Overview of the

Financial System
Presented by:
BSAcute Group




What is a financial
system?
A financial system consists of institutional
units and markets that interact, typically in
a complex manner, for the purpose of
mobilizing funds for investment and
providing facilities, including payment
systems, for financing of commercial
activity. (IMF)
A financial system:
Channels funds from lenders to borrowers
Creates liquidity and money
Provides a payments mechanism
Offers portfolio adjustment facilities
Provides financial services like insurance
and pensions
Nature and Importance of
Financial System
Allocate or match the supply of savings in
the economy to the users of those savings
in a safe and efficient manner
Financial system is vital to our economy
so the government regulates and
supervises its operation



Elements of a Financial
System
1. Financial Institutions
- firms that provide financial services to
net lenders and net borrowers.

Roles of Financial
Institutions
1.Term transformation
2. Economies of scale and
diversification in the use of funds
3. Technical Expertise


Elements of Financial
System
2. Financial Market
- an organizational framework
within which instruments can be bought
and sold.

Segments of Financial
Markets
Direct Finance
Borrowers borrow directly from lenders in
financial markets by selling financial instruments
which are claims on the borrowers future
income or assets.
Indirect Finance
Borrowers borrow indirectly from lenders via
financial intermediaries by issuing financial
instruments which are claims to the borrowers
future income or assets

Net Lenders
Financial
Markets (Stock
Market, Bond
Market, etc.)
Net
Borrowers
DIRECT
FINANCE
Financial Intermediaries
( Banks, savings and
loan association, etc.)
INDIRECT
FINANCE
Types of Financial Market

FINANCIAL
MARKET
CAPITAL MARKET
MONEY
MARKET
Capital Market
Capital market include the equity
( stock) and debt (bond) market.
Most widely followed markets
Used for long term basis and
assets mature greater than one
year

Bond Market
Issuers and Investor in the local bond market
o Issuers:
BSP
National Government
Commercial Banks
Main Investors: Banks, Insurance
Companies, Corporation and Institutional
Investors


Types of Capital Market
Primary Market
- market in which newly-issued
securities are sold to the initial buyers by the
corporation or government borrowing the
funds
Secondary Market
- market in which previously- issued
securities are traded.
Money Market
a mechanism that deals with
the lending of short term-
funds (less than one year)


Money Market Financial
Instruments
Includes the following:
oTreasury bills
oCommercial bills
oPromissory notes
oDeposits
oCollateral loans
oBills of exchange
Participants in the Philippine
Financial Market
Bangko Sentral ng Pilipinas
Commercial Banks
Brokers
Foreign Investors
Corporate and Institutional Investors
Introducing the
Financial System
3.Financial intermediaries
- most important financial institutions
-Various institutions such as banks,
savings, and loan association and credit
unions that serve as go-betweens to link
up net lenders and net borrowers
More on financial
intermediaries
Default- failure of the borrower to pay interest,
repay principal or both
Liquidity The ease with which a financial claim
can be converted to cash without loss of value.
Transaction cost The cost associated with
borrowing and lending or making other
exchanges


More on financial
intermediaries
They acquire the funds of net lenders by offering
claims on themselves
They pool the funds they acquire from many
individual net lenders and then use the funds to
make loans to businesses and households
They are lending out the surpluses they accept
from the net lenders while also appraising and
diversifying the risk associated with lending
directly to net borrowers
Depository Institutions and Other
Types of Intermediaries
Depository Institutions Financial intermediaries
that issue checkable deposits
Checkable Deposits Deposits that are subject
to withdrawal by writing a check
Elements of a Financial
System
4. Financial Instruments
- These are assets belonging to a
person or company. This can include cash,
bonds, or other assets; such as property or
items of value..
Components of Philippine
Financial System
The Philippine financial system
consists of:
1. Banks
2. Non- bank financial
intermediaries

Key Services Provided by
Financial System
Risk Sharing
Liquidity
Information
Resources:
Bain,K. and Howells, P. (2000). Financial Markets and
Institutions. Essex, England. Pearson Education Limited
Hudgins, S. and Rose, P. (2010). Bank Management and
Financial Services. New York. McGraw- Hill Education
BSP. ND. Money and Banking in the Philippines.