PART 1 – THE PHILIPINE

FINANCIAL SYSTEM
 FINANCIAL SYSTEM DEFINED

• It is a network of various institutions which generate, circulate and control

money and credit. It provides intermediation between the suppliers and users of
credit.
• Also called as financial intermediaries that acts as borrowers and lenders of
funds. The Surplus Spending Unit (SSU) that lends to others and the Deficit
Spending Unit (DSU) that borrows to others.
• The instruments, institutions, markets and rules governing the conduct of trade
that expedite the routing of funds from buyers to sellers and from savers to
lenders.
 5 ELEMENTS OF THE FINANCIAL SYSTEM
• FINANCIAL CLAIMS – These are the money and the rights to receive money
under specific circumstances that are evidenced by financial instruments which
specify the terms of the claims. There are 2 broad categories of claims: debts and
equities. Debts are financial obligations which are to be paid while equities are
claims of ownership like shares of stock.

• FINANCIAL INSTITUTIONS - These are private or government

organizations whose assets consist primarily of claims or incomes primarily
derived from dealing in and or performing services in connection with claims.
These institutions act as a middlemen between the suppliers and users of credit.
Today, a bank is more like a financial supermarket. Walk in and you will discover
a huge assortment of financial products and services for sale, from access to the
financial markets to insurance policies, mortgages, consumer credit, and even
investment advice.Examples: Commercial Banks, S&LA and Finance Companies
• FINANCIAL MARKETS – are institutions w/c expedite transactions in
financial claims. They serves as a means of bringing the forces of demand and
supply of financial claims. Ex: Mla SE, Mkti SE, PSE and other organizations
dealing with money market operations.

• GOVERNMENT AGENCIES – Monetary policies are formulated by the Monetary Board

of the Central Bank. The CB supervises and regulates the banking institutions and other
financial institutions. Being the premier institution, it controls money, credit and banking
operations in the country.

• LAWS and POLICIES – The national government regulates and supervises the whole
economy in order to attain its development objectives. The FS is the integral part of the
whole economy, laws and policies on money, credit and banking have been made to ensure
monetary stability and economic growth. Such laws are legislated by Congress, in which the
main job of implementing laws falls on the Central Bank of the Philippines.
 FUNCTIONS OF THE FINANCIAL
INSTITUTIONS
• The GENERAL FUNCTIONS OF financial institutions is to facilitate the transfer of funds
from the savers to the users.

• The specific functions are:

• 1. Investigation and credit analysis - loan applications are properly evaluated to
ensure the efficient use of credit and to protect the savings of individuals as well as to
minimize the risk of non payment of loans.
• 2. Matching the supply and demand for funds - financial institutions are money
brokers. They bring the lenders and borrowers together. They specialize in matching
the supply of savings with the demand for funds.
• 3. Provisions for liquidity – with the present of financial institutions, the liquidity of
financial assets can be increased. Through their brokerage function which provides an
organized market, the investor can find a buyer for his debt or ownership claims.
• 4. Provides Payment System - the payment system takes the form of currency,
checking accounts and various transactions media.
 5 CORE PRINCIPLES OF MONEY AND BANKING
• TIME
• Time has value. Time is a very important factor that affects the value of all financial
instruments. For loans, interest is paid to compensate lenders for the time the borrowers have
their money. Stocks are often priced using some form of discount factor model to price the value
of future cash flows of a company. In short, time affects the price of financial instruments, and
investors and lenders both require compensation for the passage of that time. In the framework
of the time value of money, a dollar today is worth more than a dollar tomorrow.

• MARKETS
Markets determine prices and allocate resources. Markets are the core of the economic
system. Markets act as resource channels to minimize the cost of gathering information and
making transactions.
• RISK
• Risk requires compensation. People will accept risk only if they are compensated
appropriately for that risk. Compensation comes in the form of explicit payments, like
dividends and interest payments, as well as not-yet payments, such as stock appreciation. The
higher the risk of a financial instrument, the higher the payment required to have an individual
carry the risk. This is a well-known financial principle: the higher the risk, the higher the
reward. Or in the immortal words of the movie Jerry Maguire, “SHOW ME THE MONEY”

• STABILITY
• Stability improves welfare - A stable economy reduces risk and improves everyone’s
welfare. In addition, stable economies grow faster than unstable economies. One way to think
about this is through volatility. The more volatile an environment, the less healthy it is, and it
makes it difficult to find solid growth. As an example, the financial crisis of 2008 was triggered
by financial instability. Central banks attempt to stabilize the economy.
• INFORMATION
• Information is the basis for decisions. Information is paramount in
the decision process of any investment. The more important the decision,
the more information we should gather. If the decision is not as
important (meaning not as expensive), we can gather less information.
For example, if your investment is a stick of chewing gum, you probably
won’t do a deep dive in gathering information while you’re at the gas
station counter buying it. However, if you are thinking about buying a
$500,000 house, you have strong incentives to gather a lot of data
pertaining to the purchase.
 WHAT IS A SECTOR

A sector is an area of the economy in which businesses share or relates business activity,
product or service. Sectors represents a large grouping of companies with similar
business activities such as the extraction of natural resources and agriculture.
Sectors are used to categorize the economic activity of consumers and businesses into
groupings based on the type of business activity.
1. Primary sector companies are directly engaged in activities utilizing natural resources,
such as Mining and quarrying, Fishing, Agriculture, Forestry, Hunting and agriculture .
Emerging economies tend to have a higher amount of economic activity and
employment concentrated within the primary sector versus more advanced economies.
On the other hand, developed nations tend to utilize machinery and technology in their
primary sector activities, meaning the primary sector doesn't represent a large portion of
the population's employment.
2. Secondary Sector
The secondary sector consists of processing, manufacturing, and construction companies.
They produces goods from the natural products within the primary sector. The secondary
sector includes the following business activities:
Automobile production, Textile
Chemical engineering
Aerospace space
Shipbuilding
Energy utilities

3. Tertiary Sector
The tertiary sector is comprised of companies that provide services, such as retailers,
entertainment firms, and financial organizations.

The tertiary sector provides services to businesses and consumers by selling the goods that
are manufactured by companies in the secondary sector. The types of services provided by
the tertiary sector include:
Retail Sales,
Transportation and distribution,
Restaurants,
Tourism,
Insurance and banking
Healthcare services and
Legal services.

4. Quaternary Sector
The quaternary sector includes companies engaged in intellectual activities and
pursuits. This sector typically includes intellectual services such as
technological advancement and innovation. Research and development that
leads to improvements to processes, such as manufacturing, would fall under
this sector.
Firms within the quaternary sector use information and technology to
innovate and improve processes and services, leading to enhancements in
economic development. Firms within the quaternary sector might be
engaged in the following business activities:

Research and development

Information technology (IT)
Education
Consulting services
 CATEGORIES OF FINANCIAL INTERMEDIARIES
Financial Intermediaries is a “financial institution such as a commercial bank,
savings bank , pension fund or an insurance company that issue claims against itself
(ultimate lenders) and uses the proceeds to acquire financial claims against others
(ultimate borrowers).
- it also states “actually borrows from one group in a society and lends to another,
thus putting itself at risk should some of the loans be defaulted.
- as per General Banking Act, Financial Intermediaries shall mean persons or
entities whose principal functions include the lending, investing or placement of funds
or evidences of indebtedness or equity deposited with them, acquired by them or
coursed through them either for their own account or for the account of others.

VARIOUS TYPES OF FINANCIAL INTERMEDIARIES:

1. Depository Intermediaries – they are called as such because the sources of their
loanable funds (secondary securities) consist of deposits received from
businesses, households and governments. Included in this group are commercial
banks, credit unions, savings and loan associations and savings banks.
2. Contractual Intermediaries – this type enter into contracts with their customers to
promote savings and/or financial protection against loss of life or property. They consist
of life and non life insurance companies. Example are GSIS, SSS, Private Pension Fund
and Educational Plan Companies.

3. Secondary Intermediaries – it is called because they depend heavily on the other

financial intermediaries like commercial banks, for loanable funds, e.g., finance companies,
mortgage banks and real estate investment trusts.

4. Investment Intermediaries – these offers the public securities that can be held as a
long-term investment and which can be sold quickly when the customer needs his funds
returned. It includes Mutual Stock funds, bond funds and money market funds.
• WHAT IS A GOOD FINANCIAL SYSTEM
• The FS plays a very vital role in the economy and society. It holds the funds for
investment, business and development. To the poor countries, money is the lifeblood
of the economy and yet very scarce and very precious. Most of it comes from foreign
investments and foreign loans.

• The CBP/BSP is the leader of the financial system has been entrusted with the very
great responsibility of promoting stability and economic growth for the whole country.
The FS through the leadership of the CBP/BSP should use its financial resources to
correct the maldistribution of wealth and income. This is the root cause of poverty
and therefore it must be uprooted. The FS should channel its resources into the
development of the depressed regions of the country and into the projects for the
poor who constitute the majority in our society. The CBP/BSP should really strive to
promote the social justice of development.

• Ultimately, our development policies will be relevant only as they touch the lives of
those who has identified in moving as the poorest, he lowliest, the exploited and the
lost.
THANK YOU!!!!

THANK YOUUUU!!!!!