Week 3

Bank and Banking Perspective

Perspective on Bank or Banking
According to Sec. 3 off New General Banking Law: “Bank shall refer to entities engaged in the
lending of funds obtained in the form of deposits.”
Nature of Banking Business
“A bank makes money out of other people’s money.”
Example: Mr. A borrows money and the bank approve his application for the loan. Mr. A could
either get the proceed in cash or simply request the bank to open a current account under his name.
If Mr. An asked the bank to open a current account under his name. the entry would be:
Loans and Discount P100,000
Demand Deposits P100,000
Principles of Banking Business
1. Partial Reserve System - certain amount deposited will support several times as much as in
credit.
2. A greater portion of deposits in commercial banks arises out of the proceeds of loans.

TYPES OF BANKS
As to ownership
1. Privately owned
2. Publicly owned
As to the place of incorporation
1. Domestic
2. Foreign
As to structure
1. Stock Corporation
2. Non-stock Corporation
As to function and line of development
1. Commercial Bank – one that receives demand deposits and give short-term loans.
2. Trust Company – deals in fiduciary activities such as administrator of estates, guardian of
minor’s interests, executor of last wills and testaments etc. This function was originally a legal
function and was handled by legal officers and lawyers.
3. Thrift Banks - primarily receives money for safekeeping from person who have no immediate
need for cash and invest these funds in long-term investments.
4. Rural Bank – primarily organized to cater to the needs of small farmers, small businesses, small
cottage industries and cooperative associations. They also receive deposits and loan our of
funds.
 5. Development Bank – takes care of giving loans to be used for developing the economy and may
therefore engage in medium and long-term lending.
6. Cooperative Bank – is organized to furnish the credit needs of duly registered and operating
cooperative associations of different kinds.
7. Investment Bank – assist government bodies and newly organized corporations to raise funds for
capital through sale of stocks and bonds.
8. Central Bank – banks of all banks; it does not directly deal with the public. It is the supervisory
and regulatory agency which makes all banks “tow the line”.

Types of Banks - As to management

1. Unit Bank - refers to a bank that is a single, usually small bank that provides financial services
to its local community. A unit bank is independent and does not have any connecting banks —
branches — in other areas.
2. Group Bank – owned by two or more banks.
3. Branch Bank – refers to a bank that is connected to one or more other banks in an area or
outside of it; to its customers, this bank provides all the usual financial services but is backed
and ultimately controlled by a larger financial institution.
4. Chain Banking - is a group of banks (minimum is 3) held together by a group of individuals for
effective banking activities while the banks function independently without any hindrance of a
holding company. These activities don't overlap so that the revenue is maximized to the best
possible extent.
Why the State supervises Banks?
1. The banks are entrusted with other people’s money.
2. The state wants to assure that the banks will perform their functions in the best interest of their
clients through honest and efficient conduct of their functions.
3. The banks may either abuse their power or use them prudently.
4. The banks 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.
Economic Significance of Banks
The existence of a strong and effective banking system is very important for the economic
development of a country.
Banks through acceptance of deposit of money from persons who do not need it at the present and
lending it to persons who want it for investment, serve as financial intermediaries thereby providing ideal
source of fund for investment that is crucial in increasing production, exports, creation of jobs and foreign
exchange earnings of the country.
Similarly bank lending to customers who need the money for consummation, purchase of various
goods and services, construction of houses, and education increases demand for those goods and services,
thereby encouraging producers and service providers to expand their undertakings and increase
production. Expansion and increase in production requires employment of additional workers, thereby
creating new jobs, encourage producers and suppliers of raw materials to increase their production and
supply.
Banks also play a positive role in encouraging savings by providing an incentive to save through
payment of interest on deposits/savings and providing safety and security. Saving is also an important
source of future investment and the improvement of the living standards of the society.
The power of the national bank in fixing interest rates is particularly crucial in both investment and
saving. If the rate of interest fixed by the bank on deposits /i.e. the interest banks pay on money deposited
on saving and other accounts / is attractive, it will encourage people to save their money rather than spend
it. However, such interest should not discourage people from investment and productive activities and
turn them to rent collection /potential investors may decide to deposit their money and collect interest/. If
the rate of interest charged by banks on money given on loan to borrowers is lower, it may encourage
potential borrowers and investors to borrow and invest, thereby contributing their part in the expansion
and increase of production of goods and services, creation of employment opportunities, increase in
exports and foreign exchange earnings of the country.
The existence of a network of banks covering all parts of a country facilities business transactions in
the country by making payments easier, safer and cheaper. Payment through banks also avoids the risk of
loss or theft of money.

THE BANKING INSTITUTION

The Banking Institution in the Philippines can be categorized as private banking and government
banking.
The private banking institutions are comprised of commercial banking such as universal banks
and ordinary commercial banks; thrift banks like savings and mortrage banks, private development banks,
and stock savings and loan association; and the rural banks.
The govenment banking institutions, on the other hand, consist of
Philippine National Bank, Development Bank of the Philippines, Land Bank of the Philippines, and the
Philippine Amanah Bank

PRIVATE BANKING INSTITUTION

1. Commercial Banking Institutions.
The Banks that fall under commercial banking institutions are the ordinary commercial banks or
non-expanded commercial banks. These banks continue to account for the bulk of the total resources of
banking industry.
2. The Thrift Banks.
Thrift banks are primarily engaged in mobilizing the small savings of the people. They provide
funds for agriculture and industry at reasonable interest rates. The small producers like farmers,
fishermen, craftsmen, and poor consumers can rely on such banks for financing their production and
consumptions inputs. The following banks fall under the category of Thrift Banks:

a. The Savings and Mortgages Banks.

The primary function of a savings and mortgage bank is to receive time deposit of different types and
to invest its funds in long term investment.

b. The Savings and Loan Association.

Very similar to the savings and mortgage banks are the savings and loans associations nowadays.
However, these institutions may either be stock or non-stock corporations.

c. The Private Development Banks.

This is quite different from the government institution of the same name. It is a government entity,
formerly the Rehabilitation Finance Corporations.

d. The Rural Banks.

Rural Banks fulfil the investment function by allowing small farmers to finance their needs through
the granting of loans for capital or other uses.
Activity:
1. Explain the types of banks through a diagram.
2. Discuss the significance of banking institutions in the lives of the people and the economy. Give a
sample scenario or your experiences on how banking contributes to your own life.