CHAPTER X

The level of national income of the Philippines is higher than that of most nonindustrialized countries in the Far East, but the volume of savings in the country is generally considered insufficient to provide the funds necessary for sizable development.

SAVINGS AND AVAILABILITY OF CAPITAL

The amount of individual savings accumulated annually through financial institutions is not large. In 1953 the total addition to savings and time deposits of commercial banks and to postal savings was about 67 million pesos. Although these peso savings are considerably large than in prewar years the increase primarily reflects higher money income rather than a real change in the rate of savings.

Other forms of individual savings such as life insurance reserves and Government pensions are relatively small. The corporate form of business organization which would allow public participation in business enterprises is not widely used in the Philippines, and Filipinos do not generally purchase those securities which are available. Savings are concentrated in the hands of a small group of businessmen and landowners. It has been estimated that about 5 to 7 percent of the people control the bulk of domestic private capital. This group normally invests heavily in real property and business.

No accurate data are available regarding the magnitude of the capital available in the Philippines or the amount of that capital available for investment, but data on gross investment indicate the level of private and Government investment and its composition. In the year 1953 gross domestic investment amounted to 697 million pesos, or about 8 percent of the gross national product of 8,356 million pesos. Private investment amounted to 534 million pesos, while Government investment was 163 million pesos (see table 9).

Private investment in the postwar period has gone primarily into replacement and reconstruction of prewar activities, while expansion and

Source: Central Bank of the Philippines, Fifth Annual Report, 1953.

modernization of these enterprises and the development of new lines of activity have been on a relatively small scale. This situation until very recently has been due in part to the need to restore facilities damaged by the war, but it also results from the reluctance of Philippine investors to take risks in new types of enterprises. Banks, including the Government-owned Philippine National Bank, as well as many of the Government's financial institutions have tended to put their funds predominantly in fields in which they have had experience and in which returns have been large, especially real estate, commerce, and certain agricultural staples.

The supply of short-term credit for traders has generally been adequate, although small businessmen, in the Philippines as elsewhere, find access to bank credit difficult. The working capital needs of industry are less adequately met than those of trade, while for most farm owners and tenants credit at reasonable rates is usually not available. Having no access to credit from banks and other financial agencies, farmers and others needing loans frequently turn to local moneylenders, who charge high rates.

Philippine lending institutions and entrepreneurs, relatively inexperienced in many types of developmental enterprises, tend to shy away from investments which do not involve commerce, real estate, or agriculture. Owners and controllers of capital in the Philippines, with a few noteworthy exceptions, have not been induced to shift to industrial ventures. Recently, however, there has been some indication of increased interest in investments in industry. Although the amount of domestic capital available is not large, it should not be impossible for imaginative entrepreneurs, especially American, to avail themselves of some portion of the untapped domestic capital since Filipinos tend to have confidence in the integrity and capability of American businessmen.

SAVINGS AND LENDING INSTITUTIONS

Commercial Banks

Banking facilities in the Philippines, developed primarily to serve the needs of traders, were well established before World War II. The facilities were severely disrupted by the war, and postwar resumption of operations was complicated by uncertainties regarding the legal obligations incurred or settled during the wartime occupation. By 1949, however, the Philippine banking system was substantially restored and since that time has gradually expanded.

At the close of 1953 banking facilities consisted of 19 banks of which 15 were commercial banks and 4 were savings and mortgage banks. Eleven of the commercial banks were domestically owned and 4 were branches of foreign banks. City and provincial branches and agencies of these banks numbered 124. In the 5 years 1949 through 1953, 4 commercial banks and 2 savings and mortgage banks were opened and city and provincial branches were increased from 86 to 124, with much of the expansion in rural areas.

The 4 foreign banks with Philippine branches include 2 American banks-the National City Bank of New York and the Bank of Americaand 2 British banks-the Hong Kong and Shanghai Banking Corporation and the Chartered Bank of Australia and China. These 4 banks have wide connections abroad. Of the Filipino banks only one-the Philippine National Bank-has a branch overseas, located in New York. All of the local banks handle import items and are equipped to take care of foreign business through correspondent banks abroad.1

1 It is a characteristic of current Philippine banking practice that all payments for imports (except in the case of a few firms of the highest credit rating with connections abroad) must be made on a letter-of-credit basis. This is necessary because of the Philippine import control system under which a particular importer is given a fixed allocation of dollars semiannually. credits are opened, they are debited to that particular importer's exchange allocation or quota. The requirement of a letter of credit assures the exporter abroad that the Philippine importer to whom he is selling has not gone beyond his fixed quota.

As

Assets of the Philippine banking system increased from 1,168 million pesos at the end of 1948 to 1,260.6 million at the end of 1953, an increase of about 8 percent.2 Expansion is reflected mostly in earned assets but there has also been an increase in savings and time deposits. The aggregate of the demand, savings, and time deposits was 908.3 million pesos as of December 31, 1953. The banks generally hold excess reserves.

The credits extended by commercial banks in the year 1953 amounted to 979.3 million pesos of which 86 percent (846.1 million pesos) were for the account of private businesses and individuals and 14 percent, for the Government. Credits have been granted primarily for commercial and agricultural purposes, industrial credits accounting for only 6 to 7 percent of the total (table 10). About two-thirds of the agricultural loans outstanding as of the end of 1953 had been extended to sugar planters and more than one-fifth to rice producers.

Bank deposits are concentrated in Manila, the principal trading center and the site of the Philippine National Bank, which holds large Government funds. Outside Manila, the Visayas hold the largest part of total deposits and Luzon (excluding Manila) ranks next. Financial facilities in the Provinces, although showing considerable improvement in recent years, are still considered inadequate except in a few large cities.

In July 1954 the U. S. Export-Import Bank established individual lines of credit to five Philippine banking corporations to enable them to help small businesses purchase American machinery, equipment, and construction materials, and services. These credits, totaling $3,750,000, were established under a general authorization of $5,000,000 for this purpose. The remaining amount may be allocated later to Philippine lending institutions.

The general banking law.-Commercial banks in the Philippines operate in accordance with regulations prescribed by the General Banking Law

2 See table XVII in appendix F which gives a comparative statement of resources and liabilities of all banks at the end of 1948, 1952, and 1953.

(Republic Act 337 of July 1948), which became effective in January 1949. This law revised the previous banking legislation, bringing it into conformity with the Central Bank Act. Investment in Government securities was encouraged by the legislation, and banks were given more latitude in lending activities. The law stipulates that at least 60 percent of the capital stock of all new banking institutions must be owned by citizens of the Philippines and that at least two-thirds of the boards of directors must be Philippine citizens.

The law prohibits investment outside the Philippines of deposits received by branches and agencies of foreign banks after the law's passage. Licensing of foreign banks by the Securities and Exchange Commissioner is required, and foreign building and loan associations are prohibited from transacting business in the Philippines. Commercial banks are authorized by the law to make loans against personal security or against securities consisting of personal property or first mortgages on improved real estate. Maturities for loans against real estate may be up to 15 years, and such loans in the aggregate may not exceed 70 percent of the savings deposits of the bank.

The Philippine National Bank (PNB).-With 12 Provincial branches, one foreign branch (New York), and some 50 agencies, as of 1952, and additional Provincial branches and agencies since then, the Philippine National Bank is the major Philippine bank. It has the largest aggregate amount of savings deposits of any single bank and, of the domestic banks, it has been the most important lender, supplying about half the commercial credit.

The Philippine National Bank began operations in 1916 as a then partly Government-owned institution established to break the virtual monopoly of commercial banking enjoyed at that time by the foreign banks and to provide banking facilities, both of a commercial and an investment nature, for industry and agriculture. In addition to normal commercial banking procedures it had a special status in relation to the Government, other banks, and the public, and it performed some of the functions of a central bank. To promote agricultural development it was permitted to make long-term loans secured by real estate mortgages aggregating 75 percent of its capital and surplus. To promote industrial development it was authorized to purchase bonds of the Government's National Development Corporation.

In 1948 the Philippine National Bank came within the scope of the General Banking Act so that its legal status at present is the same as that of other commercial banks. It is, however, owned by the Government and has used a large part of its credit resources in loans and investments on Government account. Over the years the predominant activity of the Philippine National Bank has been the supplying of short-term credit rather than development credit.

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Rehabilitation Finance Corporation

The Philippine Government has become an important source of investment capital, and Government funds set aside for financing many economic projects have been serviced since 1947 by the Rehabilitation Finance Corporation (RFC). With a paid-up capital of 100 million pesos, it granted a total of 35,221 loans with a total value of 666.1 million pesos in the period 1947 through 1953.

About 44 percent of the loans have been for real estate purposes, 35 percent for industrial purposes, and 18 percent for agricultural purposes. In the last few years there has been a slight increase in the percentage granted for industrial and agricultural projects.

About 53 percent of the loans in the period 1947 through 1953 were in amounts of less than 100,000 pesos, i. e., small or medium-sized loans, and 47 percent were large loans of more than 100,000 pesos. In the field of industrial credit, most of the loans have been large ones. The RFC has made long-term loans to sugar centrals, to various utility enterprises, and for such projects as rice mills, oilmills, cement factories, and pulp and paper mills. Agricultural loans have been primarily to medium and large-sized farms, rice farms being important borrowers.

Under the law creating it, the Rehabilitation Finance Corporation is charged with providing credit "for the rehabilitation and development of agriculture, commerce and industry, the reconstruction of property damaged by war, and the broadening and diversification of the national economy." Loans, with a maturity ranging from 1 to 30 years, may be made up to 60 percent of the collateral value, including assets accumulated through use of the loan funds.

New Agencies for Agricultural Credit

The provision of credit, especially to small producers, at reasonable rates of interest is a major requirement for the development of Philippine agriculture. Private lenders have been the principal sources of rural credit, but a succession of Government agencies over the years have undertaken to finance agricultural development. In postwar years the Philippine National Bank and the Rehabilitation Finance Corporation have been major lending agencies for agricultural purposes.

4

Facilities of credit in rural areas were materially improved by the legislation of 1952 providing

Republic Act No. 85 of October 1946.

In addition to the Philippine National Bank which had the provision of agricultural credit as one of its major objectives at the time of its establishment, these included in the postwar period the National Coconut Corporation, the National Land Settlement Administration, the National Tobacco Corporation, the National Abaca and Other Fibers Corporation, and the Rural Progress Administration, all of which are no longer in existence. These agencies, which had relatively limited funds, concentrated on trading activities and did not play an important role in agricultural finance.

for privately owned rural banks. The first of the rural banks began operation in late 1952 and as of mid-1954 some 20 rural banks, functioning under supervision of the Central Bank, were operating. By the end of 1953 a total of 2.8 million pesos in loans had been granted by the rural banks, consisting of 1.9 million for agriculture, 0.8 million for commercial purposes, and 0.1 million for industry.

Another new agricultural credit program and one which thus far has been larger than that of the rural banks is the Agricultural Credit and Cooperative Financing Administration (ACCFA), an autonomous corporation established in 1952. As of the end of 1953, ACCFA had granted crop, farm improvement, commodity, and facility loans totaling 3.5 million pesos. In addition in 1954 this agency made rice loans through cooperatives to their members. Although the agricultural lendings of the rural banks and ACCFA are small compared with those of the Philippine National Bank and the Rehabilitation Finance Corporation, they are distinctive in that they are virtually the only funds at reasonable interest rates for small agricultural producers who do not have titles to their lands.

Industrial Guarantee and Loan Fund

In a move to help expand industrial enterprises and encourage investment in new enterprises considered essential to the country's economic development, an Industrial Guarantee and Loan Fund was established in July 1952 as a 10year program. An initial capital of 10 million pesos was provided from counterpart funds to be administered by the Central Bank in cooperation with the U. S. Foreign Operations Administration and the Philippine Council for U. S. Aid (PHILCUSA).

This account was to be used primarily for guaranteeing loans made by established credit institutions for approved industrial projects which cannot meet normal security requirements, thus encouraging long-term lending to small and medium-sized industries. The commercial banks, however, have shown little interest in using this fund because long-term lending is less profitable than short-term loans. Consequently, the Rehabilitation Finance Corporation has received 5 million pesos, 3 million pesos have been invested in National Power Corporation bonds (to finance the purchase of machinery for construction of the second hydroelectric unit of the Maria Cristina project), and 2 million pesos remain unused.

5 The Rural Banks Act (R. A. 720), approved in June 1954. Republic Act No. 851, approved in August 1952.

7 Local currency deposited by the Philippine Government commensurate with U. S. dollar aid.

Other Savings and Credit Agencies

The Postal Savings Bank, with 1,157 branches in operation at the end of 1953, had 312,668 depositors holding total deposits of 33.1 million pesos. In the last few years there has been an increase in new accounts resulting from thrift campaigns. About 70 percent of postal savings are invested in real estate mortgages; the remainder is placed in loans to local governments and toll bridges and in securities.

Building and loan associations increased to 7 in 1953, with combined assets amounting to 9.9 million pesos at the end of the year. Pawnshops, which constitute a source of local credit of some importance, numbered 32 in Manila in 1953 accommodating more than 400,000 borrowers in an aggregate amount of 15.1 million pesos. These loans are primarily small loans to meet consumption and other personal expenditures.

Insurance companies in the Philippines, both domestic and foreign, have been a relatively minor source of funds for investment. A large part of the reserves of domestic companies has gone into mortgage loans and real estate, while foreign companies have tended to invest their reserves abroad. However, local investments by foreign insurers have been increasing in recent years since the enactment of legislation requiring that at least 30 percent of legal reserves be invested in the Philippines.

Approved investments for insurance company funds include Government-guaranteed obligations; real estate and mortgages thereon, subject, however, to certain limitations; stocks and bonds of corporations incorporated in the Philippines; and equipment trust obligations evidencing an interest in equipment wholly or partly within the Philippines. Life insurance companies may not invest more than 25 percent of admitted assets in corporate bonds, nor more than 10 percent each in preferred and common stocks. An amendment to the Insurance Law (Republic Act No. 489) permits life insurance companies to invest in housing and real estate projects.

As of December 31, 1951, local investments of all authorized insurance companies totaled 91,297,485 pesos. Of this sum, 58,605,485 pesos were held by domestic insurers, 17,499,568 pesos by American insurers, and 15,192,432 by other foreign insurers. Domestic insurers' investments were as follows, in pesos: Real estate, 6,088,867; mortgage loans, 17,892,753; collateral loans, 1,534,409; policy loans, 9,820,157; bonds, 8,285,685; stocks, 11,656,597; and interest-bearing deposits, 3,327,017. Foreign insurers' investments

8 Data supplied by the Insurance Staff of the Office of Intelligence and Services, Bureau of Foreign Commerce.

were, in pesos: Fixed deposits, 2,588,174; mortgage loans, 2,584,838; policy loans, 11,268,860; bonds, 13,649,903; and stocks, 2,600,225.

On June 30, 1952, there were 94 insurance companies authorized to operate in the Philippines, of which 45 were domestically incorporated companies and 49 were foreign, including 22 American. Three domestic and 8 foreign insurers sold life insurance; and 42 domestic and 41 foreign companies sold fire, marine, casualty, and miscellaneous insurance. There is also a so-called Government Service Insurance System which, besides administering a social insurance program_for Government employees, insures Federal and Provincial and most municipal property against loss.

The Philippine insurance industry has shown a steady growth over the years. Annual premium income of private insurance companies increased almost three times between 1946 and 1951, rising from 25,098,000 pesos to 71,187,000. Life insurance in force more than tripled during the same period, rising from 201,000,000 pesos in 1946 to 670,000,000 in 1951.

SECURITY MARKETS

The Manila Stock Exchange and the Philippine Securities and Exchange Commission are institutions designed to encourage and facilitate provision of capital for Philippine enterprise, but thus far they have made only a minor contribution to this end.

In the postwar period the volume of transactions on the Manila Stock Exchange, founded in 1927, has been relatively small. In 1953, 110 million shares were traded with total value of 22.2 million pesos. Most Philippine corporations are not listed on the exchange, their stock being closely held in family or other small groups.

Corporations are required to register with the Philippine Securities and Exchange Commission established in 1938, which has general supervisory authority over the stock exchange.

There is no active market for Government securities because the public has shown little interest. The Central Bank (see p. 62) holds most of the direct and guaranteed peso obligations, and some are held by local banks, insurance companies, and trust funds. All Government securities are sold through the Central Bank. During the 5year period 1949-53 the Bank's Securities Market Department sold Government obligations amounting to 22 million pesos.

CURRENCY, MONEY SUPPLY, INTEREST

Currency

The basic unit of Philippine currency is the peso, which is pegged by law (the Philippine Cur

rency Act of 1903) to the United States dollar at 2 pesos to the dollar. Under terms of the Philippine Trade Agreement of 1946 this relationship shall not be changed, "the convertibility of the Philippine peso into United States dollars shall not be suspended, and no restrictions shall be imposed on the transfer of funds from the Philippines to the United States except by agreement with the President of the United States" during the life of the agreement.

The Philippine Central Bank Act of 1948 provided for the abandonment of the dollar exchange standard and the 100-percent currency backing in dollars on which the Philippines had previously operated. With the agreement of the President of the United States, exchange control, limiting the convertibility of the peso, was instituted in 1949 and in 1951 a 17-percent exchange tax was instituted on most purchases of foreign exchange. This tax results in an effective selling rate of 2.358 pesos to the U. S. dollar.

Money Supply

In prewar years total money supply-currency and demand deposits-never exceeded 300 million pesos. In the latter part of World War II, the inflation of currency in the Philippines reportedly reached staggering proportions, then with liberation and the outlawing of occupation currency the economy temporarily had an inadequate supply of currency. The supply was rapidly increased and, by the end of 1945, the money supply had reached 1,120 million pesos or almost four times the prewar level.

From 1946 to 1949 there was little net change in the money supply, largely as a result of two opposing forces. The adverse balance of payments tended to reduce the money supply while growth in the bank credit tended to increase it. The composition of the money supply, however, changed noticeably with a decline in currency in circulation from 882 million pesos at the end of 1945 to 572 million at the end of 1949 while peso demand deposits increased from 238 million pesos to 465 million in the same period (see table 11). This change in composition resulted mainly from the restoration of banking and business during the period.

In the years 1950-53 the money supply remained relatively stable, fluctuating from about 1,130 million pesos to 1,290 million on the basis of endof-month levels. As of the end of June 1954 the money supply totaled 1,200 million pesos and was at about that level in October 1954. The greatest stabilizing influence in recent years has been the regulation of international reserves.

Interest Rates

Interest rates in the Philippines are not high and generally rise and fall within a narrow range.