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BACKGROUND OF THE STUDY

Under the rural banking system in the Philippines, the rural banks have important functions in the

country's economic development. When Republic Act 720 was enacted in June 1952 which is the enabling law

in the establishment of the rural banking system, this was just seven years after the end of World War II, and it

was envisioned that the rural banks were to provide the credits that the farmers and small businessmen in the

rural community, where credit facilities have been inadequate. These were to be government

sponsored/assisted privately owned and managed banks. In view of the importance of rural banking in rural

and agricultural development, central government banks granted incentives to organizers of rural banks. Such

incentives include tax exemptions and nominal interest rates. These incentives are intended to encourage the

formation of more rural banks in the areas where credit facilities have been inadequate. It has been noted that

with the absence of banks in these areas the poor consumers and small producers have been forced to

patronize the unlicensed money lenders who are mostly usurers.

From 18 rural banks in 1953, there were more than 700 by 2010. From 2011, the number of rural

banks started to decline and no new ones were being organized. Some upgraded to become thrift banks and

some were merged or absorbed by other banks. More however closed or were closed by the BSP.

The rural bank, upon prior approval of the Monetary Board, performs any or all of the following services:

1.Open current, demand or checking accounts or Now accounts

2.Act as trustee over estates or properties of farmers and merchants.

3. Acts as official depository of municipal, city or provincial funds in the municipality, city or province where the

bank is located.

4. Rediscount paper with the Philippine National Bank or the Development Bank of the Philippines, or other

banks and their branches and agencies, subject to such rules and regulations governing rediscounting.

5. Invest in allied undertakings.

The rural bank shall have a paid-up capital of not less than P500,000, the initial amount of P300,000 to be put

up at the start of operations and remaining P200,000 to be paid within a period of three years from the start of
operation. The authorized capital of the rural bank shall not be less than P1Million and shall be divided into

common and preferred stock, both with par value of from P10 to P100 per share.

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