Course Code and Title: FINP 7 – Credit and Collection

Professor: Dave Kieth J. Lappay

Elisa Victoria
Mark Corpuz
Teresita Fernandez
Lesson Number: 1
Topic: Introduction to Financial System and the Role of Money (1)

Learning Objectives:

At the end of this lesson, the student should be able to:

1. discuss the features of financial system,
2. discover the key components of the financial system, and
3. explain the role and uses of money in the economy.

Pre-Assessment
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. What are the features of the financial system?

2. Give examples of money market instruments.
3. Differentiate banks from non-bank institutions.

Lesson Presentation:

A financial system is a set of institutions, such as banks, insurance

companies, and stock exchanges, that permit the exchange of
funds. Financial systems exist on firm, regional, and global levels.
Borrowers, lenders, and investors exchange current funds to
finance projects, either for consumption or productive investments,
and to pursue a return on their financial assets. The financial system
also includes sets of rules and practices that borrowers and lenders
use to decide which projects get financed, who finances projects,
and terms of financial deals. (Alpert, 2019). Photo credit: Andrei Krauchuk / Alamy Stock Vector, Financial System.
Link: https://www.alamy.com/financial-system-vector-concept-metaphors-image366474477.html

Features of Financial System

● Financial System provides an ideal linkage between depositors and investors, thus encouraging both
savings and investments.
● The Financial System facilitates expansion of financial markets over space and time.
● The Financial System promotes efficient allocation of financial resources for socially desirable and
economically productive purposes.
● Financial System influences both the quality and the pace of economic development.

Components of Financial System

There are basically three components of

Indian financial systems, namely:

● Financial Institutions
● Financial Markets
● Financial Instruments

However, some financial systems from other

countries have added two categories which
can be considered under the first three:

● Financial Regulators
Photo credit: Raj Verdhan, Indian Financial System. ● Financial Services
Link: https://www.thesisbusiness.com/indian-financial-system.html
 1. Financial Institutions - The financial institutions are private or government entities which offer several
services to the general public and businesses for the management of funds.
● Banking Institutions - The banking
institutions are those which accept deposits
as well as distribute loans to the individuals
and businesses.
● Non-Banking Institutions - Non banking
institutions don’t accept deposits (cash)
from the public but offer various financial
products and services to their customers.
The insurance companies, mutual funds
agencies, stock brokers and primary
dealers are few examples of non-banking Photo Credit: vector_brothers, Money and Financial Institutions.
Link: https://www.gograph.com/clipart/money-and-financial-institutions-topic-gg102766967.html
institutions.

2. Financial Markets - The financial market is the

marketplace where the actual transactions of financial
instruments take place between two persons/ parties.
The financial markets can be broadly divided into three
categories.
● Money Market - It is the marketplace where the
short-term securities like treasury bills, Repo,
commercial papers etc. are issued and traded (sold &
purchased) over the counter among people.
● Capital Market - It is the marketplace where the long-
Photo Credit: MR.Cole_Photographer, Banking credit and deposit money theme icon, vector conceptual stylish symbol
for your design.
term securities like stocks, bonds, debentures are
Link: https://www.gettyimages.com/detail/photo/3d-animation-of-stock-market-information-stock-royalty-free-
image/1176050365 issued and traded.

Forex Market - It deals with exchange of foreign currencies and determines the rate of exchange
●
of currencies as well.
● Commodity Market - It basically deals with commodities like gold, silver, crude oils etc.
3. Financial Instruments - A financial instrument refers to a monetary document/ contract between two
parties which are traded in the financial markets (Money market, capital market or derivative market). It
represents an asset of one party and at the same time, the liability of another party.
● Money Market Instruments - Money market instrument is the short-term debt financing instrument
to enhance liquidity of businesses typically traded over the counter.
● Capital Market Instruments - The capital market instrument refers to the long-term capital
financing instrument (debt and equity) traded on the recognized stock exchanges.
● Derivative Instruments - The derivatives are those financial instruments which don’t have their
own value; instead, its value is derived from underlying assets.
4. Financial Services - The services offered by the financial institutions for the management, lending,
borrowing and investment of funds are called financial services.
● General Banking Services - The services offered by the commercial banks or other banking
institutions such as deposit of money, granting loans/ advances, Bill discounting, credit/ debit
card, account opening etc.
● Insurance Services - The various insurance policies like life insurance, health insurance, car
insurance etc. are sold under these kinds of services.
● Investment Services - The various financial institutions such as stock brokers, merchant and
investment bankers, primary dealers provide investment and asset management services to the
businesses and corporations.
● Foreign Exchange Services - These are the special services which deal in exchange of foreign
currencies.
5. Financial Regulators - Financial Regulators refers to the government bodies which are responsible for
regulating, inspecting, monitoring the functions of various financial institutions like banks, insurance
companies, business entities, Non-banking financial companies (NBFCs) etc.
Key roles of financial markets

A financial market is any exchange that facilitates trading of instruments, such as stocks, bonds, foreign
exchange, or primary commodities such as oil and gas

To facilitate saving by businesses and households

To lend to businesses and individuals
To allocate funds to productive uses
To facilitate the final exchange of goods and services
To provide forward markets in currencies and commodities
To provide a market for equities and bonds

Application:
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. What would be the results if a country produces too much money supply within the economy?

Evaluation:
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. How can you prove that the financial system in the Philippines is effective in times of pandemic?

Generalization:

Financial system is a network of financial institutions, financial markets, financial instruments and financial
services to facilitate the transfer of funds. Therefore, it is essential to study the topic to understand the concepts
on how the financial system helps allocate savings into investment channels. In addition, on how it helps in
mobilizing savings and make better use of these funds by allowing investments in various sectors of the
economy. Hence, as a student, we will be aware of the fundamental process by the time we step out from the
academic institution.

Reinforcement:
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. Make a research of at least five (5) companies in the Philippines that offers banking and non-banking
functions. Differentiate their role in economic activity.

References:

Online:

Alpert, D. (2019, December 09). The fiscal policy and financial system. Retrieved from Investopedia:
https://www.investopedia.com/terms/f/financial-system.asp

https://www.thesisbusiness.com/indian-financial-system.html

Books:

Croushore, D. (2014). Money and banking, 2nd Edition. Cengage Learning.

Medina, R. (2014). Money, credit, and banking. Unlimited Books Library Services Pub., Inc.
Pagoso, Cristobal M. (2014). “Money, credit and banking”. Rex Book Store. Manila