Chapter 1

The concept of Money

This chapter presents topic about the conditions that brought about the existence of money, the
nature and characteristics of money, the forms of money and measures of money supply.

HOW MONEY WAS INVENTED

In the beginning, people tried to produce as many types of goods as they could. Whatever excess
they produce became objects of barter. The exchange of goods between producers was tedious
and slow, owning to the limitations inherent to the barter system.

Whenever a producer being has excess goods in the barter center, he is forced to accept goods
he does not really desire. This situation brought to accept as payment a commodity that in
acceptable to most people. He accepts the commodity because he thinks that he can use it later
as payment for goods that he really desire. For instance, a farmer which has produced more
tomatoes than his family can consume, will accept the rice as payment to his excess tomatoes.
Even if he does not desire or as a commodity, he accepts it just the same because he thinks it is
generally acceptable as payment for other’s goods he wants.

The invention of money made specialization of economic activities possible. For instance, a
person who is adept in breeding carabaos will limit himself to breeding carabaos. Another person
may specialize in manufacturing carts. The two persons will soon find out that specialization
makes their jobs easier. Their production activities become more efficient. Because money is an
important pre-requisite to such undertaking money became a permanent fixture of the economy.

The same situation happened in various parts of the world in various dates in history. The only
difference is the object used as the means for exchange.

Objects Used as Money Throughout History

Various objects have been used as money by people throughout the world and through the years.
The North American Indians, for instance, used as money for 2, 500 years the shell of dentalium
a mollusk. Dentalia were the only shells that became true currency in that part of the world
because they came from a limited area (which was on the west crust of Vancouver Island in
Canada) and thus held their value. When trading posts appeared in the Northwest Indian territory
wool blankets replaced dentalia as the primary medium of exchange.

Some of the objects used as money throughout the world in various dates as History are as
follows.
OBJECT PLACE DATE
Knives, rice, spades China Around 3000 BC
Cattle and clay tables Babylonia Around 2500 BC
 Wampum(beads) and Beaver American Indians of the Around AD 1300
Fur northeast
Tobacco Early American Colonists Around 1659
Whale’s teeth Pacific Peoples on the Island Until early 1900’s
of Fiji

The Disadvantages of Using Objects as Money

1. Objects are perishable. Most of the objects mentioned above are perishable and they can
only be used as a means of exchange a limited of number of times after which they must
be consumed as commodity or they will deteriorate.
2. Objects are indivisible. Knives and Whales tooth are indivisible. They become worthless
when they are divided into small parts. It is very difficult to buy a piece of banana using
live cattle as payment.
3. Objects are not easily portable, it is very inconvenient to bring 1, 000 canvas of rice to a
certain place where they will be used as payment. The problem is compounded when the
distance travel is longer.

The Use of Precious Metals

The disadvantages of using objects as money posed a problem to early traders. Trading cannot
be made as fast as they should. This led them to rely on the use of precious metals which are
durable and less prone to destructions by the elements. As early as 2000 BC gold and silver were
used as money by ancient civilizations. As late as 1933, gold coins were still used as money in the
United States.

When used as money, metals were made to appear alike and in medium size. The first to do so
was the Greek city-state of Lydia in the seventh century BC The Lydian coins were made of
electrum (an alloy of gold and silver) or specific weight and bears the royal emblem of allan’s
head.

By 535 BC. The Etruscan Coastal City of Populania minted gold coins in the Philippines, gold was
used as a medium of exchange before the fourteenth century.

MONEY DEFINED
Money has been defined by several writers, all of them agreeing on all points except the minor
ones. Some of these definitions are listed below.

Cargill defines money as “anything used to make a payment, for a good, a service, or a debt
obligation.”

Money according to Kohn, is “any generally accepted means of payment that will be taken in
exchange for goods and services.
Another definition is provided by Mishkin, where he declares that money is “anything that is
generally accepted in payment for goods or services or in the repayment of debts.”

Kidwell and Peterson define money in two aspects:

“Broadly defined, money is a liquid store of value. Narrowly defined, money is a generally
acceptable medium of exchange.”

The foregoing definitions, which are all valid, in that money is a means used to facilitate
exchange. The broad definition of Kidwell and Peterson pertains to concepts that will be
discussed in the Succeeding sections and chapters.

THE FUNCTIONS OF MONEY

Money serves three general functions.
1. Money serves as a unit of account
2. Money serves as a medium of exchange
3. Money serves as a store of wealth.

Unit of Account
When people traded goods, the exercise was not always easy to execute. A carabao, for instance,
may not be readily exchanged for a pig because of the difference in size. It is a little difficult to
determine at an instant, how many pigs would approximate the value of the carabao.

Exchange will be easier, however, if money is used to express the value of the carabao and the
pig since the peso is the basic unit of account it can be used to determine the relative worth of
the carabao compared with the pig. Trading will be easier if we find out that the monetary value
of the carabao is say, P20,000 and the pig is, also say, P1,000.

Medium of Exchange
In the absence of money, people are forced to trade goods with goods. A farmer with a basketfull
of guavas may request for an exchange with another farmer who has a basketfull of soursops. If
both farmers agree to the exchange, well and good However, it does not always happen that the
farmer with guavas would desire soursops, and vice versa. Since the coincidence of wants rarely
happen between two traders the total number of exchanges will be severely limited. This
situation will inhibit the expansion of trade and economic development will be difficult to attain.

With the introduction of money, exchanges can take place even if there are. no coincidences of
wants. Thus, the farmer with guavas who does not desire soursops will just have to sell his guavas
and accept money as payment. Later he can use the money as payment for anything he desires
to have, including soursops.

As exchanges are facilitated with the use of money, trade expansion is also facilitated.
 Store of Value
A person with an excess in production can only enjoy the surplus for limited period of time.
Without the use of money, producers will be forced to barter their excess production with
products they do not really want. These will place them at a disadvantage.

When money is accepted as payment, the seller gets hold of the money and wait until he is ready
to buy the things he want. The waiting pay take an hour, a day, a month, a year or longer, but the
holder of the money, does not worry about losing the value of the product he sold previously.
This arrangement makes money as a store of value.

The said function is particularly useful to persons who produce large quantities of products. As
keeping products in bulk entails some risks, exchanging then with money eliminates the problem.
The producer then, can concentrate in his production activities.

One can only imagine the difficulties a billionaire has to contend with it his wealth consists
entirely of tangible products like fruits, vegetables, chairs tables, pigs, etc.

THE KINDS OF MONEY AND THEIR CHARACTERISTICS

Money may be classified into three kinds, namely:
1. commodity money
2. credit money, and
3. fiat money

Commodity Money
Money that is made up of precious metals like gold or silver or another valuable commodity like
cattle and shells is called commodity money.

Cattle and shells are poor media of exchange because their supply is subject to abrupt changes
and they are poor stores of value.

Metals are better media of exchange because they are easy to store and are divisible into almost
any amount. The disadvantage of metal is the problem brought by two values inherent in them:
their monetary or exchange value, and their intrinsic value. The amount impressed on the surface
of a metal coin indicates its monetary or exchange value Since metals are commodities, they also
possess values as commodities. A one-peso silver coin for instance, can be used as raw material
for a product like shoes. When used as such, it may be valued at an amount more than one peso.
The coin's value as a commodity (as a raw material, in this case) is referred to as the coin's
intrinsic value.

When the intrinsic value of coin rises, there is a great temptation for some to melt these coins
for use as commodities. This action affects the money supply, and it will affect the economic well-
being of many people.
Types of Commodity Money. Commodity money may be classified as: full bodied, or token.

A full-bodied commodity money is that type which has its monetary or exchange value equal to
that of its intrinsic value.

A token commodity money is one whose monetary or exchange value is higher than its intrinsic
value.

Credit Money
Money that is backed by a promise to pay is called credit money. Its worth as a commodity is
negligible resulting to its very little intrinsic value.

An example of credit money is the note issued by the government. Notes issued by banks are
also credit money. A note is a promise of the issuer to redeem the note with standard money on
demand. In effect, the notes are convertible into coins or into a quantity of precious metals.

Fiat Money
Fiat money refers to paper currency decreed by a government as legal tender but not convertible
into coins or precious metal. It is backed by a government promise that is it legally acceptable as
a means of exchange for products.

Fiat money usually takes the form of currency (metallic coins and paper money) and is found in
all countries that have central government including the Philippines. Exhibit 2.1 shows the
currencies of various countries in the world.

Exhibit 2.1
CURRENCIES OF THE WORLD

Name of Currency- Country Using

Bolivar- Venezuela
Real- Brazil Dinar- Algeria, Jordan, Kuwait, and others
Dirham- Morocco, United Arab Emirates
Dollar- Australia, Canada, New Zealand, Singapore, U.S, and others
Drachma- Greece
Franc- Belgium, France, Switzerland, and others
Guilder- Netherlands, Suriname
Koruna- Czech Republic, Slovak Republic
Krona- Iceland, Sweden
Krone- Denmark, Norway
Lira- Italy, Turkey, and others
Mark- Germany
Peseta- Spain
Peso- Argentina, Chile, Colombia, Mexico, Philippines, Uruguay, and others
Pound- Egypt, Great Britain, Lebanon, and others
Rand- South Africa, Namibia
Riyal- Saudi Arabia, Qatar
Ruble- Russia
Rupee- India, Pakistan, and others
Schilling- Austria, and others
Yen- Japan
Yuan- China
Zloty- Poland

ELECTRONIC MONEY: A NEW FORM OF MONEY

Money evolves as the requirement for its use become more sophisticated. Advances in
technology made possible the introduction of newer forms of money. The first to be developed
to electronic money which simply means money stored electronically and is also known as E-
money.

Forms of Electronic Money

Electronic money consists of four forms namely:
1. debit cards
2. stored value cards
3. electronic cash, and
4. electronic checks

Debit Cards. These cards are used to transfer funds from the bank account of the seller. Debit
cards are used in the payment of goods bought in a supermarket or any establishment accepting
such forms of payment. They may also be used for settling debts or monthly installments of items
bought on account. The amount of payment is instantly deducted from the account of the buyer.
Debit cards are similar in appearance to credit cards.

Source of the companies that issue debit cards are:

1. United Coconut Planters Bank with the UCPB Paymate which is limited to the payment of
Meralco bills.
2. Master Card International with its debit card Maestro, holding 70 percent market share with
more than 242 million cards in use worldwide.

Stord Valued Card. A stored value card is one that contains a fixed amount of digital cash. The
simplest form of stored-value card is the one with a preset peso amount that the consumer
spends down. An example is the phone card used in making telephone calls Phone cards are
available in various amounts like one hundred pesos, five hundred pesos, and one thousand
pesos. The phone card is inserted to the receptacle of a phone facility to activate it. The bill for
the telephone call is automatically deducted from the amount stored in the card.
Electronic Cash. The electronic cash, or e-cash is a form of electronic money that is used to buy
products through the internet. This is made possible by the following actions:

1. The consumer sets up an account with a bank that has links with the Internet
2. The consumer gets e-cash and have it transferred to his personal computers
3. The consumer surfs to an internet store and selects the buy option for a particular item:
4. The e-cash is automatically transferred from the personal computer of the consumer to the
computer of the internet seller
5. The internet seller effects the fund transfer from the consumer's bank
account to his account.
6. The goods are shipped to the consumer.

Electronic Checks. The electronic checks is a form of money by those who make transaction
through the internet. The electronic check is written the buyer through his personal computer
then sends the seller via. The seller send the check to his bank which effects the transfer of money
from the buyer's account to the seller's account. If check is found valid.

FORMS OF MONEY AND THEIR DRAWBACKS

Just like in the evolution of the species described by Charles Darwin money developed from one
from to another as the situation dictated.

In the beginning when people were trying to find some means exchanges of products less
difficult, they thought of using objects with vales which are generally acceptable. They found out
later, however, that objects like knives, cable, rice, etc. are poor means of exchange. For one,
some of the objects wed are not durable enough to serve as a store of value for longest periods
like ten or twenty years. Also, who would want to keep an excessive number of objects received
as payment? For instance, how would you take care of twenty cows given to you as payment?
The first thing you will do is to refuse to accept the cows as payment.

Slowly, people began using metals like silver and gold as the means of exchange. The introduction
of metals solved the problem of durability. Also, metals can be minted into various
denominations which made trading a title faster. However, when trading is done in bigger
volumes, metal money became a cumbersome means of exchange. Transporting metal from one
place to another became a burden. Imagine how one would carry gold in the amount of P100
million to the place where it will be used as payment. The exercise becomes more difficult if
payment is to be made overseas. History is replete with incidents of ships carrying gold or silver
sinking into the depths of the world's oceans.

To minimize the difficulty of transporting metal coins or gold bars paper money was introduced.
Acceptability, however, became an issue, so the government took a hand in printing and issuing
them. With the government's guarantee, the use of paper money pushed trade to expand
tremendously.
Paper money, however, has its own disadvantage. First, it is subject counterfeiting. Second, since
paper money can be carried in large amounts it can also be stolen in large amounts.

To cancel the disadvantages of counterfeiting and theft, the check introduced as means of
payment. The check authorizes the payer to with from the bank account of the payor a certain
sum of money. With the of checks, traders are no longer worried about carrying bundles of
money whenever they go shopping.

Like the other forms of money, checks have their own disadvantage. It’s acceptance as a form of
payment not guaranteed, as some people would prefer cash In addition, checks are also
susceptible to forgery.

In modem times, electronic money was introduced as a means of exchange It became a very
convenient means of effecting payments. What limits the use of electronic money, however, is
its total dependence on with internet links.

Exhibit 2.2

FORMS OF MONEY AND THEIR DRAWBACKS

FORM
objects like cattle, tobacco, rice, etc.
metals like gold and silver paper money
checks
electronic money

DRAWBACK
not durable
not easy to transport.
subject to counterfeiting, can be stolen in large amounts.
not generally acceptable
requires special equipment.

CHARACTERISTICS OF GOOD MONEY

Money evolved into different forms as soon as the older ones proved to be with serious
drawbacks. A carabao is a poor form of money for a person who only require a piece each of
pomelo and soursop. Gold and silver bars are durable but are difficult to carry. These
disadvantages serve as barriers to the full development of trading activities.

The requirement, therefore, is to make use of good money which will have the following
characteristic:
1. divisibility
2. portability
3. durability
4. stability
5. difficult to counterfeit

Divisibility
The farmer will find it difficult to use his carabao as payment for a piece of pomelo and a piece
of soursop. Even if he slaughters his carabao and use a piece of its meat as payment, he will still
have to worry about disposing the remaining parts. A medium of exchange that is divisible,
however, solve the problem.

Divisibility refers to that characteristic wherein money can be issued in a various denominations
to facilitate the exchange process. The Philippine peso, for instance, can be converted into coins
with denominations of from one centavo to fifty centavos. Furthermore, the peso is issued in
bigger denominations of ten pesos, twenty pesos, fifty pesos, one hundred pesos, five hundred
pesos, and one thousand pesos.
Portability
To be able function effectively as a medium of exchange, money must be portable. When
commodities like cattle and clay tablets were used as money, transporting them to the place of
trading was difficult. This disadvantage resulted to limited exchange between traders.
Money that is portable like paper currency and metal coins became popular throughout the
world because they can be carried in large quantities.

Durability
Durability is one of the characteristics required of a good money. The disadvantage of using cattle
as money is that it may die prematurely of disease. Therefore, the one receiving it as payment is
very apprehensive about accepting it.
Coins and paper money have the characteristics of durability. Even if they are worn out, they can
be replaced easily. Replacing a dead cattie will be very difficult.

Stability
Good money must have the characteristic of having a stable value. One would not want to accept
money as payment if its value fluctuates. When money starts losing its value, people will stop
using it as a store of value. They will find other means of storing value like land, jewelry, or other
means. If this happens, trading will be greatly hampered.

Difficult to Counterfeit
Counterfeiting is undertaken by persons who want to benefit from high exchange value of paper
currency. Because the intrinsic value of paper money is negligible, the temptation to counterfeit
may be too great for some.
Money must be difficult to counterfeit so that people will not lose confidence and stop using it
as currency. Apart from making money difficult to counterfeit, governments have declared it
illegal for anybody to print or issue fake money.
 MEASURES OF MONEY
People who are much concerned with maintaining the stable value of their money holdings will
be interested to know how the monetary system works. One of his first concerns will be to get
familiar with concepts like the measures of money.

Determining Money Supply

The money supply maybe determined by using four alternative means.
They are as follows:

M1 = consisting of currency, demand deposits at commercial banks, other checkable deposits at

banks, credit unions, and thrift institutions (negotiable order of withdrawal, automatic transfer
from savings. and share-draft accounts), and traveler's checks outstanding.

M2 = M1 plus noncheckable savings accounts and small-denomination time deposits at

depository institutions, money-market deposit accounts, shares in money market mutual funds,
and retail repurchase agreements.
M3 = M2 plus large-denomination time deposits at depository institutions, shares in institutions-
only money market funds, and large denomination repurchase agreements.

L = M3 plus other liquid financial assets such as banker's acceptances, commercial paper, short-
term Treasury securities, and savings bonds.

Which of the four measures is most useful? The answer will depend on the point of view of the
individual. In any case, the following factors may be considered:

M1 emphasizes the medium-of-exchange characteristics of money. This is so because the

accounts included under the classification are the most widely used medium of exchange.
However, even if M1 can serve as a store of wealth, it is not a good one, since coins, currency,
traveler's checks, and demand deposits do not earn interest. Their strongest advantage is
liquidity.

The accounts added to M1 (to constitute M2) have some characteristics of medium of exchange,
but they are better store of wealth than the M1 items. These accounts are almost similar in
liquidity to the M1 accounts because they can be turned into cash quickly at very little cost.

The accounts added to M2 (to constitute M3) are less liquid assets although their yields may be
higher than M2 accounts.

The accounts added to M3 (to constitute L) is measure of highly liquid assets which consist of
short-term Treasury Securities. commercial paper, savings bonds, and banker's acceptances,

THE EVOLUTION OF THE PHILIPPINE CURRENCY

The use of money in the Philippines has come a long way since the days of the barter trade up to
the present. The lack of properly preserved historical documents prevented scholar from
determining the precise dates when money was first used in the Philippines. But even so, scholars
were not deterred from making studies on the Evolution of the Philippine currency. One of them
is Victorino Manalo who was commissioned by the central bank to trace the development of
coinage, paper money and banking in the Philippines from the earliest times up the present.

The earliest known currency used in the Philippines are called “piloncitos”. These are small good
coins and individually weigh from 0.09 to 2.65 grams of pure gold. Their use pre-dated the arrival
of Magellan in 1521. Since piloncitos came in standard weights and sizes, they made trading
easier in the age long before coins and paper currency.

The important developments in the history of the Philippines currency are provided in Exhibit
2.3.

The Philippine Paper Money

The first Philippine paper money was issued by El Banco Español-Filipino de Isabel Segunda in
1852. Since the bank was the first established in the Philippines, it was inevitable that it will issue
the first paper money in country.

Changes in the political set-up also brought certain changes in the Philippine paper money. Those
which issued paper money consist of a privately-owned bank, the Philippine Government under
Aguinaldo, the United States government, a government-owned bank, and the Central Bank of
the Philippines.

Philippine paper money was issued in various denominations and as many as from one centavo
to one thousand pesos during the Japanese Occupation.

Exhibit 2.4 depicts a more detailed description of the evolution of the Philippine paper money.

Exhibit 2.3
THE DEVELOPMENT OF THE PHILIPPINE CURRENCY
PRE-SPANISH PERIOD TO THE 1800s

CURRENCY USED PERIOD

Barter system, no currency pre-Spanish period, 1st phase

seashells pre-Spanish period, 2nd phase
gold, wax, cotton, small shells, pre-Spanish period, 3rd phase
dye wood, carabao horns; metal
bells, and silver wires
pilon ’cito, a conical gold coin
with an embossed inscription
 Penniform Gold Barter Ring between the 8th and 14th centuries
European silver coins introduced by Magellan in 1521
silver coins from the mints of Mexico & other brought by the Galleon trade from Mexico in
Latin American countries 1565
Spanish Barilla (first coin minted in the 1729 onwards
Philippines)
Spain’s eight-real coins circulated throughout 1732 to 1771
the world including the Philippines
currencies of Mexico, Peru, Bolivia, Chile, 1810 onwards
Argentina, and other Latin American
countries

Exhibit 2.4

HOW THE PHILIPPINE PAPER MONEY EVOLVED

Name or Nature Issuing Party When issued Denomination

Of Paper Money

Pesos Fuertes El Banco Español- May 1, 1852, to 1896 5, 10, 25, 50 and 100
Filipino de Esabel pesos fuertes
Segunda
Republica Filipina First Philippine 1898 one-peso and five-
Papel Moneda Republic 1898 peso notes

Silver Certificates U.S Government Ca. 1900

Pesos El Banco Español- 1904

Filipino
Bank Notes El Banco Español- 1908 to 1933
Filipino

Peso-Emergency Philippine National 1917-1918

Circulating Notes Bank

Treasury Certificates U.S Government May 6, 1918

Bank Notes El Banco Español- 1933 onwards

English Version Filipino
Mickey Mouse Japanese Occupation World War II One centavo to 1,000
Money Forces pesos
 Guerilla Notes Provinces and World War II
Municipalities
Victory Notes U.S Military October 20, 1944
(series No. 66) Central Bank January 3, 1949
English Series Central Bank
Notes
Filipino Series Central Bank 1969
Notes
Bagong Lipunan Central Bank 1973
Filipino Series Banko Sentral ng 1993 10, 20, 50, 100, 500
Notes Pilipinas

SUMMARY
Money is a tool that was invented out of necessity. It was used to facilitate the exchange of goods
between persons. The early forms of money were functional to a certain extent, but they did not
facilitate trade expansion, especially those between nations.

Money evolved from crude objects to more sophisticated forms like electronic money. When
objects were used as money, they presented disadvantages like perishability. The use of precious
metals like money was also saddled with disadvantages like the problem of intrinsic value.

As electronic money is tied up with technology, it cannot be used where no appropriate

equipment is available.

Good money must possess the characteristics of divisibility, portability, durability, stability, and
difficult to counterfeit.
Measuring money supply is an important aspect of finance. There are various approaches in doing
this.

Paper money was first issued by a privately owned bank in the Philippines in 1852. Since then, a
number of issues with various characteristics and denominations appeared.
 Chapter 2
NATURE OF CREDIT
Credit is the ability to obtain a thing of value in exchange future for determinable time. This
creates obligations and rights to both debtor and creditor. There is the obligation of the debtor
to pay his debt and the right of the creditor to collect payment. From the definition, the following
elements are present:

1. It is the ability to obtain a thing of value. Thing of value may mean cash form of credit or
merchandise form of credit Debtor can apply for cash credit from several sources like
banks, private individuals, or other financial intermediaries. Merchandise form of credit
is non-cash form, where sources are retail outlets and the like.
2. A promise to pay. The debtor makes a promise to pay the creditor. A promise to pay, to
be valid should be in writing acknowledged by both the debtor and the creditor. The
promise should specify the principal amount, interest, and the maturity date.
3. Definite sum of money. Credit involves exact amount of money loaned, or money value
for non-cash form of credit The contract must identify the principal value of loan and the
corresponding interest for the credit period.
4. Payable on demand or future time. A promise by the debtor for the settlement of
obligation may involve a future date as loan maturity, or anytime the creditor demands
payment.

CHARACTERISTICS OF CREDIT
• It is a bi-partite or a two-party contract. Two parties are involved in the agreement: the
debtor and the creditor. Creditor is the source of credit, the party who extends the loan.
Debtor is the party requesting for a loan. The creditor demonstrates his faith in his debtor
by extending the loan or transferring ownership of the goods or service exchange for a
promise to pay. To be legal the contract must be in writing specifying the amount, time
of payment, interest and other terms agreed upon by both Parties.
• It is elastic. It can be increased or decreased by the creditor. Loan limit or elasticity
depends upon the capacity of the debtor and appraised value of his collateral.
• The presence of trust of faith. The basic element of credit is the creditor's reliance on
both the debtor's ability and willingness to pay his debt. This is also the risk factor in
credit, particularly when obligation remains unsettled during its maturity period. The
debtor's ability to pay is dependent on his asset and will to recall maturity date from
prompt payment, which measures his willingness to settle obligations.
• It involves futurity. Maturity date for settlement of obligation is a future time. The
creditor vests his trust on debtors’ ability and willingness to fulfill obligation when it falls
due.

FOUNDATION OF CREDIT
 • Confidence. Creditor must trust the debtor's personal character as a measure of his
capacity to pay. Creditor's confidence on the debtor's willingness and capacity to settle
obligation is based on trust.
• Proper facilities. In a credit contract, legal facilities must exist to make the agreement
valid. These are the credit information and credit document. Credit information includes
data about the debtor as a gauge of his paying capacity which can be gathered out of a
credit investigation Credit document is the written agreement signed by both parties
identifying principal loan, interest and maturity date of other supporting papers to
determine his credit rating such as copy of income tax return/ withheld or employment
certificate for personal loans and financial statements for business loans.
• Stability of monetary standard. Purchasing power of money is considered when
extending credit. The more stable value of money, the greater is the possibility for
approving credit Creditors may be reluctant in parting with excess Income during wide
fluctuations of money value.
• Government assistance. Regulations protecting both parties are highly considered for
credit transactions. To evaluate, debtors are given more protection since they cannot De
imprisoned for non-performance of obligation, that is, if they are insolvent or do not have
any asset or property. In this case, the creditors take the risk.
• Credit risk. This is the possibility that the debtor may not fulfill his promise for payment.
Credit risk shall be borne by creditors.

C’S OF CREDIT
During credit evaluation, the following are the common areas examined:
• Character. The personality of the debtor, including his mental and moral attitudes
determining his credit rating.
• Capacity. This signifies the person’s willingness and capacity to pay. This is measure of his
income level as basis of his paying capacity.
• Capital. This consists of the person’s real and personal property which can be strong
foundation for credit approval, His capital can serve as his liquid assets in case of non-
payment or non- fulfillment of obligation.
• Collateral. This is something of value, the debtor’s assets as pledge. Common practice is
for collateral to be forty percent (40%) higher than the amount of loan. Inability to
discharge loan obligation may protect creditor with the presence of collateral as his
security.
• Conditions. This may include local business conditions or economic conditions during
time of loan application. During wide fluctuations of money value, it is unwise for
creditors to grant loans. When a business or economy is facing periods of recession or
depression, ability to fulfill loan payments maybe impossible, so creditors may not
consider the application.

CLASSIFICATION OF RECEIPT

According to Type of User

Consumer credits. This is a credit used by individuals to help finance or refinance the purchase of
commodities for personal consumption. This is different from business credit in terms of the
borrower’s purpose, that is, for personal or household use. Functions of consumer credit are:

a. Convenient form of payment. Typical charge account involves purchases from a retail store
that are paid once or twice a month.
b. Aids in financial emergencies. Consumer credit helps consumers through period of financial
stress. Some people may not have liquid assets to meet emergencies, that is why consumer credit
can perform valuable function in tiding a family over a financial difficulty.
c. Buying durables on installment. It aids consumer in financing the purchase of durable goods
by paying for them in installments.

Consumer credit can be charge account, installment account, revolving credit, or lay-away plan.
Charge accounts are for non-durables, payable within two months or sixty ay term, in four
payments. Installment accounts are for durables, payable for more than six months to one or
more Payment is monthly and a down payment is needed e unit on credit is delivered Revolving
credit in a combination of charge and installment accounts. The credit pe dis ninety days. Under
this plan, the debtor can avail of renewal after ninety days, or within ninety days, for the pod
portion, provided he had not been delinquent in payment e original loan. Lay away plan is
consumer credit where payment of the product within a period is required before very of the
item is made.

Under installment account, replevin is applied. Replevin the creditor's right to repossess the item
under act, that is the durable good, in case that the debtor to fulfill his obligation. In this case,
the debtor has to deliver the item to the creditor. Other consumer credit may pre a co-maker to
serve as guarantor for the loan. Commercial credit is extended by one businessman to her
businessman. The creditor and debtor are both businesses. Objects of credit are merchandise or
goods which We delivered on consignment basis or under a credit term.

Commercial bank credit differs from the preceding in terms of the parties concerned. The
creditor is a commercial bank while the debtor can be a business firm or private businessman.
The debtor may consider commercial bank for loans in order to assist him in business operations
or expansion.

According to Purpose
Investment credit is extended by banks for company who intends to purchase fixed assets land,
building equipment for business use.

Agricultural credit is a loan intended for the acquisition of fertilizers, pesticides, seedlings,
transportation of agricultural products and farm improvements Debtors are farm Breeders and
creditors are rural banks These loans can on a short-term or long-term maturity.

Export credit uses “letter of credit” as a tool for financing international trade. This letter of credit
or LC is issued by the importer’s bank, it guarantees payment to the exporter up to some specified
amount of money in this procedure, the exporter is protected by a substitution of the bank’s
good faith and credit for that of the importer. There are two general types the import letter of
credit which requires payment se made in the importer’s currency; and the export letter of credit
which requires that it be made in the exporter’s currency Parties to this loan are the importer,
importer's bank, exporter and exporter’s bank.

Real estate loan is intended for the purchase of house and lot, for house construction, or
improvement.

Industrial credit is intended to finance industries Br logging, fishing, mining, quarrying and the
like.

According to Maturity
Short-term loans are payable within a period of one-year Intermediate term or medium-term
loans are payable for period of one to five years. Long term loans are payable for more than five
years.

According to Form of Credit

Cash form of credit Merchandise form of credit.
 Chapter 3
CONNECTING BORROWERS WITH LENDERS
Borrowers and lenders are two important segments of the economy Interactions between them
drums up economic activity. The services provided by intermediaries in the financial system make
the interactions more risk and productive.

Exhibit 3.1

THE FINANCIAL SYSTEM AND ITS COMPONENTS

Financial System

Financial Instrument

Financial Sector
-Financial Markets
–Financial Institution

Rules Governing the Conduct of Trade

Four sectors of the economy which are engaged in borrowing and lending are: (1) households,
(2) firms, (3) the government, and (4) foreigners.

Household income comes from wages, dividends, royalties, and interest and paid by firms. This
income is spent mostly on goods and services. Part of the income not spent is loaned. The
financial system absorbs, most of the savings and channel them to firms.

The money borrowed by norms is added to their own available funds to be spent on goods and
services as investment expenditures. When a firm makes purchases of plant, equipment for
material these become the income of another firm. Taken as a whole, firms will have two sources
of income (1) those arising out of household expenditures, and (2) those are arising out of
investments of other firms.

Part of the firm's revenues is paid out to Households in the form of wages, dividends, royalties,
and interest. As the cycle is completed. It will repeat all over again. Exhibit 3.2 shows an
illustration of the flow of funds in a financial system with the households and firms interacting.

If the government is included, the flow of funds will be a little complicated. The government will
have its income coming from taxes paid by households and firms. It also borrows money from
various sources. It spends its income derived from taxes and borrowings to purchase buildings,
equipment’s, or supplies. Part of this amount is given out to households in the form of wages,
dividends, royalties, and interest. These flows of funds are illustrated in Figure 3.3.
 WHY HOUSEHOLDS SAVE AND LEND
The needs of households vary from day-to-day, month-to-month, and year-to-year. A newly
married couple for instance, will need a place (a house, to be exact) to stay. If there are no
apartment or houses available for rent in the area where they work, they may need to buy or
construct one. They may even need to purchase a motor vehicle. At this point, their incomes may
not be enough to make capital expenditures. So, the couple may decide to save a part of their
monthly income to put up enough funds to construct a house and buy a car. The more disciplined
individual, however, will save money years ahead of marriage.

As the household grows older, its income will tend to grow faster than its expenses. It will then
have excess funds. The household will now consider saving the excess for use in the future when
income will be less than their needs.

Putting the savings in a vault in the house of the saver has the advantage of liquidity. This means
that the money could be spent as fast as the need arises. The disadvantages, however, comes in
the form of loss of purchasing power due to inflation and the opportunity to make income from
investment.
Exhibit 3.4 shows the relationship between household income and spending at various stages in
the life cycle.

Exhibit 3.4

RELATIONSHIP BETWEEN HOUSEHOLD INCOME AND SPENDING AT VARIOUS

STAGES
Stage in the Life Cycle of the Household
new
middle age
retirement

Income
smaller than expenses
bigger than expenses
smaller than expenses

Financial Decision
Spend savings or borrow.
build up savings and liquidate borrowings.
spend savings.

WHY FIRMS INVEST AND BORROW

Firms, at one time or another, are affected by deficiency in capital. It happens when opportunities
for investment come by. Additional investment may bring additional income or economies in
operation. A drug retailing firm for instance, may expand by opening branches in various places,
The immediate advantages that may be derived are as follows:
1. quantity discounts for bulk purchases granted by suppliers, and
2. additional revenues from sales.

When the owners of the firm cannot provide additional capital, they will resort to borrowing. This
situation happens not only to small firms button bin firms as well.

A system must be able to address that particular economic need. The answer lies in the operation
and maintenance of a financial system. Examples of firms which borrowed or intend to borrow
from the financial stems in 2014 are as follows:
1. SN Prime Holdings - P25 billion.
2. JG Summit Holdings - P30 billion.
3. PLDT - P15 billion.
4. ABS-CBN - P10 billion:
5. Filinwest Development Corporation - P10 billion.

TRANSFERRING FUNDS FROM LENDERS TO BORROWERS

The financial system is concerned with transferring funds from lenders to borrowers. The lenders
are those whose revenues exceeded their expenditures providing enough reason to be referred
to as surplus spending units (SSUs). The borrowers on the other hand, have expenditures
exceeding their revenues and thus, are referred to as deficit spending units (DSUS).

Transferring funds from SSUs to DSUs basically consists of two methods. They are direct and
indirect finance.

Direct Finance
Direct Finance refers to lending by ultimate borrowers with no intermediary Under this method
the SSU gives money to the DSU in exchange for financial claims on the DSU. The claims issued
by the DSU are called direct claims and are typically sold in direct credit markets such as the
money or capital markets.

Direct financing provides SSUs with a venue for savings with expected returns. The DSUs, as a
result, are provided with a source of funds for consumption or investment. This arrangement
increases the efficiency of the financial market.

Direct financing, however, has some disadvantages.

1. There are few DSUs which can transact in the direct market because the denominations of
securities sold are very large (usually millions or pesos)
2. It is difficult to match the requirements of SSUs and DSUs in terms denomination, maturity,
and others.

Methods of Direct Financing. There are various means used in directing financing.
1. private placements
2. brokers and dealers
3 investment bankers.

Private placement refers to the selling of securities by private negotiation directly to insurance
companies, commercial banks, pension funds, large-scale corporate investors, and wealthy
individual investors.

A broker is one who acts as an intermediary between buyers and sellers but does not take title
to the securities traded.

A dealer is one who is in the security business acting as a principal rather than an agent. The
dealer buys for his account and sells to customers from his inventory. He makes profits by selling
his inventory of securities at a price higher than the acquisition cost.
The investment banker is a person who provides financial advise and who underwrites and
distributes new investment securities.

Indirect Finance
Indirect finance (also called financial intermediation) refers to lending by an ultimate lender to a
financial intermediary that then relends to ultimate borrowers. Financial intermediaries include
commercial banks, mutual savings banks, credit unions, life insurance companies, and pension
funds.

The inefficiencies of direct financing brought to the fore the services of financial intermediaries.
Direct claims with one set of characteristics are purchased from borrowers, then transformed
into indirect claims with a different set of characteristics and then sold to lenders.

THE BENEFITS OF FINANCIAL INTERMEDIATION

Financial intermediation offers the following benefits:

1. Financial Intermediaries can substantially reduce transaction costs This happens because
they have developed expertise in lowering costs and also because the large number of
transactions provide economies of scale.

2. Reduction of Moral Hazard. As individual borrowers may engage undesirable activities

after taking the loan, the lenders who directly provide funds will be at a disadvantage. Such risk
of not getting paid back because of changes in the behavior of borrowers is called moral hazard.
 Chapter 4
The Nature and Functions of Credit

Credit to many people indicates a negative undertaking that must be set aside if one wants to
move forward. The sad experience of many persons who provided credit are enough to
discourage the uninitiated. This happens because many people look upon the availment of credit
as a solution to their current financial difficulties, never mind the repayments required.

Aware of the possibility of financial ruin for one who extends credit, we may conclude that credit
must be excluded from the economic activities of man. Inspite of this fear, however, credit
remains to be an important means for the upliftment of the economic standing of many people
including those of many nations

What is credit? How does it affect the economic well-being of a nation. That’s and other related
questions will be answered in this chapter.

CREDIT AND THE ECONOMY

Although the availment of credit is often abused, when used properly, It becomes a powerful
means of developing a person’s economic potentials.

When economic activities be pursued because of lack of capital, the economic growth of any
country will be limited. Businesses which are short of capital may not be able to produce at the
most economic level of quantity. In the same light, households which at the moment have
sufficient funds to purchase goods will have to forego consumption for a while. Even if these
households are able to make purchases later the delay may wreak havoc on the production
schedules of firms.

The provision of credit to qualified individuals and firms minimizes the ill-effects of the above-
mentioned scenarios Businesses and households will be provided with the power to produce and
consume at the precise moment when they are needed.

Credit is used heavily by even the most progressive nations. It appears That their respective
economies cannot be sustained for long, without the use of credit Most of them, as shown in
Exhibit 7.1 even avail of opportunities for barrowing from other countries.

WHAT IS CREDIT
Credit may be defined as "the power or ability to obtain goods or services in exchange for a
promise to pay for them later." The term "credit" refers to the power of the prospective debtor
rather than that of the creditor, although that power will only be realized if the debtor is
accommodated by the creditor.
When a credit agreement is consummated, the amount involved will be recorded as asset on the
balance sheet of the creditor and as liability on the balance sheet of the debtor.

CREDIT DISTINGUISHED FROM DEBT

Credit refers to that power of a person to obtain goods, or services without the requirement of
paying for them immediately upon delivery. The credit power in the hands of a person may or
may not be used. When that power is used, the person who used it is now obligated to pay a
certain amount of money at a stipulated date. That amount or any remaining portion of the
original amount is called debt.

Simply stated, credit refers to power, while debt refers to obligation. When credit is availed of,
the result is debt.

CREDIT DISTINGUISHED FROM CREDIT VOLUME

A person who has a credit card with a credit limit of P30,000 will not be able to use the card for
credit purchase higher than P30,000. Thus, ten persons with a credit card limit each of P30,000
will have an aggregate credit of P300,000.

If one person decides to use his credit limit of P30,000 every week and settles them promptly
also every week, his total credit availment per month will be P120,000. The amount of P120,000
is referred to as that person's credit volume. As credit limit is fixed for a given period, credit
volume may increase or decrease from time to time. Thus, as the aggregate credit of ten persons
may be P300,000, their credit volume may be as low as zero or as high as P3 million, or even
higher.

The measurement of credit volume serves some purposes when computed on a national scale.
The national credit volume is an important data used in the formulation of monetary policies by
the government.

CREDIT DISTINGUISHED FROM WEALTH

Although credit and wealth may be related in a way, these two terms are different. Wealth refers
to any material or physical thing that satisfies a human want, provided that it is limited in amount.
Wealth includes the following. residential building, motor car, farm equipment, books, watch,
and jewelry.

Credit, on the other hand, is a means by which one may acquire the right to use wealth.

Credit does not increase wealth, but it may be used to increase wealth When one acquires a farm
equipment on credit, he uses it to produce agricultural outputs like vegetables. He sells his
produce, settles his debts and the remaining amount is left with him for his disposal.

USERS OF CREDIT
Credit is used by the following general groups:
1. consumers
2. business and
3. government

Consumers
Household consumption is oftentimes made possible by purchases of goods and services on
credit. The following are examples of goods bought on credit by consumers:
1. house and lot
2. motor vehicle
3. household appliances
4. educational services
5. travel
6. wedding expenses
7. clothing and jewelry.

The demand for credit sales on products and services indicated above have grown to a point
where businesses were organized specifically to cater to this need. An example of a firm providing
consumer credit is shown in Exhibit 7.2.

Business
Businesses are users of credit in large and small amounts. It will be extremely difficult to find a
business big or small without debts of some kind Businesses avail of credit to finance the
following:
1. payroll
2. purchase of merchandise
3. construction of building and facilities
4. purchase of equipment
5. refinancing of maturing debts

Even financial institutions that provide credit are also users of credit. A look on the balance sheet
of a typical financial institution (Exhibit 7.3) proves the point.
 Government
The government is one big institution that uses credit in big amounts. Borrowings made by the
national government in 1998 from foreign sources, for instance, reached $47.9 billion. By June
30, 1999, the national government 's total debts amounted to P1.593 trillion, consisting of P912
billion in domestic debts and P681 billion in foreign debts.

Even local governments resort to borrowings when expected revenues fall short of programmed
expenditures.

Borrowings are not the only form of government liabilities however, other liabilities consist of
unpaid obligations to contractors and suppliers, unpaid salaries and wages, rent, and others. The

Commission on Audit in its 2012 annual report, shows the total liabilities of local governments in
the Philippines classified into various accounts (Exhibit 7.4).

KINDS OF CREDIT
Credit may be classified into several types.
1. consumer credit
2. trade credit
3. bank credit
4. investment credit
5. agricultural credit
6. export credit
7. public credit

Consumer Credit
Consumer credit refers to credit given by shops, banks, and other financial institutions to
consumers so that they can buy goods. /Products and services that consumers can buy on credit
include food and groceries, household appliances, automobiles and motorcycles, real estate,
education, travel, clothing, personal effects, and others.

Kinds of Consumer Credit. There are various kinds of credit availed of by consumers.
1. charge account
2. installment credit
3. revolving charge account and
4. personal loans.

A charge account is "an arrangement which a customer has with a store to buy goods and to pay
for them at a later date, usually when the invoice is sent at the end of the, month." Most sari-sari
stores throughout the country offer charge account services to customers. This is so because they
are situated in communities where store owners are personally acquainted with most of its
residents in their respective areas.
Installment credit is an arrangement where the customer buys goods by paying a sum regularly
each month. An example of a business firm soliciting buyers to purchase on installment is
provided in an advertisement shown in Exhibit 7.5.

A revolving charge account is an arrangement where, someone can purchase goods on credit at
any time up to an agreed amount and continue to purchase on credit while still paying off the
original, credit grant. The arrangement can also be applied when borrowing from a bank.

A personal loan is a loan to a person for household or other personal use, not for business use.

Trade Credit
Trade credit is a credit offered by a company when trading with another. When a cement
manufacturer allows a dealer 60-day allowance for payment of goods delivered to him, the
manufacturer is extending trade credit.

Trade credit appears in the book of accounts of the creditor as accounts or notes receivable. On
the book of the debtor, they are entered as accounts or notes payable.

Instruments of Trade Credit. In extending trade credit, various means are used. They are as
follows: (1) open-book credit, (2) trade acceptance, and (3) promissory note.

1. Open-Book Credit constitutes the bulk of trade credit. It is unsecured and it permits the
customer to pay for goods delivered to him in a specified number of days.

2. The Trade Acceptance is a time draft drawn by a seller upon a purchaser, payable to the seller
as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and
that the price is due and payable.

3. A Promissory Note is an unconditional promise in writing made by one person to another,

signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a
sum certain in money to, or to the order of a specified person, or to the bearer.

Bank Credit
Bank refers to all types of lending granted by the banks to others or to one another Among the
types of loans availed of by borrowers from banks are:
1. commercial loans
2. real estate loans
3. agricultural loans
4. industrial loans
5. salary loans
6. automotive loans
7. deposits collateral loans
8. interbank call loans.
The credit granted by the banking system consists of a very substantial amount. Loans granted
and outstanding in the Philippine banking system for instance, was P4,048.1 billion in 2013.

Investment Credit
Providers of credit are not normally interested in extending loans for purposes of acquiring
capital assets like plant and equipment. This is so because the returns on investment in capital
assets may be expected only after a good number of years. Hence, the liquidation of the loan
cannot be made immediately.

Nevertheless, the provision of credit for investment purposes is necessary if some economic and
business activities must be pursued. It is for this reason that specialized sources of investment
credit were organized.

Investment credit refers to that type of credit required by businesses and the government to
finance the construction and operation of certain projects. Proceeds of the investment credit are
used for the fixed and working capital of businesses, for projects undertaken by local, provincial,
and the national government, and for the purchase and improvement of real estate.

An example of investment credit is the plan of the World Bank Group and the International
Finance Corporation to allot within the next 4 years $4.2 billion in concessional loans and
investments to the Philippine government.

Of the total credit, the World Bank will lend $3.2 billion to finance the development programs of
the Philippine government. IFC will lend $1 billion for business and industry requirements.

Agricultural Credit
Agricultural credit is a very important feature of the Philippine economy. This so because food
production is a major activity of our nation. The need to produce more food is made more urgent
by the rapidly increasing population. Since land is a limited commodity, improvements in
agricultural production can only be made by providing the farmers with the financial capability
to make their farms more productive.

Agricultural credit refers to loans used to finance the production and marketing of agricultural
products, this includes the lending of funds for the purchase of farm equipment and machinery,
fertilizers, pesticides, seedlings, fingerlings, and others.

To provide funds in support of agriculture, the Agricultural Competitiveness Enhancement Fund

was created by the government in 1996 for irrigation, farm-to-market roads, post-harvest
facilities, credit, research and development, retraining, extension services, and marketing
infrastructure.

The granting of ACEF agricultural credit will be coursed through government financial institutions.
 Export Credit
Export credit refers to credit extension provided to foreign buyers of local goods. Even if
prepayments by foreign buyers are preferred by exporters, credit extension is often requested
by the buyer.
The various ways of extending credit to foreign buyers are as follows:
1. letter of credit
2. documentary bills
3. open account.

A letter of credit is a document issued by a bank on behalf of a customer (the foreign buyer)
authorizing payment to a supplier when the conditions specified in the document are met.

The use of documentary bill is a mode used by an exporter willing to ship the goods even before
there is an assurance of payment. The instrument used is the bill of exchange or draft.

An open account is a method of extending credit to the foreign buyer wherein goods are sent,
and which are billed later at regular intervals.

Public Credit
Public credit refers to loans extended to the government whether at the national, provincial, or
municipal level. Borrowings by the government are used to finance operations when expected
revenues are not sufficient to cover expenditures.

The government uses various means to avail of credit provided by various sources. The credit
instruments to avail of credit consist of bills, notes, and bonds.

SOURCES OF CREDIT INFORMATION

In determining the credit rating of a prospective borrower, various sources of information may
be availed of. These are the following:
1. interview with the applicant
2. credit rating agencies
3. lender's own records
4. financial statements.

Interview with the Applicant

In the borrowing process, the loan applicant is normally required to accomplish a loan
application. This document contains important basic information about the applicant. With the
use of the application, the credit evaluator will be able to form some opinion about the
creditworthiness of the applicant. If the evaluator wants to validate his initial impressions, he will
call for an interview with the applicant.
In the interview, the evaluator may get a glimpse of the applicant's honesty and ability. Also, the
following information may be derived:
1. the history and growth of the applicant's business.
2. the backgrounds of the key personnel of the business.
3. the nature of the products and services handled.
4. the sources of raw materials or stocks of merchandise.
5. competitive position of the business, and
6. plans for the future.

Credit Rating Agencies:

A credit rating agency is a company which report on the creditworthiness of customers to show
whether they should be allowed credit. In the Philippines, there are agencies which provide credit
information to interested parties.

Examples are provided as follows:

1. Adiova, Nancy - a firm which sells credit information services, with office at VW Castillo Bldg
., Pasay City, MM;
2. BAP Credit Bureau, Inc. - a firm established by the Bankers Association of the Philippines to
facilitate the exchange of credit information among member banks.

To serve the needs of users of credit reports throughout the world, credit agencies may be found
in many countries, A list of the top ten credit rating agencies in the world is presented in Exhibit
7.6

Lender's Own Records

There are times when a supplier of goods does business with a buys for an extended period. This
may be enough for the buyer to establish reputation as a responsible client. This experience may
be used by the supplier as a basis for extending credit to the buyer.

Providers of credit must have records of their good customers. These records will serve as a
handy source of credit information whenever they an needed.

Financial Statements
Financial statements, consisting of the balance sheet and the income statements are very useful
sources of credit information. These are required for submission by prospective borrowers
especially if the amount involved is large. Even if the amount borrowed is small, the credit
applicant is required to furnish some information regarding his income, expenses, properties
owned and liabilities.

As financial statements are documents indicating the financial condition of any enterprise or
individual. When properly analyzed, they provide very reliable means of credit evaluation.
 Chapter 5
Why worry about loans?
Understanding the difference between personal and business loans is critical when managing
debt in the Philippines. Since too much debt can be crippling, it makes sense to collect as little
debt as possible.

However, while trying to avoid debt is admirable, it is also near impossible for the average person.
Two of the most common types of debt individual accumulate are:

A credit card: Nearly unavoidable in the 21st century, especially since everything is conveniently
available for online purchase. Big Items college tuition, a car, or even a home that will all put you
into debt for a certain amount of time.

The same is true in business. An owner may encounter situations where they will need to spend
more than they have on hand. Some types of these situations are when you need to purchase
new equipment, hire new staff or even buy inventory. If you are in a similar position, you will be
thinking of applying for financing, usually from a bank or a private lender. However, which loan
should you get a business or personal one? From who, a bank or a private lender? Does it matter?
Let us take a closer look.

The Personal Loan

Personal loan – also referred to as consumer loans, personal loans are a form of financing that is
granted for the borrower’s personal use; personal loans can be either secured or unsecured.

If the loan is secured, the loan provider will require the amount to be guaranteed by your
personal assets or by a co-signer who acts as a guarantor on your behalf. In other words, if it is a
secured loan then if you fail to make payments and default on the loan, the lending institution
will be able to seize your assets or approach your guarantor and demand the outstanding balance
from them.

If the loan is unsecured, it is also referred to as a signature loan. With unsecured loans, the
amount being borrowed is approved based on the lending institution’s assessment of the
borrower’s ability to repay.

Broadly, speaking, unsecured loans are a bigger risk for the lender than secured loans. Whether
it is a secured or an unsecured loan, repayment is normally made over a specified period of time
(and in specified amounts) agreed upon in advance by the borrower and the lender.

A personal loan is precisely what the name indicates: a loan for personal use. Personal loans are
a lump sum of money that, if approved, is given to you to do whatever you would like to with it.
Of course, the “personal” in personal loans means that the intention is to give people some
financial help with matters not related to their business. If you are thinking of renovating your
kitchen or even just want to help a relative in need, you can do with it as you please. Their
requirement criteria are flexible making them very appealing and easy to get. This is because of
the non-business nature of the loan—and usually the fact that smaller amounts are involved—
personal loans don’t often have the same strict requirements for business financing.

The Business Loan

Business loan – unlike personal loans, which are approved for the personal use of the borrower,
business loans are provided for specific, reasons (more on that below). Being approved for a
business loan will generally require taking a serious and detailed look over your company’s
financial history.

What are the benefits of business loans? Where personal loans are split into secured and
unsecured categories, business loans have, a bit more variety to them because they are
specialized for certain purposes. Lending institutions will want to provide a financing solution
that fits the loan applicant’s financial need in order to avoid risky lending practices.

This means borrowers are a lot less likely to be roped into taking out a loan they cannot afford to
pay back.

You would take a business loan to pay for business expenses. The amount you can borrow is
higher since business expenditures are usually big investments. If you are looking to renovate
your store, buying new equipment, or seeking funds to hire staff, business loans can support all
of these.

Of course, because of the professional nature of business loans, that also means there is an added
level of complexity and qualification to get business loans. Good business credit is essential, and
many more options such as variable rates, interest costs, and payment options and structuring
are going to factor into your loan amount. You may even need to provide collateral for some
types of business loans or even get specific types of loans, such as equipment loans. You will also
need to open a business bank account in order to receive your business loan from a lender

The Big Difference between Personal & Business Loans

Looking at all this, you might think to yourself, “Why shouldn’t I just use personal loans all the
time if business loans are more complex and rigorous?” One answer to this question is the
liability. It is true that personal loans can be used for anything you like, including investing in your
business. However, there is one big catch. A personal loan leaves you and your personal finances
liable for anything that goes wrong.
A business loan, once granted, is intended to be used by your business. Meaning, that if you are
unable to return the borrowed amount, it is your business that has held responsible. Having the
business held responsible, your personal credit score remains protected. On the other hand, with
personal loans, the bank has the right to attempt to collect that debt from you personally; this
includes any assets owned by you. This in turn negatively affects your personal credit score.

To summarize, business loan’s risk is “contained” within the company. While personal loans have
personal consequences for you and your private finances.

Understand your borrowing options

Ultimately, it is up to every person to decide whether the risk is worth the reward. For some, a
personal loan used to cover a business investment is fast, makes sense, and is easy to address.
For others, however, using personal loans instead of business loans puts you at real financial risk
that is not worth taking.

3 reasons why business credit is important

If you have ever applied for a car loan or a credit card, you are probably familiar with personal
credit. This score shows banks and other lenders how reliable you are with your personal finances
and how likely you are to pay bills on time. As a business owner, you should also learn about
business credit, which shows how well you are able to repay your business debts on time.

Business credit shows lenders, suppliers, and other vendors how financially risky your business
is. This score helps them assess whether your business should receive financial credit. If you apply
for small business financing from lenders or trade credit from suppliers, they will often look at
your business credit score before working with you. Because of this, building your business credit
can help you set your business up for success.

Below are 3 key reasons why business credit is important.

Business credit is important for 3 main reasons. Having good business credit helps you in 3 ways:
You can obtain business financing quicker and easier
You can get better credit and repayment terms with suppliers You can protect your personal
credit score

1. You can obtain business financing quicker and easier

Having good business credit is helpful when you are applying for business loans to quickly solve
cash flow problems. Lenders may look at your business credit score when you apply for financing
from them. Having a high business credit score will improve your chances of being approved for
small business loans, business lines of credit, or other business financing products.

A high business credit score will demonstrate to your lender that you will make repayments on
time, which will help you get qualified quicker and easier. Depending on the lender, you may also
qualify for lower interest rates on financing you apply for if your business credit score is strong
enough.

2. You can get better credit and repayment terms with suppliers
Your business credit score is not just helpful when you are working with banks and lenders. A
strong business credit score can also help you get trade credit and secure better repayment terms
with your vendors and suppliers.

With a strong business credit score, they will view you as a trustworthy client and may provide
you with more flexible repayment structures. This is beneficial when you need to buy equipment,
stock up on inventory, or make other major purchases for your business. Selecting the right
supplier for your business can also help you secure good repayment terms that align with your
needs.

3. You can protect your personal credit score

Business credit is also important for protecting your personal credit. As a rule of thumb, you
should avoid using personal credit for business expenses and purchases. Incurring large business
expenses with your personal credit will increase your credit utilization ratio, which measures how
much credit you are using in relation to your credit limit. High credit utilization has a negative
impact on your personal credit score.

Personal vs business loan – which is right for my business?

With all of the factors that need to be taken into consideration, making the decision in the
‘business loan vs personal loan’ standoff can still be difficult to do. As far as business loan interest
rates vs personal loan interest rates go, the latter tend to offer a better deal for borrowers. In
addition, the qualifications are clearly much easier when it comes to personal loans.

To simplify the process, here is a shorthand look at how to choose between personal loans and
business loans when it comes to financing your business:

When to take a personal loan:

When you have a high credit score
If you make a good salary
If you don’t mind putting your personal credit history in jeopardy
If you’re either not in business yet, or have only been in business for a very short time

When to take a business loan:

When your credit score is rated as fair
If your business is your primary source of income
If you don’t want to risk your personal credit getting damaged
If you have been in business long enough that, you can comfortably offer business assets as
collateral
If you are exploring financing options other than, term loans (i.e. line of credit, merchant cash
advance)
 Chapter 6
Why does the Government Borrow?
Essentially, the government borrows so that it can enable higher spending without having to
increase taxes.
• The annual amount the government borrows is known as the budget deficit.
• The total amount the government has borrowed is known as the national debt or public
sector debt.

There are many different reasons for government borrowing.

Tax revenues are less than predicted. Borrowing means the government can meet a temporary
shortfall by borrowing, rather than having to immediately cut back on spending. Like an overdraft
facility, government borrowing gives the government more flexibility and means they can
maintain wages and spending commitments without having to keep cutting spending.

Automatic fiscal stabilizers. In a recession, government tax revenues fall (e.g. people earn less
so pay less income tax). In addition, the government have to spend more on unemployment
benefits. Therefore, in an economic downturn, borrowing rises. To eliminate borrowing in a
recession would make the recession worse and increase inequality. If the government could not
borrow in a recession, the unemployed may not get any benefits and have no income. In addition,
higher taxes and lower spending would reduce domestic demand and make the recession even
worse.

Investment. The government may invest in public sector investment. For example, building
schools, hospitals, better roads. This investment can give a return on the investment, which helps
to boost productive capacity and increase economic growth. In this case, the government is
acting like a firm who takes out a loan to finance investment.

Spending commitments. The government is committed to providing certain benefits, such as

pensions and health care spending. With an ageing population, this puts upward pressure on
government spending to rise; therefore, governments may start to run a structural deficit.

Political. The biggest tendency to borrow comes from political pressures. Voters generally like to
hear the promise of lower taxes and increasing spending. A manifesto to tackle a budget deficit
(higher taxes and lower spending) is unlikely to be popular. Voters often are supportive of the
general idea of reducing government debt, but when it comes to actual policies like lower
benefits, higher pension age, increased VAT rate, and then it is likely to hit some pressure group
with a stake in maintaining low tax and spending. For a government to increase borrowing is
generally less politically damaging than increasing taxes.

War. During a war, government spending is stretched leading to higher borrowing. The highest
rates of borrowing occurred during the two world wars. In addition, during wars, it may be easier
to sell bonds as you can play the patriotic card to encourage people to finance government
borrowing.

It is cheap. This is because people have confidence government bonds are secure and so are
willing to lend at low-interest rates. When borrowing costs are low, it can be more desirable to
borrow than raise taxes.

Can An Economy Function Without Borrowing?

Some economies like Saudi Arabia, Qatar, find it so easy to gain tax revenues from oil, which they
do not need to resort to borrowing. There is no reason economies must borrow. However, it is
not really a priority to have zero government debt.

Can An Economy Function without Borrowing in a Recession?

Attempts to reduce government borrowing in a recession, almost inevitably make the recession
worse. This further reduces aggregate demand and makes the recession worse. By reducing
spending and output, it ironically makes it more difficult to balance a budget.

Is Borrowing Good or Bad?

It depends on what a government is borrowing for. It depends where in the economic cycle is
borrowing. It depends on the cost of servicing borrowing. Do markets fear the government will
default?

Problems of Government Borrowing

What are the problems of high government borrowing?

The potential problems of government borrowing include; higher debt interest payments, a need
to raise taxes in the future, crowding out of the private sector and – in some cases – inflationary
pressures.

Higher debt interest payments. As borrowing increases, the government must pay more interest
rate payments on those who hold bonds. This can lead to a greater percentage of tax revenue
going to debt interest payments.

Higher interest rates. In some circumstances, higher borrowing can push up interest rates
because markets are nervous about government’s ability to repay, and they demand higher bond
yields in return for perceived risk. In periods of high inflation, investors will also demand higher
bond yields – e.g., in the 1970s, high government borrowing caused an increase in bond yields.
Higher interest rates on government bonds tend to push up other interest rates in the economy
and reduce spending and investment. (This impact of higher interest rates in reducing private
sector spending is known as financial crowding out)

Crowding out. A classical monetarist argument is that high levels of government borrowing cause
‘crowding out’. What they mean is that the government borrow from the private sector by selling
bonds. Therefore, because the private sector lends money to the government, they have less
money to spend and invest. Therefore, although government spending increases, private sector
spending falls. In addition, it is possible government spending may be more inefficient than the
private sector and so we get a decline in output.

• However, crowding out is unlikely to apply in a recession because in a recession private

sector saving is rising and there are surplus savings. If the government borrows, they are
making use of surplus savings and so do not ‘crowd out’ the private sector. The
government are spending to offset the rise in private sector saving.

Higher taxes in the future. If the debt to GDP rises rapidly, the government may need to reduce
debt levels in the future. It means future budgets will need to increase taxes and/or limit
spending. The danger is that if taxes are increased too early too quickly, it could snuff out the
recovery and cause a further downturn. However, if they do not raise taxes, markets may be
alarmed at the size of borrowing. High government borrowing can cause difficult choices for
future chancellors; it is a difficult situation to be in.

Vulnerable to capital flight. If a government finances its deficit by borrowing from abroad, then
there is potential for the economy to suffer from capital flight in the future. For example, if
investors feared a country like Greece would be forced out of the Euro and devalue, investors
would lose out from the devaluation. Therefore, this would encourage foreign investors to sell –
causing more pressure on the economy.

Inflationary pressures. It is rare for government borrowing to cause inflation. However, some
governments may be tempted to deal with high levels of debt by printing more money. This
increase in the money supply can cause inflationary pressures to increase. Suppose markets fail
to buy enough gilts to finance the deficit, the deficit can always be financed through
‘monetization’. i.e., creating money. This creation of money creates inflation, reduces the value
of the exchange rate, and makes foreign investors less willing to hold that countries debt.
 Chapter 7
SOURCES OF CREDIT

1. Private individuals
These are the individual money lenders who loan surplus income to those in immediate need of cash.
They usually do not require collateral but charge higher interest rates. They are sometimes called "loan
sharks", or usurers because they prescribe rate of 5/6 or over and above what the law provides.

2. Retail stores
These outlets offer merchandise form of consumer credit. It offers a book account ("palista") for
customers of the store and collection period is during paydays of the month.

3. Pawnshops
Pawnbrokers extend loans in exchange for a collateral, a pawn. Pawn acceptable are personal property or
movable assets. The pawner is given ninety days grace period from the date of maturity of the loan within
which to redeem the pawn by paying the principal amount of the loan plus interest that accrued thereon.
On or before the expiration of the ninety-day grace period, the pawnbroker shall duly notify the pawner
in writing that the pawn shall be sold or otherwise dispose of through auction. If upon the expiration of
the grace period, pawner fails to redeem his pawn, the pawnbroker may sell or dispose of the pawn only
after he has published a notice of public auction of unredeemed articles held as a security for loans in at
least two newspapers circulated in the city or municipality where the pawnbroker has his place of
business, six days prior to the date set for the public auction.

4. Savings and mortgage banks

Any corporation organized for the purpose of accumulating the savings of depositors and investing them,
together with its capital, inreadily marketable bonds and debt securities, commercial papers and accounts
receivables; drafts, bills of exchange, acceptances, or notes arising out of commercial transaction or in
loans secured by bonds, mortgages on real state and insured improvements thereon, and other forms of
security or unsecured, and financing for home building and home development; and such other
investments and loans which the Monetary Board may determine as necessary in the furtherance of the
national economic objectives.

5. Mutual savings banks.

These are mutually owned by the depositors and either pay out their profit to savers interest dividends
or retail them as a reserve cushion against loss. They sell interest - bearing savings deposits to the public
and acquire assets largely in the form of urban residential mortgage.

6. Savings and loan associations.

These are organized to obtain funds for home construction, and majority of the savings are placed in home
mortgages. There are stockholders in these organizations who receive dividends and above what is paid
out to savers. These are sometimes called building and loan associations which sell finance service to the
public and invest the funds acquired.
7. Credit unions.
These are mutual institutions whose membership have some common bond, such as employment the
same company. They are small, non-profit, thrift and lending institutions organized around some common
bond of membership, typically a common employer. They accept deposits, on which they pay interest or
dividends only from their membership and small loans only to their members usually for the purpose of
buying consumer-durable goods.

8. Insurance companies
These companies are both and stockholder owned. They receive funds from policy holders and place the
funds in loans, both individually to home buyers and other small borrowers and also through security
purchases in the organized money and cap markets. Service offered to the public is financial protection
against life's various misfortunes. To build up better amount of funds, they must place part of their assets
in investments.

9. Pension funds.
The procedure for pension fund is the verse of that for insurance companies. The person lives the longest
beyond retirement receives the higher return in the investment, through the periodic pension checks he
receives. Today, most corporation of any size offer their employees a retirement plan as a benefit e
employment. The financial service offered the public a course, the accumulation and investment of
employer employee contributions of these funds. Pension funds can be insured or non-insured. Insured
pension funds are managed by insurance companies and the investment off these funds is frequently
subject to the same govern mental restrictions like insurance contracts. Non-insured funds have wider
range in the types of assets they may acquire.

10. Bond and money market funds.

These are companies which accept savings and place them in a pool for investments that allows
diversifications of assets.

11. Sales finance companies.

These includes sales and personal finance companies which make loans to individuals for the purpose of
buying automobiles. They obtain working capital from their own stockholders, loans from commercial
banks and those obtained in sales of securities on the organized money and capital markets, Typically,
they do not lend directly to consumer or companies, but they buy the sales contracts or installment
contracts from the retailer or dealer.

12. Banks.
These are commercial banks, savings banks, rural, development and investment banks. They approve
loans based on collateral presented Collaterals are title for real property of securities. In the absence of
available pledge, a co-maker is required, serving as guarantor for the loans. They are major sources of
credit particularly for businessmen and for the development of certain industries. Commercial bank is any
corporation which accepts or creates demand deposits subject to withdrawal by check. These institutions
also accept drafts and issues letters of credit, by discounting and negotiating promissory notes, drafts, bill
of exchange, and other evidences of debts, by receiving deposits by buying and selling foreign exchange
and gold and silver bullion, and by lending money against personal security or against securities consisting
of personal property or mortgages on improved real estate and the insured improvements thereon.
 CREDIT MANAGEMENT
Lesson 8

man to the successful operation of the company. So important is he that his words generally carry
much weight. It is he who makes recommendations based upon investigations, studies, and
analyses, whether credit should be granted or denied.

Failure on his part to discharge properly the task and responsibility reposed upon him by virtue
of his position in the company could adversely affect the business world in general. Lack of
judicious care in the grant of credit will not only trigger losses for the business concern but, at
the same time, result in a diminution of credit to those who are deserving and are entitled to it.
Undue laxity, while increasing the volume of business, could mean one thing bad debts cluttering
the books of accounts of the company which are difficult, if not impossible, to collect.

On the other hand, the overzealousness of the credit man to prevent losses for the company and
thus become overly strict with respect to the grant of credit could generate the loss of customers
and thus, consequent reduction in the volume of business.

Thus, it is perhaps correct to say that a credit man must be a student of trade and business
equipped with a thorough understanding of the prevailing economic conditions and their
implications. He must have a keen foresight into future conditions that affect business in one way
or the other. In the words of Beebe and Morton, in their book "Credits and Collections"", the
credit man "has within his power to drive old customers away just as he could likewise help
educate the stubborn customers as to earn their everlasting goodwill."

Efficiency of the Credit Man in His Work

It is exceedingly difficult to lay down specific criteria for judging the effectiveness of the credit
man in the performance of his task For while it may be true that bad debts are held to the
minimum, however, such cannot be a safe gauge if at the same time it has resulted in small
volume of business. Thus, it is important as well as necessary, in the case of a retailing or
wholesaling establishments to know how many orders were refused as well as how many were
accepted.

It goes without saying that it is far easier to refuse orders than to select reasonable risks or to
handle doubtful customers in such a manner that they will be future boosters for the company.
Clearly, then, different cases must be treated in different ways.

The Credit Department

The credit department does not grant or extend credits.

Its task and responsibility revolve around the gathering of all credit information about the
applicant and assembling them in such a way that they could be of help in properly guiding the
loan officers in their assessment and analysis for purposes of establishing correct credit rating. In
a number of instances, one overriding factor which the credit department must give weighty
consideration is, not only with respect to the degree of profitability to be derived from the credit
operation, but also its influence as a booster in the sale of other goods of the company.

As may be observed, many large establishments which sell goods and/or services on credit
maintain credit departments which attempt to evaluate the paying capacity of present and
potential customers on the basis of information gathered and analyzed. Credit and sales
departments must cooperate closely with each other. A sales executive who does not support
the efforts and policies of the credit department can do much harm to his company. The same
holds true for a credit executive who is not sales oriented. The effective use of credit and the
proper application of credit management help develop business operate on a sound basis.

In the particular case of banks, the credit department collects and files every available bit of
information concerning people or firms that borrow money. In a detailed manner. its main work
consists of investigating, assembling, analyzing, and recording credit information for the guidance
of the loan officers of the bank. The officers use the information in processing loan applications
and moreover by and large in reaching decisions with respect to actions it will choose to take.

The functions of a credit department of a bank may be briefly stated as consisting of a systematic
and judicious collection of data respecting the final financial responsibility, character,
antecedents, and business qualifications and abilities of the bank's customers, the classification
at the data on each customer in chronological order and their systematic preservation for future
reference and comparison. Thus, needless to point out, an orderly and well-arranged credit file
will immediately disclose at a glance the entire career and present business standing of any
costumer.

Not infrequently, the credit departments of banks furnish a valuable if not indispensable service
for customers friends of the bank by making credit information available for them under proper
circumstances. This courtesy is often of value to non-borrowing customers to other banks and
also to business concerns.

The Credit Manager

The credit manager, paradoxical as it may seem, is a man who occupies a very important position
in the structure of a credit economy and yet is little known and least talked about outside the
world in which he lives. Upon his decision rests the success or failure of a credit granting
organization. In smalls the concerns, he is the credit investigator, credit appraiser, credit
supervisor, credit manager (if not a loaning officer at the same time) all rotted into one.

A real good and capable credit manager, in a very correct sense, owes his position to himself. For,
while he was appointed by someone at the top of the organization to his position, such is due in
large measures to his proven ability as demonstrated in every position he has held before in the
past. Moreover, his appointment is the tribute to the organization he represents for having
chosen the right man for the right position.
In a big concern, he is the head of a staff of trained, experienced and capable men charged with
credit work. Such men are known as credit investigators, credit appraisers, and credit supervisors.
A good credit manager is progressive in his ideas and thinking. Moreover, he should be devoid of
prejudices against and biases in favor of any man or organization. Otherwise, his thoughts and
views will be colored by them. He should be, over and above everything else, morally upright and
intellectually honest, and must have a complete knowledge of the facts surrounding every
application for credit, if he is to discharge his responsibilities well.

Credit Investigation and Appraisal

At this point, let us focus our attention on what a typical bank credit department does with
respect to credit investigation work. Like that of any financial institution that is engaged in the
grant of loans or extension of credits, sound bank management dictates that a thorough and
careful credit investigation of clients and appraisal of security(ies) as collateral be conducted
before any accommodations are made This task is generally performed by the Credit
Investigation and Appraisal Section of the Credit Department. Doubtlessly. the quality of
information gathered is largely dependent on the ability and resourcefulness of the credit
investigators and appraisers.

Credit Investigation
This task is performed by the bank's credit investigator who has, as his main objective, the
verification as well as evaluation of the applicant's character. credit standing and integrity
through the process of data gathering of all essential facts. Generally speaking, the elaborateness
of a credit investigation as a practical matter depends upon its cost relative to the magnitude of
the principal and interest involved and the security being offered by the applicant. The results
obtained from credit investigation is an essential part of credit analysis for the proper evaluation
of credit risks which necessarily cannot be any better than the facts assembled.

The request for Credit Investigation Report (ClF) may come from any officers/departments of the
bank for any of the following purposes:
a. On clients seeking loan accommodations or credit line with the Loans Administration
Department through Marketing Management Department;
b. On clients applying with the International Banking Department to secure availment in the form
of Letters of Credit, Import/Export Bills, Trust Receipts, and other forms of accommodations;
c. On clients opening current/savings accounts with the Cash Administration for the first time
(which, of course, is no longer common nowadays in view of the competitive nature of the
banking business).
d. On clients transferring business with the Treasury Department through the money desk.
e. On co-makers and guarantors for credit.
f. On old clients for updating client information.
g. On insurance companies requesting accreditation or offering to act as surety;
h. On beneficiaries named in the Letter of Credit.
i. On prospective buyers of assets acquired by the bank.
j. On prospective suppliers of office equipment and supplies and contractors of services, and
k. Others, subject of special cases.
Upon receipt of a request for Credit Investigation Report and supporting papers, an investigator
is assigned to handle the case and to conduct proper study of the applicant’s background.

The assigned credit investigator initially checks the subject with the bank's credit files and
prepares a tickler where he notes down initials which he thinks will require some degree of
emphasis during the conduct of his investigation, within a specified period of time, usually three
days, the credit investigator is expected to come out with a Credit Investigation Report.

The Scope of Credit Investigation

The scope of credit investigation depends, to a large degree, upon the following factors:
1. Purposes and types of investigation. Whether the investigation is a routine matter, or a special
case and the purpose is general or specific.
2. Company credit policy. Whether the policy is a conservative or liberal one. and whether it
requires a comprehensive investigation of cases, or a representative sampling would suffice.
3. Client classification. Whether the client is new or an established one a past-due account or a
valued one.
4. Amount involved. Whether the amount involved is big or small. If it is a small one, chances are
a limited type of investigation will suffice. If it involves a fairly large sum, investigation may be
rigid and thorough relative to the risks involved. And, of course, with respect to the amount of
income to be derived measure of profitability.
5. Time and resource constraint. The scope depends on such factors (time and resource
constraint) since the report must be finished on the date it is needed by the requesting officer
department of the bank and also, on the availability of the credit investigator who will conduct
the investigation.

Generally, the scope of credit investigation covers and includes the following:

I. Company's background/history

This covers the complete business record, such as the date of incorporation, the type of business
organization, record of registration with the proper authorities, the names of incorporators, and
the summary of operating records. In the case of an individual, his personal background,
business, identity, and membership in organizations will be necessary together with bank and
trade references.

The investigator also takes into account the requirements common in the following types of
business organization:
a. Single proprietorship. He sees to it that the owner has the capacity to enter into a lawful
contract. If the owner is a married woman, she must possess the legal right to transact business
as required under the Civil Code of the Philippines.
b. Partnership. The first fact to be ascertained is whether it is a general or a limited partnership.
This is important and essential since under a general partnership, all the members are general
partners. As such, they are liable to the whole extent of their separate properties, either
subsidiary and pro rata, or solidarity, for partnership debts. In a limited partnership, one or more
members, aside from the general partners, are limited partners who as such shall not be bound
by the obligations of the partnership.

Secondly, whether the contract of partnership is registered or not with the Securities and
Exchange Commission. However, registration with the Securities and Exchange Commission is
not a pre-requisite for the acquisition of juridical personality of a partnership since the juridical
personality begins from the moment of the perfection of the contract.

The credit investigator should also take into account and consider the following characteristics
of a partnership such as:
1. There must be a contract.
2. The partners must have legal capacity to enter into the contract;
3. There must be mutual contribution of money, property or industry for a common fund;
4. The purpose must be to obtain pecuniary profits and to share the same.
5. The purpose for which the partnership is formed must be lawful; and
6. Moreover, the Articles of Co-partnership must not be kept secret.

Other important matters that must be looked into are those relating to the contribution of each
partner, in what form (property, money or industry), citizenship of partners, agreement with
respect to division of profits and losses, term, and designation of officers, etc.

c. Corporation. The reader need not be reminded that a corporation is the most complicated
form of business organization and moreover is classifiable into various types. However, the most
common classes are public and private corporations, sub-divided into stock and non-stock, and
as to place of incorporation, sub-divided into domestic and foreign.

The legal existence of a corporation begins from the date of the issuance of the certificate of its
incorporation by the Securities and Exchange Commission. Important matters which a credit
investigator should carefully consider in the Articles of Incorporation are the following:

1. Name of the corporation. This is essential in as much as its name helps to establish its identity
and distinguishes it from the others. The Securities and Exchange Commission in its recent ruling
prohibits the use of the words "Maharlika", "State", etc.
2. Its purposes, objectives, nature, and powers. Although a corporation may be formed for as
many lawful purposes as the incorporators may desire, nevertheless, the corporation law and
other pertinent special laws, expressly or impliedly, prohibit certain corporations from having
more than one purpose. They are corporations "formed" for the `purpose of engaging in the
business of transportation by land or water, or of maintaining a telephone, telegraph, or wireless
communication system" and corporations for which special provisions are established by law,
such as railroad companies, building and loan associations, religious corporations, trust
corporations, colleges, and other institutions of learning. Banking corporations and insurance
companies are governed by the General Banking Act (Republic Act No 337) and the Insurance
Act, respectively.
3. The location or place of business.
4. The term of duration of corporate existence, such term is not to exceed 50 years. While a
term may be decreased, however, it cannot be increased by subsequent amendments of the
articles of incorporation.
5. The names and residences of the incorporators. This determines whether the statutory
requirements that the majority of the incorporators must be residents of the Philippines has been
fully met and complied with.
6. Names of incorporating officers.
7. The capital stock and the number of shares into which it is divided.
8. The names and citizenship of the stockholders and the amount or number of shares they
have actually subscribed to, and the amount paid on subscriptions. In cases where capital is
divided into par value shares, at least 20% of the capital stock should be subscribed. Where the
entire capital stock is divided into no-par value shares the 20% requirement shall be computed
on the basis of number of shares.

As to corporations granted franchises for operations of public utilities, mining and agricultural
corporations and other corporations organized for the disposition, exploitation, development or
utilization of the natural resources of the country, at least 60% of the capital stock of such
corporations must be owned by citizens of the Philippines.

9. The acknowledgment of the duly executed Articles of Incorporation before a notary public.
The company's history also covers the complete record of the men who comprise the operating
management of the business, their respective ages, whether they are married or not, and if they
have children, the number, sex, and age of the children. It also includes information on their
educational attainment, their previous employment, if any, and their particular experience in
their respective lines of business.

II. Financial Conditions

Herein is represented in summary form a breakdown of the financial statement of the company
reflecting its latest financial condition and the results of operation for the past three or five years.

Aside from the balance sheets and income statements, it may include schedules, explanations or
extraordinary items, breakdown of merchandise and receivables and full explanations of all inter-
company loans and merchandise transactions.

III. Dealings with Government lending agencies, etc.

a. With lending agencies of the government. The credit investigator concentrates on the size and
degree of fluctuations on borrowings as well as the nature of the security pledged to secure the
loan. In case of long-term loans, the yearly, semi-annual, quarterly, or monthly installment
payments to maturity must also be ascertained, (including arrearages, if any).
b. A multitude of facts that could merchandise suppliers. They may be very useful in matters
pertaining to incidence of credit, amount owing, amount past due, if any, terms and payment
performance of the subject of inquiry.
c. Other banking institutions The investigator should focus his inquiries on such matters as the
following:
1. Nature of the credit accommodation granted
2. Whether borrowings are on secured or clean basis.
3. If secured, whether the security real estate mortgage, shares of stock, warehouse receipts,
chattels, assigned receivables, discounted noted receivables, assignments of claims under a
government contract or other form of security.

IV. Bank's experience with the subject

Has there been any previous relationship established in the past?

V. Court Cases
From the Credit Management Association of the Philippines data on court cases could be
gathered information about the subject's involvement in, not only collection and other civil cases,
but also criminal cases, as well, if any.

It is important as well as necessary to point out fact that when a close study is being made, it is
essential to check with trade competitors on the subject (if it us a business concern). In such
"competitive checking “the following information must be sought:

a. The importance of the subject in its particular time of business, the general reputation the
ability of the management and the quality of the products and/or services being offered.
 What does PS mean in surveying?
Lesson 8. A
The professional may denote their certification as Professional Surveyor (P.S.), Licensed Surveyor
(L.S.), Professional Land Surveyor (P.L.S.), Registered Land Surveyor (R.L.S.), Registered
Professional Land Surveyor (R.P.L.S.), or Professional Surveyor and Mapper (P.S.M.).

PS - Private Survey/Surveyor (Private GE practitioner executed survey) ; BL - Bureau of Lands

(Gov't executed survey); PLS - Public Land Subdivision (Gov't executed/sanctioned survey); GSS -
Group Settlement Surveys (Gov't executed/sanctioned survey); AR - Agrarian Reform (Gov't
executed/sanctioned survey)

What does PS mean in landmark?

There are a number of marks that can be seen on top of a mohon. The most common is PS. “PS”
stands for Private Survey/Surveyor; it is common in properties surveyed by Geodetic Engineers
owned/claimed by its clients.

What are those cylindrical concrete markers we see in the borders of our lots at home?
“Mohon” is a marker that determines the boundary of your land property. Through this, you will
be guided as to where you are allowed to build on your property. It is a cylindrical concrete
monument that looks something like the one in the photo below.

What is Mohon in land?

Mohon in tagalog or Monument is any concrete object that is set permanently in the ground to
mark the position of a point or a boundary corner.

The Importance of Verifying the “Mohon” of your Land Property You need to verify the the
“mohon” or boundary of your land property before you build any structure on it. If you cannot
trace the “mohon” anymore, it’s better that you hire a geodetic engineer to do this for you. You
will face a big problem if you build your structure on the wrong lot. I have recently encountered
someone who bought a piece of land years ago but whose house was wrongly built on another
lot.
The cost of hiring a geodetic engineer then would probably be less than P10k to survey a regular
lot. The cost of fixing a house built on a wrong lot, “priceless.” You need to pay additional taxes
and fees, not to mention the headaches you will have to go through in dealing with government
bureaucracy & uncooperative property owners whom you have encroached upon. Add up the
tedious legal paper works as well