Philippine Ventures & Destinations

Read about business opportunities and interesting travel destinations in the Philippines. Learn from the experiences of seasoned Filipino entrepreneurs and business executives. Explore places where you can listen to music, watch cultural performances, and simply have hours of fun. Check out where and what to eat while in Metro Manila, on the road or in the provinces. The following essays contain personal insights on Philippine culture and life particularly in the provinces.

Location: Philippines

A statistics major, Leticia Subang spent the first 10 years of her professional career as an economic reporter covering for the Philippines' leading business paper. She later opted to become a free lance writer while working for her Masters Degree in Development Management. In the next ten years, she worked for a number of leading government agencies - the National Power Corporation, Public Estates Authority, Departments of Trade and Industry, Agriculture, Labor and Employment, and Energy.

Monday, September 26, 2005

When two husbands meet

Crusaldo La Puebla, husband of murdered Filipina maid, Jane, and Edwin Aguilar, husband of Guen, the prime suspect in Jane’s gruesome murder, had an emotional meeting last week in Singapore, shortly before the September 23 court mentioning or preliminary investigation was held.

“It was Eddie (as Cruzaldo is called by relatives and friends) who requested the meeting,” one of La Puebla’s companions said after a brief press conference held immediately after the court proceedings. Subordinate Court Judge Carolyn Wee ordered a postponement until October 14. Guen will have to go through psychiatric evaluation.

The two came to court in separate cars, were seated apart, and barely had any eye contact during the proceedings that lasted barely 10 minutes. They also left the courthouse separately.

But when they faced the Filipino reporters at the Philippine Embassy later that morning, La Puebla and Aguilar, both dressed in white, were seated side by side. Both politely refused to answer questions and instead requested Philippine ambassador to Singapore Belen Anota to speak on their behalf.

Aside from the support extended by the Philippine government, the two families also have counsellors and religious support groups, Anota said as she pleaded members of the media to be more sensitive to the emotional turmoil the two husbands and their relatives are currently going through.

Later that evening, La Puebla and Aguilar along with Jane’s aunt, Sally Parangan, were treated by two staffmembers of the Philippine Embassy to a trip to the Midnight Safari, one of Singapore’s leading tourist destinations. Jane’s mother, Paulina, did not attended the court proceedings or joined the press conference or the night out.

The following day, September 24, a tearful memorial service for Jane, which Edwin also attended, was held. About 90,000 Filipinos work in Singapore, mostly as domestic helpers. Now in a wooden coffin, Jane’s body was retrieved after the completion of an autopsy that was observed by a representative from the Philippines’ National Bureau of Investigation (NBI).

Eddie La Puebla arrived in the Philippines at about 9pm Sunday together with the remains of Jane. Edwin Aguilar took the earlier Singapore Airlines flight which arrived in Manila 5pm.

But the case is expected to take some time to resolve. The court gave an extension upon the request of police authorities to give them more time to evaluate the results of their investigation and available evidences.

The counsel for the defense, Shashi Nathan, on the other hand, also requested the court for an independent psychiatric evaluation of Aguilar and for her husband, Edwin, to see her before returning toManila.

Aguilar, wearing a white t-shirt, appeared only for a few minutes and was immediately whisked back to a special room. With the postponement, Aguilar would be brought back to the Changi Women’s Prison, where she would remain until her case will have been resolved.

Nathan said the results of the psychiatric test would be very important as it could have a bearing on the outcome of the case. Just like in the Philippines, Aguilar’s case, which is a capital offense is unbailable. But under Singapore law, insanity or having an unstable mind is not a ground for acquittal but could help lighten the penalty.

The defense team is focusing on the chronology and sequence of events before and after the murder, Nathan said. After meeting with Guen for about four hours, Nathan said he needed more information to fill in a lot of gaps.

“I need to get a bigger picture of what happened,” Nathan said as he evaded touchy questions such as the possible love triangle earlier reported. Aguilar, a mother of two, hails from Baguio City,while La Puebla, who is also working as a maid, is from Nueva Ecija.

La Puebla was allegedly murdered by Aguilar for still unknown reasons. La Puebla's dismembered bodies were found in different areas in Singapore. If found guilty, Aguilar will be meted out the penalty of death by hanging.

The grisly murder case was reminiscent of the 1995 Flor Contemplacion's story, who was hanged at Singapore's Changi Prison for the death of compatriot Delia Maga and her 4-year-old Singaporean ward.

(Note: The author was in Singapore to attend the court proceedings last Friday, September 23.)


Friday, September 09, 2005

A Synergy of Strength

Many are those who wonder at the vastness and variety of Lucio Tan’s business interests. The key and secret is revealed by Mr. Tan himself whereby the strength of his companies is in the synergy of all of them.

Practicing some borrowed principles from the Sun Tzu’s Art of War which says: “The control of a large force is the same as the control of a few men: it is merely a question of dividing up their number.” The same principle is applied by Lucio Tan.

Lucio Tan presides over the mega conglomerate – from cigarette production to steel fabrication to chemical manufacturing to hog-raising to food to banking to airlines to education – that extends beyond Philippine shores. His companies employ more than 50,000 workers, and are a source of income for another 200,000 of our countrymen.

So huge are the accounts of his companies that not even the biggest of domestic banks can service all their needs exclusively. It goes without saying, however, that the bulk of the business is lodged with Allied Bank.

But according to Yolly Albano, senior vice president with the Account Management division, Allied Bank has to compete with other banks also bidding for these accounts, which often go to whoever offers the best terms. And the other Tan company “handled their accounts very well,” she says.

That the rest of the Group provides Allied Bank with a very substantial base bolsters its strong and stable image. Clients feel that “Mr. Tan will take care of Allied Bank because the money of his other companies is there.”

Bidding for limitless possibilities

The failure of his first venture, Royal Corn Starch where he was merely a minority stockholder, gave the young Lucio invaluable lessons in business. For his next venture, the chemical engineering graduate went back to what he knew best – chemicals. In 1960 was born the first of the geese that would lay the golden eggs.

It was Mariano Khoo, a physics professor who later became the company’s plant manager, who suggested naming the company “Himmel,” derived from a German word meaning “sky” or “heaven.” For Lucio Tan, the word connoted “limitless possibilities.” And the pursuit for those possibilities would lead him everywhere indeed.

Starting with second-hand machines from the United States, Mariano Khoo designed and operated the plant while Lucio Tan, the hands-on businessman, took charge of sales, finance and overall management of the company.

Himmel’s first plant arose by the Pasig River in Barrio Santolan, then just a rural community. The new company specialized in industrial compounds, starting out with glycerin, an ingredient in many processed products.

As the business grew, so did its products, among them sorbitol, industrial honey, menthol as well as fragrances and flavouring mixes. Later Himmel would trade in pure and unadulterated chemical compounds used in the production of food, pharmaceuticals, tobacco, beer, paints, ink, textiles, cosmetics, paper, glue, plastic, rubber, PVC, and cement.

To handle the every increasing volumes of chemicals, in the Eighties the company decided to build a private wharf in Pinamucan, Batangas, capable of servicing large cargo vessels and equipped with 15 shore tanks with combined capacity of 11.5 million liters. Today Himmel maintains similar tank terminals in Tokyo and key Southeast Asian cities.

A fortune built on Hope

Himmel gave Lucio Tan and his group the template for his succeeding entrepreneurial endeavours. Tan’s second venture was in a field he was only too familiar with – cigarette making.

Organized in 1965, Fortune Tobacco Corporation, just like Himmel started out with second-hand equipment bought from another cigarette maker. Every frugal and practical, the now-flourishing businessman housed the machinery and commenced rolling the cigarettes in a small Quonset hut in Parang, Marikina.

It was not an easy start but persistence prevailed, and soon Fortune’s brands – Evercool, Boss, Champion and Jaguar – gained acceptance, necessitating expansion of the plant and upgrading of its equipment. By 1968, Fortune had taken over the Northern Tobacco Redrying Corporation in Vigan, Ilocos Sur, and started introducing more affordable local brands such as Mark, More, Westpoint, Every Green and Peak to consumers in the provinces.

In 1974, Fortune went on to acquire Sylvanna Tobacco Corporation, which produced licensed R.J. Reynolds brands, namely Salem, Winston and Camel. By then it had also launched Hope, which would subsequently become the country’s largest selling cigarette. With Champion and Hope, Fortune has come to control a 60 percent share of the domestic market.

From the Quonset hut that typhoon Welming blew away in 1967, Fortune Tobacco now has four giant factories in Marikina engaged in direct buying of tobacco from farmers, redrying operations, warehousing, printing, security, transport as well as power generation. In 1979 it was awarded three gold medals and a silver medal in the 13th Monde Selection, a worldwide quality competition for tobacco products held in Paris. Fortune was the sole tobacco company from the entire Far East to be given that recognition.

Besides contributing over P90 billion in taxes to government coffers from 1990 to 2000 alone, Fortune employs over 5,000 workers and supports thousands of tobacco farmers producing Virginia tobacco in the Ilocos and Burley in Pangasinan and other areas in the North.

Foremost in agribusiness

With a whole decade of successful entrepreneurial experience behind him, Lucio Tan was ready to make his mark on an even more vital sector of the country’s socio-economic life by demonstrating how state-of-the-art technology and integration can boost agricultural productivity.

Foremost Farms, Incorporated, organized in April 1970, was envisioned to provide a more constant supply of cheaper meat products for the Filipino table. It immediately assumed the lead in scientific sow propagation and livestock management in the country.

The first two years were spent meticulously planning for the feedmill, the head office and the pilot farm that were to be located in “Dagat-dagatan,’ a 100-hectare property in the valley 30 kilometers east of Manila. The name graphically described the site, which half of the year was submerged.

But hog-raising requires plenty of water and how to harness that abundant resource in the area was for Tan simply an engineering problem. A more pressing concern was the peace and order situation, which normalized after the declaration of martial law. From 1972 onward, wells were dug and roads constructed in Barangay Pinugay, Baras, Rizal.

From an initial 650 sows, Foremost went on to expand its herd by as much as 700 to a thousand head each year. As the count reached 12,000, an additional 40 hectares of land were added to the Pinugay complex. Subsequently, a 68-hectare extension was also set up in nearby Barangay Pantay, able to house as many as 90,000 hogs at a time. At the two plants, the staff number some 1,000.

Equipped with modern water treatment and recycling facilities, Foremost’s environment-friendly systems also boast of a bio-gas facility and a fertilizer plant that process manure.

In 1975, Foremost undertook the first successful artificial insemination in the country. Then, in 1981, it pioneered in pig embryo transplant in Pinugay. In 1997, a fully computerized liquid feeding system was installed in Pantay.

The role these farms play in the Philippine economy goes beyond the hogs they raise. Consuming about 200 tons of feeds a day, Foremost buys as much as 50,000 tons of corn a year, thereby providing steady income to tens of thousands of farmers.

In 1984, Progressive Farms Inc., another piggery project, was founded in Tupi, South Cotabato. This was followed in the early Nineties by Grains Handlers Philippines, a model plant for feed making. And until now, Lucio Tan’s agribusiness ventures continue to spearhead the livestock and feeds industry, bringing it to a higher level at every turn.

Connecting the dots

The late Seventies witnessed the Lucio Tan Group reaching out even further. By then Tan had moved on from starting businesses on his own to training his sight on others already existing, aiming to turn these around.

In 1977, he bought Manufacturing Services and Trade Corporation or Manserv, a manufacturer of soap and perfume products under its own brands, Persona and Nova. The company likewise supplies materials to other makers, both local and multinational, of well-known dermatological products.

That same year he also won the bid for the assets and liabilities of insolvent Genbank, resurrecting it as Allied Bank. That entry into the world of finance spawned several subsidiary or affiliated firms in succession: Pan Asia Securities, Allied Savings Bank, Allied Forex Corporation, Allied Bankers Insurance Corporation and Allied Leasing and Finance Corporation.

Challenging Goliath

While the entry of Lucio Tan into the prestigious and exclusive world of banking may have earned him a secure niche in business community, it was the gutsy challenge he posed to a well-entrenched monopoly in 1981 that pushed him into the limelight. In setting up Asia Brewery, Incorporated in Cabuyao, Laguna, he assumed the role of a David pitted against the Goliath that was San Miguel Corporation, long synonymous with beer in the country.

In launching Manila Beer in 1984, ABI sought to offer a more affordable alternative to local drinkers at the mass end of the scale. Later it further broadened consumer choice and made larger inroads into the market by tying up with Denmark’s leading brewer and introducing more upscale Carlsberg.

The segmentation of the market continued with the arrival on the scene in 1988 of a product with a generic sounding name, Beer na Beer. This was followed in 1991 by Stag Pale Pilsen that targeted a new and younger breed of beer drinkers.

After a decade in the highly competitive market, reinforced by the remarkable market acceptance of its beer products, ABI expanded to Mindanao and opened its second brewery in El Salvador, Misamis Oriental, 20 kilometers from Cagayan de Oro City.

Towards greater product diversification, ABI next went into licensing agreements with other international breweries: with G. Heilman Brewing Company for Colt 45 Malt Liquor in 1995; with the world’s largest brewer, Anheuser-Busch of Missouri, for Budweiser, the “King of Beer,” in 1996; and with Lone Star, the “national beer of Texas,” in 1999.

These partnerships fortified the company’s reputation as a world-class company with products that could match the best in the world. Its flagship product, Beer na Beer, was awarded a gold medal for three consecutive years, 1999 to 2001, in the Monde Selection, one of the world’s most competitive tests of product quality.

Asia Brewery’s main complex in Laguna can process 4 million hectolitres of beer. The complex also has facilities for manufacturing glass bottles, plastic crates, and corrugated cartons.

It has also become a leader in the bottled water market after it started producing Summit Natural Spring Water in 1992 and later, Absolute Distilled Drinking Water. And it has gone on to penetrate residential urban communities and provincial towns with the highly successful purified water refilling stations franchised by Agua Vida Systems, Inc.

In a related move in 1988, the Lucio Tan Group pulled off a historic coup by acquiring Tanduay Distillery from the Elizalde family. Established in 1854 by Ynchausti y Cia, Tanduay is the oldest and largest producer of alcoholic beverages in the country, most famously Tanduay Rhum.

Subsequently, the Lucio Tan Group’s successes in the liquor and bottled water markets emboldened it to venture into the food business. Organized in 1995, Lotte Philippines partners the Group with one of Japan’s leading manufacturer of quality biscuits, chocolates, chewing gum and other confectioneries.

Growth in diversity

As the Group’s interests continued to grow in both size and scope, and its founder’s network of contacts and alliances expanded apace, other investment opportunities beckoned and were pursued at a rate that soon made the name Lucio Tan a byword for daring in business environment where hedging was the order of the day.

Clearly the man was in a hurry. But so sure was his footwork, sharp his instinct, and steady his nerve that even in fields where risks and pitfalls abounded and many far more experienced had failed, haste did not make for waste.

From boom in the Seventies the tourism industry had started sliding badly to bust in the Eighties owning to political uncertainties and economic reversals. For the same reason, the real estate market was down as could be, with prices for even the best properties bottoming out as never before. By then however Lucio Tan was on a roll. And for one as far-sighted it was time not to merely sit tight and wait, but to cast around and buy.

In 1983, primarily to service his own far- and farther-flung organization’s needs, Tan incorporated Lucky Travel. It was just one agency in an overcrowded field, but there were assuredly enough savings and profits to be made from consolidating the transport arrangements of Group executives and foreign visitors on business trips and inspection tours.

Two years later, he upped the Group’s tourism stakes many notches higher by picking up the five-star deluxe Century Park Hotel at the boundary of Manila and Pasay Cities. To many, the move appeared foolish since occupancy levels were dismal and price competition was cutthroat. But the demand for food and beverage outlets and function rooms remained strong. And owing to its central location, the hotel did considerably better than expected.

Down the road, Tan likewise bought Charter House, an apartelle in the heart of Legaspi Village in Makati dating back to 1980, transforming it into a three-star residential hotel and meetings and conferences facility. This, another hotel in Makati and one in Hong Kong make up the Charter House Hotels.

Today, Landcom Realty Corporation is the Lucio Tan Group’s arm for acquiring and managing hard assets that form part of its ever-growing portfolio. Among these are not a few whose use only Tan himself initially appreciated, but whose values have since multiplied and which have well served his purposes.

Doubtless, it was with the developer’s hat on that Tan organized Grandspan Development Corporation in Binangonan, Rizal, one of the largest steel fabricators in Southeast Asia. On top of many other prominent clients and major projects, Grandspan supplied the Metro Rail Transport with railway tracks that run the whole stretch of EDSA.

Three more companies, Lapu-lapu Packaging Corporation, Grand Cargo and Warehousing Services and Rapid Movers and Forwarders, are obviously meant to boost the efficiency of the group’s manufacturing and marketing operations.

Investing in national development

In the Nineties, having accumulated the most valuable assets and huge cash hoard while pole-vaulting from entrepreneur to leading industrialist and capitalist, Lucio Tan took the biggest steps in his entire business career.

Breaking away from the mold of the Filipino-Chinese moneyed class which has always preferred to be discreet about his holdings and dealings, he went public in a way none of his compatriots and peers had ever done.

Courting controversy and ignoring the advice even of his closest friends and associates, Tan put both fortune and reputation on the line for two government corporations whose profiles were as impressive as their financial prospects were depressed.

He’s just throwing good money after bad, experts pronounced. The fellow would lose his pants, critics and cynics predicted, when Lucio Tan pitched for Philippine Airlines first, and for the Philippine National Bank a few years later.

But in Tan’s own hardnosed assessment, the timing and the arithmetic were apparently right. More important, as one who had been vocal about what ailed the nation, he now felt compelled to put his money where his mouth was. And so he did.

How he ended up owning Philippine Airlines is a rather convoluted story. In 1992, a company named PR Holdings headed by Antonio “Tonyboy” Cojuangco of the Philippine Long Distance Telephone Company, President Cory Aquino’s nephew, gained control of the majority stock of the national flag carrier. Unknown to most, it was Tan who provided the funds for the $385 million transaction.

The following year, after Cojuangco and his secret financier had a falling out over the purchase of new aircraft without the latter’s consent, Tan came out in the open to exercise his right to run PAL. Other shareholders in PR Holdings, various government investors, and politicians attempted to stop the takeover, but to no avail. Three years later, Tan was firmly in the saddle.

While the controversy raged, PAL’s hemorrhage due to mismanagement and inefficiency continued. It piled up staggering net losses of P4.35 billion. And as Tan, already chairman and CEO, poured billions more into rehabilitating the nearly moribund airline, a crippling, protracted strike by flight and ground crew unions in 1998 all but wrote finis to it.

However, Lucio Tan’s persistence in sorting out its problems, streamlining operations, rationalizing expenses, and regaining the confidence of creditors and customers alike have undeniably paid off. Though still far from being out of the woods, PAL is assuredly back on track, with 29 wide-bodied jets aged just six years on average flying to 21 foreign and 18 domestic destinations.

In 1999, its domestic and international operations were consolidated in one hub, the brand new and more passenger-friendly Centennial Terminal 2 of the Ninoy Aquino International Airport. And after six consecutive years of massive losses, by the end of its fiscal year in March 2000, the carrier was able to report a modest net income of P45.8 million.

The following year, it did much better yet, posting an income of P436 million. But in the aftermath of September 11, operation in fiscal year 2001-2002 saw a loss of P1.6 billion. For the first quarter of 2002-2003 alone, however, the airline registered a net income of P982.9 million, the highest for that duration in Philippine Airline’s entire 61 years.

Prior to these, Tan had created additional profit centers for the Group by spinning off PAL’s catering and ground handling services to a newly formed company, Macro Asia. Subsequently, MacroAsia entered into a joint venture with Lufthansa Technik to organize Lufthansa Technik Philippines or LTP, to which PAL’s maintenance and engineering unit was transferred.

In January 2003, the Board of Investments approved LTP’s application for incentives covering a P1.1 billion aircraft engine and components maintenance, repair, and overhaul project, as part of which Lufthansa Technik is shifting its A330 and A340 overhaul contract operations from Hamburg to Manila.

To handle a bigger volume of traffic on primary and secondary routes, the Lucio Tan Group has also acquired a smaller carrier, Air Philippines, whose tariffs are more competitive on account of its lower capital expenses and overhead costs. Additional economies have accrued from the sharing of equipment, systems and other resources, the coordination of schedules, and the dovetailing of marketing efforts by the sister companies.

If, in bidding for Philippine Airlines, Lucio Tan had to steer through rough waters and gale winds, his next deal would plunge him headlong into the eye of the storm, taxing his wits, energies, and coffers to the utmost. For at stake is nothing less than the jewel in the crown of the local banking system, the Philippine National Bank.

Although PNB was still the biggest of all the banks, public or private, when 30 percent of its outstanding shares of stock were unloaded by the Aquino government through an initial public offering or IPO in 1989, its glory days were past. While accounting for some 10 percent of the sector’s total assets, it also carried more non-performing loans in its books than any other financial institution, and was slow to implement badly needed policy changes and structural reforms.

In 1992, PNB issued its second public offering. By 1996, when the Securities and Exchange Commission approved its amended Articles of Incorporation and By-Laws, it had in effect been privatized, with government-held stock in the minority of 46 percent. That was further diluted to only 30 percent towards the end of the decade, even as the Asian crisis led to many more delinquent accounts that aggravated its financial straits.

In 1999, PNB posted losses of P13.85 billion. At that juncture, the value of its shares had dropped to a mere fraction of what it had been ten years earlier, which by common consensus was artificially bloated to begin with. Most of those acquired at the public offerings were ripe of the picking but there were no takers apart from the Tan Group, which started buying and eventually ended up owning 46 percent of the whole pie.

As was the case with Philippine Airlines, certain quarters immediately posed objections and obstacles to Tan’s entry into PNB. Although other would-be investors went through the motions of beating him to the draw, at the end of the day nobody else could satisfy government’s terms and match his offer.

It took him three years to make his position at PNB unassailable. But all the issues were finally resolved with the inking of a memorandum of agreement between the Lucio Tan Group and the government in May 2002, paving the way for PNB’s rehabilitation under Tan’s stewardship as chairman and chief executive officer.

For the first quarter of 2003, PNB posted a net income of P53 million, a sharp contrast to the previous P738 million loss for the same period.

Today, guided by Tan’s vision of making PNB a more marketing oriented, customer-centered sales organization, PNB’s staff are undergoing re-training and higher service quality standards have been introduced.

Now led by a man whose drive and capacity for work have no equal, PNB is a sleeping giant no more.

(Note: This piece is part of Chapter 6 of Banking on the Nation’s Progress, Allied Banks 25th anniversary commemorative book.)


Tuesday, September 06, 2005

Banking in the beginning

The early history of the Philippine banking system was closely intertwined with the Catholic Church.

Endowed with large funds from the legacies of the wealthy faithful, the religious foundations called Obras Pias or Pious Works started in the 16th century to become the precursors of lending institutions in the country.

These bequests were primarily applied to religious, educational and charitable projects of the Church, such as the saying of masses for the dead and the care of orphans, the sick and the elderly. They were administered by institutions like the Confraternity of Mercy and the Third Order of St. Francis.

Pious intents, secular purpose

But traders also tapped the Obras Pias as source of financing for the Galleon trade, which lasted for 250 years with over a hundred vessels crossing between the Philippines and Mexico.

Horacio de la Costa, SJ, describes the role played by the Obras Pias in the trade:

“Since these institutions also insured the goods shipped on the galleon, they acted, in effect, as the colony’s commercial banks. Because of the risks of the voyage, their premiums and interest rates were high; but shippers had little hesitation in paying them because of the even greater profits.”

The alcaldes mayores, seeking to augment their earnings by trading local produce, also relied on the Obras Pias for financing.

But on their own, other businessmen of the Spanish colonial period were engaged in money lending as well. For client they had the native who tilled the land mainly to feed his own family. On this Martinez de Zuniga wrote in 1803:

“There’s no money. What does he do? He cannot sell his land, because the law forbids it. So he goes to a mestizo for the money. The mestizo give it to him, on condition that he mortgages his land by the contract known as “sangla-bili,” that is, a sale with option to repurchase. And every time the native comes for money, the mestizo gives it to him (on the same terms), until the amount he has drawn becomes so great that he cannot possibly repay it to redeem his land. Thus, the option to repurchase lapsing, the contract comes a straight sale and the mestizo acquires full ownership of the land.”

While no less shrewd, foreign merchants were fairer. From Antonio Regidor and J. Warren Mason, we learn that at the start of each planting season, they estimated what the value of the next harvest would be and paid the farmers for it in advance. If the advance was subsequently found to be too little, the balance was returned to them. But if the crop had been over-valued, the difference was extended on to the sale from next harvest.

With the advent of the first steam machines for hulling rice and the establishment of experimental farms, foreign firms provided more crop growers with short-term financing. Eventually they introduced the rudiments of formal banking, receiving funds for deposit and paying interest as well as dealing in foreign exchange and brokering for insurance companies.
Enterprising locals quickly followed suit. “Banks” were set up by Francisco Rodriguez, Damaso Garricho and Mariano Tuason. Commission and commercial houses were opened, and bills of exchange along with other negotiable instruments used in business transactions were introduced.

According to Benito Legarda, Jr., the bills of exchange were comparable to the present-day letters of credit:

“With the bills of exchange… traders could buy with little capital. A European buyer, for example, could dispatch a ship to Manila with an order for so many tons of, say, sugar, and pay for these with a bill of exchange. When the order arrived in London, the bill would not fall due until nine months later, giving the trader enough time to sell his goods and perhaps play with market prices.”

The first banks

As trade between the Philippines and other nations like China and India flourished, the demand for banking services mounted. The domestic banking system formally came into being in August of 1851, when the Junta de Autoridades under Governor General Antonio de Urbiztondo passed a resolution creating the Banco Espanol-Filipino de Isabel II, which evolved into what is now the Bank of the Philippine Islands.

Banco Espanol-Filipino commenced operation in May 1852 at the Royal Customhouse on Aduana Street, Intramuros, with a capital of P400,000, a sizeable portion of which was drawn from the Obras Pias.

The complementary relationship between the two financial institutions is described by Regidor and Mason:

The Obras Pias and the Banco Espanol-Filipino were operated, in effect, as two branches of the same institution. The former was compelled by the Spanish authorities to undertake the less remunerative part of the banking business… It was made to accept mortgages on houses or town building properties, in full security for loans, when houses were not easily convertible into money… while the Bank Espanol-Filipino was given every right the authorities could extend to elevate it to a commanding position. It was permitted to require what security it desired for loans.”

By virtue of a royal decree, Banco Espanol-Filipino began issuing the Philippines’ first paper currency called “Pesos Fuertes” in October 1854, effectively becoming the official state bank of the colony.

To support the growing British commercial interests in the region, the London-based Chartered Bank of India, Australia and China, today Standard Chartered Bank, established a branch in Manila in 1873. Hongkong and Shanghai Banking Corporation followed suit two years later. In the next decade both would also set up shop in Iloilo to service the sugar industry.

The system expanded further with the organization of the country’s first savings bank in 1882 by Fray Felix Huertas. As its name indicates, Monte de Piedad y Casa de Ahorros (later known as Monte de Piedad and Savings Bank) combined the functions of bank and pawnshop. Its start-up capital of P33,959 was made available by the Real Case de Misericordia, a religious foundation.

Monte de Piedad paid four percent per annum on deposits with the maximum set at P1,000 for each client. It likewise extended loans at six percent, accepting jewelry, new and used clothing and other valuables as security.

With the outbreak of the Philippine Revolution of 1896, the first bank run was recorded. The Spanish-American War in 1898 caused another run, with Spanish military personnel and civil officials withdrawing their deposits before returning to Spain. Although still in its infancy, the system survived both.

A new century dawns

Under American rule, banks were subjected to closer supervision and monitoring, a task assigned by the First Philippine Commission to the Bureau of Treasury. The gold coins of the United States became legal tender in the Philippines.

In the early years, several local banks arose not just in the capital, but also in Pangasinan and Zambales, but most were short-lived. More significantly, the International Banking Corporation opened in 1904, to be absorbed later by the National City Bank of New York, the present Citibank. It was then too that the Manila Building and Loan Association, a pioneering venture in development financing, was organized.

Meanwhile, as Japanese business interests expanded throughout the region, S. Mikasa Bank started servicing the needs of the expatriate community in the Philippines.

Initially, banking services were made available in the rural areas by the Postal Savings Bank. But in 1908, the American colonial government established the First Agricultural Bank of the Philippines. Capitalized at P1 million, it granted loans to farmers equivalent to 40 percent of the assessed value of the real estate used as collateral.

On the way to maturity

Following the enactment of the Jones Bill in 1916 laying the groundwork for the country’s independence, the Philippine National Bank was created with a start-up capitalization of P20 million, making it the giant of the system. PNB promptly absorbed the First Agricultural Bank and began setting up branches and agencies in the provinces, particularly those that produced sugar and coconut oil for export.

More banks began doing business in the country, among them, Yokohama Specie Bank, precursor of the Bank of Tokyo, which dealt chiefly with Japanese firms involved in abaca plantations in Mindanao; the Chinese American Bank of Commerce of Peking; and the China Banking Corporation.

In 1929, the US stock market crashed, signalling the start of the Great Depression. As the crisis deepened, Wall Street investment houses and banks came under scrutiny. Here, the supervision of banks was transferred from the Bureau of Treasury to the Bureau of Banking under the Department of Finance.

After Franklin D. Roosevelt became President in 1933, he ordered banks closed and banned gold exports. This triggered a gold boom in the Philippines.

But the local banking system continued to attract investors, to wit, the People’s Bank and Trust Company in 1926, the National City Bank of New York in 1930, the Japanese-owned Bank of Taiwan and the Nederlands Handelsbank NV in 1937. With the Philippine Trust Company and the Philippine Bank of Communications, they brought to 11 the total number of banks.

There was no Central Bank when the Philippine Commonwealth was inaugurated in 1935. Being the government bank and the largest commercial bank at the same time, the PNB issued notes in tandem with the Bank of the Philippine Islands. Both these notes and Treasury Certificates from the Bureau of Treasury were freely convertible to US dollars at the official exchange rate of two to one.

The commercial banks relied on their clearing house association, usually chaired by the PNB, to formulate rules and regulations covering the clearing and exchange of checks. The PNB exercised some of the functions of a Central Bank, including the clearing of checks and the settlement of interbank balances.

When the Philippine stock market itself crashed in 1938, many brokerage firms went bankrupt, among them the Finance and Mining Brokerage headed by Miguel Cuaderno, Sr. Cuaderno subsequently organized the Philippine Bank of Commerce, the first wholly Filipino-owned private commercial bank, with himself as president. With him in the venture were the prominent Cojuangco, Jacinto and Rufino families, as well as well-known figures like Lorenzo Sumulong, Aurelio Montinola and Francisco Lopez.

At about the same time, the government organized the Agricultural and Industrial Bank to take over the agricultural lending activities of the PNB.

Just before the outbreak of World War II, the Philippine banking network comprised 17 offices in Manila with 22 branches and 154 agencies around the islands, with an aggregate resource base of P371 million.

As preparations for the war intensified, the banks experienced heavy withdrawals. People used the money to stock up on canned goods, clothing, soap and other essential commodities. Many went home to the provinces where they felt they would be safer.

During the Occupation

The Japanese bombed Pearl Harbor in December 1941. A month later, they occupied Manila. The Philippine currency was demonetized and replaced with Japanese military notes.

The Yokohama Specie Bank and Bank of Taiwan resumed operations in January 1942. The Philippine National Bank, the Bank of the Philippine Islands and the Philippine Bank of Commerce reopened the following month. However, all American, British, Dutch and Chinese-owned banks were placed under liquidation. The Bank of Taiwan was designated as liquidator.

The “buy and sell” business flourished as materials needed for the war effort like scrap metal, copra and coconut oil, sugar, rice and other food items were funnelled to the Japanese military forces.

The inflation rate skyrocketed and the military government responded by printing more notes. This in turn resulted to more inflation, bringing down the value of the currency in circulation. Thus, the legal tender under the Occupation came to be known as “Mickey Mouse” money.

Post-war reconstruction

With the defeat of the Japanese by the Allied Forces in 1945, the Yokohama Specie Bank and the Bank of Taiwan quit the Philippines. Meanwhile, the Nederlands Handelsbank was acquired by the Bank of America.

Immediately after the cessation of hostilities, an executive order was issued empowering the Bank Commissioner to let any bank deemed solvent to resume operations. Initially, only the PNB, being the government bank, was allowed to reopen. The old Treasury notes overprinted with the word “Victory” were circulated, with the same pre-war value and convertibility rate to the US dollar.

The banks were freed from any liability for deposits made during the Japanese Occupation and made responsible only for pre-Occupation deposit balances less voluntary withdrawals.

The PNB was rehabilitated through Commonwealth Act No. 726 in July 1945, and the Rehabilitation Finance Corporation was established under Republic Act No. 85. Capitalized at P350 million, it was to provide credit facilities for the reconstruction and diversification of the ravaged economy.

With the grant of Philippine independence, the political leadership lost no time in laying the foundation for a Central Bank. In June 1948, Republic Act No. 265 was passed creating the Central Bank of the Philippines. This was followed by Republic Act No. 337 or the General Banking Act.

Regulations on the reserve requirement were set – 18 percent for demand deposits, of which 13 percentage points should be in the form of cash with the Central Bank and the remaining 5 percentage points could be in government certificates of indebtedness. Furthermore, banks were required to set aside an equivalent 5 percent in reserves for savings and time deposits and another10 percent for foreign currency deposits.

The era of managed currency system for the country had begun. The appropriate levels of money supply and international reserves needed to meet economic targets were now determined by the monetary authorities.

These developments encouraged the bankers to band together and for the Bankers’ Association of the Philippines in March 1949. Elected president was Felix de la Costa.

To hasten the restoration of the war-battered economy, the Central Bank issued the Rehabilitation and Development Bonds, whose proceeds would finance various economic development projects seeking to increase production capacities and generate employment.

Rediscounting was introduced. In the past, the banks had to utilize their own resources to meet their clients’ requirements. Now they could borrow from the Central Bank, the bank of banks, with receivables as collateral.

Inasmuch as most production facilities were destroyed during the war, importation levels had risen higher than ever, while exports lagged far behind. Significant capital outflows aggravated the situation, resulting in rapid depletion of international reserves.

The Central Bank eventually imposed import controls to conserve foreign exchange for essential and productive purposes. Importation of non-essentials and the sale of foreign exchange for travel, profit and dividend remittances were restricted.

On the brighter side, US investments began pouring into the country owing mainly to parity rights, which gave Americans equal opportunity to exploit indigenous natural resources. Also, the Korean War led to improved world prices, consequent to which Philippine exports surged. Owing to better export performance and tight import controls, when 1950 ended, a positive balance of payments and higher international reserves had been achieved.

By then there were 11 commercial banks with a total of 75 branches. However, only one savings bank, the Monte de Piedad Savings and Mortgage Bank, remained in operation. Provincial depository needs were being serviced by the PNB and the Philippine Postal Bank through the offices of the Bureau of Posts.

The era of import substitution

In the 1950s, the government pursued an import substitution strategy, offering incentives to encourage the setting up of more industries and packaging plants. Imported goods arrived in drums and were transferred to smaller containers. Others came as knocked-down units for assembly in local factories.

Such thrust fuelled the proliferation of banks. Equitable Banking Corporation was organized in 1950 by the Go family. The Jacintos and Rufinos formed Security Bank and Trust Company in 1951 after selling their interests in the Bank of Commerce to the Cojuangcos. That same year, the Bank of Calape, a savings and mortgage bank, was established in Bohol.

Following in their wake were the Prudential Bank and Trust Company owned by the Roman R. Santos family of Malabon and Navotas in 1951; the Republic Savings Bank, Manila’s first, in 1953; the Commercial Bank and Trust Company in 1954; and the Pacific Banking Corporation in 1955.

Previously, small farmers and traders had limited access to formal banking services, and were forced to turn to usurious money lenders. The enactment of Republic Act No. 720 or the Rural Banking Act of 1952 sought to remedy the problem, setting as target a rural bank for every municipality.

The country’s first, the Rodriguez Rural Bank owned by the family of Senate President Eulogio Rodriguez, was inaugurated in Pasig, Rizal, in December 1952. Four months later, 24 rural banks formed the Rural Bankers Association of the Philippines, with Alfredo Montelibano as president. Eight years after the passage of Republic Act No. 720, the Central Bank was supervising 160 of them.

Alongside rural banking, the concept of development banking was introduced via Republic Act. No. 4093 or the Private Development Bank Act of 1954. Private sector response to the measure, however, was slow in coming.

Republic Act No. 2081 was passed in June 1958, amending the charter of the Rehabilitation Finance Corporation and renaming it the Development Bank of the Philippines. This proved to be the catalyst for development banking. The following year, the Lipa Development Bank was established.

By the end of the decade, the country’s development banking system was composed of DBP’s 39 branches and five private development banks. This on top of 21 commercial banks and four savings and mortgage banks.

On another front, the private sector took the lead in packaging other types of financial services. In the Fifties, six financing companies came into existence: the First Acceptance and Investment Corporation and Filipinas Investment and Finance Corporation in 1955; the Industrial Finance Corporation in 1956; the Commercial Credit Corporation and Filipinas Mutual Finance Inc. in 1957; and the House of Investments in 1959.

With the increase in the number of banks and branches nationwide, government intensified its monitoring and supervision of the system.

The Bank Deposit Security Law or Republic Act No. 1405 was passed in 1955, prohibiting the disclosure of or inquiry into deposits with any banking institution. A Central Bank circular in May 1956 fixed interest rates on deposits at 2 percent per annum compounded quarterly for savings deposits and 2.5 percent for time deposits with 12-month maturity.

Faced with mounting inflationary pressure, the Central Bank used a wide range of instruments to control the demand for credit. Between 1957 and 1959, it raised the bank’s reserve requirement on demand deposits and partially suspended their access to rediscounting windows. Similarly upped was the interest rate on savings deposits.

Selective credit policy measures were adopted: rediscount rates were revised to favor credit to primary enterprises, and ceilings on loans and investments for specific industries set. These controls were also applied to promote the government’s “Filipino First” policy and industrialization program geared towards import substitution.

The foreign exchange allocation system, meanwhile, gave preference to exporters and the manufacturing and mining sectors. And the Filipinos’ share in the allocation was increased from 40 percent in 1953 to 52 percent in 1959.

Summing up, the controls and restrictions that the Central Bank imposed in its first decade of operation ushered in profound changes in the methods of doing business and patterns of consumption in the country.

The decade of decontrol

The 1960s challenged government policy makers to further calibrate monetary policies. They periodically shifted between contractionary measures and expansionary policies to suit the economic thrusts being pursued.

With more stable prices, improved incomes, and better international reserves position, the Philippines began to shift towards a free market system. Thus, in April 1960, the Central Bank launched its decontrol program.

The complicated foreign exchange control mechanisms were dismantled and the pace of economic growth left for determination by market forces. All restrictions on sales of foreign exchange were lifted. Apart from the retention of 20 percent of export proceeds by the Central Bank at the rate of P2:$1, de facto devaluation ensued with the exchange rate of the peso to the US dollar allowed to fluctuate.

Decontrol, however, was short-lived. Businessmen needed more pesos to finance their activities, the banks lent more to customers, the amount of money in circulation increased, and inflation became a serious problem.

Accordingly, between 1962 and 1965, government resorted once again to controls so as to manage the money supply and credit. The reserve requirement on demand deposit was raised anew. Special time deposits against import letters of credit were required. Rediscounting rates for commercial banks were increased and a rediscount quota system went into effect.

Excess money in circulation was siphoned off from the system, and the peso-dollar exchange rate stabilized. By November 1965, it stood at P3.90:$1.

By 1966, the country’s international reserves position had improved and a favourable balance of trade had been achieved, leading the monetary authorities to loosen the grip. The rediscount rate, at 6 percent since 1962, was lowered to 2 percent. The reserve requirement on demand deposits was reduced and the special time deposit requirement on import letters of credit removed.

But as a result, demand for import financing increased, which together with the growing fiscal deficit once more brought heavy pressure to bear on international reserves. These hit a low of $167 million by June 1956, as against $300 million in 1954.

Confronted with yet another monetary crisis, the third since the Central Bank was created, the authorities reverted to credit control. Unpopular with the business community, the move underscored the need to strike a balance between economic expansion and price stability.

The1967 monetary crisis paved the way for the first rescheduling of the country’s foreign debt, by then maturing. Furthermore, fresh credit to finance increased export production costs had to be secured.

As condition for the standby loan that the International Monetary Fund finally extended, the Philippines had to adopt a stabilization program with more stringent credit controls. Again rediscount rates were increased, special time deposit requirements on import letters of credit revived, and ceilings on loan portfolios of commercial banks as well as regulation of certain foreign exchange transactions re-established.

In the midst of these economic adjustments, the Philippine money market came into its own, with more investment houses and other financial intermediaries lending added dynamism to the sector. In February 1963, the Private Development Corporation of the Philippines began providing medium and long term equity and debt financing and managerial services to private enterprises.

Two more government banks became operational – the Land Bank of the Philippines mandated to finance the national agrarian reform program, and the Philippine Veterans Bank, to grant loans to army veterans, their families and heirs.

In 1963, Republic Act No. 3779 vested supervision of savings and loan associations in the Central Bank. The first SLA, aptly named First Savings and Loan Association, was organized in July 1965.

Ultimately, the deterioration of the Philippine economy in the mid-Sixties coupled with the intense competition among so many players in the field affected the viability of several banks, particularly those that had committed serious lapses and malpractices.

In 1968, the Central Bank had to close a commercial bank, a savings bank, and four rural banks, which led to a bank run. So grave was the crisis that besides ordering the release of emergency advances, the CB governor had to personally calm the crowds of worried depositors and urge the banks to display in their lobbied piles of peso bills to reassure the public.

The Central Bank then required commercial banks to increase their capital to at least P20 million over a five-year period. It also imposed rules on loans to directors, officers, stockholders and related interests or DOSRI.

At the end of the decade, there were 41 commercial banks in the country with total assets of close to P10 billion. DBP and the private thrift banks accounted for another P2.5 billion, while the 369 rural banks had combined resources of P409 million.

The Philippine formal banking system was now over a century old. It had weathered interesting times indeed. But even more interesting times, both politically and economically, lay ahead.

(Note: this is Chapter 2 of "Banking on the Nation's Progress," a 25th anniversary commemorative book of Allied Bank. The author of the this chapter is the book's lead writer and senior editor. )