BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION

major in FINANCIAL MANAGEMENT

MONETARY POLICY AND CENTRAL BANKING

CB-01: THE PHILIPPINE FINANCIAL SYSTEM1

The financial system consists of all financial intermediaries and financial markets and their relations with respect to
the flow of funds to and from households, governments, business firms and foreigners, as well as the financial
infrastructure.

Financial markets perform the essential economic function of channeling funds from households, firms, and
governments that have saved surplus funds by spending less than their income to those that have a shortage of
funds because they wish to spend more than their income. Financial institutions compete to provided financial
services to households and business.

NATURE AND NECESSITY OF FINANCE

Financial system provides intermediation between suppliers and users of credit. As an integral part of the economic
system, it provides loans to poor families, small producers, big businessmen, and industrialists. It stimulates the
social and economic development of the country.

These arises a need for financial institutions in a society where many individuals have surplus incomes. People with
excess income are inclined to place their extra funds in investments or productive projects. Some intend to lend their
funds to borrowers to earn interests.

The primary job of financial institutions is to satisfy the business interests of both lenders and borrowers of funds.
Both parties transact their business with financial institutions. This is more convenient, economical and safer for
lenders.

Idle financial resources lent out to individuals without financial capital but with business inclinations will become tools
for production. Such transfer of money can improve consumption pattern and resource allocation. These creates
several favorable effects in the economy.

ELEMENTS OF THE FINANCIAL SYSTEM

1. Financial claims
– These comprises the money and the rights to receive money under specific circumstances. There are two
broad categories of claims: debts and equities. Equity conveys ownership rights while debt does not.

2. Financial institutions
– These are private or government organizations whose assets consists primarily of claims or incomes
primarily derived from dealing in and/or performing services in connection with claims. Such institutions
act as middlemen between suppliers and users of money. Some of these are commercial banks, savings
and loans associations, and finance companies.

Financial institutions provide financial information and advice, manage portfolios of financial assets on
behalf of economic units, buy and sell claims on instructions from client, and assist in finding sources for
those economic units seeking loans.

3. Financial markets
– These are institutions which expedite transactions in financial claims. It serves as a means of bringing the
forces of demand and supply of financial claims.

4. Financial regulators
– The Monetary Board is the policy-making body of Bangko Sentral ng Pilipinas. Laws on money, credit, and
banking are legislated by the Congress and through presidential decrees issued by the President.

FUNCTIONS OF FINANCIAL INSTITUTIONS

The general function of financial institutions is to facilitate the transfer of funds from savers to users. In transferring
such savings, there is a need for assistance due to large volume of savings. Also, certain barriers are created by
individuals in the transfer of funds: risk, inconvenience, and cost of transfer and desire to avoid illiquidity.

1
Central Banking by Feliciano R. Fajardo and Manuel M. Manansala
 THE PHILIPPINE FINANCIAL SYSTEM page 2

Financial institutions perform certain specific functions:

a. Investigation and credit analysis
b. Matching the supply and demand for funds
c. Provision for liquidity

STRUCTURE OF THE PHILIPPINE FINANCIAL SYSTEM

Bangko Sentral ng Pilipinas

Banking Institutions Non-Bank Financial Institutions

Private Banks Government Banks Private Non-Banks Government Non-

Banks
Expanded Development Bank of Investment houses Social Security
Commercial the Philippines (DBP) Investment banks System
Banks/Universal Land Bank of the Financing companies Government Service
Banks (EKB/UB) Philippines (LBP) Securities Insurance System
Commercial banks Philippine Al-Amanah dealers/brokers PAGIBIG
(KB) Islamic Investment Savings and loans
Thrift Banks (TB) Bank associations
 Savings and Mutual funds
Mortgage Banks Pawnshops
(SMB) Lending investors
 Private Pension funds
Development Insurance companies
Banks (PDB) Credit union
 Stock Savings
and Loan
Associations
(SSLA)
Rural Bank (RB)
Cooperative Banks

PHILIPPINE DEPOSIT INSURANCE CORPORATION

PDIC is a government instrumentality created in 1963 by virtue of Republic Act 3591 to insure the deposits of all
banks. PDIC exists to protect depositors by providing deposit insurance coverage for the depositing public and help
promote financial stability.

Consistent with its public policy objectives, the PDIC has the following mandates:

I. Deposit Insurance. The PDIC provides a maximum deposit insurance coverage of PHP500,000 per depositor per
bank. To pay insured deposits, the PDIC builds up the Deposit Insurance Fund primarily through assessments of
member-banks at an annual flat rate of 1/5 of 1% of their total deposit liabilities.

II. Examination and Resolution. The PDIC works closely with the Bangko Sentral ng Pilipinas (BSP) to help
maintain stability in the banking system. PDIC is authorized to issue regulations to implement its Charter, conduct
bank examinations and investigations to assess financial safety and soundness of banks and their adherence to
banking and deposit insurance rules and regulations, and extend financial assistance to eligible distressed banks.

III. Receivership and Liquidation. The PDIC is the statutory receiver and liquidator of closed banks2. Upon order
of the Monetary Board of the BSP, PDIC takes over closed banks; administers their assets, records and affairs; and
manages and preserves these assets for the benefit of the closed banks' creditors. Under RA 10846 or the amended
PDIC Charter, a closed bank transitions seamlessly from closure to liquidation, enabling PDIC to dispose and
distribute assets and settle claims of creditors in accordance with the preference and concurrence of credits as
provided by the Civil Code of the Philippines.
 THE PHILIPPINE FINANCIAL SYSTEM page 3

ROLES OF WORLD BANK, INTERNARIONAL MONETARY FUND AND ASIAN DEVELOPMENT BANK IN THE
PHILIPPINE FINANCIAL SYSTEM

Primarily, the main objective of WB was to held reconstruct Western Europe which has been destroyed by the World
War II. It shifted its goal to funding development projects of the Third World Country like the Philippines.

IMF’s main goal has been to ensure an international monetary system that will promote international free trade.

The main role of ADB is to held promote the economic and social growth of its developing member countries by
lending funds and extending technical assistance.

The Philippines is a member of WB, IMF, and ADB. It is also a big borrower from such institutions

THE ROLE OF BANGKO SENTRAL NG PILIPINAS

Through appropriate and adequate monetary policies, in coordination with fiscal policies, the government can reduce
or eliminate some socio-economic problems.

Monetary policies are made by the Monetary Board and implemented by the Bangko Sentral ng Pilipinas. The BSP has
the power to supervise and regulate financial institutions to promote economic efficiency and stability.

The financial system through the leadership of Bangko Sentral ng Pilipinas is a key factor in our economic
development. It can easily create jobs, incomes, and goods. The financial system is the best source of funds for
social and economic development.

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– jmls