UNIVERSITY OF THE EAST Caloocan Campus Department of Finance, Economics and Business Mathematics SUBJECT: FM111/FIN101 INSTRUCTOR: Annie

Lee G. De Belen, MBA

PRESCRIBED TEXT BOOK: 1. Rosemarie B. Laman. (2008). Financial System: Market and Management. Manila, Philippines REFERRENCE: 1. Rosemarie B. Laman and Vincent Patrick B. Laman.(2005). MONEY, CREDIT and BANKING-The Basics. Latest Edition 2. Stephen A. Ross. (2008). Essentials of Corporate Finance 6th Edition. McGraw-Hills. USA _________________________________________________________________________________________________

MONEY, ITS EVOLUTION & SIGNIFICANCE

BARTER SYSTEM was the first stage of monetary development. It is the direct exchange or swapping of goods for goods, services for services, goods for services or services for goods . Society abandoned the BARTER SYSTEM for the ff. reasons: 1. It was difficult to look for the person who has things you need and who also wants the things you are offering for exchange. 2. There is no common denominator to measure the value of goods and services sought for exchange. 3. Most of the goods traded have unequal values. 4. It is time consuming, cumbersome and very inconvenient for individuals to use the barter system. 5. It lacks generalized purchasing power. Because of the above difficulties of the BARTER SYSTEM, society had to look for another system of PAYMENT. Man had to invent a medium by w/c all goods and services can be exchanged, so they came up with the use of MONEY. MONEY is anything used by society as a medium of exchange, and is widely accept able for the payment of goods and services w/o questioning the integrity of the person offering it. In the Philippines, MONEY SUPPLY consists of DEPOSIT MONEY, w/c is withdrawable by means of CHECKS and CURRENCY, w/c consist of NOTES & COINS. The primary function of money is to facilitate the process of exchange. Exchange of course, could take place w/o money, but it would be very complicated. In primitive societies, direct bartering of goods for goods is common, but there are difficulties.

COMPOSITION OF MONEY SUPPLY: 1.Coins 2. Central Bank Notes 3. Bank Money

LEGAL TENDER money that is authorized by the law to be accepted as payments for debts both in private and public.

EVOLUTION OF MONEY
The GOLDSMITHS were instrumental to the evolution of money. Hundreds of years ago, the goldsmiths helped developed the use of money by accepting GOLD BULLIONS to be converted into COINS. They also accepted GOLD DEPOSITS for SAFE KEEPING, w/c were returned in another precious METAL of the same weight and fineness. MINTING OF COINS When GOLD BULLIONS were converted into COINS, coins were considered the first type of modern money. They were not in standard form, that is why each transaction required weighing & testing for its quality. Today, the sole power of issuing NOTES & COINS lay on the government of a country. In the Philippines, we have our SECURITY MINT w/c is managed by the BANGKO SENTRAL NG PILIPINAS, that MINTS & PRINTS our NOTES and COINS.

FUNCTIONS OF MONEY 1. As a medium of exchange money enables goods/services to be transferred from person to person. It is a way of exchange or a means of exchange. 2. As a standard to measure the value of goods/services money measures the value of goods/services. It is used as a yardstick in the pricing of things. The monetary unit of the country is used as a standard of value. 3. As a store of value money can be kept for future use. Since money is widely acceptable, it enjoys a generalized purchasing power and can serve as a store of value. Such holder of the money can hold on to it and spend it only when he/she desires to. The magnitude of the cost of converting as asset into money is an important concept known as LIQUIDITY. By liquidity, we mean the relative core of w/c an ASSET MAY BE CONVERTED INTO MONEY WITHOUT SIGNIFICANT INCONVENIENCE OR LOSS OF TIME. Money, w/c is ready to spend at a moments notice, is the ultimate in liquidity. Assets raging from TIME DEPOSITS, BONDS, T-BILLS to common stocks that involves interests, risks, transaction costs, etc. For these reason some people choose hold some portion of their wealth in CASH.

2 WAYS TO KEEP MONEY FOR FUTURE USE: (STORING VALUE) 1. By Saving ie- Bank Deposits 2. By Investing ie- Business Corporate or Government Securities(stocks or bonds) Money Market(short-term or long-term) Real Estate Properties Jewelries(gold/diamonds)

3 DIVISIONS OF INVESTMENT: 2.1 Industrial Business is concerned w/ the manufacture of goods(physical & chemical transformation of raw materials to finished products). Example - mining industry; oil industry; fishing industry 2.2 Commercial Business is concerned w/ the bridging the gap betn the producer and the ultimate consumer. It deals w/ the distribution of goods. Example deals of retailer wholesale trades; cargo dealing (shipping companies/freight trucks and planes) 2.3 Servicing Business is concerned w/ rendering services. Example Restaurants; Beauty Parlors; Salons; Hospitals; Banks; Schools etc. 4. As a means of deferred payment money enables people to buy goods on credit. Goods/services can be obtained at the present time in exchange for a promise to pay at a future date.(get now pay later)

ATTRIBUTES OF GOOD MONEY

1.General Acceptability good money should be acceptable to every specific territory. It refers to the willingness of people to accept the money in exchange for goods/services. 2. Stability of Value is characteristic is a prerequisite to general acceptability. Before a particular kind of money becomes acceptable, IT MUST FIRST HAVE A STABLE VALUE. The purchasing power of money should not change abruptly. 3. Portability money being easily carried from place to place. The materials used as money should conform to these characteristics. 4. Cognizability money circulating w/in a country can be easily distinguished from other kinds of money. A fake bill can be recognized from a genuine bill. 5. Divisibility the material used as money must be capable of being divided into smaller denominations w/o impairing or destroying the value of the whole. So, a 100 peso bill can buy exactly the same as what 5 pcs. Of 20peso bills can buy or what a 10peso bill can buy. 6. Elasticity refers to the volume of money being capable of manipulation by monetary authorities. Money supply can easily be increased/decreased depending upon the needs of our community. 7. Durability enables money to withstand wear and tear. The paper money used by almost all countries of the world is made of a special kind of paper, w/c has extra strength to withstand usage. 8. Homogenity(uniformity) the material used as money should not only be capable of being divided into equal parts or smaller units, but that such equal parts should have equal weight & fineness, and must be made of the same material and possess equal value. 9. Malleability money should easily be melted/shape into several forms desired.

KINDS OF MONEY
1.Commodity Money type of money that has a value of its own. In order for it to circulate, the commodity value should equal its money value. Example: Iron used in China; Lead in Burma; Salt & Corn used in North America 2.Credit Money is a credit instrument that is widely acceptable in payment for goods/services and in settlement of existing debts/obligations. 3 TYPES OF CREDIT MONEY 2.a-Representative Paper Money- backed up by 100% gold/silver reserves 2.b-Fiduciary Paper Money - backed up by partial gold/silver reserve 2.c- Bank Note-refers to the promise of a bank to pay the bearer/holder of the note a sum certain in standard money upon demand or upon presentation of note 3.Fiat Money a kind of paper money issued by a government edict or decree. It is most often issued during a war whereby the occupying country circulates a kind of paper money whose money vale has no relationship at all with its intrinsic value. 4. Legal Tender Money is a kind of money that circulates coz of its legal tender power. By legal tender we mean that the debtor is authorized by law to offer it in payment of his debt or of his existing obligation. FINENESS Is defined as the ratio of pure gold & silver to the total weight of the coin. MINT Is a place or factory where coins are manufactured or minted. It is usually operated by the government. ALLOY Combination of metal COINAGE It is the process of making uniform coins from metals and stamping them with a specific design as a guaranty of its weight & fineness and the integrity of the country it represents. COIN is the product of coinage. It is defined as a mass of metal cast in some convenient shape with a definite weight & fineness, w/c is guaranteed by the government and certified by the integrity of the design impressed upon its surface. OBJECTIVES OF COINAGE 1. To prevent counterfeiting 2. To prevent fraudulent removal of the metal from the coins 3. To reduce the loss by legitimate wear & tear

KINDS OF COINAGE 1. Gratuitous Coinage or Free Coinage is a system where by money metals may be brought to the government mint and converted into standard money w/o any charge or any expense for minting except for the delay involved in the process. 2. Brassage is a kind of coinage where the fee charge by the government mint for metals into coins is just sufficient to cover the cost of minting. 3. Seignorage is a kind of coinage where the fee charge by the government is more than the cost of minting ,so here, the government earns profit. 4. Limited Coinage is a system adopted by a country where by the government converts metals into coins, only at its option.

FORMS OF MONEY 1. Non-metallic Money (ie-stone/coins) 2. Metallic Money 3. Paper Money 4. Bank Money deposits in the bank in the forms of paper,metal etc. DETECTING COUNTERFEITED BILLS A. Notes 1. Paper 6. Background Design 2. Portrait 7. Color of each denomination 3. Watermark 8. Style/Size of serial number 4. Security Fiber 9. Vignette 5. Security Thread 10. Cleanness of print B. Coins 1. Even flow of metallic grains 2. High relief of letter & numerals 3. Regularity of readings & beadings

PRE-SPANISH REGIME Long before the coming of Spaniards in 1521, the Philippines was already having trade relations with Java, China, Siam and Macau. In exchange of commodities needed CARABAO w/c is our domestic animal were used as money to pay or buy such needs. SPANISH REGIME After the arrivals of the Spaniards in 1521, trade was conducted by using irregular shaped coins, hammered in Mexico. The silver coins HILIS KALAMAY were popularly used w/c bore seals of Spanish rulers Charles II, Philip IV and Philip V. The Spanish regime started 1571. Coins that were minted in Mexico like the silver cobs w/c are called CABO DE BARA DE PLATA in Spanish were known to be the first coins that were widely circulated during and after the reign of King Philip II. In the 17th-19th century, Manila became one of the major centers of trade in the Far East. In 1766, a second coin was minted in the Philippines, known as COLDERILLAS. It was about half the size of the Spanish BARILLA and was made of copper.

FIRST PHILIPPINE REPUBLIC Ruled by Emilio Aguinaldo, the leader of Philippine revolution, issued paper money that was backed up by the resources of the Philippines. These notes were in Spanish and bore the signature of PEDRO A. PATERNO, the President of the Council of State at that time. These was considered the 2nd treasury certificates that were issued by the Philippines. Emilio Aguinaldo issued coins minted in 1899 in denominations of TWO CENTIMOS, w/ inscription on the verse: REPUBLICA FILIPINA around the upper half portion of the edge, w/ the sun and 3 stars in the center, rugged islands below the sun and the year 1899 at the bottom. AMERICAN REGIME Various currencies circulated in the country back then were allowed to continue circulating until 1904 when American Civil Government in the Philippines demonetized. The principal currencies allowed to circulate were MEXICAN SILVER DOLLAR or PESO containing EIGHT REALS, AMERICAN DOLLAR & TREASURY CERTIFICATES. JAPANESE REGIME When Japanese forces occupied the Philippines, they issued a great quantity of paper bills called the JAPANESE WAR NOTES, issued under the authority of the Imperial Japanese Government. The popularly MICKEY MOUSE MONEY was used then. These bills has no reserves, neither was it backed up by any government asset. People were forced to accept these bills and since there was no control on its issuance it became inflationary. PHILIPPINE BANK NOTES In 1852, the first Philippine bank note was printed. It was called the PESOS FUERTES issued by the EL BANCO-FILIPINO DE ISABEL II. With the volume of trade increasing due to the increased demand for Philippine products, the money supply of the country was insufficient to meet the needs of trade. To remedy this, PHILIPPINE NATIONAL BANK(PNB) was authorized to issue the Philippine Bank Notes. These notes were note legal tender, it was payable to the bearer and the bearer was promised the corresponding equivalent in Treasury Certificates, a silver peso or subsidiary coins. Later the EL BANCO DE LAS ISLAS FILIPINAS known now as the BANK OF THE PHILIPPINE ISLAND(BPI) was authorized then to issue its own bank notes. These notes were redeemable by the issuer. The notes were not made legal tender.

TYPES OF MONEY 1. Standard Money is a kind of money designed by the state, usually by legislation, as the basic standard of value, into w/c all other kinds of money are redeemable or convertible. (ie-CB notes) 1.a COMMODITY MONEY 1.a.1 Past represent numerous items used as the media of exchange 1.a.2 Present represents the monetary unit of adequate weight/fineness of a given metal(gold/silver),the face value is equal/approximately equal to its metallic value. 1.b- REPRESENTATIVE MONEY money w/c are those representations of some other kind of money. (ie-Philippine Treasury Certificate of 1903) 1.b.1 Convertible Representative Money a representative money than can be converted into other kinds of money (ie-Phils. Treasury Certificate of 1903) 1.b.2 Inconvertible Representative Money representative money paper currency in circulation (ie-CB Notes) 1.b.3 Subsidiary Token or Coins known as small change.(ie- 5cents/10cents/50cents etc) (ie-Philippine Treasury Certificate of 1903) 6

1.c -FIAT MONEY money whose value is fixed by the government edict or decree at a level that bears no relation to the actual value of the commodity used as money. (ie-past = Japanese war notes in 1992; present=CB Notes) 2. Other types of Money 2.1 CREDIT MONEY this type of money presupposes the existence of credit/trust/confidence as a basic feature 2.2 DEFINITIVE MONEY in w/c the monetary system is defined.

MONETARY STANDARD and SYSTEMS When the country sets down rules to govern the creation of MONEY and to control the quantity in circulation whether the rules are strictly followed or are to be accepted simply as guidelines for its own money managers, here the is said to establish a MONETARY STANDARD. Standard Money is the monetary unit recognized by the government as the ultimate basic standard of value upon w/c all kinds of money are convertible. In the case of the Philippines, the monetary system is managed by currency system, and the monetary unit is the PESO. Monetary Standard refers to the currency system adopted by a country to provide a stable medium of exchange for domestic transactions and means of international payment for foreign obligation. Monetary unit also refers to standard money.

CLASSIFICATION/TYPES OF MONETRAY STANDARDS 1. Commodity Standard or Metallic Standard is a monetary system in w/c the purchasing power or value of the monetary unit is equal to the value of a designated quantity of a particular commodity or set of commodities. This is also called the full-bodied money coz it is 100% back up by gold/silver reserves. 1.a Monometallic a monetary system in w/c the country uses one metal as a standard unit of value 1.b Bimetallic Standard a monetary system in w/c the country uses 2 metals as a standard unit value. 2. Non-commodity Standard or Fiat Standard this standard refers to the system in w/c the face value of the monetary unit is much higher than that of value of the material used as money.

GRESHAMS LAW if two money of the same nominal value are made both as legal tender in the payment of debts, the less desirable kind tends to drive other out of circulation. In the Philippines, the objective of the MANAGED CURRENCY STANDARD is the same objective of the BANGKO SENTRAL NG PILIPINAS(BSP). OBJECTIVES 1. To facilitate production 2. To make prices stable 3. To make each and every Filipino maximize income 4. To promote full employment 5. To have an equitable distribution of wealth in the country 6. To preserve the international value of peso 7. To make the country economically rich 8. To make political and military strong and powerful

INFLATION and DEFLATION

INFLATION is a sustained increase in the price level of commodities. It is an economic disorder, w/c is characterized by spiraling of prices as a result of over issuance of money . This occurs when money supply increases faster than the volume of trade in the economy.(ie- when the money in circulation is not properly channeled to production, the economy will have little output ). Thus, with so much money in circulation and fewer goods available, PRICES WILL GO UP. DEFLATION is characterized by an uncontrolled decline in the general price level as a result of undersupply of money. Also an economic disorder because there is so much money with plenty of goods available, the tendency is for PRICES TO GO DOWN. In times of these economic disorders, the government has developed measures in order to stabilized prices, thereby, stabilizing the value of money.

CREDIT AND ITS USES

In general, CREDIT is based on CONFIDENCE in the debtors ability to make payment at some future time. Credit is simply defined as the POWER OR ABILITY TO OBTAIN MONEY,GOODS/SERVICES AT THE PRESENT TIME IN EXCHANGE FOR A PROMISE TO PAY WITH MONEY UPON DEMAND OR AT A FUTURE DETERMINABLE TIME. Credit is very important part of our everyday life. The use of credit has not only been expanded among individual consumers, retailers, wholesalers, manufacturers, and financial executives but also among national provincial, and local governments. Merchants are called upon to extend credit to buyers. Other lending institutions extend credit to BORROWERS who wish to obtain money with which to make purchases. VIEW POINT(Credit) a. Borrowers Viewpoint represents the borrowers ability to obtain goods/services or money in exchange of a future promise to pay. b. Leaders Viewpoint credit is the trust & confidence of the lender on the borrowers ability and willingness to pay c. Economists Viewpoint credit is the exchange of actual reality against the future probability d. Legalistic Viewpoint credit creates a legal right in favor of the creditor against the debtor who is under obligation to pay FUNCTIONS OF CREDIT Many believe that CREDIT AVOIDS THE USE OF MONEY, or CREDIT IS USED AS A SUBSTITUTE FOR MONEY. As such, it ENABLES GOODS/SERVICES TO BE TRANSFERRED FROM ONE PERSON TO ANOTHER. It then functions as (1) A MEDIUM OF EXCHANGE; (2) FACILITATES THE PRODUCTION & CONSUMPTION OF GOODS AND USUALLY RESULTS IN THE GROWTH OF THE ECONOMY; (3) THE TENDENCY TO ELEVATE THE MORAL STANDARDS OF THE PEOPLE; (4) IT INDUCES PEOPLE TO SAVE; (5) ENABLES BUSINESSMEN & CORPORATIONS TO GATHER LARGE AMOUNTS OF CAPITAL TO UNDERTAKE LARGE-SCALE PRODUCTION;(6) ALLOWS WEALTH TO BE FULLY UTILIZED;(7) HELPS IN THE EXPANSION/CONTRACTIONOF MONEY SUPPLY.

CHARACTERISTICS OF CREDIT 1. Credit as a BIPARTITE CONTRACT credit always involves two parties 2. Credit as a PECUNIARY CONTRACT credit is always expressed in terms of money 3. Credit as a FIDUCIARY CONTRACT since credit is based on TRUST & CONFIDENCE, the DEBTOR must be able to merit the trust & confidence of the CREDITOR. Without this, there can be NO CREDIT TRANSACTION. 4. RISK IS ALWAYS INVOLVED there is always the possibility of the obligation not being paid. 5. ALWAYS INVOLVES FUTURITY payment on credit is always done at a future date. In actual accounting, FUTURITY means a day or more after the credit is obtained.

CREDIT RISK For every CREDIT, there is RISK involved. CREDIT RISK refers to the POSSIBILITY OF NON-PAYMENT OF THE OBLIGATION WHEN IT FALLS DUE.

Cs of CREDIT 1. Character is a quality of a credit risk, w/c makes the debtor pay or intent to pay when his debt is due. A persons character is the sum total of his mental and moral qualities. 2. Capacity signifies the ability of a debtor to pay his obligation. A debtor may be willing to pay his debt, but may not have the cash w/ w/c to pay when it falls due. 3. Capital is the financial strength of a business. To creditor, it is the guarantee that a credit transaction entered can be redeemed. (ie-Total LiabilitiesMINUS-Total Assets =CAPITAL) 4. Collateral are properties of value pledged to secure a loan.(ie-Real Properties; Assets; Bank Deposits) 5. Condition refers to the environment in the customers industry, economically, legally and politically in relation to growth. OTHER Cs OF CREDIT 6. Currency 7. Country

HAZARDS in the USE of CREDIT Improper use of credit on non-productive goods may encourage consumption w/o a corresponding increase in production and thus would result to inflation. It may lead to an excessive increase in money supply, overstimulation of business activities, and may cause inflation, w/c may necessitate a corrective action by the BSP. Since credit influences all units in our economy. Credit may either benefit the entire economy or may cause everyone including the country as a whole to suffer from it. Our creditors and debtors should recognize their individual responsibilities. By having a better understanding of the nature and role, w/c credit plays in the economy, this will definitely lead to the proper care and use of CREDIT. 9

CREDIT and the BUSINESS CYCLE All credits, function as STIMULANTS or ACTIVATORS of the FLUCTUATIONS in the BUSINESS CYCLE. During RECESSION, when business activities decline, business and consumer products are reduced. Thus, the need for credit also declines. On the other hand, during RECOVERY and PROSPERITY periods of the business cycle, general optimism prevails among businessmen and consumers. This favorable outlook results in increased purchases, thus the use of both business and consumers credit is also increased.

CLASSIFICATION/KINDS OF CREDIT A. PERSONAL CREDIT are those credit obtained for ones use. 3 Types of Personal Credit: A.1 Service Credit (ie- Lawyers/CPAs/Doctors etc.) these professionals usually bill us for their services. A.2- Retail Credit goods obtained mostly on retail. A.3 Personal Loan Credit differs from retail or consumer credit. The cash or money is given as credit instead of goods/services.(ie-banks/pawnshop/credit unions/sss/pagibig/GSIS) Criteria for Granting PERSONAL CREDIT: 1. 2. 3. 4. 5. 6. 7. 8. 9. Employment/Occupation best Personal Resources criteria Wealth & Accumulated Resources. (primary factor) Income from Investments Successful Business Ratings Operating Expenses Additional Sources of Income of the Family Size of Family Paying habits of the borrower

TRUTH IN LENDING ACT is an act designed to protect consumers against unfair billing practices of people who extend credit to a purchases of goods on installment basis. Any person who willfully violates the provision of the act or any regulation shall be fined by not less than 5,000 or 6 months imprisonment not more than 1 year. B. COMMERCIAL or MERCANTILE CREDIT are credit extended by one businessman to another. (ie- Manufacturer to Wholesaler; Wholesaler to Retailer) C. BANK CREDIT or BANK LOANS Granted by bank to businessmen to finance their short term credit needs. Commercial banks like Metro Bank or BDO usually grants these loans. Repayment is oftentimes done w/o a short period of time coz the turnover of goods is fast. 10

D. EXPORT/IMPORT CREDIT Export is obtained to finance the selling of goods outside the country. Import is obtained to finance the buying of goods from other countries. E. INVESTMENT CREDIT (purely investment use) Long term borrowing is one of the most common form of financing used by business enterprises. ie - Acquisition of Fixed Asset like Land, Buildings, Machineries & Equipments - Supporting Working Capital Needs F. AGRICULTURAL CREDIT given to farmers for the development/improvement/cultivation of their lands. 4 Forms of Agricultural Credit: f.1 Crop Loan for the purpose of financing the production of a particular crop.(ie-Rice/Corn) Crops is grown by the Borrower(farmer). He can not sell the crops unless he notifies the Creditor. f.2- Livestock Loan is obtained to finance the raising of pigs, ducks, cows,chicken, goats and other animals for breeding purposes. Collateral is a requirement to avail loan, the livestock is also offered as collateral. f.3 Agricultural Time Loan used to finance the development /improvement of farm land. Collateral is usually the land and farm equipment owned by borrower(farmer). Also used to finance acquisition of farm equipment.

*DBP & LBP offers/grants

loans for farmers who wants to obtain agricultural credit.

f.4 Commodity Loan obtained to finance the selling and distribution of farm crops w/c are kept in a warehouse with warehouse receipts. G. INDUSTRIAL CREDIT loans granted to industries to finance the acquisition of equipments/machineries to finance the construction of a plant or factory and to some extent to the purchase of raw materials for manufacturing capital goods for consumption purposes. H. REAL ESTATE CREDIT are loans to finance the purchase and improvement of real properties like house or a building. Usually these loans are paid off by installment over a period of time. I. GOVERNMENT/PUBLIC CREDITare credits obtained from any of the government institutions or their instrumentalities. The Debtor maybe the national, provincial, or local government. SECURED/UNSECURED CREDIT Secured Credit are those credits, w/c are covered by properties of value called collaterals to guarantee loans. When Borrower fails to pay his loan when it falls due, the Creditor has the right to foreclose the mortgage and have such properties disposed off to satisfy the formers obligation, including interests and other charges and expenses accruing to the loan. Unsecured Credit, on the other hand, is one where the Borrower has merited the full trust & confidence of the Creditor, that is the creditor is willing to part w/ his money, goods/services for just a mere promise to pay.

J.

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This situation arises when the Debtor is able to make the Creditor fully trust him. Sometimes, we call this type of loan a character loan or a clean loan, since no property of value was pledged to secured it. K. SHORT-TERM,MEDIUM TERM & LONG TERM LOANS Short-term Loans are those loans payable w/in a year. (ie- commercial bk loans; retail cr) Medium term Loans are payable from 1 year to 5 years. Sometimes it is called an intermediate term loan. (ie- Car loans; installment plans for appliances) Long-term loans are loans payable beyond 5 years and usually up to 15 to 20 years. (ie- real estate loans; investment loans) L. DIRECT LOANS, DISCOUNT LOANS & CREDIT LINES Direct Loans are loans whose interest payments are made at the time the loan matures. Here, the Borrower gets the entire amount applied for, and upon maturity of loan, he pays the principal PLUS the interest. Discount Loans are those loans where interest payments are deducted at the time the loans are granted. The Borrower obtains only the proceeds of the loan; that is the principal MINUS the interest. Upon the maturity, the Debtor pays the entire amount loaned. Credit Line is an agreement betn the Debtor & the Creditor wherein the Debtor is allowed to obtain funds from the Creditor up to a certain amount.

SOURCES OF CREDIT 1.Banks (ie-commercial bank/thrift bank) 2. Retail Stores 3. Credit Unions 4. Individual Money Lenders 5. Insurance Companies (ie-individual can borrow money equivalent to the surrender value of their policy) 6. Sale Finance Companies (ie- Accnts. Recievables/Lease of vehicles/Heavy equipments/machineries etc) 7. Pawnshops

CREDIT INFORMATION It is important that the credit man should be able to gather information about his prospective debtors. Using CREDIT INFORMATION from various sources is a basic and necessary part of every good credit decision. The more information you have about your customer, the more reliable your credit decision becomes.

SOURCES OF CREDIT INFORMATION:

Application Form it is the best s source of data. It ranges from 1-6pages of information sheet that is filed once for the basis of credit information. Personal Interviews is the cheapest and the easiest source of credit information. Its good for verification purposes. Also necessary for opening new account. Gen. Mercantile Agencyit provides credit information it has assembled from all parts of its business field of operation. Its main purpose is to have updated and complete information regarding the status of all business concerns w/c its subscribers are interested.

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Dun & Bradstreet commonly known in US & Canada. The oldest organization of its kind. Dun & Bradstreet prepares trade summaries by canvassing all subscribers who have ordered reports on the subject of the company who arein direct communication with it. Special Mercantile Agencies are sometimes referred to as trade agencies. They are distinguished from general mercantile agencies in that their scope of coverage is limited to a single trade or limited to number of allied trades. Personal Investigation is another form of gathering information of credit files. A staff of full time reporters is maintained. It also provides interviewers that can investigate methodically & regularly. Public & Published Records consists of all legal recordings such as deeds, mortgages, suits, judgements, and current news items such as clippings from newspapers and trade journals. Credit Bureaus are associations of businessmen providing information gathered from each other to other members of the organization. The credit bureaus have in recent years become the principal clearing houses for information. Credit Bureaus analyze the data in order to avoid shortcomings and omissions, and if still necessary, gather more information. Such review would avoid possible deregatory information furnished by other sources. 2 Kinds of Credit Bureaus 1. Retail Credit Bureau 2. Credit Interchange Bureau Bank Credit Department is one of the best credit information. Banks are intimately involved in the activities of their client/customers. They can furnish trade ownership & operating information that may be difficult to obtain elsewhere. Information from References references indicated in the information sheets and obtained from the interviews could give light on the prospective customers credit worthiness. This can be done either by mail or by telephone.

COMPILATION OF THE CREDIT REPORT The credit report is now compiled when all data have been gathered. This would include financial statements, ledger experiences & comments of references, and observations of reporters. The credit investigator writes down the facts in a standard form used for the purpose. He now gives you his rating. If doubt arises on the rating given, then a review committee goes over the file and makes its decision.

CREDIT INSTRUMENTS Credit instruments were known to have existed long before coinage. Indeed, clay tablets & fragments more or less similar w/ our present-day bill of exchange and promissory notes were obtained in Assyria about 8th century BC. Today, the use of credit instruments is probably as common as the use on money w/ particular reference to commercial transaction, if not more. Credit instrument is defined as a document evidencing the existence of a credit obligation, w/c defines the responsibility of the debtor towards his creditor and the right of the creditor to collect from the debtor on the date designated. Another definition is that, it refers to a promise, or order, to pay a definite or determinable sum of money to bearer, or to a specified person or his order. A firm engaged in commerce (business) is interested in 3 kinds of credit instruments: (1) open book account, (2) promissory note, and (3) trade acceptance. Other credit instruments like (4) Bills of exchange and (5) Letters of Credit. 13

CLASSIFICATION OF CREDIT INSTRUMENTS Credit instruments fall into under 2 broad classifications: (1)CREDIT INSTRUMENTS WITH GENERAL ACCEPTABILITY (2) CREDIT INSTRUMENTS WITH LIMITED ACCEPTABILITY 2 Subdivision of Credit instruments w/ Limited Acceptability 2.1 Credit instruments for investment purposes Subdivision of Credit instruments for Investment purposes 2.1.1 Stock certificates ownership in the corporation. The owners are called STOCKHOLDERS. 2 Types of Stocks 2.1.1a Preferred Stocks 2.1.2b Common Stocks

2.1.2

Bond Certificates is an evidence of indebtedness of a corporation to a bond holders. may be issued by governments and business corporations. are promises to pay, the principal as well as the interests to its holder at a certain specified time indicated in the instrument.

Kinds of Bonds 2.1.2a Debenture Bonds 2.1.2b Collateral Trust Bonds 2.1.2c Mortgage Bonds 2.1.2d Sinking Fund Bonds 2.1.2e Registered Bonds 2.1.2f Guaranteed Bonds 2.1.2g Convertible Bonds 2.1.2h Redeemable Bonds 2.1.2i Serial Bonds 2.1.2j Income Bonds 2.1.2k Coupon Bonds 2.1.2l Profit-sharing Bonds Classes of Bonds a. Nature of the issuer it could be the government, municipal, corporate, industrial etc. b. Nature of Security it could be as to mortgage, collateral, trust, debenture, guaranteed income c. Maturity it could be long term or short term. d. Termination (payment or redemption) it could be convertible, redeemable, serial, sinking fund etc. e. Form of Instrument it could be coupon and or registered. f. Purpose it could be for refunding, construction, development, equipment etc.

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2.1.3

Money Market Bills are negotiable instruments bought and sold in the market. A Money Market is a meeting place for users/suppliers of short term funds. Parties in Money Market Bills a. Fund User are those companies with high credit rating that are in need of funds. b. Fund Supplier are individuals/corporations with excess liquidity who are looking for possible investment outlets for their excess funds. c. Broker are individuals/institutions engaged in buying/selling of money market instruments. They make a profit in the difference between their buying/selling rates. Kinds of Money Market Instruments 2.1.3a Interbank Call Loans 2.1.3b Promissory Notes 2.1.3c Repurchase Agreement 2.1.3d Certificates of Assignments 2.1.3e Certificates of Participation 2.1.3f Commercial Papers 2.1.3g CBCIs 2.1.3h Treasury Bills 2.1.3i DBPs Progress Bonds

2.2 Credit instruments for commercial purposes is better known and subdivided into as a PROMISE-TOPAY and ORDER-TO -PAY. Promise-to-pay Instruments consists of (1) Promissory Notes, (b) Financial Institution deposits, (c) Letter of Credit, (d) Open book accounts. 2 Parties in Promise to-pay: a. The MAKER who is the DEBTOR b. The PAYEE who is the CREDITOR or the party receiving the payment PROMISSORY NOTE is a written promise of one person to pay another a sum certain of money on demand or at a determinable future time. it is used to evidence obligations incurred through the purchase of merchandise or the acquisition of cash credit. Classification of PN: a. Negotiable PN b. Non-negotiable PN popularly known as IOU(I Owe You) c. Secured PN d. Unsecured PN FINANCIAL INSTITUTION DEPOSITS are promises of a certain institutions to return money deposits with them. when funds are deposited in any financial institution, the depositor receives an acknowledgement in the form of passbook for savings deposit, certificate for time deposits and a deposit stub or duplicate for demand deposit. It indicates the institutions promise-t- pay on demand or upon advance notice, or at any future determinable time. 15

Form of Deposits: a. Demand Deposits b. Time Deposits represents funds left w/ a bank by a customer or depositor not on call but for stated periods of time. Funds thus deposited, earns higher rate of interests than that of savings deposit since it is possible for the funds to be placed in longer term investments. c. Savings Deposits gen. speaking, savings bank & savings department of commercial bank accept deposits from people of average means. These deposits are accepted by the banks on the basis of time. Interest for their use is paid by the bank to the depositor.

LETTER OF CREDIT is a letter made by one bank addressed to another bank, requesting the bank to honor drafts drawn against in the behalf of a 3rd party. It covers terms and conditions. The Intl Chamber of Commerce sometimes calls it documentary credit. 2 Types of LC: 1. Commercial Letter of Credit is often used in international trade. It includes import/export letter of credit. 2. Traveler Letter of Credit w/c maybe applied for by a traveler from his home bank instead of purchasing a travelers check. Not so popular in the Philippines. OPEN BOOK ACCOUNT a supporting documents to show the existence of a credit transaction, these may be a sales slip or invoice, DR, or a signature of the debtor on the sellers notebook, acknowledging his debt. Orders to pay a type of commercial credit instruments. CHECK, DRAFTS and MONEY ORDERS fall under this type of instrument. 3 Parties in Order-to-pay: a. The DRAWER b. The DRAWEE c. The PAYEE

CHECKS most commonly used bills of exchange for satisfying credit obligations. They are always drawn on a bank and paid on demand. considered as credit instrument s but with limited acceptability. Classification of Checks: Crossed check Post dated check Stale check Managers check Cashiers check Treasurers check Bouncing or Rubber check

a. b. c. d. e. f. g.

Question: DOES THE DRAWER OF THE CHECK NECESSARILY COMMIT A CRIME OF ESTAFA? Answer: Not necessarily so. 16

To be held liable for a crime(estafa), it must be shown that: 1. The maker of the check(estafador) fooled the payee into accepting the check after something of value(for w/c no credit terms were arranged) was exchanged for the check because of the false pretense of the maker that he has money in the bank; and 2. When the estafador issued the check, he had no funds in the bank or his funds were not sufficient to cover the amount of the check. Thus , even if the check bounces, the drawer may not be held liable if: a. There was no deception or false pretense as when the drawer informs the payee that he is not sure that his funds are enough; or b. Even if something of value was exchanged for the check, the check was issued in payment of a debt w/c was incurred prior to the issuance of the check. h. Counter check i. j. Certified check Falsified check

k. Forged check l. Travelers check

m. Personal check n. Business check o. Cancelled check p. Returned check is a check returned by the bank from various reasons such as (a) amount in figure does not tally with the amount in words (b) it is a post dated check (c) drawn against insufficient funds (d) it has unsigned alterations (e) it is a forged check (f) it is falsified check.

DRAFTS resembles, more or less, to the ordinary bank check. is also termed as a bills of exchange w/c is unconditional order made by the drawer requesting the drawee to pay the payee a sum certain in money on demand or at a determinable future time. Classification of Bills of Exchange: Date of payment the amount indicated on the instrument is payable upon demand or sight. Generally speaking, time drafts may cover 60, 90, or 120 days. Character of the Drawee properly endorsed to pay a certain sum of money. Place where the Party Reside on the basis of residence of the parties, drafts must be termed as either domestic or foreign Whether the Drafts are Accepted or Not writing the word ACCEPTED on the face of time draft must be stated and not forgotten. Whether Drafts are Free or Documented necessary documents for attachment purposes must be done or fee to complete the said transaction.

1. 2. 3. 4. 5.

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a. b. c. d. e.

Kinds of Drafts: Demand draft Time draft Bank draft Commercial or Trade draft Acceptance draft

f. Documented drafts g. Clean drafts

MONEY ORDERS
Money orders are of 2 types: 1. Bank Money Order w/c is an order of one bank to another bank to pay a person named therein a sum certain in money on demand. 2. Postal Money Order w/c is an order of a post office to another post office to pay a person named therein a sum certain in money on demand. HOW CREDIT INSTRUMENTS IS NEGOTIATED The negotiable instrument law states that an instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee as the holder thereof. If payable to order, It is negotiated by the endorsement of the holder and completed by delivery. If the instrument is payable to bearer, it is negotiated by mere delivery, but it may, if desired, be endorsed. In the Philippines, Act No.2031 known as THE NEGOTIABLE INSTRUMENTS LAW was enacted on February 31, 1911 and took effect 3 months after, that is on June 2, 1911. What is negotiability? Negotiability has been defined as that quality whereby bill, note or check, passes freely from hand to hand like currency Negotiation an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. Formal Requirements of Negotiability: 1. It must be in writing and signed by the maker or drawer. 2. It must contain unconditional promise or order to pay a certain sum in money. 3. It must be payable on demand, or at a fixed or determinable future time. 4. It must be payable to order or to bearer. 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with a reasonable certainty.

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BANKING
BANKING plays an important role in the lives of individuals as well as nations. In fact, it is extremely difficult to imagine even for a brief moment how our economic system in particular could function efficiently w/o the services rendered by banks. As the heart of the financial structure, BANKS HELP IN THE ACCUMULATION & MAINTENANCE OF SUPPLY OF FUNDS THROUGH ITS DEPOSITORY AND SAFEKEEPING FUNCTIONS W/C IS ESSENTIAL TO CAPITAL ACCUMULATION. The cumulative effect of lending money, receiving deposits, and transferring of money and credit, as performed by the banking system, is to produce a kind of money, or at least to amplify(to make stronger) the use of the official money supply. Thus, the BANKING SYSTEM nay be said to be CREATING A CIRCULATING MEDUIM credit instruments arising out of bank deposits. What is the meaning of CIRCULATING MEDUIM? It is defined as SOMETHING THAT CAN BE SATISFACTORILY USED AS MONEY. i.e.- Checks drawn on Banks - Channeling Saving into Real Investment(made by individuals)

BANKING and the PUBLIC INTEREST With millions of customers using deposits & checking facilities of banks, their loan facilities, collection services, and other multifarious(many and various) services, the importance of the banking system to the social and business structure of the country is very apparent(clear or obvious). If these services were no more than convenient and economical, they would still play a prominent(easy to see; well-known) part in the efficient conduct of trade and commerce because of the extent to which they are used from one time to another. Banking SERVICES and FACILITIES are likewise of great importance to those who are not direct customers of banks, for it is quite apparent that every individual or business enterprise, in dealing with a commercial customer of a bank, is affected, not to say, influenced by such services. i.e.- A job of a worker in garment factory, may depend upon whether management can secure a loan from a bank.

CUSTOMER RELATIONSHIP Banks maintain important customer relationship with other financial institutions. They are a major source of the credit employed by INVESTMENT BANKERS, BROKERS, FINANCE COMPANIES and others. Bank perform many services for other banks. The CENTRAL BANK may occupy the position of BANKERS BANKS. In this capacity, they may discount commercial paper, make advances in the form of loans and assist in the clearing and collection of checks. They may act as agents in providing FOREIGN EXCHANGE and in the PURCHASE SECURITIES for other banks or their customers.

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HISTORY OF BANKS and BANKING The first bank to offer most of the basic BANKING FUNCTIONS known in the 20th century was the BANK OF BARCELONA in SPAIN. Founded by merchants in 1401, this bank held deposits, exchanged currency, and carried out lending operations. It also is believed to have introduced the BANK CHECK. THREE other early BANKS, each managed by a COMMITTEE OF CITY OFFICIALS were the BANK OF AMSTERDAM(1609), the BANK OF VENICE(1587), and the BANK OF HAMBURG(1619). These institutions laid the foundation for modern banks of deposit and clearance. In spite of these beginnings, continental EUROPE lagged behind ENGLAND in developing COMMERCIAL BANKING. For more than three centuries, banking on the Continent was in the hands of powerful statesmen and wealthy private bankers, such as the MEDECI FAMILY in FLORENCE and the FUGGERS in GERMANY. During the 19th century, members of the ROTHSCHILD FAMILY became the most influential bankers in all of Europe and probably in the world.

BANKING IN BRITAIN English banking originated with the goldsmiths of London of the 16th century. These men made loans and held valuables for safekeeping. They also held deposits in their shops and issued promissory notes, called goldsmiths notes in return. The goldsmiths dominated the English banking business until the BANK OF ENGLAND obtained its charter(contract ; agreement) authorizing it to engage in banking operations. With the onset of the 20th century, most domestic banking in England were handled by the 11 joint-stock banks that belong to the London Clearing House.

BANKING IN THE UNITED STATES(U.S.) Banking in the US began with the chartering(1781),in Philadelphia, Pa., of the BANK OF NORTH AMERICA, w/c opened for operations to the public a few months after the hostilities of the Revolutionary War had ended w/ the surrender of Marquess Cornwallis at Yorktown, Virginia. The earliest US banks, founded by merchants, were employed chiefly in the provision of commercial credit. The lent only for 30 days or less and on the security of contracts for the sale readily marketable commodities in both export/import trade. In 1838, New York State passed a FREE BANKING LAW. Before this date, ALL INCORPORATED BANKS had been CHARTERED BY STATES and had been GRANTED THE NOTE-ISSUING PRIVILEGE. Under FREE BANKING, charters could be obtained w/o a special act of the state legislature. The main requirement for new banks was they post collateral government bonds of equal in value to the notes to be issued. Moreover, the depression of the 1930s dealt the country a severe blow to the commercial banking industry resulting bank failures and the attendant panic among the people.

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BRIEF HISTORY OF PHILIPPINE BANKING Banking in the PHILIPPINES has its beginning as early as 1830. At least three of the commercial banks that are still very active in their operations, were established during Spanish regime. They are: (1) BANK OF THE PHILIPPINE ISLANDS(BPI) w/c originally was named BANCO ESPANOL FILIPINO, started in 1851, (2) the CHARTERED BANK OF INDIA, AUSTRALIA & CHINA in 1823, (3) the HONGKONG AND SHANGHAI BANKING CORPORATION in 1876, a British-owned bank. In 1882, a savings bank named the MONTE DE PIEDAD AND SAVINGS BANK was established, followed by the opening of BANCO PENINSULAR ULTRAMARINO of Madrid, but the latter unfortunately folded up after only 4 years of operation. Today, Monte De Piedad, the first savings bank established in this country is still very much active in its operations having withstood the test of time. During the American regime, the first bank to be opened during the period of American occupation was named the AMERICAN BANK founded in 1901. But its operations were short-lived. During the Commonwealth period, the Commonwealth period ushered in the establishment of more banks in the country. The NEDERLANDSCH INDISCHE HANDELSBANK opened a branch in Manila in 1937. The following year, the PHILIPPINE BANK OF COMMERCE, perhaps, the first bank to be put up purely with Filipino capital, was established. At the same time, the BANK OF TAIWAN was granted the right to open a Manila Branch. In 1939, three more banks commenced operations: (1) the PHILIPPINE BANK OF COMMUNICATIONS(PBCom), (2) the BANK OF THE COMMONWEALTH and the government-owned (3) AGRICULTURE AND INDUSTRIAL BANK. However, by the command of the Japanese military authorities, the PHILIPPINE NATIONAL BANK (PNB), the PHILIPPINE BANK OF COMMERCE, the BANK OF PHILIPPINE ISLANDS, and the PHILIPPINE TRUST COMPANY(PhilTrustBank) were ordered reopened during the period of Japanese occupation.

FINANCIAL INSTITUTION an institution that deals w/ money. It serves as media in the transfer of funds held by those who do not have immediate need for them to those who are confronted w/ the lack and accurate need for such funds. IMPORTANCE OF FINANCIAL INSTITUTION With the help of financial institution and intermediaries, capital finds its way into those channels in w/c it has the best chance of being profitably employed resulting in greater productive mobilization and employment of the economys resources. CLASSIFICATION OF FINANCIAL INSTITUTIONS I.Banking Institution Institutions that accept deposits and extends credit. It is an entity authorized by Central Bank to engage regularly in lending of funds obtained from public through the receipt of deposit of any kind. a. Commercial Banks b. Thrift Banks b.1 Private Development Bank b.2-Savings and Mortgage Banks c. Rural Bank d. Specialized Government Banks d.1- DBP d.2-Al Amanah Bank 21

d.3-Land Bank e. Offshore Banking Units (OBUs) II. Non Bank Financial Intermediaries a. b. c. d. e. f. g. h. i. j. k. l. Investment Houses Financing Company Security Dealer Security Broker Investment Company Fund Manager Lending Investor Pawnshop Money Broker Credit Unions Cooperative Insurance Company

III. Non Bank Institutions a. Mutual Building and Loan Association b. Non Stock Savings and Loan Association

THANK YOU FOR STUDYING WITH PROF. DE BELEN

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