Banking in the beginning
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.
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. )