FINANCIAL SYSTEM

A financial system needs efficient monetary system

facilities foe encouraging savings and investment, and
market to facilitate investment process. It must provide
an efficient medium of exchanging goods and services,
there must be a unit In which to measure prices, that is, a
unit of account.

A financial system makes possible the creation of capital
on a scale large enough to meet the demands of the
economy.

A financial system has the following elements:
Financial claims-includes the right to receive money under
certain conditions. It may be debt-claim/equity claim. Debt-
claim is right to pay principal loan and interest. Equity claim is
right to dividends or interest for stocks or investments.
Financial Institutions-these are commercial banks, savings and
loan associations and finance companies.
Financial Markets-they serve as a means of bringing forces for
demand and supply of financial claims under Philippine Stock
Exchange.
Government Agency-this is the Bangko Sentral ng Pilipinas and
its Monetary Board.

THESE FINANCIAL INSTITUTIONS
PERFORM THE FOLLOWING ROLES:

Facilitate transfer of funds from investors to borrowers.

Investigation and credit analysis.

Brokerage function by matching supply and demand for
funds.

MONEY
FACTORIES
PRODUCERS
MONEY
CONSUMERS
WORK
FAMILY HOUSE HOLDS
GOODS and SEVICES
THERE ARE 3 BASIC WAYS IN WHICH THE
SAVINGS OF AN ADVANCED ECONOMY CAN
BE CHANNELLED TO THE BORROWER:

1.By the direct meeting of money-and-capital-market borrowers
and lenders.
2.Through the sale by the borrower in the organized money and
capital markets of bonds and other public investment
instruments, which in turn are brought directly by the savers.
3.Through the use of financial institutions that gather the savings
of individuals, place part of the proceeds directly into loan to
other individuals, and assemble the rest into larger blocks of
money, which are invested in securities sold on the organized
money and capital markets.

MANAGING
CREDIT RISK
Credit Risk. This is the possibility that the debtor may not
fullfill his promise for payment.

One basic principle for banks is that diversification reduces
the overall credit risk of the banks portfolio.
Diversification
The theory of portfolio allocation predicts that investors,
individuals or financial institutions, can reduce exposure to the
risk of price fluctuations by diversifying their loans.

To manage credit risk of individual loans, banks use credit-
risk analysis to examine borrowers and
determine the appropriate interest rate of charge.
Credit-risk Analysis
This is examining the borrowers likelihood of repayment
and general conditions that might influence the borrowers
ability to repay the loan.

Banks use screening techniques, collateral
requirements, credit rationing, monitoring and restrictive
covenants and develop long term relationships with borrowers
to help reduce cost of both adverse selection and moral hazard.

Collateral
These are assets pledged to the banked in the
event that the borrower defaults.

Credit Rating Rationing
In rationing credit, the bank either grants a
borrowers loan application but limits the size of the
loan or denies a borrowers loan application for any
amount at the going interest rate.

Monitoring and Restrictive Covenant
Banks monitor borrowers to make sure that a
borrower does not use the funds borrowed from the
bank to pursue unauthorized, risky activities.
Determining whether the borrower is obeying
restrictive covenants, or explicit provisions of the loan
agreement that prohibit the borrower from engaging in
certain activities.

Long-term Relationships
By observing the borrower overtime
through checking account activity and loan
repayments the bank can significantly reduce
problems of asymmetric information by reducing
its information-gathering and monitoring costs.
For individual applicants, the
following credit information
should be secured and verified:
1. Income
2. Employment
3. Payment of record
4. Residence
5. Marital Status





6. Age
7. References and reputation
8. Reserve assets
9. Equity in purchase for
installment accounts
10. Collateral
CREDIT QUALITIES TO INVESTIGATE

SOURCES OF CREDIT INFORMATION
1. Salesmans reports
2. Customer supplied information
3. Bank information
4. Credit interchange with credit representatives of
other companies
5. Other sources of information

a. Interchange Bureaus. Credit Managament
Association of the Philippines(CMAP)
b. Securities and Exchange Commission (SEC)
Articles of Incorporation, Partnerships and Financial
Statements of companies are submitted here.
c. Miscellaneous Sources- Newspapers,
accountants and lawyers.

The Philippines debt market is broadly
divided into public sector debt issues and private
sector debt issues. Public debt securities are
issued by the National Government, Bangko
Sentral and other government agencies while the
Private debt securities are mainly issued by
commercial banks and corporations.

THE INSTRUMENTS COMMONLY
USED BY BOTH SECTORS ARE:

Treasury Bills(T-Bills)-These are direct, unconditional and
general obligations of the national government w/ an original
maturity of one year or less.
Floating Rate Treasury Note(FRTNs)-These are direct,
unconditional and general obligations of the national
government w/ a term of 3years primarily aimed at long term
transformation of maturity treasury bills.
Fixed Rate: Treasury Notes-Government securities aimed
primarily to develop the capital markets by providing varying
instruments and to supplement the existing short-term
securities with longer term maturity. These instruments have
term of 2,6,7 and 10years.It is also offered to the public
through auctions conducted by the BTr.


THE BOND MARKET ISSUERS ARE: BANGKO
SENTRAL NG PILIPINAS; NATIONAL GOVERNMENT;
AND COMMERCIAL BANKS.

In order to provide the BSP w/ effective instruments for open
market operations, the BANGKO SENTRAL NG PILIPINAS,
subject to such rules and regulations as the Monetary Board
mar prescribe and in accordance with its primary objective of
achievement price stability, may issue, place, buy and sell freely
negotiable evidences of indebtedness of the BSP.
The NATIONAL GOVERNMENT issues government securities to
finance public expenditure. Government securities are direct
and unconditional obligations of the Republic of the Philippines.
COMMERCIAL BONDS are allowed to float bonds as part of their
borrowing activities.

The main investors in the Philippines bond market are
the Banks, Insurance companies and in some cases,
corporate and institutional investors which have funds
that they are willing to place in longer-dated issues.
Non-residents are likewise allowed to invest their funds
in certificates of indebtedness issued by the Philippine
government, or its political subdivisions, agencies and
instrumentality.
Government securities are transferred from one
account to another through the RoSS, as explained in
Delivery Mechanism in Money Market.

REPUBLIC ACT NO. 3765
INTRODUCTION
A. THE TRUTH-IN-LENDING ACT (TILA) WAS CREATED TO GUARANTEE THE ACCURATE
AND MEANINGFUL DISCLOSURE OF THE COSTS OF CONSUMER CREDIT. TILA IS
PRIMARILY A DISCLOSURE STATUTE CREATING DISCLOSURE REQUIREMENTS.
B. GENERALLY, TILA APPLIES TO EVERYONE THAT OFFERS OR EXTENDS CREDIT WHEN
FOUR CONDITIONS ARE MET:
CREDIT IS OFFERED OR EXTENDED TO CONSUMERS;
THE OFFER OR EXTENSION OF CREDIT IS DONE REGULARLY;
THE CREDIT IS SUBJECT TO A FINANCE CHARGE OR IS PAYABLE BY WRITTEN AGREEMENT IN MORE THAN
FOUR INSTALLMENTS; AND
THE CREDIT IS PRIMARILY FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES.

C. SOME CREDIT TRANSACTIONS ARE EXEMPT
BUSINESS/ COMMERCIAL/ AGRICULTURAL
PUBLIC UTILITY
SECURITIES OR COMMODITIES ACCOUNTS
HOME FUEL BUDGET PLANS, IF NO FINANCE CHARGE
CERTAIN STUDENT LOANS

SECTION 1.
THIS ACT SHALL BE KNOWN AS THE
TRUTH IN LENDING ACT
SECTION 2.
DECLARATION OF POLICY
TO PROTECT THE CITIZENS FROM LACK OF AWARENESS
OF THE TRUE COST OF CREDIT TO THE USER BY
ASSURING A FULL DISCLOSURE OF SUCH COST WITH A
VIEW OF PREVENTING THE UNINFORMED USE OF
CREDIT TO THE DETRIMENT OF THE NATIONAL
ECONOMY.
TO PROTECT DEBTORS FROM THE EFFECTS OF
MISREPRESENTATION AND CONCEALMENT;
TO PERMIT THEM TO FULLY APPRECIATE AND
EVALUATE THE TRUE COST OF THEIR
BORROWING.
SECTION 3.
THE TERMS USED IN THIS ACT
ENTITY IN CHARGE OF IMPLEMENTING THE TRUTH IN
LENDING ACT.


MONETARY BOARD
BANGKO SENTRAL NG PILIPINAS
WITHIN THE SCOPE OF THE ACT
ANY LOAN, MORTGAGE, DEED OF TRUST, ADVANCE, OR
DISCOUNT; ANY CONDITIONAL SALES CONTRACT;
ANY CONTRACT TO SELL, OR SALE OR CONTRACT OF SALE OF
PROPERTY OR SERVICES, EITHER FOR PRESENT OR FUTURE
DELIVERY, UNDER WHICH PART OR ALL OF THE PRICE IS
PAYABLE SUBSEQUENT TO THE MAKING OF SUCH SALE OR
CONTRACT;
WITHIN THE SCOPE OF THE ACT
ANY CONTRACT OR ARRANGEMENT FOR THE HIRE, BAILMENT, OR
LEASING OF PROPERTY; ANY OPTION, DEMAND, LIEN, PLEDGE, OR
OTHER CLAIM AGAINST, OR FOR THE DELIVERY OF, PROPERTY OR
MONEY;
ANY PURCHASE, OR OTHER ACQUISITION OF, OR ANY CREDIT
UPON THE SECURITY OF, ANY OBLIGATION OF CLAIM ARISING OUT
OF ANY OF THE FOREGOING;
AMOUNTS TO BE PAID BY THE DEBTOR INCIDENT
TO THE EXTENSION OF CREDIT SUCH AS
INTERESTS, FEES, SERVICE CHARGES, DISCOUNTS
OTHER CHARGES INCIDENT TO THE TO EXTENSION OF
CREDIT AS THE BOARD MAY BY REGULATION PRESCRIBE.


PERSON ENGAGED IN THE BUSINESS OF EXTENDING CREDIT
(INCLUDING ANY PERSON WHO AS A REGULAR BUSINESS PRACTICE MAKE LOANS OR SELLS OR
RENTS PROPERTY OR SERVICES ON A TIME, CREDIT, OR INSTALLMENT BASIS, EITHER AS
PRINCIPAL OR AS AGENT)
PERSON
ANY INDIVIDUAL, CORPORATION, PARTNERSHIP,
ASSOCIATION, OR OTHER ORGANIZED GROUP OF
PERSONS
SECTION 4.
OBLIGATIONS OF CREDITOR
THE ACT IMPOSES UPON CREDITORS THE OBLIGATION OF FURNISHING TO
EACH PERSON TO WHOM CREDIT IS EXTENDED

PRIOR TO THE CONSUMMATION OF THE TRANSACTION

A CLEAR STATEMENT IN WRITING, CALLED THE DISCLOSURE STATEMENT,
SETTING FORTH, TO THE EXTENT POSSIBLE, THE FOLLOWING:
DISCLOSURE STATEMENT
(a) THE CASH OR DELIVERED PRICE OF THE PROPERTY OR
SERVICE TO BE ACQUIRED;
(b) THE AMOUNTS, IF ANY, TO BE CREDITED AS DOWN
PAYMENT AND/OR TRADE IN;
(c) THE DIFFERENCE BETWEEN THE AMOUNTS IN ITEMS (A)
AND (B);
DISCLOSURE STATEMENT
d) The charges, individually itemized, which are paid
or to be paid by such person in connection with the
transaction but which are not incident to the
extension of credit;
e) The amount financed;
DISCLOSURE STATEMENT
f) The finance charge expressed in terms of
pesos and centavos;
g) The percentage that the finance charge
bears to the total amount to be financed
expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.
NON-COMPLIANCE OF OBLIGATION
NON-COMPLIANCE WITH LAW DOES NOT AFFECT THE
VALIDITY OR ENFORCEABILITY OF THE CONTRACT
ITSELF.
WOULD AUTHORIZE THE DEBTOR TO RECOVER ANY
INTEREST PAYMENT MADE.
MAKES THE CREDITOR LIABLE FOR DOUBLE FINANCE
CHARGES PLUS ATTORNEYS FEES.

DEBTOR COULD REFUSE PAYMENT OF FINANCE CHARGES
IF CHARGES HAVE ALREADY BEEN PAID, HE COULD SUE TO RECOVER THE PENALTY
PRESCRIBED BY LAW, I.E., P100 OR AN AMOUNT EQUAL TO TWICE THE FINANCE CHARGE
REQUIRED BY THE CREDITOR IN CONNECTION WITH SUCH TRANSACTION, WHICHEVER
IS GREATER, EXCEPT THAT SUCH PENALTY SHALL NOT EXCEED P2,000.00 ON ANY CREDIT
TRANSACTION.
DEBTOR MAY INITIATE CRIMINAL PROCEEDINGS AGAINST THE CREDITOR.

PRESCRIPTION


CIVIL ACTION MUST BE BROUGHT WITHIN ONE
(1) YEAR FROM THE DATE OF THE OCCURRENCE
OF VIOLATION.
PENALTIES
1) ANY CREDITOR WHO VIOLATES THE LAW IS LIABLE IN THE AMOUNT OF P100 OR IN AN
AMOUNT EQUAL TO TWICE THE FINANCE CHARGED REQUIRED BY SUCH CREDITOR IN
CONNECTION WITH SUCH TRANSACTION, WHICHEVER IS THE GREATER, EXCEPT THAT
SUCH LIABILITY SHALL NOT EXCEED P2,000 ON ANY CREDIT TRANSACTION. THE
ACTION MUST BE BROUGHT WITHIN ONE YEAR FROM THE DATE OF THE OCCURRENCE
OF THE VIOLATION.
2) THE CREDITOR IS ALSO LIABLE FOR REASONABLE ATTORNEYS FEES AND COURT COSTS
AS DETERMINED BY THE COURT.
PENALTIES

3)ANY PERSON WHO WILLFULLY VIOLATES ANY PROVISION OF THIS LAW OR
ANY REGULATION ISSUED THEREUNDER SHALL BE FINED BY NOT LESS THAN
P1,00 OR MORE THAN P5,000 OR IMPRISONMENT OF NOT LESS THAN 6
MONTHS, NOR MORE THAN ONE YEAR OR BOTH.
HOWEVER, NO PUNISHMENT OR PENALTY UNDER THIS LAW SHALL APPLY TO THE
PHILIPPINE GOVERNMENT OR ANY AGENCY OR ANY POLITICAL SUBDIVISION THEREOF.
THIS ACT SHALL BECOME EFFECTIVE UPON
APPROVAL.
APPROVED JUNE 23, 1963