CHAPTER 1

THE FINANCIAL SYSTEM

• LEARNING OUTCOMES
At the end of this chapter, the students should be able to:
1. define what a financial system is and illustrate its role in the economy;
2. identify the different participants in the financial system and their roles;
3. elaborate on the role of BSP in the economic development of the
Philippines;
4. explain monetary policy and its role in the economic development of the
country;
5. discuss the relationship between monetary policy and financial system; and
6. illustrate how the tools of monetary policy are used to influence money
supply and interest rates.
 INTRODUCTION
The International Monetary Fund (IMF) and the
World Bank (WB) conduct financial sector
assessments of countries that they help. It is
imperative that the IMF and WB monitor the financial
standing of country borrowers. A study of the
country's financial system is crucial in the study of
capital markets because the financial market is
central to the financial system. The following report
shows the standing of the Philippine financial sector.
 The main findings of this assessment are:
• The banking sector has been strengthened considerably since the
Asian crisis of the late 1990s and today appears generally resilient to
a broad range of macroeconomic risks. The impact of the ongoing
global crisis has thus far been milder than originally feared and the
macroeconomic outlook is improving, although risks remain elevated
in the near term.
• Further strengthening of supervisory powers and practices is needed
to bring supervision and bank safety nets to the best international
standards and practices. In particular, it is critical to ensure adequate
legal protection for supervisors and eliminate bank secrecy with
respect to supervisory duties.
Development of the nonbank financial
sectors would help growth and risk
diversification. Capital markets and the
insurance sector would benefit from
harmonizing various taxes and lowering the
regulatory burden on some products and
services. In the housing finance sector, the
multitude of government interventions and
institutions need to be rationalized.
All members of society - households, businesses, non-profit
organizations, the church, and the government - are affected
by the financial system of the country to which they belong.
The government is primarily responsible for defining and
regulating the financial system itself.
The central bank and its Monetary Board determine the rules,
regulations, and monetary policies that need to be
implemented to ensure a stable a healthy financial system for
the country. Business firms, households, and governments
play a wide variety of roles in our modern financial system. All
of us, one way or the other, are involved in the financial
system either as a borrower or a lender or both.
 FINANCIAL SYSTEM : DEFINITION
• Financial system describes collectively the financial markets, the
financial system participants, and the financial instruments and
securities that are traded in the financial markets. The functions
of the financial system are:
• to channel the funds from the saving units (lenders) to the deficit
units (borrowers)
• to provide a medium of exchange;
• to provide a mechanism for risk sharing; and
• to provide a channel through which the central bank can influence
the economy, in general and the financial system, in particular.
• With the advent of globalization, we have a multinational
financial system. Multinational financial system refers to the
collective financial transfer mechanisms that facilitate the
movement of money and profits between and among
financial system participants throughout the world. These
mechanisms include transfer of prices on goods and
services traded internally and internationally; intercompany
loans and leading (speeding up) and lagging (slowing down)
payments, fees, and royalty charges wherever they are
located in the world; and dividend payments. Together, they
lead to a “pattern of profits and movements of funds that
would be impossible in the world of Adam Smith”(Shapiro
2003).
 Kidwell et al. (2013) cited the interferences that we can
draw about the financial system:
• If the financial system is competitive, the interest rate that the
bank pays on certificate of deposit (CDs) will bear at or near the
highest rate that you can earn on CDs of similar maturity and
risk. At the same time, borrowers will have borrowed at or near
the lowest possible interest cost, given their risk class.
Competition among banks for deposits will drive CD rates up and
loan rates down.
• Banks and other depository institutions, such as insurance
companies, gather money from consumers in small dollar
amounts, aggregate it, and then make loans in much larger
dollar amounts.
• One important function of the financial system is
to allocate money to the most productive
investment projects in the economy. If the
financial system is working properly, only projects
with high-risk adjusted rates of return are funded,
and those with low rates are rejected.
• Finally, banks are profit-making organizations,
and the bank and other lenders earn much of
their profits from the spread between lending and
borrowing rates.
 Four basic functions that financial system
performs
• Fund acquisition - a way of getting deposits and
necessary funds to finance projects and
investments
• Fund allocation - determining to which uses,
projects, or investments the acquired funds will be
used
• Fund distribution - the process by which necessary
funds are given to the uses, projects, or
investments that need funds
 FINANCIAL SYSTEM PARTICIPANTS
• There are six participants or sector in the financial
system:
1. households or consumers
2. financial institutions/intermediaries
3. non-financial institutions
4. government
5. central bank
6. foreign participants
 HOUSEHOLDS OR CONSUMERS
• Are generally described as the group that receives income, majority of
which typically comes from wages and salaries. Such income is spent on
goods and services, and a part is saved. Gross savings is equal to
current incomes less current expenditures. What is spent is termed
consumption. Goods that are consumed within a current period are
termed non-durable consumer goods or non-durables. Goods that will
last for more than a year are termed durable consumer goods or
durables. According to the Hadjimichalaskises (1995), “the standard
definition of consumer durables, however, is that they are consumption
goods with a life of three or more years. The assumption is that all
consumer goods with shorter lives are used up in the year in which they
are purchased.” Typically, consumers or households purchase
non-durables from current income and borrow for the durable like cars,
washing machines, air conditioners, or houses.
 Financial Institutions/Intermediaries
• Are the firms that bridge the gap between surplus units
(SUs) or investors/lenders and deficit units (DUs) or
borrowers. They channel funds from lenders to borrowers.
They include depository institutions and non-depository
institutions. Other than being channels, they are lenders
and borrowers at times. When they underwrite securities
or acts as brokers or dealers, they are intermediaries. If
they buy securities, they are investors or lenders, and
when they are the ones issuing the securities, they are
borrowers.
 Non-Financial Institutions
• Are businesses other than financial institutions or
intermediaries. They include trading, manufacturing,
extractive industries, construction, genetic industries, and
all firms other than the financial ones. Just like
households and financial institutions, these are also
borrowers or lenders or both at one time or another.
When these non-financial institutions buy securities, they
are lenders, investors, or savers; when they issue the
securities, they are the borrowers.
 Government
• Means the national, provincial, municipal or city governments, and
barangays or towns comprising the Philippines as a whole. Each division
has its heads and agencies that help in running the division they are
responsible for. The president is responsible for the entire country, the
governor is responsible for his own province, the mayor is responsible for
his own city/municipality, and the barangay captain is responsible for his
own barangay. Each of them has his own agencies. The Bureau of the
Treasury (BTR) is part of the government that is a participant in the
financial system. When BTR or any other subdivisions of government
issue their own securities, they act as borrowers/deficit units, and when
the BTR or any other subdivisions of government buy securities, they act
as investors or savers/surplus units.
 Central Bank
• The Bangko Sentral ng Pilipinas and all the other central banks
of the different countries are mandated to ensure that their
respective countries have a stable and healthy financial system.
They oversee the operations of their entire financial system and
mandate the rules, regulations, and monetary policies that will
help them maintain a healthy and stable economy. Central bank
is the “banker” to banks. It provides various services to bank
such as helping them collect and clear checks and loaning them
funds as needed. As a lender and a regulator, central bank
oversees the health of the banking system. Central banks are
the monetary policymakers of their respective countries.
 Foreign Participants
• Refer to the participants from the rest of the world -
households, governments, financial and
non-financial firms, and central banks. Goods and
services and financial instruments/securities are
exchanged across national boundaries, as well as
within these boundaries. International trade and
finance are parts of globalization. As globalization
affects the entire world, the role of foreign
participants in the financial system has become
more important.
 BANGKO SENTRAL NG PILIPINAS AND THE
PHILIPPINE FINANCIAL SYSTEM
• Bangko Sentral ng Pilipinas (BSP) is the Central Bank of
the Republic of the Philippines. It was established on
January 3, 1949 as the country's central monetary
authority. The Bangko Sentral ng Pilipinas (BSP) was
established on July 3, 1993 pursuant to the provisions of
the 1987 Philippine Constitution and the Republic Act No.
7653, the New Central Bank Act of 1993 to replace the
Central Bank of the Philippines. BSP enjoys fiscal and
administrative autonomy in the pursuit of its mandated
responsibilities.
 NEW LOGO
The new BSP logo is a perfect round shape in blue that
features three gold stars and a stylized Philippine eagle
rendered in white strokes. These main elements are
framed on the left side with the text inscription “Bangko
Sentral ng Pilipinas” underscored by a gold line drawn
in half circle. The right side remains open, signifying
freedom, openness, and readiness of BSP as
represented by the Philippine eagle (signifying strength,
clear vision, and freedom) to soar and fly toward its
goal. Putting all these elements together in a solid blue
background signifies stability. The stars are rendered in
gold to symbolize wisdom, wealth, idealism, and high
quality. The white color of the eagle and the text for
BSP represent purity, neutrality, and mental clarity.
 Principal Elements:
1. The Philippine eagle, our national bird, is the world's
largest eagle and a symbol of strength, clear vision,
and freedom, the qualities we aspire for as a central
bank.
2. The three stars represent the three pillars of central
banking: price stability, stable banking system, and a
safe and reliable payments system. It may also be
interpreted as a geographical representation of BSP's
equal concern for the impact of its policies and
programs on all Filipinos, whether they are in Luzon,
Visayas, or Mindanao.
3. Colors
• The blue background signifies stability
• The stars are rendered in gold to symbolize wisdom, wealth, idealism,
and high quality.
• The white color of the eagle and the text for BSP represent purity,
neutrality, and mental clarity.
4. Font or typeface, Non-serif, bold for “BANGKO SENTRAL NG
PILIPINAS” to suggest solidity, strength, and stability. The use of
Non-serif font characterized by clean lines portrays the no-nonsense
professional manner of doing business at BSP.
5. Round shape to symbolize the continuing and unending quest to
become an excellent monetary authority committed to improve the quality
of life of Filipinos. This round shape is also evocative of our coins, the
basic units of our currency.
 Organizational Structure
• By organization, the basic structure of the Bangko Sentral ng
Pilipinas includes:
– The Monetary Board exercises the powers and functions
of BSP, such as the conduct of monetary policy and
supervision of the financial system. Its chairman is the
BSP Governor, with five full-time members from the private
sector and one member from the Cabinet. The Governor is
the Chief Executive Officer of BSP and is required to direct
and supervise the operations and internal administration of
BSP. A deputy governor heads each of the BSP's
operating sectors. (see references for organizational
structure)
• Executive Management Services is the functional grouping of all units
directly reporting to the Monetary Board or to the Governor.
• Functional Sectors:
– Monetary Stability Sector takes charge of the formulation and
implementation of the BSP's monetary policy, including serving the
banking needs of all banks through accepting deposits, servicing
withdrawals, and extending credit through the rediscounting facility.
– Supervision and Examination Sector enforces and monitors compliance
to banking laws to promote a sound and healthy banking system.
– Resource Management Sector serves the human, financial, and
physical resource needs of BSP.
• Security Plant Complex is responsible for the production of Philippine
currency, security documents, and commemorative medals and
medallions.
 BSP's Organizational Structure
Monetary
Board

Governor

Monetary Supervision and Resource

Stability Examination Sector Management Sector
Sector
Security Plant Complex
 The Monetary Board
• The Board that governs the Central Bank. Hence, the powers
and functions of Bangko Sentral are exercised by its Monetary
Board, which has seven members appointed by the President of
the Philippines. The Chairman is the Governor of BSP. Under RA
no. 7653, the New Central Bank Act, one of the government
sector members of the Monetary Board must also be a member
of the Cabinet designated by the President. Five other members
come from the private sector. The New Central Bank Act took
effect on June 14, 1993, during the reign of then President Fidel
Ramos. It established an independent Central Monetary
Authority, which is now known as the Bangko Sentral ng
Pilipinas (BSP) with a capital of ₱50 billion.
• The New Central Bank Act established certain qualifications
for the members of the Monetary Board and also prohibited
members from holding certain positions with other
governmental agencies and private institutions that may give
rise to conflicts of interest. With the exception of the
members of the Cabinet, the Governor and the other
members of the Monetary Board serve terms of six years
and may only be removed for cause.
• The Monetary Board meets at least once a week. The Board
may be called to a meeting by the Governor of the Bangko
Sentral or by two other members of the Board. Usually, the
Board meets every Thursday but on same occasions, it
convenes to discuss urgent issues.
 The major functions of the Monetary Board include the
power to:
1. Issue rules and regulations it considers necessary for the effective
discharge of the responsibilities and exercise of the powers vested
in it.
2. Direct the management, operations, and administration of Bangko
Sentral, organize its personnel, and issue such rules and
regulations as it may deem necessary or desirable for this purpose.
3. Establish a human resource management system which governs
the selection, hiring, appointment, transfer, promotion, or dismissal
of all personnel. Such system shall aim to establish professionalism
and excellence at all levels of the Bangko Sentral in accordance
with sound principles of management.
4. Adopt an annual budget for and authorize such
expenditures by Bangko Sentral in the interest of the
effective administration and operations of Bangko Sentral in
accordance with applicable laws and regulations.
5. Indemnify its members and other officials of Bangko Sentral,
including personnel of the departments performing
supervision and examination functions, against all costs and
expenses reasonably incurred by such persons in
connection with any civil or criminal action, suit, or
proceeding, to which any of them may be made a party by
reason of the performance of his functions or duties, unless
such members or other officials are found to be liable for
negligence or misconduct.
The current composition of the Monetary Board:
Chairman & Governor Benjamin E. Diokno
Members Carlos G. Dominguez III

Felipe M. Medalla

Juan D. De Zuňiga

Peter B. Favila

Antonio S. Abacan, Jr.

V. Bruce J. Tolentino (the end

 BSP VISION AND MISSION

VISION:
BSP aims to be a world-class
monetary authority and a catalyst
for a globally competitive economy
and financial system that delivers a
high quality of life for all Filipinos
 MISSION
• BSP is committed to promote and maintain price stability
and provide proactive leadership in bringing about a
strong financial system conducive to a balanced and
sustainable growth of the economy. Towards this end, it
shall conduct sound monetary policy and effective
supervision over financial institutions under it's
jurisdiction.
 OBJECTIVES OF BSP:
1. Maintain monetary policies conducive to a balanced and
sustainable growth of the economy;
2. maintain price stability in the country
3. promote and maintain monetary stability and the
convertibility of the peso
4. maintain stability of the financial system
5. provide payment and the other financial services to the
government, the public, financial institutions, and foreign
official institutions
6. supervise and regulate depository institutions.
• To attain it's objectives, the monetary and fiscal
policies of the country need to be closely and
efficiently coordinated.

• The different agencies of the government, both

financial and fiscal, need to cooperate with one
another. Moreover, it is important that there
would be coordination and cooperation between
the government and the private sectors. These
sectors are partners in nation-building.
 FUNCTIONS OF BSP

•Being the primary

monetary authority, BSP
performs the following
functions:
 1. BANK OF ISSUE
• BSP has the monopoly of printing bills and minting
money coins. This monopoly is designed to:
• ensure the uniformity of design and content of
money;
• effect government supervision over money
supply;
• give prestige and honor to the central bank; and
• become a good source of income for the
government.
 2. GOVERNMENT'S BANKER, AGENT, AND
ADVISER
• BSP handles the banking accounts of government
agencies and instrumentalities. All government
agencies deposit their funds with BSP. It provides
foreign exchange to the government for the importation
of goods and services and for payment of foreign loans.
If funds are not sufficient for the needs of the country,
BSP borrows from international financial institutions like
World Bank (WB) and International Monetary Fund
(IMF).
3. CUSTODIAN OF THE CASH RESERVES OF
BANKS
• All banks are regulated to have adequate reserves in proportion
to their deposit liabilities with BSP to ensure availability of cash
to depositors who wish to withdraw deposits.
• Interbank call loans, these create reserve requirements that is,
when one bank lack of funds to comply with the reserve
requirement of BSP, it borrow's money from other bank's reserve
with BSP
• The interest rate on these interbank call loans is called the
reserve repo rate (RRP), which is the overnight borrowing rate,
the official interest rate in the Philippines.
4. CUSTODIAN OF THE NATION'S RESERVES OF
INTERNATIONAL CURRENCY
• The early years of central banking required central
banks to maintain a minimum reserve of gold, and
later of international currency, as a guarantee for its
issuance of currency bills or notes and deposit
liabilities (cash reserves of commercial banks). This
is designed to meet problems relevant to balance of
payments and maintaining the external value of the
local currency
5. BANK OF REDISCOUNT AND LENDER OF
LAST RESORT
• The rediscounting function of the central bank means the central
bank lends money to banks distress on the basis of their
promisory notes or the promisory notes of the bank borrowers
• When bank grant loans to borrowers, borrowers execute a
promisory note, which the bank discounts. Interest is
immediately deducted from the proceeds of the loans. The
process is known as discounting.
• These notes are presented by these banks to obtain a loan from
the central bank, that is why it is termed rediscounting, that is,
the discounted notes are again discounted.
6. BANK OF CENTRAL CLEARANCE AND
SETTLEMENT
• The Central Bank act as a sort of Clearing House
• This means that banks send representatives to the
clearing house at the central bank where claims are
demanded by one bank against another.
• Banks have their own boxes at the clearing house. All
checks placed in the boxes are payable to banks that
cashed them.
• The clearing of checks is conducted by the Philippine
Clearing House Corporation (PCHC)
• Trusted as a neutral service bureau of banks,
PCHC extended its operating outfit by
implementing several electronic-based
payment system services for the banking
community such as the Electronic Peso
Clearing System (EPCS), Philippine Domestic
Dollar Transfer System (PDDTS), and Project
Abstract Secure System (PASS).
• Sorting, processing, and clearing of checks are
done by computers.
 7. CONTROLLER OF CREDIT
• Controlling money supply requires controlling credit.
• The higher the money supply in circulation, the higher the prices
of goods and services
• Limited supply of money means lower prices, which do not
encourage production.
• Hence, it is imperative for the central bank to limit, not only the
money supply, but also credit.
• This is because credit is in addition to the money supply in
circulation. The more credit there is available, the more
production is encouraged because the consumers, can also
spend more if they are also able to obtain credit.
 BSP can control credit by:
• Increasing or decreasing interest rates;
• Increasing or decreasing the legal reserves
requirement of banks;
• regulating the margin requirements of stock
exchange securities;
• open market operations (buying or selling
government securities)
• imposing ceilings on total amounts bank can lend
 MONETARY POLICY AND FINANCIAL
SYSTEM
• Monetary policy refers to the manipulation of money
supply to affect the economy of a country as a whole.
It largely impacts interest rates. Increases in the
money supply lower short-term interest rates and will
encourage investments and consumptions. On the
long run, however, an abundance of money supply
leads to increased prices or inflation and is
undesirable. This is where BSP plays its role as the
balancer.
• Generally speaking, expansionary monetary
policies and contractionary monetary policies
involve changing the level of the money supply
in a country. Expansionary monetary policy is
simply a policy which expands (increases) the
supply of money, whereas contractionary
monetary policy contracts (decreases) the
supply of a country's currency. Money supply is
the total of currency and coins and demand
deposits in the economy.
 THE PHILIPPINE MONETARY SYSTEM
ORGANIZATION:
•BANGKO SENTRAL NG PILIPINAS

I. BANKING INSTITUTIONS
II. NON-BANK FINANCIAL INSTITUTIONS
 I. BANKING INSTITUTIONS
A. PRIVATE BANKING INSTITUTIONS
1. COMMERCIAL BANKING INSTITUTIONS
1.a Universal Bank (UB) or Expanded
Commercial Bank (EKB) is any commercial bank,
which performs the investment house function in
addition to its Commercial Banking Authority. It
may invest in the equities of allied and non-allied
enterprises. Allied enterprises may either be
financial or non-financial.
1.b Commercial Bank or Domestic
Bank (KB) is any commercial bank that
is confined only to commercial bank
functions such as accepting drafts and
issuing letters of credit, discounting and
negotiating promisory notes, drafts and
bills of exchange.
 2. THRIFT BANKS
• Are primarily engaged in mobilizing the small
savings of the people. They encourage the habit
of thrift and savings, and provide loans at
reasonable interest rates. They provide funds
for agriculture and industry at reasonable
interest rates. The small producers like farmers,
fishermen, craftsmen, and poor consumers can
rely on such banks for financing their production
and consumption inputs.
 A. SAVINGS AND MORTGAGE BANKS
• The primary function of a savings and mortgage
bank is to receive time deposits of different types
and to invest its funds in long term investments.
It is a corporation organized primarily for the
purpose of accumulating the small savings of
depositors and investing them, together with its
capital, in bonds or in loans secured by bonds,
real estate mortgages, and other forms of
security as provided for by law.
 B. THE SAVINGS AND LOAN ASSOCIATION
• RA 3779 known as Savings and Loan Association
Act defines as “any corporation engaged in the
business of accumulating the savings of its
members or stockholders, and using such
accumulations, together with its capital in the case
of a stock corporation, for loans and/or for
investments in the securities of productive
enterprises or in securities of the Government, or
any of its political subdivisions, instrumentalities, or
corporations.”
 C. PRIVATE DEVELOPMENT BANK
• Is a bank that exercises all the powers and shall assume
all the obligations of the savings and mortgage banks as
provided in the General Banking Act as otherwise stated
• help construct, expand and rehabilitate our agriculture
and industry. It helps meet the needs of these sector.
• The Development Bank of the Philippines is the
government counterpart of the private development
banks and helps the private development banks augment
their capitalization. Under Private Development Bank Act
RA 4093 June 19, 1964.
 D. RURAL BANK
• Is any bank authorized by the central bank to
make credit available to farmers, businessmen
and cottage industries in the rural areas. Loans
may be granted by the rural banks on the
security of land without torrents title where the
owner of private property can show five (5)
years or more of peaceful continuous and
uninterrupted possession of the land in the
concept of ownership.
 E. COOPERATIVE BANKS

•Are banks established to

assist the various
cooperatives by lending
those funds at reasonable
interest rates.
 B. GOVERNMENT BANKS or
SPECIALIZED GOVERNMENT BANKS
• A. LAND BANK OF THE PHILIPPINES (LBP) is a
government bank which provides financial support in the
implementation of the Comprehensive Agrarian Reform
Program (CARP).
• the authorized capital stock of the bank is P 3 billion
divided into 180 million common shares at a par value of
P10 per share. These shares are fully subscribed by the
government. Another 120 million preferred shares with a
par value of P10 each are non-voting.
• is a universal or expanded commercial bank
• The affairs and business of the bank are directed by a
Board of Directors consisting of seven members
composed of the Secretary of Finance as chairman, the
president of the bank as Vice Chairman, the Secretary of
Agrarian Reform and the Secretary of Labor as ex-officio
members.
• The Board Member who represents agrarian reform
benificiaries is appointed by the President of the
Philippines, while the two remaining members are elected
by the stockholders in their annual meeting.
 Land Bank of the Philippines
BOARD OF DIRECTORS
• Carlos G. Dominguez- Secretary - Department of Finance
• Cecilia C. Borromeo - President and CEO - Land Bank of
the Philippines
• William Dar - Secretary - Department of Agriculture
• Silvestre H. Bello III Secretary - Department of Labor and
Employment
• John R. Castriciones - Secretary - Department of Agrarian
Reform
• Virgilio DV. Robes - Representative - Agrarian Reform
Beneficiaries Sector
• Jaime L. Miralles - Representative - Agrarian Reform
Beneficiaries Sector
• Jesus V. Hinlo, Jr. - Representative - Private Sector
• Nancy Irlanda Tanjuatco - Representative - Private Sector
 B. AL-AMANAH ISLAMIC INVESTMENT
BANK
• Was created under the 1989 charter of RA 6848 January
26, 1990 for the purpose of promoting and accelerating
the socio-economic growth and development of
Mindanao, particularly the provinces of Cotabato, Lanao
del Sur, Lanao del Norte, Zamboanga del Sur,
Zamboanga del Norte and Sulu.
• The operation of Islamic Bank is based on the Islamic
concept of banking following the no-interest and
partnership principles. The authorized capital stock of P 1
billion, divided into 10 million shares at a par value of P
100 each.
• The affairs and business of Islamic bank are directed,
including the management and preservation of it's
properties, by a Board of Directors consisting of 9
members who are elected by the stockholders. The CEO
is the chairman who is chosen by the Board of Directors
from among themselves.
 DIRECTORS
• MR. ALEX P. BANGCOLA - Chairman and CEO
• MIGUEL C. ABAYA - Director
• MARIA LOURDES A. ARCENAS - Director
• ROGELIO V. GARCIA - Director
• EDGAR N. SERONAY - Director
• ABDELNOOH K. HADJIRUL - Director
 C. THE PHILIPPINE NATIONAL BANK
(PNB)
• Operates under the provision of Executive Order No. 80,
the 1996 revised charter of PNB. The bank has an
authorized capital stock of P 10 billion which is divided
into P 100 million common shares at a par value of P 100
per share. The government's paid-up subscription is P 2.5
billion. The PNB is a universal bank.
• The PNB's operation and affairs are governed by a Board
of Directors which has 9 members elected by the
stockholders annually.
• The Chairman of the Board is appointed by the President
of the Philippines. The President, who is elected from
among the members of the BoD, with the advise and
consent of the President of the Philippines, is the bank's
chief executive.
 Board of Directors
• Florencia G. Tarriela - Chairperson
• Felix Enrico R. Alfiler - Vice Chairman
• Florido P. Casuela - Director
• Leonilo G. Coronel - Director
• Carmen K. Tan
• Lucio C. Tan
• Lucio K. Tan, Jr.
• Michael G. Tan
• Vivienne K. Tan
• Wick A. Veloso - President & CEO
 D. DEVELOPMENT BANK OF THE
PHILIPPINES ( DBP)
• provide loans for developmental purposes gives loans, gives
loans to the agricultural sector, commercial sector and the
industrial sector.
• started operating in 1935 as the National Loan and
Investment Board
• In 1939, it became the Agricultural and Industrial Bank that
managed government resources until the outbreak of the
war.
• In 1947, it was renamed the Rehabilitation Finance
Corporation (RFC) that provided credit facilities for the
development of agriculture, commerce, and industry and
the reconstruction of properties damaged by the war.
• In 1958, it was reorganized into the DBP
• In 1995, the bank was granted an expanded bank license
attaining universal bank status.
• The bank is capitalized at P35 billion, divided into 350
million common shares with a par value of P 100 per
share. These shares are subscribed by the national
government.
• The Board of Directors consisting of 9 members
appointed by the President of the Philippines, are directed
the affairs and business of the bank including the exercise
of it's powers and management of it's properties.
• The Chairman and Vice Chairman are appointed by the
President of the Philippines. The Chairman is the bank's
chief executive.
 Board of Directors
• Alberto G. Romulo, Chairman
• Emmanuel G. Herbosa, Vice Chairman/President & Chief
Executive Officer
• Miguel C. Abaya, Director
• Maria Lourdes A. Arcenas, Director
• Luis C. Bonguyan, Director
• Emmanuel P. Galicia, Jr., Director
• Rogelio V. Garcia, Director
• Teodoro M. Jumamil, Director
• Rolando L. Metin, Director
C. NON-BANK FINANCIAL INSTITUTIONS
• 1. Investment House/Bank - any enterprise which
engages in underwriting securities of other corporations.
Underwriting is the act or process of guaranteeing the
distribution and sale of securities of any kind issued by
another corporation.
• Presidential Decree no. 129 otherwise known as the
Investment Houses Law, governed the establishment,
operation and regulation under this provision
• formed as stock corporation registered at the SEC
• The minimum initial paid-in capital of any investment
house is P 300 million.
• at least 40% of the voting stock of any investment house
must be owned by citizens of the Philippines.
• Majority of the members of the Board of Directors must be
citizens of the Philippines.
 2. FINANCING COMPANY
• is any business enterprise where the primary purpose is
to extend credit facilities to consumers and to industrial,
commercial or agricultural entities either by discounting or
factoring commercial papers or accounts or by buying
installment contracts, leases, chattel mortgages or other
evidences of indebtedness,or by leasing motor vehicles,
heavy equipment and industrial machineries and business
and office equipment, appliance and other movable
properties.
 3. SECURITIES BROKERS
• Is any person engaged in the business of effecting
securities transactions and earns through commission
basis.
 4. SECURITIES DEALER
• Is any person engaged in the business of buying and
selling securities for his own account thereby making a
profit from the difference between his buying and selling
securities.
 SECURITIES DEALER / BROKER
• Must be registered, as part of SEC requirements, a surety
bond in the amount of P200,000 for a stock broker, and
P100,000 in the case of a dealer in securities is needed
• A minimum paid-up capital in the amount of P 1 million is
required of every applicant for license as stock broker or
dealer in securities.
 5. BUILDING AND LOAN ASSOCIATION
• Is any corporation whose Capital Stock is periodically paid
by its stockholder members. Its purpose is to encourage
frugality, home building among its members, and to loan
its funds including funds it borrowed from its own
members.
• It also uses the accumulated funds to repay its
stockholders upon surrender of their shares.
 6. PAWNSHOPS
• Provide credit to small borrowers who are not qualified to
obtain small loans from other financial institutions.
• The business operation of pawnshops is governed under
the provisions contained in the Pawnshop Regulation Act
and Rules and Regulations for Pawnshops.
• The Pawnshop has a required minimum paid-in capital of
P 100,000.00
• A duly organized and licensed pawnshop has, in general,
the power to engage in the business of lending money on
the security of personal property within the framework and
limitations of the Pawnshop Regulation Act and the Rules
and Regulations for Pawnshops.
 D. GOVERNMENT NON-BANK
FINANCIAL INSTITUTIONS
1. The Government Service Insurance System (GSIS)
• On May 13, 1937 started its operations, with an initial capital of P
200,000.00 for operating expenses and a personal force of 50
employees
• The GSIS was entrusted first with the administration of a Life
Insurance Fund.
• It then extended life insurance coverage and benefits to
government employees.
• Presently, the GSIS administers the following: Life
Insurance Fund, Retirement Fund, Health Insurance
Fund/Medicine, State Insurance Fund/Employees'
Compensation, General Insurance Fund/Property
Insurance, and Barangay Officials' Life Insurance Fund.
 2. SOCIAL SECURITY SYSTEM (SSS)
• September 1, 1957 started its operations with 211
personnel and assets of P6,372.
• At first, granted only death, disability, sickness, and
old-age benefits under its social security program for the
workers/employees in the private sector.
• As its capacity for funding and administrative experience
grew, other benefits have been added to the program
such as hospitalization benefits under the Medicare
program, employees' compensation benefits, and
maternity benefits.
 3. THE NATIONAL HOME MORTGAGE
FINANCE CORPORATION (PAG-IBIG)
• Primary purpose is to develop and provide for a
secondary market for home mortgages granted by public
and/or private home financing institutions.
 Under Section 5 of PD no. 1267, the
NHMFC is authorized to exercise the
following powers and functions:
• To purchase, acquire, sell, discount, refinance or
otherwise deal in home mortgages or participations
therein under such terms and conditions as may be
prescribed by the Board of Directors of the Corporation.
• To own, lease, purchase or otherwise acquire, sell or
otherwise dispose of property, real or personal, as may be
necessary and appropriate for the conduct of its business.
 CHAPTER SUMMARY
• Financial System encompasses the financial markets,
participants, and instrument dealt with in said markets.
• The functions of the financial system include channeling funds
from saving units to deficit units, providing a medium of
exchange, providing a mechanism for risk-sharing, and providing
a channel through which the central bank can influence the
economy in general and the financial system in particular.
• Households or consumers are the wage/salary-earners
whose income is spent on goods and services and if there
is something left to save, they save it.
• Financial Institutions/intermedaries are the firms that act
as bridge between surplus units/lenders and deficit
unit/borrowers.
• Non-financial institutions are businesses other than the
financial institutions/intermediaries like trading,
manufacturing, mining, and other businesses.
• Government includes all levels of government from
barangays up to the national government. All government
units act as either lenders or borrowers at one time or
another.
• The central bank of any country is in charge of the
financial system of any country. The Bangko Sentral ng
Pilipinas is the agency that is in charge of the Philippine
monetary and financial system.
• Internally, BSP is structured as follows:
a. The Monetary Board
b. The Monetary Stability Sector
c. The Supervision and Examination Sector
d. The Resource Management Sector
 Objectives of the BSP include
a. maintaining the monetary policies conducive to a balanced and
sustainable growth of the economy;
b. maintaining price stability in the country;
c. promoting and maintaining monetary stability and convertibility
of peso;
d. maintaining stability of the financial system
e. providing payment and other financial services to the
government, the public, financial institutions, and foreign official
institutions;
f. supervising and regulating depository institutions.
 Functions of the BSP include:
a. Bank of issue;
b. Government's banker, agent, and adviser;
c. Custodian of the cash reserves of banks;
d. custodian of the nation's reserves of international
currency;
e. bank of rediscount and lender of last resort;
f. bank of central clearance and settlement; and
g. controller of credit
Monetary policy refers to regulations that will affect money supply
to benefit the economy. Among the tools of monetary policy are
money supply, open market operations, reserve requirement on
banks, discount rate, and credit control, among others.