The Philippine Financial System

The Bangko Sentral ng Pilipinas and its Role in Deposit

Expansion and Money Supply

What is Bangko Sentral ng Pilipinas (BSP)?

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the
Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987
Philippine Constitution and the New Central Bank Act of 1993.

The BSP's main responsibility is to formulate and implement policy in the areas of money,
banking and credit with the primary objective of preserving price stability.

Roles/Functions Of The Bangko Sentral Ng Pilipinas.

● Liquidity Management.
The BSP formulates and implements monetary policy aimed at influencing money
supply consistent with its primary objective to maintain price stability.
● Currency issue.
The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the Government and are
considered legal tender for all private and public debts.
● Lender of last resort.
The BSP extends discounts, loans and advances to banking institutions for
liquidity purposes.
● Financial Supervision.
The BSP supervises banks and exercises regulatory powers over non-bank
institutions performing quasi-banking functions.
● Management of foreign currency reserves.
The BSP seeks to maintain sufficient international reserves to meet any
foreseeable net demands for foreign currencies in order to preserve the
international stability and convertibility of the Philippine peso.
● Determination of exchange rate policy.
The BSP determines the exchange rate policy of the Philippines. Currently, the
BSP adheres to a market-oriented foreign exchange rate policy such that the role
of Bangko Sentral is principally to ensure orderly conditions in the market.
● Other activities.
The BSP functions as the banker, financial advisor and official depository of the
Government, its political subdivisions and instrumentalities and GOCCs.
Effect of monetary policy on the financial system, institutions,
and markets

What is Monetary Policy?

In the Philippines, monetary policy is the way

the central bank, the Bangko Sentral ng Pilipinas,
controls the supply and availability of money, the cost
of money and the rate of interest. Monetary policy is
also used to promote economic growth and
development. Monetary policy strategies include
revising interest rates and changing bank reserve
requirements.

What are the effects of monetary policy on the financial system and institution?

Monetary policy, financial stability and the strategy review

Our job is to keep prices stable. We know that a stable financial system is good
for price stability. Stable prices are good for the financial system too, as people and
businesses are better able to plan and invest knowing prices will not change by much over
time. That is why information about the health of the financial system plays an important
role in our analysis and decisions.
Why was financial stability part of our strategy review?

The financial system important because this is a key part of our economy. It
includes, for example, banks, insurance companies and financial markets. The financial
system helps money flow through the economy when and to where it is needed. For this
essential function to work well, we need the financial system to be stable. While other
authorities are primarily responsible for this task, we also keep an eye on the stability of
this system.

Financial stability is good for price stability, and vice versa

Our job is to keep prices stable. We do that using our monetary policy, which works
through the financial system. When banks and markets are healthy, our monetary policy
works better. In times of financial instability, it becomes harder for us to keep prices
stable. Price stability is good for the financial system. People and businesses are better
able to plan and invest in the knowledge that prices will not change by much over time.

How does monetary policy affect the financial system?

• By adjusting interest rates, we can influence prices.

Monetary policy reaches people, businesses and governments through the financial
system. By adjusting our interest rates, for instance, we can influence how expensive it is
for people and businesses to borrow money from banks. That affects how much people
and businesses spend and invest. This in turn influences how much things cost in the
economy.

• Very low interest rates and financial stability.

Sometimes the financial system and monetary policy can affect each other in unwanted
ways. The case of very low interest rates is a good example. Very low interest rates are
helpful for price stability when the economy is doing badly. This has been the case in
recent years. However, interest rates that are too low for too long may have unintended
side effects on financial stability.

Very low interest rates may encourage some people and businesses to take on more debt
than they can handle. Banks would not earn as much from making loans. Savers would
not make much of a return on their savings. People and businesses may take riskier
decisions. As a result, the financial system can become more unstable.

• We keep an eye on side effects.

We are watching out for any unwanted side effects of our monetary policy. While rules by
other authorities to encourage responsible behavior in financial markets are the key
response, we also adjust some of our own tools to keep these side effects small.

On balance, unwanted side effects have been offset by good ones. For instance, banks
might earn less now from lending money. But our monetary policy also helps banks
because it stabilizes the economy. That keeps people in jobs, allowing them to pay back
their loans to banks or to take out new one.

How does monetary policy affect financial markets?

Monetary policy is aimed at preserving price stability. In some countries, central

banks operate under mandates that refer to additional objectives such as full employment,
maximum sustainable growth, stable interest rates or stable exchange rates. To meet their
objectives, central banks intervene in financial markets. It is through the financial
markets that monetary policy affects the real economy. In other words, financial markets
are the connecting link in the transmission mechanism between monetary policy and the
real economy.

i.e. the transmission from the monetary policy instrument to financial markets.
Monetary policy affects financial markets through various channels. However, the
transmission process from monetary policy to financial markets and finally to the real
economy has a single source: the monetary policy instrument. Typically, the monetary
policy instrument is a financial market price which is directly set or closely controlled by
the central bank. For most central banks with floating exchange rates today, the monetary
policy instrument is a short-term interest rate. Under fixed exchange rate regimes, a
particular exchange rate serves as the instrument. Under monetary targeting
regimes, the instrument is typically the quantity of central bank money in the banking
system.

How do financial markets affect monetary policy?

The link between monetary policy and financial markets is not a one way
street. Financial market prices reflect market expectations about future economic
developments, such as inflation, output, and the likely course of monetary policy. It is
therefore natural and appropriate for central banks to evaluate closely the information
contained in market prices. In other words, market expectations can and should influence
the setting of monetary policy. However, central banks must exercise caution in using the
information extracted from market expectations as an input to formulating
monetary policy.

Non-bank financial institutions: characteristics, role in the

financial system; institutional and market issues, and
regulations
WHAT IS NON-BANK FINANCIAL INSTITUTION?

Nonbank financial institutions (NBFIs) are a group of institutions with varying

characteristics. These are nonmonetary financial institutions, classified into government
and private, with or without quasi-banking functions. They are primarily engaged in long-
term financing for the expansion and modernization of productive ventures and in
facilitating short-term placements in other financial institutions.

The three major classifications of NBFIs are:

• private nonbank financial intermediaries,

• government nonbank financial institutions, and
• private nonbank thrift institutions.

Investment houses, financing companies, securities dealers and brokers,

investment companies, fund managers, lending investors, pawnshops, private
insurance companies, venture capital corporations, and money brokers comprise
private nonbank financial intermediaries.

Government nonbank financial institutions, on the other hand, consist of the

Government Service Insurance System (GSIS), Social Security System (SSS),
 National Home Mortgage Finance Corporation, Philippine Veterans Investment
Development Corporation, and National Development Corporation.

Private nonbank thrift institutions, meanwhile, are composed of mutual building

and loan associations and nonstock savings and loan associations.

Characteristics of Nonbank Financial Institutions:

• Private Nonbank Financial Institutions

In 1972, the BSP was given regulatory authority to institute and implement reforms
on NBFIs under PD 72. Private NBFIs were given the function of providing long- and short-
term financing and mobilizing funds for the account of others.

The following briefly describes the duties and functions of various private NBFIs
and nonbank thrift institutions:

Investment houses - enterprises engaged in guaranteed underwriting of securities of any

kind issued by another corporation, person, or enterprise, including securities of
government and its instrumentalities.

Financing companies - corporations or partnerships organized primarily for these

purposes: extend credit to consumers and agricultural enterprises either by discounting
or factoring commercial papers, account receivables or other evidences of indebtedness;
and lease motor vehicles, heavy equipment, industrial machinery and equipment, and
appliances.

Securities dealers - institutions organized either as partnerships or corporations that

buy and sell securities of another for the purpose of reselling or offering them for sale to
the public for their own accounts. They do not earn commissions but derive income from
trading (the difference in the buying and selling prices of securities).

Securities brokers - institutions engaged in the business of effecting transactions in the

sale of securities for the account of others. They earn commissions out of these
intermediary transactions.

Investment companies - entities primarily engaged in investing, reinvesting, or trading

in securities.

Fund managers - institutional and personal administrators of funds created or

constituted for the benefit of others.

Lending investors - persons who practice lending money among themselves or others,
usually utilizing their own capital to extend all types of loan, generally short-term and
without collateral.

Pawnshops - business establishments engaged in lending money for personal property

delivered as security or pledge.

Private insurance companies - insurance carriers of all kinds, such as life, fire, marine,
accident, health, title, financial obligations, casualty, fidelity, and surety; insurance
agents and brokers’ organizations servicing insurance carriers; consultants for policy
holders; adjusting agencies; and independently organized pension (superannuation)
funds.
Venture capital corporations - entities organized jointly by private banks and
government agencies to develop, promote, and assist small and medium enterprises
through debt or equity financing.

Mutual building and loan associations - corporations whose capital stock is required or
permitted to be paid in by the stockholders in regular, equal, or periodic payments to
repay said stockholders their accumulated savings and profits upon surrender of their
shares. This is done to encourage industry, frugality, and home-building among the
stockholders on the security of unencumbered real estate pledge of shares of the capital
stock owned by such stockholders as collateral security.

Nonstock savings and loan associations - corporations organized primarily for mutual
self-help and the common interest of its members who must belong to a welldefined group
and shall not transact business with the general public. These associations are businesses
that accumulate the funds of their members through earnings or capital contributions,
and relend these accumulated funds to their members or invest them in either government
securities or other productive enterprises.

In compliance with the provision of Section 130 of Republic Act No. 7653 or the
New Central Bank Act, the BSP transferred to the Securities and Exchange Commission
its regulatory powers and responsibilities over finance companies without quasi-banking
functions and other institutions performing similar functions.

• Government Nonbank Financial Institutions

The Government Service Insurance System. The GSIS is a social insurance institution
created under Commonwealth Act No. 186 on November 14, 1936. It provides and
administers a pension fund to secure the future of all employees in the Philippine
government which has the following social security benefits: compulsory life insurance,
optional life insurance, retirement benefits, and disability benefits for work-related
accidents and death benefits. As mandated by Republic Act 696 or the Property Insurance
Law, the GSIS also manages the General Insurance Fund for the comprehensive protection
to government insurable interests.

In 2010, the GSIS have accumulated PhP578.44 billion assets earning additional 2
percent from its 2009 PhP566.96 billion. In addition, the GSIS has PhP478.37 billion
worth of investments and reserves valued at PhP530.78 billion. Both have also posted an
increase of 1.5 percent and 4.5 percent, respectively.

Meanwhile, the GISIS covers all government workers irrespective of their employment
status except members of the judiciary and Constitutional Commissions who are covered
by separated retirement laws; contractual employees who have no employee-employer
relationship with their agencies; uniformed members of the Armed Forces of the
Philippines and the Philippine National Police, including the Bureau of Jail Management
and Penology and the Bureau of Fire Protection

The GSIS provides services not only to its members but also their dependents and
beneficiaries, the retirees and pensioners, and the survivors of deceased members or
pensioners. Active members are entitled to loan privileges such as salary, policy,
emergency and housing loans.
RA 8291, known as the Government Service Insurance Act of 1997, expanded the social
security protection of the government workers. It also enhanced the powers and functions
of the GSIS to better respond to the needs of its members.

The Premium-Based Policy, which GSIS uses to compute and pay retirement and other
social benefits on the basis of actual premiums received, was adopted in 2003. Thus, those
who have served the government for 30 years but paid premiums corresponding to only
25 years should be entitled to benefits equivalent to 25 years of service. The
implementation of this policy saw the suspension of the loan privileges of members
belonging to 66 delinquent agencies.

Another decision designed to enhance the healthy relationship between the premium and
benefit structure of the Social Insurance Fund is the restructuring of the survivorship
benefits provided under RA 8291. The restructuring hopes to prevent a situation where
survivors who never paid any contribution to the fund qualify to benefits more easily and
actually enjoy more benefits than the retirees or pensioners who actually paid their
contributions to the fund.

Meanwhile, the GSIS introduced a legacy of innovations in 2003. It set in place a network
of systems and data that permits members to transact business with any GSIS office
across the nation and an online service that allows members to check all their GSIS
accounts and records.

GSIS also opened a mobile phone texting facility for checking loan balances, maximum
loan amount, and status of loan applications. This is the first such service in all Asian
bureaucracies.

On the other hand, the GSIS Identification Card was introduced. This card may be used
by a member in transacting purchases with department stores and any outlet allowing
such transaction, and it shall also be the depository of benefits and loan proceeds in real
time.

Another breakthrough introduced by the GSIS was “e-GSIS”. This puts the System on the
leading edge of online delivery of services by government agencies. It is the first online
service in the Philippine bureaucracy that answers queries from live databases, and is
programmed and expanded to include online processing of loan applications submitted
through the web. This can be accessed through the GSIS website at www.gsis.gov.ph.

The Social Security System. The SSS was created on September 1, 1957 by virtue of RA
1972. Section 2 of the SSS Law (Republic Act No. 1161), as amended by the SSS Act of
1997 (Republic Act No. 8282) provides that, it is the policy of the State to establish,
develop, promote and perfect a sound and viable tax-exempt social security system
suitable to the needs of the people throughout the Philippines, which shall promote social
justice and provide meaningful protection to members and their beneficiaries against the
hazards of disability, sickness, maternity, old age, death and other contingencies resulting
in loss of income or financial burden.

On its more than 50 years of existence, the SSS has been a key partner of government in
fulfilling the collective mission to improve the lives of the people. As of 2010, its members
accounted a total of 29.65 million members comprising of regular employees, self-
employed individuals, and employers. Correspondingly, the SSS has total assets of
PhP271.27 billion recording a 9.4 percent increase from its PhP228.92 billion in 2009.
Likewise, it posted a total of PhP253.84 billion worth of investment and reserves at
PhP262.66 billion in 2010.
The continued innovation of products and services being offered by the SSS to its members
has achieved greater heights that made a difference for the past decade. In 2001, the SSS
launched the Flexifund Program for Overseas Filipino Workers (OFW) which allowed them
to contribute beyond the maximum level so they can avail of higher benefits. In its
commitment to reduce the processing time of member, the SSS Covenant of Service (COS)
Program was also launched.

A Daily Remittance Scheme for members belonging in the informal sector was offered in
April 2002. In September of the same year, various services initiatives were launched such
as On-line Inquire System through the SSS website; Text-SSS, which allowed members to
inquire their contributions and loan records through mobile phones; Branch Tellering
System, which allowed specific SSS branches to directly receive contributions and loan
payments; and the Sickness, Maternity, and Employee’s Compensation (SMEC) Payment
Thru-the-Bank Program, which allowed employers to directly receive their
reimbursements for SMEC payments advanced to their employees through their respective
bank accounts.

In 2003, the Special Financing Programs for small enterprises was opened to support the
micro-business development program of the government. A Condonation Program was
also offered on penalties on delinquent Stock Investment and Privatization Fund loans. It
was the same program was offered to short-term member loans in early part of 2004,
September 2006, and May 2008. To ensure that pension benefits are being paid to the
right and qualified beneficiaries, the Annual Confirmation of Pensioners (ACOP) Program
was launched in 2004.

Aimed at streamlining, harmonizing and unifying existing identification systems used by

government agencies, the SSS joined the Unified Multi-Purpose Identification System
(UMID) Project in May 2006. This was done through the issuance of a common reference
number (CRN). This paved the way for a Single Employer Registration Process initially
started between SSS and Philippine Health Insurance Corporation in May 2009.

In a bid to reach out to its members worldwide, the SSS has its official website on the
Internet with www.sss.gov.ph as the address. This website serves the members’ access to
convenient electronic service, through which they can inquire, retrieve forms, and
transmit feedback from their homes or offices any time of the day.

Roles of Non-Bank Financial Institution.

For most people, the bank is the first port of call when seeking out financial aid or advice.
However, many people also find that services offered by the bank don’t adequately meet
their requirements, leaving them at a loss for what to do next. In this situation Non-Bank
Financial Institution plays a vital role to the economy by;
• Allocating surplus resources to individuals and companies with financial deficits,
allowing them to supplement banks. By unbundling financial services, targeting
them and specializing in the need of individual, NBFIs work to enhance competition
in the financial sector.
• Providing wealth management such as managing portfolios of stocks and shares,
discounting services e.g. discounting of instruments and advice on merger and
acquisition activities.
• Supporting investments in property and prepare feasibility, market or industry
studies for companies.
Market Issues of Non-Bank Financial Institutions.

• Poor Capital Market Condition- The trade declined drastically reducing the revenue
for the securities houses and NBFIs that maintain a portfolio also faced huge loss
due to price reduction.
• Lack of Human Resources- Due to the rapid growth of NBFIs, availability of the
experienced manpower is a challenge of the industry, the supply shortage of
efficient resource personnel has been leading to a significant increase in the
competition package.
• Sources of fund NBFIs collect funds from a wide range of sources including financial
instruments, loans from banks, insurance companies and international agencies
as well as deposits from institutions and the public. Line of credit from banks
constitutes the major portion of total funds for NBFIs. Deposit from the public is
another important source of fund for NBFIs, which has been increasing over the
years. . Political instability is another major
• Political Instability is another major problem. For political reasons, many people
fear to invest.

Regulation of Nonbank Financial Institution:

• The Manual of Regulations for Non-Bank Financial Institutions (the “Manual”)

contains the rules and regulations which govern non-bank financial institutions
(NBFIs) subject to the supervision of the Bangko Sentral ng Pilipinas (BSP) under
existing laws. The Bangko Sentral has supervision over the operations of banks and
exercises such regulatory powers as provided in the New Central Bank Act and
other pertinent laws over the operations of finance companies and non-bank
financial institutions performing quasi-banking functions.
• The regulation of non-bank financial activities and institutions, particularly the aim
to create uniformity between the legal systems of individual member states.
• The most significant regulations of the non-bank financial institutions are those
requiring a supervisable group structure and supervision on a consolidated basis,
including capital adequacy requirements, restrictions on bank holdings, and
restrictions on large exposures.

(another pdf is attached for your reference on the Manual of Regulations for Non-bank
Financial Institutions)