Chapter 10 The Philippine Financial System

The financial system is composed of various banks, insurance companies, pawnshops, credit unions, money market, central bank and monetary laws and policies. The most dominant and powerful financial institutions are the world bank, International Monetary Fund, Asian Development Bank and the multinational or transnational banks. Although these are involved in the global banking or finance, they greatly influence the operations of our financial system. Hence they also CONTROL our economy. Financial System- a network of various institutions, together with government agencies, laws and policies, which generates, circulates and controls money and credit. -provides link between the lenders and borrowers of money -finances the socioeconomic programs of the country Functions of Financial Institutions -the general function of financial institutions is to facilitate the transfer of funds from the savers to the users. Specific functions of financial institutions: Matching supply and demand for funds Investigation and credit analysis Provisions of liquidity Provides payments system

b. Thrift banks - savings and mortgage banks - private development banks - stock savings and loan institutions 2. Government banking institutions a. Philippine National Bank b. Development Bank of the Philippines c. Land Bank of the Philippines d. Philippine Amanah Bank Non-bank financial institutions 1. Private non-bank financial institutions a. Investment houses b. Investment companies c. Financing companies d. Securities dealers/brokers e. Non-stock savings and loan associations f. Building and loan associations g. Pawnshops h. Lending investors i. Retirement/provident/pension fund managers j. Trust companies/departments k. Insurance companies l. Credit unions/cooperatives m. Unlicensed moneylenders 2. Government non-bank financial institutions a. Government Service Insurance System b. Social Security System Financial Reforms In 1980, a series of laws were introduced amending the: General Banking Act Savings and Loan Associations Act Private Development Banks Act Charter of the Development Bank of the Philippines Investment Houses Act Central Bank Act

Structure of the Philippine Financial System Bangko Sentral ng Pilipinas Banking Institutions 1. Private banking institutions a. Commercial banking institutions -expanded commercial banks/universal banks - ordinary commercial banks

These package of reforms in the financial system are part of the recommendations of IMF-CB Group in 1972.

The objectives of the 1980 financial reforms are: To attain greater efficiency through increased competition and scale of economies To obtain greater availability and use of long-term funds

To achieve such objectives, the following reforms became necessary for implementations: Introduction of universal banking Removal of most ceilings on interest rates of deposits and loans Increase of the powers and functions of quasi-banks Elimination of all functional distinctions between private development banks and saving banks Minimization of the difference between banks and quasi-banks

years. It does not lose its value or purchasing power except for inflation. During inflation, many people are discouraged to keep or save their money. They prefer to buy jewelry, appliances or real states. A great increase in prices of goods and services automatically decrease the value of money or its purchasing power. The Development of Money With the discovery of the properties of metals, man invented a superior kind of monetary medium such as gold, silver, copper, tin and iron. The first known coins those of Lydia in Asia Minor were composed of gold and silver and believed to have been struck about the year 700 B.C. Paper money first appeared in China about the beginning of the 8th century. However, issues similar to paper money were used even long before the invention of paper by China during the 2nd century. In Philippines, earlier coins were the gold piloncito of pre-Spanish times and the famous Spanish Pieces of Eight of pirate lore used in the Galleon Trade. Our early paper money included a treasury note in 1877 and a handsigned note of 1896 of the BancoEspanol-Filipino, the first government bank during the Spanish time. At present, we have the Central Bank Security Printing Plant, Mint and Gold Refinery Complex. It prints paper money, bank notes, checks, and other related security instruments; it mints coins (including LRT token coins) and it refines gold and silver. Prepared: Mark John L. Abo

What is Money? Money is ANYTHING that is commonly used and generally accepted as a medium of exchange or as a standard of value. Functions of Money 1. Medium of exchange Barter- refers to the exchange of goods with goods or services. A term used when money is no money. 2. Standard of Value Money measures the value of a product or service. Such economic values are stated in monetary terms as prices. Exchange of goods or services can only take place if the value of goods and services has been established. 3. Store of Value Money which is not spent constitutes savings. It is retained for a number of days, weeks or even

Monetary Standards The monetary standards of a country are synonymous with its standard money. The monetary system of a country is usually described in terms of its standard money. If the standard monetary unit is gold, the country is said to have a gold standard. If the standard money is silver, it is silver standard. If the standard money is the inconvertible paper or managed currency, it is inconvertible standard or managed currency standard. Money Supply Money supply refers to money in circulation. It is the money which is used in purchasing goods and services. This forms of money are cash, checks, and other liquid financial instruments. Money supply is composed of: Currency circulation ( paper money and coins issued by the Central Bank) Demand deposit or checking account (checks) Savings and time deposits Large negotiable certificates of deposits (CDs) at commercial banks.

P is the average price level of goods and services V is the income velocity of money or the number of times money is spent in one year The classical economists believed that velocity is stable. Therefore, if money supply (M) increases with velocity being stable, total spending on goods and services will increase (PQ). So according to the classical economists, money is the key determinant of aggregate demand or total demand. Based on this theory, an increase in money supply leads to an increase in purchases of goods and services. Such conditions stimulates more investments and then employment and production. Eventually, it will be economic prosperity. Credit Credit is a vital tool of economic development for both individuals and countries. Credit is not only favorable to the borrowers but it also benefits other individuals and eventually the whole economy and society. Nevertheless, the most important point in the administration of credit is its social impact. Bases of Credit The word credit has been derived from a Latin word creditum. It means trust. Credit refers to the ability to acquire something of value like goods, services, money or securities at the present time in return for a promise to pay at a certain future time. In granting credit owners to borrowers, there are bases in evaluating their ability to pay and willingness to pay: Character- refers to the personal integrity of the borrower Capacity-this has something to do with the managerial ability of the borrower Capital-refers to the resources owned by the borrower such as priorities

Monetary Theory Monetary theory analyzes the role of money in the economic system. A monetary theory explains the causes of the rise or fall of prices. Monetary theory is simply the theory of the value of money. Value of money refers to its purchasing power. There is a popular monetary theory which is the quantity theory of money of the classical economists. Such theory is explained in the ff. equation of exchange: MV = PQ M is the quantity of money or money supply Q is the number of goods and services

Collateral- this is a safety measure for the payment of the loan Condition- conditions in the community, industry or the whole economy affect the ability of borrowers to pay their loans.

and urban slums where conditions are more miserable.

Banking It is a strong force in mobilizing the savings of the people, and the use of these resources for investments. Lending activities were recorded in the Temples of Babylon as early as 2,000 B. C. during the medieval times, Italian cities were active in banking activities in support of the expanding domestic and foreign trade. However, many believed that the goldsmiths of England started modern banking. In the Philippines, the obras pias became the forerunners of banking institutions. These were funds donated by the rich citizens and religious individuals for charitable and religious projects. In 1851, the first government bank, Banco Espanol-Filipino de Isabela II, was established by Governor Antonio de Urbiztondo. This is now the Bank of the Philippine Islands. Later on, British and American banks put up their branches in our country.

Advantages of a Credit Economy 1. Allows business firms to acquire cash loans by using their machines or buildings as security, instead of selling a part of their physical properties to obtain money. 2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit. 3. Government projects or programs can be funded through bonds or loans. 4. Credit accelerates production, employment, income and consumption. 5. Permits low-income consumers to enjoy the consumption of goods and services sooner, like house and lot, appliances, and other consumer products. Disadvantages of a Credit Economy 1. Heavy borrowing by the governments my likely lead into inflation. 2. Borrowing by the government may result to extravagance and inefficiency. 3. Business errors in the use of credit funds have unfavorable chain effects on the whole economy. 4. Excessive loans from other countries by the government may likely to be a burden to future generation, unless such loans are wisely invested in the economy for the benefits of the masses 5. In some cases, credit reduces future consumptions of debtors. The Social Philosophy of Credit The objective of the credit system of the government is to improve the social and economic conditions of the poor, especially in the rural areas

Prepared: Christian A. Dela Cruz