The Philippine Financial System

The financial system is a system functioning within another system, the economic system.

The economic system is involved in the aspect of goods and services, while the financial system is
involved in the use of money.

The financial system is functioning in the economic system in a way that the use of money makes way
for the production and transfer of goods and services. Theoretically, it can be said that volume of goods
and services that can be produced by the economic system of any country depends upon the loanable
funds as financial resources and credit facilities of the financial system.

Financial system may be defined as the diversified financial activities being performed by the
different economic units whose activities are closely related to each other, taking into account
the use of money and different instruments associated with money.

The different economic units include the financial institutions which are banks, non-banks, and
business organizations and individuals.

The financial system is a network of various institutions which generate, circulate and control
money and credit.

It provides intermediation between the supplier and users to credit.

Some people have excess money while many others need funds for consumption or production.
Under this circumstance, the services of financial institution like a bank should be made
available to both parties.

Those who have money are inclined to look for profitable investments or to lend their money in
order to earn interest.for instance idele funds of some people who have excess money are made
available for profitable projects or production.

This means more employment and income

When people have more incomes, they buy more goods and services. And this is good for the
economy. Similarly, more production means more goods. This is a very good way

The financial system, acting as an intermediary between the lenders and borrowers of funds,
creates several positive implications on the national economy.

Requirements of an effective financial system

 It needs efficient monetary system facilities for encouraging savings and investment, and market
to facilitate investment process.

 It must provide an efficient medium for exchanging goods and services.

  There must be a unit in which to measure prices, that is, a unit of account.

 It makes possible the creation of capital on a scale large enough to meet the demands of the
economy.

 It must provide markets, and procedures for the transfer of claim to wealth, such as promissory
notes and shares of ownership in a business, and for the conversion

Monetary system - the system used by a country to provide money and

to controlthe exchange of money

Financial markets - Broad term describing any marketplace where buyers and sellers participate
in the trade of assets such as equities, bonds, currencies and derivatives.

Elements of the financial system

1. Financial claims – the right to receive money under certain conditions. It may be debt-claim or
equity claim.

2. Financial institutions – these are commercial banks, savings and loan associations and finance
companies. They act as intermediaries between suppliers and users of money.

3. Financial markets – they serve as a means of bringing forces for demand and supply of financial
claims under Philippine Stock Exchange.

4. Government agencies – This is the Bangko Sentral ng Pilipinas and its Monetary Board

5. Laws and policies – the national government regulate and supervises the whole economy in
order to attain its development objectives

debt-claim is right to pay principal loan and interest. Equity claim is right to dividends or interest
for stocks or investments.

4. Monetary policies are formulated by the monetary board. The BSP supervises and regulates the
banking institutions and other financial institutions. Being the premier financial institution, it controls
money, credit and banking operations in the country.

5. Since the financial system is an integral part of the whole economy, laws and policy on money, credit
and banking have been made to ensure monetary stability and economic growth. Such laws are
legislated by congress. The main job of implementing said laws falls on the BSP.

History of banking in the Philippines (Lagacies – inheritance)

Banking in the Philippines began during the Spanish period. The Obras Pias were organized by
Father Juan Fernandez de Leon in 1594. It was a religious foundation that accumulated large
funds from the legacies of wealthy individuals who made out wills before going out on
dangerous expeditions, bequeathing their estates to the church. The Obras Pias were then the
sole source of commercial credit. The profits were channeled to the construction of churches,
government buildings and other charitable and religious projects.

In 1930 Francisco Rodriguez organized the Rodriguez Bank which operated more as a loan
association rather than a regular bank. Next to be established was the Gorricho Bank, followed
by the bank owned by the Family of Mariano Tuason. These institutions did not last long.

Formal banking started in the country with the establishment of the Banco Espanol-Filipino de
Isabel II which is now known as the Bank of the Philippine Islands. This is the first commercial
bank organized in the Far East. This is now the oldest existing bank in the country.

Another bank was also established in 1882 which is the Monte de Pieded – a savings and
mortgage bank. The bank extended loans on the security of personal properties aside from
accepting deposits.

During the American period, those banks which already existed were allowed to continue
operations. More banks were opened to finance the increasing demand of the trade in the
country. In 1916 under Act no. 2612, the Philippine National Bank was organized as the sole
depository of government funds and had the authority to issue currency notes.

The Philippine Bank of Commerce which was the first private commercial bank in the country
wholly owned by Filipinos was opened for business in 1938.

At the outbreak of World War II, the Philippines were occupied by the Japanese Imperial Forces.
During the Japanese occupation, three domestic banks were allowed to resume operation. They
were the Philippine national bank, Bank of the Philippine Islands and the Philippine Bank of
Commerce.

The Japanese occupation left the banking system in a state of almost total collapse. Most banks
had worthless Japanese notes on hand. Immediate rehabilitation of the banking system was
made.

In 1948 upon the enactment of the RA 265 or the so called Central Bank Act, the Central bank of
the Philippines was created, establishing a managed monetary system in the Philippines. More
private commercial banks and savings banks into operation later. The period saw the start and
growth of rural banking system, the savings and loan associations and the specialized
government banks.
Banking Institutions

 According to the General banking Act, the term bank refers to “an entity duly authorized by the
Monetary board of the Bangko Sentral ng Pilipinas that may engage in the lending of funds
obtained from the public through the receipts of deposits of any kind and all entities regularly
conducting such operation”

 Some authors define banks as financial institutions charge with the responsibility of accepting
deposits from the general public and lending these funds to those in need.

Private banks

1. Commercial Banks – covers the widest range of functions among all financial intermediaries.
Their services include receiving, collecting, transferring, paying, lending, investing, dealing,
exchanging and handling money, safe deposit, custodianship, trusteeship and money claims
domestically and internationally.

e.g. Allied Bank, Banco de Oro, BPI, China Bank, Metrobank, PNB, prudential Bank, UCPB, Bank
of Commerce, East West bank, Phil. Veterans Bank

2. Thrift Banks – Banks established to encourage thriftiness, industry, frugality, and the
accumulation of savings among the people. They differ from commercial banks in that they
cannot engage in international banking operations. But they can accept checking accounts,
government deposits and foreign currency deposits and perform trust functions upon approval
from BSP.

Types of thrift banks

-Savings and mortgage bank – These banks are organized for the purpose of accumulating the
small savings of individuals and investing them. e.g. Banco Filipino, BPI Family Savings Bank,
Insular Life Savings & Trust Co., Philam Savings Bank, RCBC Savings Bank

-Stocks Savings and loan association – include any corporation engaged in the business of
accumulating the savings of stockholderss and give these out for loans and for investment. e.g.
First Savings Bank, Active Bank, Builders SLA Inc,

-Private Development Banks – organized to expand, develop, construct and rehabilitate our
agriculture and industry. e.g. Asiatrust Development Bank, Ilocos Sur Development Bank, LBC
Development Bank.

3. Rural Banks – regional banks operating primarily to serve the needs of people in the provinces
and suburban areas. Rural banks perform the granting of short-term loans to farmers,
merchants, cooperatives to finance their requirements in the pursuit of their business which are
principally aimed at countryside development.
Government banks
Land bank of the Philippines – Its lending activities are geared primarily towards helping
farmers acquire land under the agrarian reform program, as well as finance the cultivation of
these lands and marketing their produce. It has also been granted special powers under the
General Banking Act.

Development Bank of the Philippines – provide long term credit facilities for the rehabilitation
and development of agriculture and industry and low-cost housing.

Al-Amanah Islamic Investment Bank of the Philippines– promotes and accelerates the socio-
economic development of Mindanao, especially in the predominantly Muslim province and
economically depressed areas of Cotabato, Lanao del Sur, Lanao del Norte, Zambaoanga del Sur,
Zamboanga del Norte and Sulu. It provides credit, commercial, development and savings
banking facilities at a reasonable terms to the people.

3. The bank was sold to another government-owned bank, the Development Bank of the
Philippines, in 2008.[1] However, in 2012, DBP announced that it intended to divest itself of the
bank, since it does not have the expertise to handle an Islamic financial institution.[4]

Amanah Islamic Bank is the only bank in

the Philippines authorized to offer Islamic

Private non-bank financial institutions

1.Investment Houses – are stock corporations engaged in the underwriting of securities of other
corporations on a guaranteed basis. As underwriters, they guarantee the distribution and sale of
securities issued by corporations including bonds and debentures.

2. Financing companies – finance company, specialized financial institution that

supplies credit for the purchase of consumer goods and services by purchasing the time-sales
contracts of merchants or by granting small loans directly to consumers.

3. Investment companies – these are issuers of securities primarily engaged in the business of
investing or trading in securities

An investment company is a company whose main business is holding securities of other

companies purely for investment purposes. The investment company invests money on behalf
of its shareholders who in turn share in the profits and losses.

A company or other entity that administers the public issuance and distribution of securities
from a corporation or other issuing body. An underwriter works closely with the issuing body to
determine the offering price of the securities, buys them from the issuer and sells them to
investors via the underwriter's distribution network.
When a company wants to issue stock, bonds, or other publicly traded securities, it hires an
underwriter to manage what is often a long and complex process.

Time sales contract - A form of financing where a third party purchases installment
sale contracts from a dealer and the borrower will make his payments to the lender. The
contracts are sold at a discounted value

4.Securities dealers and brokers. A broker-dealer is a financial firm that trades securities either
for its own account or on behalf of other firms. If a broker-dealer firm is trading securities on
behalf of a customer account, it is acting as an agent or a broker whereas if the broker-deal firm
is trading securities on behalf of its own account, it is acting as a principal or a dealer.

5.Pawnshops – these are businesses engages in lending money on personal property delivered
as security or pledge.

6. Lending investors – receive funds from one group of persons, regardless of number, through
traditional deposits, or issuance of debt and equity securities, and make available or lend these
funds to another person or entity, who cannot borrow from banking institutions due to stringent
requirements.

(4. A security is a tradable financial asset of any kind

A person or firm in the business of buying and selling securities, operating as both a broker and
a dealer, depending on the transaction. The term broker-dealer is used in U.S. securities
regulation parlance to describe stock brokerages, because most of them act as both agents and
principals. A brokerage acts as a broker (or agent) when it executes orders on behalf of clients,
whereas it acts as a dealer (or principal) when it trades for its own account.

Broker-dealers are incredibly important because they facilitate liquid -- and thus efficient --
markets. Without them, buyers and sellers would have trouble finding each other, transactions
would be more cumbersome to complete and inactive stocks would become even harder if not
impossible to trade.

Brokers and dealers are an important link in the transmission of funds from savers to the
ultimate investors because they are a means of distributing both new security issues.

6. Lending companies or lending investors are those engaged in granting direct loans with
interest and charges, whether on a secured or unsecured basis. Simply put, they are the ones
that provide credit to borrowers who are left out of the sophisticated formal fmancial system.)
7. Non-stock savings and loan associations are corporations engaged in the business of
accumulating savings of its members. A non-stock membership, wherein it is authorized to
transact only to members for loans and deposits.

8. Trust corporations act as trustee or administrator of any property or trust, and deposit.

9. Insurance companies provide mechanism for distributing equitably losses among a large
number of persons who are subject to a particular risk. Premiums collected, but unused, are
extended as loans to consumers and business entities.

(7. Non-stock savings and loan association shall mean a non-stock, non-profit

corporation engaged in the business of accumulating the savings of its

members and using such accumulations for loans to members to service the

needs of households by providing long term financing for home building and

8. A trust company is a corporation, especially a commercial bank, organized to perform

the fiduciary of trusts and agencies

development and for personal finance. The "trust" name refers to the ability of the institution's
trust department to act as a trustee – someone who administers financial assets on behalf of
another. The assets are typically held in the form of a trust, a legal instrument that spells out
who the beneficiaries are and what the money can be spent for.

A trustee will manage investments, keep records, manage assets, prepare court accountings,
pay bills (depending on the nature of the trust) medical expenses, charitable gifts, inheritances
or other distributions of income and principal.

A trust company does not own the assets its customers assign to its management, but it may
assume some legal obligation to take care of assets on behalf of other parties. )

Government non-bank financial institutions

1. Government Service Insurance System (GSIS) – provides retirement benefits, housing loans,
personal loans, emergency and calamity loans to government employees

2. Social Security System (SSS) – provides retirement benefits, funeral benefits, housing loans,
personal loans and calamity loans to employees who are working in the private companies and
offices.

3. Pagtutulunagn sa Kinabukasan- Ikaw, Bangko, Industriya, Gobyerno (Pag-ibig) – provide

housing loans to both government and private employees.
 (Compulsary insurance in the public and private sector. These institutions were created
essentially to protect the welfare of employees.

They set up large funds that were generated from the insurance premium of members and their
counterpart institutions.

Pag-ibi is based on a payroll deduction for a specific purpose which is in case is to provide
housing loans to its members)

Financial markets are where traders buy and sell stocks, bonds, derivatives, foreign
exchange and commodities. These markets are where businesses go to raise cash to grow, to
reduce risks, and to make money.

Money market

Capital market

Foreign exchange market

As money became a commodity, the money market became a component of the financial
markets for assets involved in short-term borrowing, lending, buying and selling with original
maturities of one year or less between banks and other financial institutions.

Financial assets like treasury bills, certificates of deposits and commercial paper are some of the
short-term debt securities traded in the money market.

Money markets are largely unregulated and informal where most transactions are conducted
over phone, fax, or online.

(One of the sections of a financial market where securities and financial instruments with short-term
maturities are traded is called the money market. Financial assets like treasury bills, certificates of
deposits, commercial paper and bankers' acceptance are some of the short-term debt securities traded
in the money market.

Money markets are largely unregulated and informal where most transactions are conducted over
phone, fax, or online.
Unregulated – not controlled by laws/regulations. No rules or restrictions.
Read more: http://www.businessdictionary.com/definition/money-market.html#ixzz3ChgBQ57s

Description: The instruments traded in the money market have a short-term maturity period ranging
from 30 days to a year. Hence this market is the best source to invest in liquid assets.
The only demerit accompanying the money market is the disorganization. Unlike organized markets,
e.g. capital markets, the money market is unregulated and informal. In addition, this market gives
lesser returns to the investor. However, the money market is regarded as safe.)

Capital market

capital markets are financial markets for the buying and selling of long-term debt or equity-
backed securities. These markets channel the wealth of savers to those who can put it to long-term
productive use, such as companies or governments making long-term investments.

Markets for buying and selling long-term equity and debt instruments.

Capital markets channel savings and investment between suppliers of capital and users of
capital.

Capital markets are vital to the functioning of an economy, since capital is a critical component
for generating economic output.

Capital markets include primary markets and secondary markets.

Primary market

Primary issues are used by companies for the purpose of setting up new business or for expanding or
modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the economy.

Part of the capital market that deals with issuing of new securities. Companies, governments or
public sector institutions can obtain funds through the sale of a new stock or bond
issues through primary market.

Secondary market

In the secondary market, securities are sold by and transferred from one investor or speculator to
another.

The secondary market, is also called aftermarket, is the capital market in which previously
issued financial instruments such as stock and bonds are bought and sold.

A market where investors purchase securities or assets from other investors, rather than from
issuing companies themselves.

Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the
trading of currencies. The main participants in this market are the larger international banks.
 The world’s largest financial market. Consisting of almost trillion in daily volume, and as
investors learn more and become more interested, the market continuous to rapidly grow.

Also called forex market or currency market.

This is the market in which one country’s currency is traded for another country’s currency.

The foreign exchange market is an over-the-counter market, so there is no single location where
traders get together. Instead, market participants are located in major commercial and
investment banks around the world.

Participants in the forex market

 Importers who pay goods using foreign currencies.

 Exporters who receive foreign currency and may want to convert to the domestic currency.

 Foreign exchange brokers who match buy and sell orders

 Traders who “make a market” in foreign currencies.

 Speculators who try to profit from changes in exchange rates.

THE PHILIPPINE STOCK EXCHANGE (Pamilihang sapi ng pilipinas)

 The national stock exchange of the Philippines, one of the oldest stock exchange in Southeast
Asia (1927).

 Stocks exchange is the place where stocks, bonds or other securities are bought and sold.

 There are two trading floors: PSE Plaza Ayala Triangle, PSE (Tektite Towers), Ortigas Center,
Pasig City.

 It works on the “Supply and demand” principle

(S and D principle: very unpopular – less valuable. More people wanted to buy for whatever reasons, the
more the stock will go higher. When business makes money, the price of its shares rises.

Investor try to figure out what will become more popular and scarce and invest on it.

Buyers and sellers need to be near one another to make transaction)

Main purposes

 Company lists or goes public to get money from investors for use in expansion and settling debts
through stock exchange
  For investors to get into and buy into companies easily no matter how small their share size is.

(Investors then can use the PSE to buy and sell stocks of companies that they are interested in)

HOW TO SELL

 File registration statements with the Securities and Exchange Commission and wait for 20 days
before the sale of stocks.

(Raising new capital through public offering is easier and less expensive when the company is already
listed.

Over 240 companies are listed.)

HOW TO BUY

 Assistance by a broker or brokerage firm for your trading, buy in person, or thru phone call or
just by a click via accredited online broker.

How to earn money

 You gain money when you sold at a higher price than when you bought. You just know when to
buy, when to sell and what to sell. (appreciation of stocks)

 Dividends declared by the company.

Tips in investing

1. Know the stock market

2. Find a broker online or through yellow pages

3. Identify your profile as an investor.

The international monetary fund & world bank & Philippine
financial system
The IMF and WB were made to patch up the shortcomings of our financial system

History of imf and wb

The International Monetary Fund (IMF) and the World Bank (WB) were both created at an
international conference convened in Bretton Woods, New Hampshire, United States in July
1944. A group of 44 Allied Nations participated in the Conference to formulate a global
monetary system in order to facilitate the growth of international trade as one of the major
goals.

The International Monetary Fund (IMF) and World Bank (WB) are twin organizations, set up
after World War II to promote economic stability and development throughout the world. They
opened their doors for business on June 25, 1946.

Purposes of the IMF and The World Bank

The International Monetary Fund (IMF) maintains international monetary cooperation among its
members

The World Bank aids in the development and reconstruction of it members

The IMF’s mandate

The IMF promotes international monetary cooperation and provides policy advice and technical
assistance to help countries build and maintain strong economies.

The Fund also makes loans to countries with balance of payments problems. Balance of
payments is the summary of all financial transactions between one country and other countries.

IMF loans are short and medium term and funded mainly by the pool of quota contributions
that its members provide.

Currently, there are 184 member countries of IMF.

Three main functions of the IMF today

1. Surveillance (supervision):

- Evaluation of member countries' overall economic performance

more influence on members' economic policies

periodic consultations in the member country .

 BELIEFS :strong and consistent domestic economic policies

will lead to stable exchange rates and a growing and prosperous world economy

2. Financial assistance:

- The IMF lends money to member countries with payment problems

IMF lending enables countries to rebuild their international reserves; stabilize their currencies;
continue paying for imports; and restore conditions for strong economic growth.

3. Technical assistance:

for members who need expertise in central banking and public finance etc

• About 90 percent of IMF technical assistance goes to low and lower-middle income countries.

IMF GETS MONEY

Most comes from the quota subscriptions

the money each member contributes when joining the IMF

Power among the members

Size of the quotas determine voting power

IMF decides on the quota for each member

richer countries have larger quota

When is a country in need ?

A country that had not taken in enough foreign currency to pay the other countries for
what they have bought

spends more money than it takes in

IMF will lend foreign exchange to that member

hoping to stabilize its currency which will strengthen its t

The World Bank’s mandate

The World Bank promotes long-term economic development and poverty reduction by
providing technical and financial support to help countries reform particular sectors or
 implement specific projects—for example, building schools and health centers, providing water
and electricity, fighting disease, and protecting the environment.

World Bank assistance is generally long term and is funded both by member country
contributions and through bond issuance.

WB is made up of 5 different organizations. It has184 member countries and membership of

the IMF is required.

5 Largest shareholders: France, Germany, Japan, UK, and US

The World Bank Group

1. International Bank for Reconstruction and Development (IBRD)

Est. 1946, “aims to reduce poverty in middle-income and creditworthy poorer countries
by promoting sustainable development through loans, guarantees, risk management
products, and analytical and advisory services”

2. International Development Association (IDA)

Est.1960, interest free loans and grants. assist the poorest developing countries

3. International Finance Corporation (IFC)

Est.1956, Private sector arm of the World Bank. Provides both loan and equity finance
for business ventures in developing countries

4. Multilateral Investment Guarantee Agency (MIGA)

Est.1988, Promotes Foreign Direct Investment in developing countries. It helps

developing countries attract foreign investment

5. International Centre for Settlement of Investment Disputes (ICSID)

Est. 1966, facilitate the settlement of investment disputes between governments and
foreign investors. Promote increased flow of international investment