BANKING &FINANCIAL INSTITUTION WEEK 1

St. Anthony’s College

San Jose de Buenavista, Antique
BUSINESS EDUCATION DEPARTMENT

HANDOUTS IN FM 201- BANKING AND FINANCIAL INSTITUTIONS

OVERVIEW OF THE PHILIPPINE FINANCIAL SYSTEM

Week 1
Learning Competencies:
Students manifest understanding the impact of Philippine Financial System in their day to day.
Students manifest understanding how and why Philippine Financial System came into being.

PHILIPPINES FINANCIAL SYSTEM

History of Financial System

Financial System is like the heart of the human beings, if it stops working then the person is dead
in the same way that if the financial system stops working, then the economy would collapse. It is
inherent in every society the law of supply and demand. There will always be those who have surplus
resources and others will have deficit. Financial System is crucial to the allocation of these resources.

In the Philippines settings, Financial System is composed of banking institutions and nonbank
financial intermediaries, including commercial banks, specialized government banks, thrift banks and
rural banks. It is also composed of offshore banking units, building and loan associations, investment and
brokerage houses and finance companies. The Bangko Sentral ng Pilipinas and the Securities and
Exchange Commission maintained the regulatory and supervisory control.

The first credit institution in the Philippines, "The ObrasPias" was started by Father Juan
Fernandez de Leon in 1754 and ended in 1820. It was in 1851 that the first Philippine Bank was
established, the "Banco Espanol-Filipino de Isabela II". Banco Español-Filipino de Isabela II is now
known as Bank of the Philippine Islands. It is the oldest standing bank in the Philippines and in the whole
of Southeast Asia. It was established on August 1, 1851 and named after the mother of then Spanish King
Alfonso XII. Her mother's name was Isabella. The bank only came into being after 23 years after Spanish
Monarch Ferdinand VII decreed that a public bank was to be established in the Spanish colonized country
of the Philippines. The bank began its operations in 1852 and was given the honor of being the first to
issue paper money. In 1906 "First Agricultural Bank of the Philippines" was established and in 1916 all of
its assets and liabilities were transferred to the newly organized Philippine National Bank.

Definitions of Financial System

Financial System describes collectively the financial markets, the participants, and the instruments and
securities that are traded in the said markets. The functions of the financial system is to channel the funds
from lenders to the borrowers, provide a medium of exchange, provide a mechanism for risk sharing and
provide a channel through which the central bank can influence the economy, in general, and the financial
system in particular

Financial system is where the institutional units and markets interact for the purpose of mobilizing funds
from lenders to borrowers.

A financial system refers to a system which enables the transfer of money between investors and
borrowers. A financial system could be defined at an international, regional or organization level. The
term “system” in “Financial System” indicates a group of complex and closely linked institutions, agents,
procedures, markets, transactions, claims and liabilities within a economy.

Elements of a Financial System

1. Financial claims- money and the right to receive money under specific circumstance.
2. Financial institution- private and government organization whose assets consist primarily of
claims on income is primary derived from providing services in connection with claims
3. Financial intermediaries- institutions that deals with creation and issuance of claims against
themselves and use the proceeds to acquire and hold claims against others.
4. Financial Markets- market in which people and entities can trade financial securities,
commodities and other fungible items of value at low transaction cost and at prices that reflect
supply and demand.
5. Government agencies – i.e. Central Bank, maintains internal and external stability of peso.
6. Law and policies- formulated to ensure that the desired levels of investment, employment,
production, income and consumption.

FUNCTIONS OF FINANCIAL SYSTEM

The financial system of a country performs certain valuable functions for its economy growth. The main
functions are:

1. Saving function: An important function of the financial system is to mobilize savings and
channelize then into productive activities. It is through financial system the saving are
transformed into investments.
2. Liquidity function: The most important function of the financial system is to provide money and
monetary assets for the production of goods and services. Monetary assets are those assets which
can be converted into cash or money easily without loss of value. All activities in financial
system are related to liquidity- either provision of liquidity or trading in liquidity.
3. Payment functions: The financial system offers a very convenient mode of payment for good and
services. The cheque system and credit card system are the easiest methods of payment in the
economy. The cost and time of transactions are considerable reduced.
4. Risk function: The financial markets provide protection against life, health and income risks.
These guarantees are accomplished through the sale of life, health insurance and property
insurance policies
5. Information function: A financial system make available price-related information. This is a
valuable help to those who need to take economic and financial decisions. Financial markets
disseminate information for enabling participants to develop an informed opinion about
investment, disinvestment, reinvestment or holding a particular asset.
6. Transfer function: A financial system provides a mechanism for the transfer of the resources
across geographic boundaries.
 7. Reformatory function: A financial system undertaking the functions of developing, introducing
innovative financial assets/ instruments services and practices and restructuring the existing
assets, services etc. to cater the emerging needs of borrowers and investors (financial engineering
and reengineering).
8. Other function: It assist in the selection of project to be financed and also reviews performance of
such project periodically. It also promotes the process of capital formation by bringing together
the supply of savings and the demand for investible funds.

Components of Financial System

A financial system refers to a system which enables the transfer of money between investors and
borrowers. A financial system could be defined at an international, regional or organization level. The
term “system” in “Financial System” indicates a group of complex and closely linked institutions, agents,
procedures, markets, transactions, claims and liabilities within a economy.

Five Basic Components of Financial System

 Financial Institutions
 Financial Markets
 Financial Instruments (Assets or Securities)
 Financial Services
 Money

Financial Institutions
Financial institutions facilitate smooth working of the financial system by making investors and
borrowers meet. They mobilize the savings of investors either directly or indirectly via financial markets,
by making use of different financial instruments as well as in the process using the services of numerous
financial services providers.

They could be categorized into Regulatory, Intermediaries, Non-intermediaries and Others. They
offer services to organizations looking for advises on different problems including restructuring to
diversification strategies. They offer complete array of services to the organizations who want to raise
funds from the markets and take care of financial assets for example deposits, securities, loans, etc.
 Financial Institutions are firms that connect borrowers and lenders, provide savers and borrowers
access to financial instruments & markets. There are two types of Financial Markets – the primary market
and the secondary market.

Financial Markets
A Financial Market is a place or network where financial instruments can be sold quickly &
cheaply.

A financial market is the place where financial assets are created or transferred. It can be broadly
categorized into money markets and capital markets. Money market handles short-term financial assets
(less than a year) whereas capital markets take care of those financial assets that have maturity period of
more than a year. The key functions are:

1. Assist in creation and allocation of credit and liquidity.

2. Serve as intermediaries for mobilization of savings.
3. Help achieve balanced economic growth.
4. Offer financial convenience.

Financial Instruments
This is an important component of financial system. The products which are traded in a financial
market are financial assets, securities or other type of financial instruments. There is a wide range of
securities in the markets since the needs of investors and credit seekers are different. They indicate a
claim on the settlement of principal down the road or payment of a regular amount by means of interest or
dividend. Equity shares, debentures, bonds, etc are some examples.

Financial Instruments are formal obligations that entitle one party to receive payments or a share
of assets from another party. Examples of tradable financial instruments include loans, stocks, bonds.

Financial Services
Financial services consist of services provided by Asset Management and Liability Management
Companies. They help to get the necessary funds and also make sure that they are efficiently deployed.
They assist to determine the financing combination and extend their professional services upto the stage
of servicing of lenders. They help with borrowing, selling and purchasing securities, lending and
investing, making and allowing payments and settlements and taking care of risk exposures in financial
markets. These range from the leasing companies, mutual fund houses, merchant bankers, portfolio
managers, bill discounting and acceptance houses.

The financial services sector offers a number of professional services like credit rating, venture
capital financing, mutual funds, merchant banking, depository services, book building, etc. Financial
institutions and financial markets help in the working of the financial system by means of financial
instruments. To be able to carry out the jobs given, they need several services of financial nature.
Therefore, Financial services are considered as the 4th major component of the financial system.

Money
Money is understood to be anything that is accepted for payment of products and services or for
the repayment of debt. It is a medium of exchange and acts as a store of value.
Money is used as a medium to buy goods & services. It also is a standard unit of measurement
and acts as a store of value. However, money may not be a good store of value since it loses value with
inflation.
Central Banks are large financial institutions that handle government finances, they regulate the supply of
money, and they serve as banks to commercial banks.

DEVELOPMENT OF THE PHILIPPINE FINANCIAL SYSTEM

 Obras Pias- means pious works; the first credit institutions in the Philippines started by Father
Juan Fernandez de Leon in 1754.
 10 years later Francisco Rodriquez organized the Rodriquez Bank
 Banco Español-Filipino de Isabella de II – first Philippine bank established in 1851
 1869- opening of the Suez Canal resulted in the expansion of the Philippine trade
 1873- Chartered Bank of India, Australia and China set up manila branch
 British banks donated the economy during the Spanish colonization
 1882- Spain was able to put up their first saving bank, Monte de Piedad, despite of British
domination
 1898- US acquired Philippines through Treaty of Paris which gave way to free trade between US
and the Philippines provided by the Payne Aldrich Act.

Structure of the Philippine Financial System

CENTRAL BANK (bank of all bank)

Refers to those banks that offer a wide range of financial services, beyond commercial banking and
investment banking, insurance etc. Universal banking is a combination of commercial banking,
investment banking and various other activities including insurance.

BANKING INSTITUTIONS:
PRIVATE BANKING; COMMERCIAL BANKS
An institution which accepts deposits, makes business loans and offers related services. CB also allow for
a variety of deposits accounts, such as checking, saving and time deposits. These institutions are run to
make a profit and owned by a group of individuals. While commercial banks offer services to individuals,
they are primarily concerned with receiving deposits and lending to business.

PRIVATE BANKING:
 Universal Banks
Refers to those banks that offer a wide range of financial services, beyond commercial banking,
insurance etc. Universal banking is a combination of commercial banking, investment banking and
various others activities including insurance.

 Thrift Banks
Mobilization of small savings, provide loans generally longer and easier terms.

 Rural Banks
Banks entrenched to ensure sufficient institutional credit to agriculture and other rural sectors. A
mobilize financial resources from rural/ semi-urban areas, grant loans small farmers.

 Cooperatives Banks
Is a business organization owned and operated by a group on individuals for either mutual
benefit. Cooperatives are defined as autonomous association of persons united voluntarily to meet their
common economics, social, and cultural needs and aspirations thorough jointly owned and democratically
controlled enterprise. It may also defined as a business owned and controlled equally by the people who
use its services of the people who work there. Cooperative enterprises are the focus of study in the field of
economics.

 Microfinance Banks
Is the provision of financial services to low-income clients, including consumers and the self-
employed, who traditionally lack access to banking and relates services. More broadly, it is a movement
whose object is the world in which as many poor and near-poor household as possible have permanent
access to an appropriate range of high quality financial services, including not just credit but also savings,
insurance, and fund transfers. Those who promote microfinance generally believe that such access will
help poor people out of poverty.

External Sector
Nonbank Thrift Institutions
Government Specialized Nonbank Financial Intermediaries
Private Nonbank Financial Intermediaries
Specialized Government Banks