FINANCIAL

SYSTEM
• Explain the diagram illustrating
how the Financial System works
• Define Financial Institutions

FINANCIAL • Identify the different types of

Financial Institutions

INSTITUTION 1
THE FINANCIAL SYSTEM
Principally responsible for the flow of
money or funds from the lender to the
borrower.
It controls, regulates, and facilitates
the saving, borrowing, and investing
activities happening among the different
players in the system
2
SCENARIO

MARIO WANTS TO INVEST HIS EXCESS MONEY AND

LINA IS LOOKING FOR AN ADDITIONAL CAPITAL.
 PRIVATE
PLACEMEN
T
Please take note that
If Mario knows that Lina is in need of funds, on the illustrations
presented:
or if Lina knows that Mario is willing to invest SOLID
LINES - represent
funds, Mario and Lina may agree to make a the flow of
cash/funds
Private Placement.
 PRIVATE
PLACEMEN
T

FINANCIAL Please take note that

MARKET on the illustrations
presented:
SOLID
However, if they are unknown to each other, Mario and Lina can go to a Financial LINES - represent
Market which is an organized forum that lets Mario, along with other suppliers of the flow of
funds, and Lina, along with other users of funds, meet and make transactions. cash/funds
 FINANCIAL
INSTITUTIO
NS
PRIVATE
PLACEMEN
T
FINANCIAL
MARKET
If Mario and Lina do not want to make an effort to find counterparty in the Financial Markets, Mario and Lina
may go to a Financial Institution. A Financial Institution will receive Mario’s supply of funds and match it with
Lina’s demand of funds.
Financial institutions actively participate in the financial markets as both suppliers and users of funds.

FINANCIAL
INSTITUTIO
NS
PRIVATE
PLACEMEN
T
FINANCIAL
MARKET
 the transfers of funds from
one party to another are
made through Financial
Instruments.

Please take note that on the

illustrations presented:
SOLID LINES - represent
the flow of cash/funds
---------- BROKEN LINES -
represent the flow of financial
instruments which represent
obligations to transfer cash or
other assets in the future.
The transactions between suppliers and
users take place and can be proven
through a:
o Verbal agreement, or
o Written agreement
 GOVERNS THE FINANCIAL
SYSTEM IN THE PHILIPPINES
Bangko Sentral ng Pilipinas (BSP)
 a government agency that plays an active role in the
flow of money in the economy in the Philippine financial
system.
 BSP regulates the operations of financial institutions and
financial intermediaries

10
BASIC ELEMENT OF
FINANCIAL SYSTEM
1.Financial Institutions
2.Financial Markets
3.Financial Instrument
4.Lenders and borrowers

11
FINANCIAL INSTITUTION -
DEFINITION
is an institution or organizations that provide
financial services, among others, in the form of
loan, credit, fund administration (investment),
financing, depository, and safekeeping
an intermediary (agent) that channels the
savings of individuals, businesses, and governments
into loans or investments
are required by the government to operate within
established regulatory guidelines
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Classification of Financial
institutions based on the financial
services:

1.Depository institutions
2.Financial Intermediaries
3.Investment Institutions
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1. DEPOSITORY INSTITUTIONS
Is financial institutions that accept
deposits (savings, current, and time
deposits) from individuals and corporate
entities, extend loans to borrower, transfer
funds, and manage fund for investment
purposes.
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TYPES OF DEPOSITORY
INSTITUTIONS
1.Banks
2.Savings and Loan
Association
3.Trust Companies
4.Credit Unions
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 1. BANK (Depository Institutions)
institutions authorized to operate and regulated by the BSP under
the General Banking Law of 2000.
accept deposits and bill payment, provide loans, and facilitate the
transfer of funds domestically or abroad.
Under BSP Circular No. 271, the major classifications of banks
operating in the Philippines are as follows:
Universal bank
Commercial Bank
Thrift Bank
Rural Bank
Cooperative Bank
Islamic Bank 16
 A. Universal bank
the biggest bank in terms of asset, loan portfolio, and revenue.
Minimum capital requirement with more than 100 branches is
P20billion in compliance with BASEL III requirement
Universal Bank may perform the following:
(a) involve in underwriting activities;
(b)engage in financial activities of investment houses;
(c) invest in equities of non-banking institutions.
Examples:

BDO Unibank Inc, China Bank, PNB, LBP, DBP, Security Bank,
Bank of the Philippine Island (BPI), Rizal Commercial Banking
Corporation (RCBC), United Coconut Planters Bank (UCPB)and
others. 17
 B. Commercial bank
provides commercial loans to firms and personal
loans to individuals and offers investment products in
addition to the regular banking service of accepting
deposits.
Examples:
Bank of Commerce, BDO Private Bank, Inc., Cathay
United Bank Co., Ltd. - Manila Branch, Citibank, N.A., JP
Morgan Chase Bank, N.A., Maybank Philippines, Inc.,
Philippine Veterans Bank, Robinsons Bank Corporation
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 C. THRIFT BANK
 include savings and mortgage banks, private development banks,
stock savings, loan associations, and microfinance thrift banks that
are organized under existing laws for the following purposes:
a. accumulating and investing the savings of depositors;
b. providing working capital to businesses engaged in agriculture,
service, and housing;
c. providing diversified financial services to individuals and small
and medium. enterprises
Examples:
Bank of Makati, A Savings Bank Makati; BPI Direct Savings Bank Makati; BPI Family
Savings Bank, Makati; BPI Globe BanKo, A Savings Bank, San Juan City; Card SME
Bank, A Thrift Bank, San Pablo City; City Savings Bank, Cebu City, Legaspi Savings
Bank 19
 D. RURAL BANK AND COOPERATIVE BANK
 areorganized and operating in rural areas. They are
intended to promote and expand the rural economy
by providing the people with basic financial services.
Example:
A rural bank in Catanduanes: ARDCI Bank, Camalig Bank,
and Agri Bank.
There is no cooperative bank within the area of
Catanduanes, only cooperatives that is regulated by
Cooperative Development Authority (CDA)
20
 E. ISLAMIC BANK

created and organized under R.A No.

6848, aims to promote and accelerate the
socio-economic development of the
Autonomous Region of Muslim Mindanao
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. 21
2. SAVINGS AND LOAN ASSOCIATION
(Depository Institutions)
 referred as a financing and mortgage loan company;
 it is a financial institution that is engaged in the business of
accumulating the savings of its member and stockholders,
and using such accumulations for loans or investments in
securities of productive enterprises.
 Can be a stock or non-stock.
 The depositors are also the member-borrower of the
association.
 The members have voting rights and may control the
association’s operation
 Example: ARDCI Microfinance Inc., ASA Philippines, TSPI,
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3. TRUST COMPANIES (Depository
Institutions):
is a legal business entity, usually a major division of a
universal or commercial bank that acts as a fiduciary
agent or trustee on behalf of an individual person or
corporate entity for the purpose of management,
administration, and final transfer of property to the
beneficiary.
It acts as the custodian of the property for and on
behalf of the beneficiary for a fee.
It can be also appointed as the administrator of the
properties of a decedent when indicated in the last will and
testament. 23
 4. CREDIT UNIONS (Depository Institutions):
a financial depository institutions that is mainly controlled
and operated by its members for the following purposes:
(a)extending credit to members;
(b)offering competitive interest rates;
(c)promoting the concept of thrift;
(d)providing other types of financial services.
 The funds collected from the membership fees shall be made
available for borrowing by the members who are in need.
 Only those who have accounts with the credit union are
considered members and owners
 Example: Cooperatives 24
2. FINANCIAL INTERMEDIARIES
a type of financial institutions that acts
as the middleperson between two parties
– the investors and the borrowers.
It raises and accumulates money from
investors and offer the accumulated
money to individuals or corporate entities
in need of financial assistance.
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TYPES OF FINANCIAL INTERMEDIARIES:

A.Mutual funds,
B.Pension fund, and
C.Insurance companies

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 A. MUTUAL FUNDS (FINANCIAL INTERMEDIARIES)

are owned by investment companies which enable small

investors to enjoy the benefits of investing in a diversified
portfolio of securities purchased on their behalf by
professional investment managers.
a pooled funds from different investors. It is allocated to
purchase variety of investments like corporate and government
bonds, blue chips company in stock market with specific
strategy and goal.
When mutual funds use money from investors to invest in newly issued debt or equity
securities, they finance new investment by firms. Conversely, when they invest in debt or
equity securities already held by investors, they are transferring ownership of the securities
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IMG

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B. PENSION FUND (FINANCIAL
INTERMEDIARIES)
a financial institution that receive
payments from employees and invest the
proceeds on their behalf
Example:
Philplans by Phillife, SSS, Philam Plan,
Manulife Plans, Sun Life Financial Plans,
SSS, GSIS, and others

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 C. INSURANCE COMPANIES (FINANCIAL
INTERMEDIARIES)

Individuals purchase insurance protection

with insurance premiums.
The insurance companies pool these
payments and invest the proceeds in various
securities until the funds are needed to pay off
claims by policyholders.

30
 C. INSURANCE COMPANIES (FINANCIAL
INTERMEDIARIES)

The following products offered in the public:

Life insurance
Health insurance
Car insurance
Fire insurance
Crop insurance
Marine insurance - covers the loss or damage of ships,
cargo, terminals, and any transport or cargo by which
property is transferred, acquired, or held between the points
of origin and final destination
Other insurance products 31
 3. INVESTMENT INSTITUTIONS
•is a company engaged in buying securities of other companies
which are listed in the stock exchange for investment purposes
only.
•It simply holds on the securities acquired from other companies.
The financial institution earns income from holding the securities
in the form of interest or dividends.
•Composed of very wealthy investors that resources are pooled
together in the institution for the purchase of financial securities.
Example:
•Mutual funds and insurance companies pool their financial
resources together to form an investment company for investment
purposes only. 32