AN OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM

Every individual and business organization in a civilized society are directly involved in the financial
system – a complex structure and operation.
We use money in buying goods and services. We borrow money from banks, pawnshops or credit
unions to satisfy our needs. These are some of those activities very familiar to us because they are part of four
daily activities and observations.
However, the financial system does not only include banks, credit unions or pawnshops but also other
financial institutions like money markets, investment houses, financing companies, securities dealers, among
others. Likewise part of the whole financial system are those which have a tremendous influence in our
economy such as the World Bank, the International Monetary Fund, the Asian Development Bank, the
transnational banks, the Bangko Sentral ng Pilipinas, and other government agencies which are, in a way,
associated with the laws affecting money, credit and banking.
In a modern economy, the financial system is more sophisticated. It has a vast network of institutions
with modern facilities. Its policies and programs play a major role in the social and economic development of
any country. This is proven by progressive financial centers of the world like New York, London, Singapore, and
Hong Kong.
This chapter presents the nature, importance, elements and functions of the financial system. Also
included are brief discussions on the development and growth of the Philippine financial system, and the
influence of the transnational banks, the World Bank, the International Monetary Fund, and the Asian
Development Bank in our financial setup.
Nature and Necessity of Finance
The financial system is a network of various institutions which generates, circulates, and controls
money and credit. It provides intermediation between the suppliers and users of credit. As an integral part of
the economic system, it provides loans to poor families, small producers, big businessmen, and industrialists.
It further, stimulates the social and economic development of the country. It is noted that the highly
developed countries like the United States, Japan, and those in Western Europe (Great Britain, France, and
Germany) have become prosperous because of the support. of financial institutions during the initial stage of
their industrial development.
These arises a need for financial institutions in a society where any individuals have surplus incomes.
People with excess incomes are inclined to place their extra funds in investments or productive projects. Other
intend to lend their money in order to earn interests. In a primitive economy, the lenders can directly deal
with the borrowers in transferring their savings. However, in a larger market, middlemen are needed to
facilitate the meeting of lenders and borrowers. But in a developed economy, specialists are needed to satisfy
the business interests of both suppliers and users of funds. And this is primarily the job of financial institutions.
There is no more need for the lenders to deal personally with the borrowers. Both parties transact their
business with financial institutions. This is more convenient, economical, and safer for the lenders.
From the point of economics, the transfer of funds from lenders to borrowers, through financial
institutions, creates several favorable effects in the economy. For instance, such transfer of money can
improve consumption pattern and resource allocation. People with surplus money which they do not use for
production have no positive contribution to society and the economy. But if these idle financial resources are
lent out to individuals without financial capital but with business inclinations, then such resources become
tools of production. These will create more employment, income, and consumption. Many other members of
society will be benefited. In the long run, these interdependent economic activities, together with their linkage
effects, simulate further economic growth for the whole economy.
Elements of the Financial System
Financial claims. These comprise the money and the rights to receive money under specific
circumstances. Usually, these are evidenced by financial instruments which specify the terms of the claims.
There are two broad categories of claims: debts and equities. The latter conveys ownership rights while the
former does not. The debtor has an obligation to pay his loan plus interest. On the other hand, equities are
investments like shares of stock which earn dividends.
Financial institutions. These are private or government organizations whose assets consist primarily of
claims or incomes primarily derived from dealing in and/or performing services in connection with claims.
Institutions which deal with the creation and issuance of claims against themselves, and use the proceeds to
acquire and hold claims against others, are commonly referred to as financial intermediaries. Such institutions
act as middlemen between suppliers and users of money. Some of these are familiar to us like commercial
banks, savings and loan associations, and finance companies. The unfamiliar ones are presented and explained
in subsequent chapters of this book.
Other financial institutions are primarily involved in services related to claims. They provide financial
information and advice, manage portfolios of financial assets on behalf of other economic units, buy and sell
claims on instructions from clients, and assist in finding sources for those economic units seeking loans. These
and other services are explained in details in subsequent chapters.
 Financial markets. These are institutions which expedite transactions in financial claims. Examples are
the Manila Stock Exchange and other organizations dealing with money market operations. A financial market
serves as a means of bringing the forces of demand and supply of financial claims.
Government agencies. The Monetary Board is the policy-making body of the Bangko Sentral ng
Pilipinas. Laws on money, credit, and banking are legislated by the Congress and through executive orders
issued by the President of the Philippines. The role of the government agencies has a tremendous impact on
the financial system. For example, one very important goal of the Bangko Sentral is to attain internal and
external stability of our peso.
Laws and policies. The national government regulates and supervises the behavior of the whole
economy. Hence, its control of the financial system is a vital condition for the whole economic behavior. Laws
and policies have been formulated to ensure the desired levels of investment, employment, production,
income, and consumption.
Specific Functions of Financial Institutions
The general function of financial institutions is to facilitate the transfer of funds from the savers to the
users. To transfer such savings to spenders, assistance is necessary because of the large volume of savings.
Furthermore, in a highly developed economy, certain barriers are created by individuals in the transfer of
funds: risk, inconvenience and cost of transfer, and the desire to avoid illiquidity.
Financial institutions perform certain specific functions such as:
Investigation and credit analysis. An individual who lends his money through a financial institution is
assured of a minimum risk. A careful investigation and credit analysis about the application of the borrower is
conducted. This is to ensure that the funds will be used efficiently by the borrower, and to protect the
interests of both the lender and the financial institution.
Matching the supply and demand for funds. Financial institutions perform a brokerage function. They
bring the lenders and borrowers together. They provide conveniently located offices to make things available
and economical for both parties. Some types of financial institutions purchase. securities in large quantities
and then sell these in smaller lots. Financial institutions specialize in matching the supply of savings with the
demand for funds.
Provisions for liquidity. Not a few savers are reluctant to lend their money to borrowers. They feel that
they may need cash prior to due date of payment. Or, in case they purchase bonds, they may not be able to
find buyers when they decide to liquidate their bondholdings. However, with the presence of financial
institutions, the liquidity of financial assets can be increased. Through their brokerage function which provides
an organized market, the investor can find a buyer for his debt or ownership claims. Moreover, some financial
institutions accept savings from individuals who in return acquire claims against the assets of the financial
institutions. In case a client of such institution decides to liquidate his claim, the latter can pay its client with its
current funds which it receives from other savers.
Development of the Philippine Financial System
The first credit institutions established in the Philippines were the Obras pias which literally mean
pious works. These were started by Father Juan Fernandez de Leon in 1754. Their funds came from pious
Catholics, together with those who made their wills before undertaking dangerous expeditions. These
institutions consisted of foundations which invested their money in trade and channeled their profits to
charitable works. Most of the obras pias funds were lent out to traders to finance the Galleon Trade. Such
credit institutions had been under the control of the friars, and eventually became commercial banks or
marine insurance companies.
The last of the obras pias came to an end in 1820. Ten years later, Francisco Rodriguez organized the
Rodriguez Bank. However, this was more of a loan association than a bank. Most of the clients of the bank
were American and British merchants. When the owner died, the bank's funds were turned over to the Queen
of England.
The first Philippine bank. In 1851, the first Philippine bank was established. This was the Banco Español-
Filipino de Isabela II. Actually, the bank had been granted a charter in 1528. But it started transacting business
when several Philippine ports were opened to foreigners. Nevertheless, foreign trade outside Manila was not
very substantial. Thus, the bank handled mostly domestic transactions.
With the opening of Suez Canal in 1869. Philippine trade expanded. European markets became
accessible to Philippine producers and this induced the country's agricultural development. The Banco
Español-Filipino funded crops for exports and established correspondent relations in Spain and France to help
the European trade.
The growth of trade with Europe began to attract British capital to the Philippines. As a result, the
Chartered Bank of India, Australia, and China set up a Manila branch in 1873. Two years later, the Hong Kong
and Shanghai Bank also put up its branch in Manila. In 1883, both banks opened branches in Iloilo to finance
the sugar industry.
The British banks dominated the economy during the Spanish colonial rule. Likewise, British merchants
controlled the economy. Their ships, connections with China and Europe, credit resources, and technique and
machinery for large scale crop production gave them an advantage over the other merchants from 1820s to
1900s. However, Ameri-can business interests started to expand during this period.
 In the case of Spain, it was able to put up the first savings bank in 1882 despite British domination in
the banking industry. This is Monte de Piedad. Its funds came from the obras pias. One year later, another
Spanish bank, Banco Peninsula de Ultramirano, set up a branch in Manila.
Financial institutions during American rule. At the time the United States acquired the Philippines in
1898 through the Treaty of Paris, its business interests were not as strong as those of the British and Chinese.
However, with "free trade" between the United States and the Philippines as provided by the Payne-Aldrich
Act of 1902, American economic control in the Philippines substantially increased. In addition, the weakening
of the British commercial activities in Asia because of its involvement in World War I (1914-1918), gave the
Americans the opportunity to promote their business interests in the Philippines.
In 1902, the International Banking Corporation of New York set up an office in the country. However, in
1915 the bank was acquired by the National City Bank of New York. At present this bank is one of the top five
banks in the United States and the whole world. It is now called the First National City Bank. Through the
International Banking Corporation, Americans were able to generate more business. interests in the
Philippines. Other branches of American banks were established such as the Guaranty Trust and American
Bank.
Other banks were organized such as the Postal Savings Bank in 1904, and the First Agricultural Bank of
the Philippine Government in 1906. However in 1916 the assets and liabilities of the agricultural bank were
transferred to the newly-organized Philippine National Bank (PNB). The Catholic Church set up the Philippine
Trust Co. in 1916 while a group of Manila-based American businessmen established the People's Bank and
Trust Co. in 1926. The Chinese were likewise active in moneylending at very high interest rates. The Chinese
banks were formed in the 1920s: China Banking Corporation in 1920 and the Mercantile Bank of China in 1926.
With the coming of the Japanese Imperial Forces in 1942, the PNB closed its doors. A few months later,
the Japanese occupation forces ordered the PNB to reopen for business, and it was supervised by Japanese
military advisers during the war years. The Southern Development Bank, a Japanese bank, put up a branch in
the country to perform the role of a central bank. War notes were then printed and circulated as money. This
caused the worst inflation so far in the country.
Postwar Financial Institutions
In 1946, the Rehabilitation Finance Corporation was established to provide credit facilities for the
rehabilitation of agriculture, commerce, and industry, and the reconstruction of war-damaged properties.
Some years later, it became the Development Bank of the Philippines.
Another very important milestone in the development of the Philippine financial system during this
particular period was the creation of the Central Bank of the Philippines in 1948. Its operations, however,
started the following year.
By 1947, there were four branches of foreign commercial banks in the country and seven local banks.
Of these seven local banks, only one was owned by Filipinos. Most of the non-commercial banks emerged
after World War II and during the 1960s up to 1970s. The rural banking system was organized in 1952. At the
end of 1978, there were thirtyfive commercial banks – including the four branches of foreign banks – with a
nationwide network of 2,830 banking units.
Structure of the Philippine Financial System
Bangko Sentral ng Pilipinas
Banking Institutions
1. Private Banking Institutions
a. Commercial Banking Institutions
* expanded commercial banks/universal banks
* ordinary commercial banks
b. Thrift Banks
* savings and mortgage banks
* private development banks
* stock savings and loan associations
c. Rural Banks
2. Government Banking Institutions
a. Philippine National Bank
b. Development Bank
c. Landbank of the Philippines
d. Philippine Amanah Bank
Non-Bank Financial Institutions
1. Private Non-Bank Financial Institutions
a. Investment Houses
b. Investment Companies
c. Financing Companies
d. Securities Dealers/Brokers
e. Non-stock savings & loan association
f. Building & loan association
 g. Pawnshops
h. Lending investors
i. Fund managers
j. Trust companies/departments
k. Insurance companies
l. Venture capital corporations
2. Government non-bank financial institutions
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
Financial Reforms
In 1980, a series of laws were introduced amending the General Banking Act, Savings and Loan
Associations Act, Private Development Banks Act, Charter of the Development Bank of the Philippines,
Investment Houses Act, and the Central Bank Act. Such reforms are part of the recommendations in 1972 by
IMF-CB group. Also, the offshore banking system was set up in 1977 as one of the proposals of the IMF-CB
group. This has allowed the multinational banks to operate in our financial system.
Another example of financial reform was the increase of commercial banks from P20 million to P100
million and then to P300 million. Because of this requirement, several private commercial banks merged their
resources to be able: to meet the former CB (and IMF) requirement. Again, foreign banks equity participations
found their way into our financial system.
In view of the shortcomings of the Philippine financial system, monetary authorities realized during the
1970s the need for monetary reforms. Among other things, the banking industry could not support the
economic development of the country because of its inadequate long-term loans or funds. Moreover, the
financial system is made up of many small institutions which make them less competitive and inefficient. They
do not enjoy economies of scale that the big banks or financial institutions have.
According to the former Central Bank, the main objectives of the 1980 financial reforms are: (1) to
attain greater efficiency through increased competition and scale of economies; and (2) to obtain greater
availability and use of long-term funds. To achieve such objectives, the following reforms became necessary
for implementation (Ibon Data):
a. Minimized the difference among banks and quasi-banks.
b. Eliminated all functional distinctions between the two types of thrift banks: private development banks
and savings banks.
c. Increased the powers and functions of quasi-banks.
d. Removed most ceilings on interest rates on deposits and loans.
e. Introduced expanded commercial banking or universal banking
Transnational Banks in the Philippines
Global banking dominates the Third World – and the Philippines is no exception. Transnational banks
(or multinational banks) operate in our country through their branches, offshore banking units, representative
offices, and/ or equity investments in both Philippine financial institutions and non-financial firms.
Transnational banks are international financial institutions which operate in many countries all over the world.
They specialize in international finance, and their clients are primarily the multinational corporations,
governments, big companies, and wealthy individuals in the developing countries.
The aforementioned banks are owned by the industrialized countries like the United States, Japan,
France, and Great Britain. Such banks have huge resources which are several times bigger than the
international reserves of the central banks of the industrialized countries. Because of their enormous credit
resources, the transnational banks possess the tremendous power in deciding which country can be bailed
out.
As of 1977, almost 70% of the 300 biggest banks in the world were from six rich countries. The
transnational banks of the United States and Japan alone had 42.3% of the total assets of the whole global
banking system. In the Philippines, top Japanese, American, and European banks have business affiliations in
both financial and non-financial companies. For example, the top ten US banks operate in our country. The
first three top US banks are Citibank, Bank of America, and Chase Manhattan.
WB-IMF and ADB Roles in the Philippine Financial System
The World Bank (WB), International Monetary Fund (IMF), and the Asian Development Bank (ADB) are
owned mostly by the governments of the rich countries. The United States is the biggest shareholder of all the
three international financial institutions. As a matter of tradition, the President of the World Bank is an
American, the Managing Director of the International Monetary Fund is a European, and the President of the
Asian Development Bank is a Japanese. Nevertheless, the United States, considering its large financial
contributions has a strong influence in all the aforementioned institutions.
Both WB and IMF were created in 1945. They occupy the same headquarters at Washington, D.C. and
they hold together their annual meetings. Primarily, the main objective of the WB was to help reconstruct
Western Europe which had been destroyed by World War II. Later on, it shifted its goal to funding
development projects of the Third World like the Philippines. In the case of the IMF. Its main goal has been to
ensure an international monetary system that will promote international free trade. With regard to the ADB, it
started its operations in 1966. Its headquarters is based in Manila. The main role of the bank is to help
promote the economic and social growth of its developing member countries by lending funds and extending
technical assistance. The ADB has fourteen non-regional highly developed member countries like the United
States, France, Canada, Germany, and Great Britain, among others.
The Philippines is a member of WB, IMF, and ADB. It is also a big borrower from such institutions. Like
the Philippines, borrowing member countries with very low credit ratings have to follow rigid requirements. It
is not easy to apply loans from WB-IMF. For instance, one condition for the approval of our WB-IMF loans is to
implement political, fiscal, and monetary reforms. In some cases, the WB even dictates the kind of subjects
and textbooks to be studied. Specific examples of WB-IMF policies for the debtor-country like the Philippines
are:
- adoption of floating rate system
- devaluation of the peso
- import liberalization
- export promotion
- encouraging foreign investments
- raising indirect taxes like specific tax on oil products
- comprehensive interest rate reform
- removal of price controls over essential goods for domestic use
- limiting growth of money supply and domestic credit reducing or eliminating consumption subsidies
like rice subsidy
- clean elections
- limiting budget deficit of the national government
Study of the Financial System
The financial system performs a very vital role in our economy and society. It affects every man, every
family, every businessman, and the government. Since the financial system concerns every one – especially
students of finance – there is a good reason to know and understand its scope, policies, and operations.
Whether you are pursuing a career in economics, finance, or management, your knowledge of the financial
system is definitely an advantage as future professionals.
However, the study of the Philippine financial system does not purely concentrate on financial
institutions. The financial system operates in an environment where political, economic, and social conditions
affect its performance. For instance, it cannot isolate itself from the extreme poverty of the masses. Likewise,
the World Bank (WB), the International Monetary Fund (IMF) and the Asian Development Bank (ADB),
together with the transnational banks, have great influence on the operations of the Philippine financial
system. This, too, should be given serious study whether our own financial system is run by Filipinos or by
foreigners.
The national government, especially the Bangko Sentral ng Pilipinas, supervises and regulates the
financial system. It has the great task of mobilizing and directing the resources of the financial system towards
the social and economic growth of our country. Improving the quality of life of the masses should be the
paramount program of the government. And the financial system is in the best position to pursue such social
program. However, it can undertake said program with more sincerity and dedication if the financial system is
imbued with a deep sense of social responsibility.
In finance courses, commercial banking is treated separately from the study of other financial
institutions. Commercial banks differ much from the other financial institutions. These banks hold demand
deposits which are Such very subject to transfer by checks. This enables the commercial banking system to
create or destroy money. important feature may lead to either inflation or deflation and either full
employment or underemployment. Because of their great impact on the economy, commercial banks are
subject to monetary policies. On the other hand, the other financial institutions do not have the ability to
create money. But they do also serve the interests and needs of individuals, corporations, the government,
and the whole economy.
Although this book is mainly about the other financial institutions, a comprehensive information on
ordinary and expanded commercial banking is presented for comparative notes and for acquiring a complete
view of the whole financial system. In addition, the operations of the WB, the IMF, the ADB, and the
transnational banks shall also be discussed – a subject that students of finance must learn.

ADDITIONAL INFORMATION:
Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money
people leave in an institution with the understanding that they can get it back at any time or at an agreed-
upon future time. A loan is money let out to a borrower to be generally paid back with interest. This action of
taking deposits and making loans is called financial intermediation. A bank's business, however, does not end
there.
Examples of Banks in the Philippines
 BPI
 BDO
  RCBC - Rizal Commercial Banking Corporation
 Land Bank
 Philippine National Bank
 Union Bank
 Metro Bank

The World Bank promotes long-term economic development and poverty reduction by providing technical
and financial support to help countries implement reforms or projects, such as building schools, providing
water and electricity, fighting disease, and protecting the environment.
The International Monetary Fund (IMF) is an organization of 190 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world.
Asian Development Bank provides loans, grants and technical assistance to its developing member countries,
to the private sector and through public-private partnerships to support the building and maintenance of
infrastructure. The majority is in water, energy, transport, urban development, and information and
communications technology.
The primary objective of the Bangko Sentral ng Pilipinas is to maintain price stability conducive to a balanced
and sustainable growth of the economy and employment. It shall also promote and maintain monetary
stability and the convertibility of the peso.
Examples of Private Banks in the Philippines
 Bank of the Philippine Island
 Philippine National Bank
 Land Bank of the Philippines
 Union Bank of the Philippines
 BDO Unibank Inc.
 China Bank
 Development Bank of the Philippines

QUESTIONS IN RECITATION
1. What is financial system?
 The financial system is a network of various institutions. which generates, circulates, and controls
money and credit. However, the financial system does not only include banks, credit unions or
pawnshops but also other financial institutions like money markets, investment houses, financing
companies, securities dealers, among others.
2. What is financial claims?
 Financial claims comprise the money and the rights to receive money under specific circumstances.
Usually, these are evidenced by financial instruments which specify the terms of the claims. There are
two broad categories of claims: debts and equities.
3. What is financial markets?
 Financial markets are institutions which expedite transactions in financial claims. Examples are the
Manila Stock Exchange and other organizations dealing with money market operations.
4. What is monetary board?
 Monetary Board is the policy-making body of the Bangko Sentral ng Pilipinas. Laws on money, credit,
and banking are legislated by the Congress and through executive orders issued by the President of the
Philippines.
5. What is the important goal of the Bangko Sentral ng Pilipinas?
 The primary objective of the Bangko Sentral ng Pilipinas is to maintain price stability conducive to a
balanced and sustainable growth of the economy and employment. It shall also promote and maintain
monetary stability and the convertibility of the peso.
6. Why laws and policies have been formulated?
 Laws and policies have been formulated to ensure the desired levels of investment, employment,
production, income, and consumption.
7. Why is financial market serves as a means of bringing the forces of demand and supply?
 Financial markets serve as a means of bringing the forces of demand and supply together because they
provide a platform where buyers (demand) and sellers (supply) can meet to trade various financial
assets.
8. What is the general functions of financial institution?
 The general function of financial institutions is to efficiently allocate and manage financial resources in
the economy. They accomplish this by providing a wide range of financial services, including accepting
deposits, extending credit, facilitating payments, managing investments, and offering risk management
solutions, all of which help promote economic growth, stability, and financial well-being.
9. In what way investigation and credit analysis necessary by Bank to loan applicant?
  Investigation and credit analysis necessary by Bank to loan applicant to ensure that the funds will be
used efficiently by the borrower, and to protect the interests of both the lender and the financial
institution.
10. What is transnational banks?
 Transnational banks are international financial institutions which operate in many countries all over
the world. They specialize in international finance, and their clients are primarily the multinational
corporations, governments, big companies, and wealthy individuals in the developing countries
11. What is International Monetary Fund?
 International Monetary Fund is an organization of 190 countries, working to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world.
12. What is Broker?
 A broker is a financial intermediary who facilitates the buying and selling of various financial assets or
securities on behalf of clients, such as individual investors or institutions. Brokers can work in various
financial markets, including stocks, bonds, commodities, and real estate, and they earn commissions or
fees for executing transactions.
13. What is World Bank?
 The World Bank promotes long-term economic development and poverty reduction by providing
technical and financial support to help countries implement reforms or projects, such as building
schools, providing water and electricity, fighting disease, and protecting the environment.
14. Who are the parties in the financial markets?
 The key parties in financial markets are investors, who provide capital by purchasing financial assets;
borrowers, who raise funds by issuing financial instruments; and intermediaries, such as banks and
investment firms, that facilitate transactions and provide financial services. These parties collectively
drive the functioning and liquidity of financial markets, influencing investment decisions, capital
allocation, and economic growth. Regulatory authorities also play a crucial role in overseeing market
activities and ensuring fairness and transparency.
15. What is Government Financial Institution?
 A government financial institution is a specialized financial entity owned or controlled by a
government, typically at the federal or state level. Its primary purpose is to provide financial services,
funding, or support for various government programs, projects, and initiatives, including infrastructure
development, housing, small business lending, and agricultural subsidies.
16. What is Private Financial Institution?
 A private financial institution is a non-governmental financial organization owned and operated by
individuals, shareholders, or non-government entities, providing various financial services and products
to clients in exchange for fees, interest, or commissions.
17. What is Liquidity?
 Liquidity refers to the availability of cash or easily convertible assets to meet short-term financial
obligations and demands, ensuring that the institution can fulfill customer withdrawals, pay its own
liabilities, and maintain financial stability.
18. Why resources become tools of production?
 Resources became tools of production because they are essential inputs that are transformed or
combined to create goods and services in the production process. These resources are harnessed and
utilized to generate economic value, drive industrial and technological progress, and meet the needs
and wants of society.
20. In what way financial institutions perform brokerage function?
 Financial institutions perform brokerage functions by acting as intermediaries between buyers and
sellers in financial markets. They facilitate the buying and selling of various financial assets, such as
stocks, bonds, and derivatives, on behalf of their clients. This involves executing orders, providing
market information, and offering advisory services to help clients make informed investment decisions.
21. Why is financial market serves as a means of bringing the forces of demand and supply?
 Financial markets serve as a means of bringing the forces of demand and supply together because they
provide a platform where buyers (demand) and sellers (supply) can meet to trade various financial
assets. Prices in these markets adjust based on the interaction of supply and demand, reflecting market
participants' collective views on the value of these assets and enabling efficient allocation of capital.
22. What is Financial Intermediaries?
 Institutions which deal with the creation and issuance of claims against themselves, and use the
proceeds to acquire and hold claims against others.
23. What is matching supply and demand for funds?
 Matching demand and supply for fund bring the lenders and borrowers together. They provide
conveniently located offices to make things available and economical for both parties.
 CHAPTER 2: CENTRAL BANK OF THE PHILIPPINES
The Bangko Sentral ng Pilipinas is the central monetary authority. It is primarily responsible in
implementing and administering the policies formulated by the Monetary Board. It regulates the flow of
money and credit into the whole economy in order to attain monetary stability and sustainable economic
growth. Through its various monetary instruments, the BS can fashion a desirable level of prices,
investments, productions, incomes, and consumptions.
The Bangko Sentral supervises the banking institutions and regulates many non-bank financial
institutions. Cooperatives are under the supervision of the Cooperative Development Authority, office of the
President.
Meanwhile, private insurance companies are supervised by the Insurance Commission. However,
they are required to submit reports to the BS so that it can determine the influence of the insurance
companies on the monetary, credit, and exchange conditions of the country.
On the other hand, the Securities and Exchange Commission has the power to supervise and regulate
the operations of other financial institutions such as investment houses, investment companies, financing
companies, securities dealers and brokers, and lending investors.
The various financial institutions are directly involved in money, credit, and banking. This enables them
to become significant in the economic and social development of our country. These institutions, thus need
the supervision and regulation of the various financial institutions by the Central Bank.
This chapter provides basic general information on central banking — history, objectives, functions,
instruments and its role in the national economy.
The Development of Central Banking
The development and growth of central banking has been a gradual and slow process. The oldest
central banks emerged in Europe because of the great need to protect the interests of the bankers and to
improve monetary and financial. conditions. The first central banks were privately owned and were generally
known as banks of issue or national banks. Later, they gradually acquired the functions of central banking
since the State granted them the sole right of note issue and the authority to act as agent and banker of the
government.
The oldest central bank is the Riksbank of Sweden (1656). However, the Bank of England (1694) is
considered as the first central bank because it developed the fundamentals of central banking. It has also
become the model of central banking for other countries. In Europe, central banks were organized in
countries such as France (1800), Netherlands (1814), and Norway (1816). Other European countries organized
their central banks at the closing of the 19th century. On the other hand, Russia founded its central bank in
1860. while Japan organized its Bank of Japan in 1882. However. at the start of the twentieth century, the
countries of the New World, and some parts of the Old World, like China and India, were still without central
banks. The United States organized its central banking system (composed of twelve Federal Reserve Banks) in
1914. Such system is coordinated by the Federal Reserve Board at Washington.
In Southeast Asia, the Bank of Thailand was established in 1942, the Bank of Indonesia in 1953, and
the Central Bank of Malaysia in 1958. In the Philippines, its central bank had been created by law in 1948
but started its operations in 1949.
The Central Bank of the Philippines
The concept of a central bank was developed in 1933 by Miguel Cuaderno, the first governor of the
Central Bank of the Philippines. For thirteen years he conducted a research on the various central banks of
many countries. However, it was only in 1946 that a formal preparation for the establishment of a central
bank began upon instruction of President Manuel Roxas. Cuaderno had been assigned the task and
eventually chose the charter of the Central Bank of Guatemala as the model for our Central Bank because of
its similar economic and social conditions.
The Monetary Board is the policy making body of the Bangko Sentral ng Pilipinag. It is composed of
seven members who are appointed by the President of the Philippines. The chairman is the Governor of the
Bangko Sentral ng Pilipinas who serves a six-year term. The five other members come from the private
sector.
Prior to the change in the membership of the Monetary Board in 1972, the Minister of Finance was
the chairman of the Monetary Board. The members were the president of the Philippine National Bank
(PNB), the chairman of the Development Bank of the Philippines (DBP), the governor of the Central Bank,
and three other persons from the private sector. The change, however, was proposed (I) to emphasize the
important role of the monetary functions; (2) to stress the need for more efficient coordination of the
planning and private investment function with the regulation of the financial and monetary system; and (3)
to eliminate the possible conflict of interests of the PNB and DBP which are regulated by the Central Bank,
being members of the Monetary Board. However, in 1080 amendments to the membership of the Monetary
Board, a provision stated that the President of the Philippines can replace the heads of NEDA and BOI with
any heads of nay other financial or economic agency.
The New Central Bank Act took effect on June 14, 1993. It established an independent Central
Monetary Authority which is known as the Bangko Sentral ng Pilipinag. The capital of the Bangko Sentral is
P50 billion. Five of the seven members of the Monetary Board come from the private sector. This reflects
the thrust of the Ramos government in assigning the private business sector as the engine of economic
growth. In contrast, the 1972 CB Act amendment gave only two seats in the Monetary Board to the private
sector.
Objectives of the Bangko Sentral
The Bangko Sentral is responsible for administering the monetary, banking, and credit system of the
country. It has been given' the task of attaining the following principal objectives:
1. The primary objective is to maintain price stability conducive to a balanced and sustainable growth
of the economy.
2. It shall also promote and maintain monetary stability and the convertibility of the peso.
To achieve the primary goal of the Bangko Sentral, there is a great need for a close and efficient
coordination and cooperation between monetary and fiscal policies and practices. For example, the
monetary and financial programs of the BS are useless if the national government does not properly use its
funds. Moreover. the attainment of monetary stability and economic growth is not only the responsibility of
the government but also of the private sector, especially the business community. Hence, both are partners
in nation-building.
The internal factors which hamper the achievement of the principal objectives of the Bangko Sentral
are (1) wrong economic planning, (2) improper implementation, (3) unfavorable policies, and (4) lack of
coordination between the BS and the national government in matters of policies. There are also external
factors which can destroy our monetary stability and economic growth. Like recessions in the developed
countries which have adverse effects on our balance of payments position. Clearly, the demand for our
export products by the developed countries decreases; consequently, our export earnings go down. Another
external factor is the increase in the price of oil. Since we import a great quantity of oil for our industries, an
increase in the oil price will automatically increase the cost of production. Therefore, the price of goods and
services increases.
Functions of a Central Bank
1. It is a bank of issue. A central bank has a complete monopoly of note issue, although there are still very
few central banks which do not enjoy such privilege, The main reasons for granting the central bank the sole
power to issue notes are: (1) to ensure uniformity in money, (2) to effect government supervision over
money supply, (3) to give prestige on the central bank, and (4) to become a good source of profit for the
government Our own BS prints money for our use. However, caution must be observed as overprinting can
lead to inflation.
2. It is the government's banker, agent and adviser. As a government's banker, the central bank conducts
the banking accounts of government agencies and instrumentalities. It provides foreign exchange to the
government for the importation of goods and services, and for payment of foreign loans. In case foreign
exchange (like dollars) is not available in the country, the central bank has to borrow from international
financial institutions such as the World Bank and the International Monetary Fund.
As agent f the government, the BS performs a variety of financial services for the former. The Central bank
lends money to the government, buys and sell securities, administer and manages national debts and acts as
the government's agent when there is exchange control. And as financial adviser to the government, the
central bank informs the top officials of the government, like the President and the finance minister, about the
monetary and financial conditions of the country.
3. It is the custodian of the cash reserves of banks. This is the legal reserve requirement imposed on the
deposit liabilities of banks. They are required to deposit at the central bank a certain percentage of their bank
deposits as a means of controlling money supply. When there is oversupply of money which creates inflation,
the legal reserve requirement is higher. In the Philippines, for instance, to cut down liquidity or too much
money in circulation, the legal reserve requirement has been raised to 24%. This means that for every one
peso of their deposits, they can only lend 76 centavos. Bank officials are not happy about this monetary policy
because their cash reserves at the Bangko Sentral earn only 3% interest. Their millions of pesos can earn more
if these are loaned out to investors or businessmen. But the national interest takes the first priority. Such cash
reserves, aside from regulating money supply, can be utilized during periods of financial crises.
4. It is the custodian of the nation's reserves of international currency. During the early years of central
banking, a central bank was required by law to maintain minimum reserves of international currency against
its note issue and deposit liabilities (cash reserves of commercial banks). When many countries were under
the gold monetary standard (until 1914), a central bank had to keep sufficient gold to be able to pay its notes
(paper money) which would be presented for payment. This means the money in circulation was supported by
an equivalent amount of gold. At present, international reserves refer to gold and foreign exchange. In the
Philippines, the acceptable foreign exchange are the US dollars, the Swiss francs, the Japanese yen, the
German mark, and the British pound.
The purposes of keeping gold and foreign exchange are to meet problems in balance of payments and to
maintain the external value of the local currency. Evidently, a central bank which can meet its local and
international payments can create confidence in the local money both at home and abroad.
5. It is a bank of rediscount and lender of last resort. The central bank's function as a lender of last resort
came from the rediscounting function. The BS has the duty to assist banks in distress. However, it lends funds
to other banks only if they have exhausted all other available sources and methods of solving their financial
problems. This function is associated with rediscounting in which the central bank lends money to the banks in
distress on the basis of their promissory notes or those of the borrowers (loan applicants). The central bank
charges interest on its loans to the banks. This is called rediscounting because the documents of indebtedness
of loan applicants which are presented to the central bank are promissory notes that were discounted by the
bank when it granted the loans to the applicants.
6. It is a bank of central clearance and settlement. Settlements among banks is easier and more convenient if
these are performed by a central bank. Various banks have paid cash to many checks owned by other banks.
To obtain payments, the banks just send their representatives to the Clearing House at the central bank where
claims are demanded against one another. The banks have their individual boxes at the Clearing House. All
checks placed in the boxes are payables to the banks which cashed them. For example, the representative of
bank B has the check of bank A. He has to place the check of bank A in the box of bank A. This means bank B
demands payment from bank A. Through the process of bookkeeping (debit and credit) bank's claims against
one another are settled. The deposit reserves maintained by the banks at the Bangko Sentral serve as the basis
for the clearing of checks and the settlement of interbank balances.
However, in the case of checks issued and cashed by banks within Metro Manila, clearing of cheeks is
conducted by the Philippine Clearing House Corporation. This is a private firm conducting its operations on the
ground floor of the Bangko Sentral building in Manila. The processing, sorting, and clearing of checks are done
by computers. The clearing of checks however, between provincial banks and Metro Manila banks is done
manually. Checks are placed at the boxes of banks at the Manila Clearing/Regional Clearing Unit of the Bangko
Sentral. In Cebu, Davao, and Bacolod Clearing Units, the banks pick up "On Region" checks at 9:00 A.M. and
deliver "On Manila" checks. In Manila, banks deliver "On Region" checks at 4:00 P.M.
7. It controls credit. The central bank has to control credit in order to regulate money supply at an acceptable
level. More money supply in relation to production of goods means high prices. On the other hand, when
prices are low, producers are not encouraged to produce more. This is the law of supply. However, if low
prices are the results of market competition and technology, then the economic situation is favorable.
The Bangko Sentral can control credit by (1) increasing or decreasing interest rates, (2) increasing or
decreasing the legal reserves requirement, (3) regulating the margin requirements of stock exchange
securities, (4) rationing central bank credit or imposing ceilings on total bank lendings, (5) buying or selling
government bonds (open market operations), (6) restricting imports, (7) selecting projects for funding, and (8)
persuading all parties concerned to support and cooperate with the monetary policies (moral suasion).
Monetary Policies
As stated earlier, the Monetary Board of the Bangko Sentral ng Pilipinas is in charge in the formulation
of monetary policies. As a rule, policies must be flexible, widely acceptable, reasonable, and consistent with
the objectives to be attained.
The most important element of a good monetary policy is its sincere and deep concern for the welfare
of the people. In this connection, the Philippine government has been stressing that its main program is to
improve the quality of life of the people. Dr. Placido Mapa, Jr., former PNB President, said:
Man has always been the focus of all development efforts. Hence, the ultimate goal of all development
activities is to improve the people's quality of life... this goal can only be achieved by pursuing national
development policies for various regions, through which the government hopes to redress income disparities
caused by growth imbalances.
Limitations of Monetary Policies
Monetary policy, as defined by Prof. James Boughton, is the process whereby the monetary authority
attempts to achieve a desired set of economic goals by controlling either the money supply, the cost and
availability of credit or the allocation of credit to its various uses. Such policy becomes effective if the policies
of the national government on expenditures, taxation, and borrowings are consistent with those of the
Monetary Board of the Bangko Sentral. If the monetary policy is a tight credit policy in order to reduce
inflation, the national government should then be rational in its expenditures. However, most top politicians in
several countries are more concerned with political considerations rather than economic implications. They
have to put up vote-getting projects to ensure their reelection. In the Philippines, money supply increases
during election time.
Another shortcoming monetary policies takes place during prolonged depressions such as a period of
widespread unemployment due to very low production. This reduced level of production results from a lesser
demand for goods due to very low income. Under such circumstances, even if financial institutions would offer
the lowest possible interest rate to investors or businessmen, still they would not borrow because the most
probable return of investment (profit) would be even lesser than the interest rate. Therefore, lowering
interest rate as a monetary policy for stimulating business is not effective.
In addition, those who formulate monetary policies are human beings. They have their individual
weaknesses like value judgement, vested interest. and cultural inclinations such as pakikisama, and utang na
loob. All these would possibly affect their decisions. It is thus impossible for them to remain independent from
the top politicians who were responsible for their appointment.
Another observation on our monetary policies is that these are dictated by the IMF. Due to our huge
foreign debts of more than $35 billion, we comply with the requirements of the IMF everytime we request for
more additional loans. For example, our monetary authority introduced several reforms and changed not a
few policies in our Philippine financial system. Such policies may be referred to those concerning universal
banking, operations or transnational banks, devaluation and increase of legal reserves requirement. All these
are recommendations of the IMF. Unfortunately, the countries which have been heavily indebted to IMF have
become even poorer by implementing the requirements of IMF. In fact, a central bank governor in Brazil
resigned because he could not accept IMF policies for his country.
BS Supervises the Banking Institutions:
- Universal banks/expanded commercial banks
- Ordinary commercial banks
- Savings and mortgage banks
- Private development banks
- Stock savings and loan associations
- Rural banks
- Government banks, such as PNB, DBP, LBP and Philippine Amanah Bank
BS Regulates the Non-Bank Financial Institutions:
- Investment houses
- Investment companies
- Financing companies
- Securities dealers and brokers
- Non-Stock savings and loan associations
- Lending investors
- Pawnshops
- Building and loan associations
- Fund managers for retirement, provident and pension funds.
Supervision and Regulation Distinguished
Supervision includes not only the issuance of rules and regulations but also the overseeing of
operations of a financial institution to ascertain that such rules and regulations are complied with. It also
includes examination and investigation to determine whether the institution is conducting its business in a
sound financial basis, that is, whether the institution is liquid and solvent.
Supervision is broader in scope and character than regulation, because the former seeks to look into
the details of operations, activities, and performance of a particular financial institution as they affect private
and public interests. Supervision also intends to determine the soundness of operations and the ability of the
financial institution to meet its obligations to creditors upon proper demand when due.
On the other hand, regulation refers to the issuance of rules of conduct or the establishment of modes
or standards of operation for uniform application to all financial institutions or functions covered. In
determining such coverage, the distinctive character of the operations of financial institutions and the
substantive similarities of specific functions to which such rules, modes or standards are to be applied are
taken into consideration.
Regulation is basically undertaken through the review and analysis of reports submitted by a financial
institution to a government agency concerned. Upon receipt of the reports, an employee of the government
office concerned looks into their contents, and if such reports are financial statements, the employee checks
the mathematical accuracy and determines the changes for him to ascertain the cause or causes of such
changes. The checking process also seeks to determine the compliance of the financial institution with existing
rules and regulations being enforced by the government agency concerned. If the regulating office visits the
financial institution, it is to get reports which the former may not have received or to seek some explanations
on certain matters not clear to regulating government agency. To save time and unnecessary expenses, the
regulating agency writes the financial institution concerned about certain matters which may be useful in
improving the manner by which regulation can be undertaken more effectively.
Types of Examination
The Bangko Sentral utilizes three types of examination in supervising the banking institutions;
General or regular examination. This is undertaken once a year. Such examination covers the
verification of assets, liabilities and capital accounts to determine the stability and solvency of the financial
institution. It also reviews incomes and expenses to determine the profitability of operations and the probable
return (profit) that stockholders would expect from their investments.
Special or interim examination. This is conducted as often as necessary. It includes a review of a
special account or groups of accounts such as loans or deposits. Such examination is usually of short duration
since the purpose is limited to a specific area of activity or operation. It follows up findings in a previous
examination to determine whether the institution has implemented the recommendations of the Bangko
Sentral or whether the errors have been corrected as suggested by the examiners.
 Special investigation. Although this is not an examination, the procedure sometimes involves some
steps of what are being done in regular and special examinations. Such investigation is conducted when a
complaint is received by the Bangko Sentral from a borrower, a depositor, a stockholder, or an employee, or
even from anybody regarding the operation of a financial institution. If proven guilty, a positive action or
remedial measure is made to correct an erroneous or illegal practice of the institution, its officers or
employees.
Benefits of Bank Supervision
The supervision of the banking system by the Bangko Sentral is intended to protect public interests as
well as the banking system. The benefits of bank supervision to the public must surpass the cost of controls.
The principal benefits of bank controls are:
1. Prevention of over-expansion or under-expansion of money and credit through a system-wide
monopoly or through excessive competition
2. Elimination of local monopoly
3. Protection of depositors against the consequences of bank failures
Purposes of Supervision and Regulation
Supervision and regulation of financial institution are being undertaken by the government for the
following purposes:
1. To ensure full compliance with laws, rules, and regulations affecting the operations and activities of
financial institutions.
2. To ensure that the financial institutions being supervised and regulated are operating on a sound
financial basis (that is, they are solvent and stable). so that their stockholders are assured of a fair
return on their capital investments.
3. To act as guardian of depositors and money market investors to ensure that they get not only the
interests but also their deposits and placements.
4. To protect the interest of the government's investments.
5. To protect the interest of other creditors of financial institutions.
6. To ensure the stability, solvency, and safety of our financial system towards the economic
development of urban and rural areas.
The Effectiveness of Supervision and Regulation
The supervisory and regulatory agencies of the government, like the Bangko Sentral, Securities and
Exchange Commission (SEC), and other offices, are putting into gear time and effort in order to ensure the
effectiveness of supervision and regulation of financial institutions on a continuing basis.
In the past, the BS did not hesitate to place under close supervision or controllership banks which have
committed, even at the slightest indication, mismanagement and fraud in their operations. The reason for
such strict supervision is mainly to protect the interests of the depositors and stockholders. When a bank is
under close supervision or controllership, as the case may be, the Bangko Sentral suspends its financial
privileges. Some of its activities are restricted like the granting of loans for certain purposes and the
declaration of dividends until its operations shall have improved or the errors have been corrected. When a
bank becomes insolvent (obligations are bigger than assets), it is closed by the BS and placed under
receivership or liquidation. As additional action, a bank under close supervision, controllership, or receivership
is under prosecution. The Bangko Sentral files cases against the directors, officers and/or employees who are
responsible for mismanagement and frauds.
In the case of financing companies under the supervision and regulation of the Securities and Exchange
Commission, the latter issues cease and desist order which, in effect, stops the lending operation of the
financial institution concerned. Its operation shall resume if it has improved or its errors shall have been
corrected. Like the Bangko Sentral. the SEC has also the power to place a financial institution under
receivership as a means of protecting the interest of creditors and stockholders.
At present, figures and data on the financial conditions and results of operations of financial
institutions are being monitored on a regular and systematic basis to the supervisory and regulatory agencies
of the government. These are evaluated and they form the basis of formulating policies, rules, and regulations
in improving the quality of supervision and regulation of financial institutions in our country.
Philippines 2000
The Philippines 2000 has become the central program of the Ramos government. President Fidel
Ramos has envisioned the Philippines — by the year 2000 — to attain its newly industrialized country-status.
By that year, the President believes that most Pilipinos will have decent and dignified existence.
TO realize such vision, the Ramos government has formulated twin goals: global excellence, and people
empowerment. In this connection, the following growth strategies have been adopted:
- commitment to a planned free market economy;
- giving the people a stake in development;
- industrializing from a base of agricultural productivity;
- encouraging a high saving rate;
- developing an educated work force;
- fostering export industries; and
 - building a solid structure.
The Philippines 2000, just like any other grandiose government programs, depends on several factors,
such as the determination and sincerity of the government, attitudes and values of the people, and availability
of financial resources. It is a common knowledge that most government programs have remained "paper
programs."

Bangko Sentral ng Pilipinas and the Philippines 2000

The New Central Bank Act declares as a policy that the State shall maintain a central monetary
authority that shall function and operate as an independent and accountable body corporate in the discharge
of its mandated responsibilities in the areas of money, credit and banking. Such central monetary authority
shall enjoy fiscal and administrative independence. The name of the aforementioned central monetary
authority is Bangko Sentral ng Pilipinas.
The Bangko Sentra! has been capitalized by P50 billion. With such huge capital based, the Bangko
Sentral is expected to perform efficiently its responsibility and attain its primary objective. The New Central
Bank Act provides that the Bangko Sentral shall provide policy directions in the areas of money, credit and
banking. It shall have supervision over the operations of banks and exercise such regulatory powers over the
operations of finance companies and non-bank financial institutions performing quasi-banking functions, and
other institutions performing similar functions.
The New Central Bank Act also states that the primary objective of the Bangko Sentral is to maintain
price stability conducive to a balanced and sustainable growth of the economy. It shall also promote and
maintain monetary stability and the convertibility of the peso. Compared with the objectives of the Central
Bank of the Philippines in 1948 and 1972, there is no fundamental difference. Except that in the present
objectives, the focus is on price stability.
In a farewell speech, Central Bank Governor Jose Cuisia, Jr. said:
The new CMA promised to be an organization that is more effective in its primary role of curbing
inflation by virtue of its strengthened financial position and capital base and the institutionalization of its
policy of independence. It will also be equipped with new legal tools to enable it to act expeditiously and thus
more effectively discharge its bank supervisory role.
The fuel of economic growth
The emphasis of the government is the major role of the private sector as the engine of economic
growth. Such people empowerment is one of the twin goals in achieving the vision of Philippines 2000.
Evidently, money becomes the fuel of economic growth. The government has numerous good economic and
social projects. However, lack of funds has prevented their implementation. Most people, particularly the
poor, have been dreaming of good micro business projects as sources of incomes. Likewise, lack of funds has
frustrated their dreams. Such unfortunate situation hampered the growth of our economy and the economic
emancipation of the poor.
With the proper sourcing and wise management of funds, the Bangko Sentral can transform a stagnant
economy into a dynamic and progressive one. Thus poverty is eradicated. This is one of the targets of the
present government. Of course, this is easier said than done considering our record in economic growth. In
1960, Japan had a per capita income of $300. Ours was close to it, being No. 2 in Asia. Now, the per capita
income of Japan is $24,000 while we are only more than $700. Still we are No. 2 — from below. For the last 20
years our economy has remained practically stagnant. Our neighboring countries have surpassed our
economic growth.
If only the credit facilities of the Bangko Sentral could be made accessible to the poor masses, life for
them would be much better. With seed capital coming from the government, the poor could put up their
micro businesses. Hence, they would become entrepreneurs. They would create jobs, incomes and goods.
Such situation would accelerate economic development. When most of the people have more incomes, they
buy more goods and services. This increases further the production of goods and services. Again, more jobs
and incomes are generated. Therefore, the vision of President Ramos to provide most people a decent
maximum of food, clothing, shelter and dignity by the year 2000 will become a reality.
If only the Bangko Sentral could accomplish its primary objective of maintaining price stability
conducive to a balanced and sustainable growth of the economy, it would be already a strong stepping stone
towards higher stages of economic growth. Inflation is a formidable enemy of the low-income groups. It
destroys their weak purchasing power. Their ability to buy even their most basic needs is greatly reduced. And
this creates a chain of social problems which affect the economy.
CB Reorganization
To enhance the efficiency of the new Bangko Sentral, the Central Bank has been restructured.
Redundant positions were abolished. Six operational sectors were merged into three. Several operating
departments were merged. Hierarchical levels of authority across all departments were reduced from five to
three.
In addition, a greater number of the organizational functions have been computerized. In this
connection, computer facilities were upgraded. The restructuring of the Central Bank has greatly reduced cost
of operations. Thus, the Central Bank has gained a net income of P37 billion in the three-year period 1990-
1992, in contrast to only P8 billion the 1987-89 period.
Clearly, many Central Bank personnel were adversely affected by the reorganization of the Central
Bank. As a matter of fact, 1,308 plantilla positions were abolished. However, a Separation Incentive Plan (SIP)
has been implemented for the interest of those who were affected. Not a few applied for early retirement.