits in commercial banks arises out of the proceeds of
loans.

Types of Banks

As to ownership
a. Privately owned- organized and capitalized by private citizens for their profit.
b. Publicly owned- organized by the state and sometimes has a minimum private
ownership.

As to place of Incorporation
a. Domestic – incorporated under Philippine Laws. Majority of the stocks are owned
by Filipinos.
b. Foreign- incorporated under laws of other country although the bank might be
doing business in the Philippines.

As to Structure
a. Stock corporation- when they sell shares of stocks to the general public to raise
capital.
b. Non-stock Corporations- the organization is on a membership basis. Such as
savings and loans associations.

As to Function
a. Commercial bank – is one that receives demand deposits and gives out short-term
loans.
b. Trust company – an institution which deals in fiduciary activities such as
administrator of estates , guardians of minor’s interest, executor of last wills and
testaments, registrar and transfer agent of stocks and bonds and similar activities.
c. Savings Bank- one which primarily receives for safekeeping funds from persons
who have no immediate need for cash and invests these finds in long-term
investment.

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 d. Rural Bank- organized primarily to cater the needs of small farmers, small
business, small cottage industries, and cooperative associations. They also receive
deposits and loan out funds.
e. Development Bank- takes care of giving loans to be used for developing the
economy and may therefore engage in medium and long-term lending. The
organization of private development banks shall be, under the control and
supervision of the Development Bank of the Philippines (formerly Rehabilitation
Finance Corporation).
f. Cooperative bank- organized to furnish the credit needs of duly registered and
operating cooperative associations of different kinds.
g. Investment Bank - one which assist government bodies and newly organized
corporations to raise funds for capital through the sale of stocks and bonds.
h. Central Bank- is a bank of banks, as it does not deal directly with the public.

As to Management
a. Unit Bank- one where ownership is concentrated on one corporation which does
banking business independent of others.
b. Group Banking - When a majority portion of stocks of two more banks are held by
a holding company, this is considered as group banking.
c. Branch Banking – is one where there is a head office and two or more branches.
d. Chain Banking – When one or more persons control the activities of banks, it’s
known as chain banking.

Economic Significance of Bank

- A bank facilitates dealings between debtors and creditors because it acts as an
intermediary in the flow of credit funds. It allows others the use of idle funds of the
community in productive activities.
- Creates money out of proceeds of loans.
- Maintains foreign trade.

Why The State Supervises Banks

-The state does not only supervise banks, but with the advent of central banking, it
also controls the bank’s operation.

Reasons:
1. The banks are entrusted with other people’s money. Mismanagement or
malfeasance in the duties of the board of directors will result to banking failure.
2. The state wants to assure that the banks will perform their functions in the best
interest of their clients through the honest and efficient conduct of their functions.
3. The banks may either abuse their power or use them prudently.
4. The Banks, furthermore, are quasi-public corporations and as in all other
corporations of this calling, the state must exert its restraining influence to
safeguard the welfare of its constituents.

It is not the critic who counts, the credit belongs to the man who is actually in the
arena, who strives valiantly; who errs and come short again and again; because there
is no effort without error and shortcomings. – Theodore Roosevelt--

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