The Philippines was among the developing countries that managed to register substantial economic progress during the uncertain decade of the '70s. Real gross national product rose by an average of more than 6 percent a year, allowing a satisfactory increase in per capita income during the period.
While GNP advanced, there was a noticeable shift in the pattern of production , with the share of agriculture declining and that of the manufacturing and other industrial sectors gaining increasing importance.
Employment improved and prices were, by and large, stabilized; the inflation rate was substantially lower than in some other developing countries. Moreover, there was a rapid rise in exports, especially of nontraditional commodities, which helped in cushioning the tremendous impact of recurring oil prices increases.
Along with this economic expansion was the growth of the domestic financial system, both in assets and transactions volume.The system's financial resources improved over sixfold from 1970 to more than P238 billion (about Us $32 billion) at the start of 1980. There were also additions in the types of financial instruments actively used in the market.
Undoubtedly, the financial sector plays a very important role in development by allowing financial intermediation to take place. Holders of surplus funds find a way through which such funds are made available to those who have a need for them, the borrowers. In short, financial institutions serve as the vital link in the translation of savings into investment for economic growth. They also serve generally as conduits through which foreign loans are used for productive activity in the domestic economy.
In 1972 a series of reforms was promulgated designed to evolve a stable financial system responsive to the requirements of a growing economy. Among the more specific steps taken were the preference for branch banking over unit banking [one bank, on eoffice] to maximize efficiency in existing financial units and the extension of Central Bank authority to the entire financial and credit system to enhance its effectiveness in policymaking and implementation.
The reforms also included a capitalization buildup program for various types of financial institutions. These measures helped the healthy development of the financial system and its supportive role in the progress of the '70s.
This year, the financial system is undergoing major innovations again. The objective remains the evolution of a stable, responsive system. Specifically, the reforms are meant to increase competitive conditions for greater efficiency and improve the availability of and access to long-term funds.
Greater efficiency will be achieved by eliminating specialization in various financial institutions. Whereas certain legal specialization and limitations were deemed appropriate during the earlier stages of development of the financial system, it is now thought that greater competition in the scope of activities of banks and quasi-banks is more desirable under the basic principle that "any bank can do what any other bank can do." or universal banking.
For instance, a commercial bank with expanded authority, granted on the basis of capitalization, experience, and expertise, may go into areas heretofore reserved for investment houses, such as underwriting, securities dealing, and equity investments.
At the same time, the differentiation among various categories of banks and quasi-banks is reduced and the latter are given new powers and functions.
The services offered by financial institutions need to be broadened to further encourage competition.
So far, available funds in the Philippines have generally been short-term, and the lack of long-term funds has somewhat hampered the development process. Current reforms seek to increase the availability of such funds, mainly through term transformation. Considering the present situation, the core of short-term bank deposits that remains untouched may be used as a basis for long-term lending. At the same time, the interest rate structure is under constant review , so as to encourage longer-term deposit through attractive rates. Thus, the goals are to generate greater long-term deposits and to provide increased longer-term loans and equity investments.
A major argument against unibanking is the possible concentration of economic power in a few financial institutions or firms. The authorities have devised certain safeguards that promise to deal effectively with this.
An example is the limit on an expanded commercial bank's investment in any single nonallied enterprise to 35 percent of the voting stock, 35 percent of the total subscribed capital stock in that enterprise, or both. Also, a bank cannot have total exposure, either in equity or loans, in any single enterprise or institution, allied or nonallied, exceeding 15 percent of the bank's net worth.
There are other safeguards such as those on interlocking directorships, officerships, or both, and credit accommodations to related interests and areas the aim to deal with possible conflict-of-interest problems.Moreover, safeguards like required net worth-to-risk assets ratio, reserve requirement, loan limit to a single borrower, and others are available to ensure that the objectives of long-term lending and prudent banking are both pursued.