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, IT’S 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.

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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.

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 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 bet’n 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.

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 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

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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.

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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)

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 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.

GRESHAM’S 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

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 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 debtor’s 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. Borrower’s Viewpoint  represents the borrower’s ability to obtain goods/services or money

in exchange of a future promise to pay.
b. Leader’s Viewpoint  credit is the trust & confidence of the lender on the borrower’s ability
and willingness to pay
c. Economist’s 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.

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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.

C’s 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
person’s 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 customer’s industry, economically, legally and politically in
relation to growth.

OTHER C’s 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.

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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 consumer’s credit is also increased.

CLASSIFICATION/KINDS OF CREDIT

A. PERSONAL CREDIT  are those credit obtained for one’s use.

3 Types of Personal Credit:
A.1 – Service Credit  (ie- Lawyers/CPA’s/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. Employment/Occupation best
2. Personal Resources criteria
3. Wealth & Accumulated Resources. (primary factor)
4. Income from Investments
5. Successful Business Ratings
6. Operating Expenses
7. Additional Sources of Income of the Family
8. Size of Family
9. 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.

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 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 CREDITare credits obtained from any of the government institutions or their
instrumentalities. The Debtor maybe the national, provincial, or local government.

J. 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 former’s 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.

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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 bet’n 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 Agencyit 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 customer’s 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.

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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 CBCI’s
2.1.3h Treasury Bills
2.1.3i DBP’s Progress Bonds

2.2 Credit instruments for commercial purposes  is better known and subdivided into as a PROMISE-TO-
PAY 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 institution’s promise-t- pay on demand or upon
advance notice, or at any future determinable time.

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 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 Int’l 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 traveler’s 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 seller’s 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:
a. Crossed check 
b. Post dated check
c. Stale check
d. Manager’s check
e. Cashier’s check
f. Treasurer’s check
g. Bouncing or Rubber check

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

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 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. Certified check

j. Falsified check

k. Forged check

l. Traveler’s 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:

1. 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.
2. Character of the Drawee  properly endorsed to pay a certain sum of money.
3. Place where the Party Reside  on the basis of residence of the parties, drafts must be termed as either
domestic or foreign
4. Whether the Drafts are Accepted or Not  writing the word ACCEPTED on the face of time draft must be
stated and not forgotten.
5. Whether Drafts are Free or Documented  necessary documents for attachment purposes must be done
or fee to complete the said transaction.

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 Kinds of Drafts:
a. Demand draft
b. Time draft
c. Bank draft
d. Commercial or Trade draft
e. 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 1930’s 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 economy’s 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
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 d.3-Land Bank

e. Offshore Banking Units (OBUs)

II. Non Bank Financial Intermediaries

a. Investment Houses
b. Financing Company
c. Security Dealer
d. Security Broker
e. Investment Company
f. Fund Manager
g. Lending Investor
h. Pawnshop
i. Money Broker
j. Credit Unions
k. Cooperative
l. 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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