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Business Finance

Roles of Financial Institutions

a. they allocate or channel savings efficiently from savers to borrowers
b. they provide information, liquidity and risk-sharing services
c. they provide flexibility and divisibility of funds for users and sources of funds
d. they are essential for ensuing capital formation and economic growth
e. they help in funding important government projects and extend advisory services to help in nation building

Key Individuals Who Play Vital Roles in Financial Institutions

1. Depositor - is the person who has the money and deposits it in a savings account with a bank
that pools this together with the savings from other depositors.
2. Borrower - is the one who needs the funds and borrows the funds through a bank.

Classification of Financial Institutions

1. Banks-are financial intermediaries that bring and link together the depositors and borrowers.
-are major sources of funding for working capital requirements.
-they have to be regulated by Bangko Sentral ng Pilipinas (BSP) because they take
deposits and there is public interest involved.
2. Nonbanks -are financial intermediaries that are supervised and regulated by a government body, the
Securities and Exchange Commission (SEC).

Different Kinds of Banks

1. Universal banks
2. Commercial banks
3. Investment banks
4. Thrift banks

1. Universal Banks - are banks that provide a wide variety of financial services, including commercial and
investment services.
-they lend to multi-national companies or companies with global presence.
-their transactions are larger than commercial banking transactions and are
denominated in multi-currencies and not just limited to the local currency.

2. Commercial Banks - are mainly deposit-taking financial institutions that extend credit to the retail and
consumer market.
-their transactions are usually many but small, denominated in the local currency.
3. Investment Banks - are known to successfully raise funds for big corporations and governments
-are banks that provide various financial-related and other services to individuals,
corporations and government, such as raising financial capital by underwriting or acting as the clients agent in
the issuance of securities or stock certificates.

4. Thrift Banks - usually include savings and mortgage banks, private development banks, microfinance
institutions, stocks savings and loan associations.
-refers also to credit unions and mutual savings banks that provide savings and loans services.
-usually cater banking services to the country side or rural areas.

Examples of Nonbank Institutions

1. Contractual savings institutions (e.g. insurance companies and pension funds)
2. Investment companies/institutions (e.g. mutual funds and finance companies)
3. Securities market institutions
4. Credit card companies
5. Pawnshops
6. Private equity funds
Insurance companies - are companies that sell insurance coverage to provide guarantee of compensation for
specified death, illness, accident, loss or damage to property in return for payment of a premium.
-they sell life and nonlife insurance products.
- are companies that are regulated by the Insurance Commission.
Pension funds come from Social Security System (SSS) and Government Service Insurance System (GSIS).

Investment companies are regulated by the Securities and Exchange Commission (SEC) and perform similar
functions as banks in the sense that they can provide funding to companies or raise funds through bond issuance
or initial public offerings.
Mutual funds - provide opportunities for big and small investors to invest in financial instruments
which they would not have considered on their own, or they may have considered but do not
have the time or the expertise to do it including investments in the stock market, bonds, treasury
notes, and other money market instruments like treasury bills.

Securities Market Institutions - comprise of securities brokers and dealers, lending investors and organized
exchanges like the Philippine Stock Exchange (PSE).

Philippine Stock Exchange - provides a system for the trading of equity securities of publicly listed companies.

Pawnshops - are non-bank financial institutions that give credit to individuals who turn in their valuables (e.g.
jewelry) in exchange and then retrieve such valuables when they have raised the amount the borrowed plus the
interest charged.

Private equity funds are not regulated by government or any regulatory body. These funds are managed by
private fund managers and private investors and hence, the owners are able to invest more aggressively in the
financial markets.
- They finance businesses and projects.