PROF 3

BANKING AND FINANCIAL INSTITUTIONS

BANKING INSTITUTIONS

Banks are entities engaged in the lending of funds obtained in the form of deposits

Nature of Banking Business- Banks makes money out of other people’s money

Principle of Banking Business

a) Principle of Liquidity Deposits are the life blood of the bank. Depositors are repayable
on demand or after expiry of a certain period. Everyday depositors either deposit or
withdraw cash. To meet the demand for cash, all banks have to keep certain amount of
cash in their custody.

b) Principle of Profitability The driving force of commercial enterprise is to generate

profit. So it is true in case of banks

c) Principle of Solvency Banks should be financially sound and maintain a required capital
for running the business.

d) Principle of Safety While investing the fund, banks are to be cautions because bank’s money
is depositor’s money. Unless the money lent out is safe, the banks can’t pay depositors money
back. Therefore, the banks are considering very seriously the aspects of safety of the lent out
money

e) Principle of Collection of Savings This is a very important principle for today’s banking
business. Banks always seek huge amount of idle money from the clients. Now a day’s
banks fix up the target for their employees to generate more savings from the people.

f) Principle of Loan and Investment Policy The main earning sources of banks are
lending and investing money to the viable projects. Banks always try to earn profit
through sound investment.

g) Principle of Economy Banks never go for any unnecessary expenditure. They always
try to maintain their functions with economy that increase their yearly profit.

h) Principle of Providing Services Commercial bank thinks that customer service should
be done efficiently and promptly. A better service brings great reputation for the bank

i) Principle of Secrecy Bank maintains and keeps the clients’ accounts secretly. Nobody
except the authorized person is allowed to see the accounts of the clients. Principle of
Modernization It is the age of science and technology. So to cope up with the advanced
 world the bank has to adopt modern technical services like online banking, credit card
etc.

j) Principle of Specialization It is an age of specialization. Banks segments their whole

functions into various parts and place their human resources according to their efficiency.

k) Principle of Location Banks choose a suitable site where the availability of customers is
large.

l) Principle of Relation Banks always try to maintain a good relation with their clients and
potential customers. Principle of Publicity It is an age of publicity. If you would like to
earn more money, you have to give more advertisement through various media. In that
case, banks follow this kind of principle to increase their customers

Types of Banks

1. As to ownership

a. Privately owned-organized and capitalized by private citizens for their profit.

b. Publicly owned-organized by the state and sometimes has a minimum private

ownership.

2. As to place of Incorporation

a. Domestic - incorporated under Philippine Laws. Majority of the stocks are owned by
Filipinos.

b. Foreign- incorporated under laws of other country although the bank might be doing
business in the Philippines.

3. As to Structure

a. Stock corporation-when they sell shares of stocks to the general public to raise
capital.

b. Non-stock Corporations- the organization is on a membership basis.Such as savings

and loans associations.

4. As to Classification

The following are the classifications, powers and scope of authorities of banks, as
well as the prerequisites for the grant of banking authorities as stated in the Manual of
Regulations for bank (MORB) Banko Sentral ng Pilipinas.

Banks are classified into the following subject to the power of the Monetary
Board to create other classes or kinds of banks:

i. Universal banks
 is a type of bank which participates in many kinds of banking activities
and is both a commercial bank and an investment bank as well as
providing other financial services such as insurance.

Several investment banks are subsidiaries of universal banks.

Universal banks are authorized to do investment banking activities, but

several of them opted to create subsidiaries to focus on investment
banking. Others opted to create their own investment banking
departments.

ii. Commercial banks

represent the largest single group, resource-wise, of financial institutions

in the country. They offer the widest variety of banking services among
financial institutions. Universal banks are also authorized to engage in
underwriting and other functions of investment houses, and to invest in
equities of non-allied undertakings.

is one that receives demand deposits and gives out short-term loans.

iii. Thrift banks (TBs), as defined in Republic Act (R.A.) No. 7906, which shall be
composed of:
savings and mortgage banks,
stock savings and loan associations,
private development banks;
is composed of savings and mortgage banks, private development banks,
stock savings and loan associations and microfinance thrift banks. Thrift
banks are engaged in accumulating savings of depositors and investing
them. They also provide short term working capital and medium- and
long-term financing to businesses engaged in agriculture, services,
industry and housing, and diversified financial and allied services, and to
 their chosen markets and constituencies, especially small- and medium-
enterprises and individuals.

iv. Rural banks (RBs), as defined in R.A. No. 7353;

organized primarily to cater the needs of small farmers, small business,
small cottage industries, and cooperative associations. They also receive
deposits and loan out funds.

v. Cooperative banks (Coop Banks);

as defined in R.A. 6938 (Cooperative Code)

organized to furnish the credit needs of duly registered and operating

cooperative associations of different kinds.

Rural and cooperative banks are the more popular type of banks in the rural
communities. Their role is to promote and expand the rural economy in an orderly
and effective manner by providing the people in the rural communities with basic
financial services. Rural and cooperative banks help farmers through the stages of
production, from buying seedlings to marketing of their produce. Rural banks and
cooperative banks are differentiated from each other by ownership. While rural
banks are privately owned and managed, cooperative banks are
organized/owned by cooperatives or federation of cooperatives.

vi. Islamic banks (IBs), as defined in R.A. No. 6848.

The primary purpose of the Islamic Bank shall be to promote and

accelerate the socio-economic development of the Autonomous Region by
performing banking, financing and investment operations and to establish
and participate in agricultural, commercial and industrial ventures based
on the Islamic concept of banking.

As to Management

a. Unit Bank-one where ownership is concentrated on one corporation which does banking
business independent of others.

b. Group Banking - When a majority portion of stocks of two more banks are held by a
holding company, this is considered as group banking.

c. Branch Banking -is one where there is a head office and two or more branches.

d. Chain Banking -When one or more persons control the activities of banks, it's known as
chain banking.
Economic Significance of Bank

 A bank facilitates dealings between debtors and creditors because it acts as an

intermediary in the flow of credit funds. It allows others the use of idle funds of the
community in productive activities.

 Creates money out of proceeds of loans.

 Maintains foreign trade.

Why The State Supervises Banks

-The state does not only supervise banks, but with the advent of central banking, it also controls
the bank's operation.

Reasons:
1. The banks are entrusted with other people's money. Mismanagement or malfeasance in
the duties of the board of directors will result to banking failure.
2. The state wants to assure that the banks will perform their functions in the best interest of
their clients through the honest and efficient conduct of their functions.
3. The banks may either abuse their power or use them prudently.
4. The Banks, furthermore, are quasi-public corporations and as in all other corporations of
this calling, the state must exert its restraining influence to safeguard the welfare of its
constituents.