1. What are the elements of financial system? Discuss each.

There are six elements of financial system, namely:

 Lenders and Borrowers – Lenders are equivalent to the so-called surplus
economic units while borrowers to the deficit economic units, i.e. the non-
financial economic units that undertake the lending and borrowing process. The
ultimate lenders lend to borrowers either directly or indirectly via financial
intermediaries, by buying the securities they issue. The borrowers comprise the
four broad sectors of the economy: household sector, corporate (or business)
sector, government sector, and foreign sector. The same non-financial economic
sectors appear on the other side of the financial system as ultimate lenders. The
members of the four sectors are either lenders or borrowers or both at the
same time. An example of the latter is government: the governments of most
countries are permanent borrowers (usually long-term), while at the same time
having short-term funds in their accounts at the central bank (and the private
banks in some cases), pending spending. As noted before, borrowing and
lending takes place either directly or indirectly via the financial intermediaries.
 Financial Intermediaries – Intermediates the lending and borrowing process.
They interpose themselves between the lenders and borrowers, and earn a
margin for the benefits of intermediation (including lower risk for the lender).
They buy the securities of the borrowers and issue their own to fund these (and
thereby become intermediaries). Financial intermediaries exist because there is
a conflict between lenders and borrowers in terms of their financial
requirements (term, risk, volume, etc.). For example, members of the household
sector as lenders generally have a need for current account deposits (i.e.
essentially 1-day deposits), while government’s borrowing needs range from 3
months to 30 years. Another example: a surplus company may wish to lend for 3
months, while a deficit company may wish to borrow for 2 years. The financial
intermediaries solve these divergent requirements by (for example) investing in
the instruments of debt of government with the short-term funds of the
household sector invested with them. They also perform many other functions
such as lessening of risk for lenders, creating a payments system, the efficacy of
monetary policy, and so on.
 Financial Instruments – Are assets which are created/issued by the ultimate
borrowers and financial intermediaries to satisfy the financial requirements of
the various participants. These instruments may be marketable (e.g. treasury
bills) or non-marketable (e.g. retirement annuities). As a result of the process of
financial intermediation, and in order to satisfy the investment requirements of
the ultimate lenders and the financial intermediaries (in their capacity as
borrowers and lenders), a wide array of financial instruments exist. The
instruments are either non-marketable (e.g. retirement annuities, insurance
policies), which means that their markets are only primary markets (see later),
or marketable (e.g. treasury bills, bonds), which means that they are issued in
their primary markets and traded in their secondary nukes.
  Creation of Money – Equivalent to bank deposits by banks when they satisfy the
demand for new bank credit. This is a unique feature of banks. Central banks
have the tools to curb money growth. Money creation is an integral part of the
financial system, and a significant part of the investment environment in terms
of new financial instrument (debt) creation, inflation and interest rates. Interest
rates are important for many reasons, including being a target / reflection of
monetary policy actions and the valuation of financial instrument (debt and
shares) and income-property assets. Different financial systems may have
different forms of money creation, but there must be an adequate amount of
money circulating to keep the system going. In regards to cryptocurrency,
money creation happens when a new type of currency is created. In terms of
the stock market, money creation happens when a company makes more shares
available for the public to purchase.
 Financial Markets – The institutional arrangements and conventions that exist
for the issue and trading (dealing) of the financial instruments. A financial
market is any marketplace, physical or virtual, where financial instruments can
be traded between people and financial institutions. The stock market is a
financial market. Other examples of financial markets include the real estate
market, the bonds market, the commodities market and the foreign exchanges
market.
 Price Discovery – the establishment in the financial markets of the price of
money, i.e. the rates of interest on debt (and deposit) instruments and the
prices of share instruments. Price discovery is the process of setting a price for
goods, services or even financial instruments. Price discovery is based on a
variety of factors, such as supply and demand. If more people want something,
its price rises. If there’s a limited supply of a certain good, its price rises. Items
that are unwanted or plentiful often have cheaper prices. Although it may not
always seem this way to consumers, price discovery is a collaborative effort
between buyers and sellers. Sellers must price their goods in order to make a
profit, and buyers must be willing to pay that price.
2. What are the functions of financial institutions?
There are multiple functions of financial institutions. They include:

 Banking services – Financial institutions, specifically commercial banks, assist

their customers by giving them banking services like deposit and saving services.
These institutions also give out credit services that assist their clients in catering
to their immediate needs. The credit services could include mortgages, personal
or educational loans.
 Capital formation – Financial institutions assist in the creation of capital by
increasing capital stock. Financial institutions can increase the stocks by
organizing savings that are not in current use by customers and giving them to
investors.
 Monetary supply regulation – Financial institutions control the supply of money
in an economy. The main objective of this control is to ensure that there is
 stability in an economy and limited chances of inflation. The financial institution
tasked with this responsibility is the central bank, and it completes this task by
transacting the government’s securities to influence liquidity.
 Pension fund services – Pension funds are made by financial institutions to assist
people in preparation for their retirement. These pension funds are investment
means that these institutions create to ensure individuals have money after
their retirement, which could be issued on a monthly basis.
 Ensure economic growth of a nation – Governments play a vital role in
controlling financial institutions, and the main objective is to help in the growth
of an economy. When there are issues in an economy, financial institutions are
mandated to provide loans with low interest to assist in maintaining an
economy.
3. Discuss the structure of the Philippine Financial System.
The financial structure comprises the Monetary Authorities (Central Bank of the
Philippines and the Ministry of Finance), 32 commercial banks, 931 rural banks, 10 savings
banks, 37 development banks, 72 stock savings and loans associations, 250 finance companies,
12 investment houses, 59 investment companies, 448 pawnshops, and various specialized
financial institutions. Some of the financial institutions are government- or semi-government-
owned, e.g. the Philippine National Bank, the Philippine Veterans Bank, the Development Bank
of Philippines, Land Bank, Philippine Amanah Bank, and the specialized, non-bank institutions.
The public sector plays an important part in the financial system in terms of the share of
Government financial institutions’ assets to the total assets of the financial system and the share
of Government financial institutions’ lending to the total.
In terms of the assets of the financial institutions, commercial banks constituted about
44% of the total financial system at the end of 1977, Monetary Authorities (Central Bank of the
Philippines and the Philippines Treasury) 18%, the specialized banks 13%, the thrift banks 2.6%,
the rural banks (including those accepting demand deposits and those which do not) 2.2%, and
the non-bank financial institutions 21%. The predominant role of the commercial banks
contrasts with the minor role of the thrift banks and rural banks. However, non-bank financial
institutions, such as finance companies, investment houses and investment companies, grow
faster than commercial banks.
4. Number of financial institutions according to its classification.
The financial system is composed of two general groups namely: bank and non-bank
financial institutions. The banking institutions include the universal banks, commercial banks,
thrift or savings banks, and the rural and cooperative banks. Universal and commercial banks
have the largest resources and offer the widest variety of banking services outside of collecting
deposits and providing loans. These other services include underwriting and other functions of
investment houses, investing in equities and non-allied undertakings. Thrift banks include
savings and mortgage banks, private development banks, stock savings and loan associations
and microfinance thrift banks. They accumulate the savings of depositors and provide housing
loans and financing for short-term working capital as well as medium and long term financing
to small and medium scale enterprises engaged in agriculture, services, and industry. Rural and
cooperative banks promote and expand the rural community by mobilizing savings and
 extending loans and other financial services to farmers to help with the purchase of seeds,
livestock, fertilizers, and other farm inputs and the marketing of their produce.
Non-bank financial institutions, on the other hand, are composed of insurance
companies, pension fund institutions, investment banks, financing companies, pawnshops, and
mutual fund institutions.
There are several types of non-bank financial institutions offering a wide variety of
services such as investment houses, financing companies, investment companies, securities
dealers/brokers, lending investors, government non-bank financial institutions, venture capital
corporations, non-stock savings and loans associations, pawnshops and credit card companies
(Lirio, 2001).
5. Discuss the role of BSP in Banking and Financial Institution.
The Bangko Sentral ng Pilipinas (BSP) is the independent central monetary authority of
the Philippines that has regulatory and supervisory power over banks and non-bank financial
institutions. The BSP supervises the nation’s banking system. Non-bank financial institutions
such as insurance companies and investment houses are overseen by the Insurance
Commission and Securities and Exchange Commission respectively.
The role of financial intermediation in the Philippine economy continues to expand and
is expected to create greater prospects for employment over the next several years. The
share of financial intermediation output to total service sector output as well as to gross
domestic product has continually increased over the recent past.
The BSP extends discounts, loans and advances to banking institutions in order to
influence the volume of credit consistent with objective of price stability and maintenance of
financial stability. It also grants loans or advances to banking institutions in precarious financial
condition or under serious financial pressures, subject to certain conditions.