Introduction to Finance

• Finance is the study of how entities get, use, and manage money and other financial assets.

Why Study Finance?

• To make informed economic decisions
• To make informed personal and business investment decisions
• To make informed career decisions based on a basic understanding of business finance

Six Principles of Finance

• Money has a time value

• Higher returns are expected for higher risk

• Diversification of investments can reduce risk

• Financial markets are efficient in pricing securities

• Manager and stockholder objectives can differ

• Reputation matters

• The financial environment includes the financial system, its institutions/intermediaries, financial markets, business firms, individuals, and global interactions, all contributing to an efficiently operating economy.

• The three areas of finance are institutions and markets, investments, and financial management

• While these areas are distinct, they intersect and affect one another

• Financial institutions help the financial system operate efficiently.

• They transfer funds to individuals, businesses, and governments to spend or invest in physical assets.

• Financial markets, whether physical or electronic, facilitate the flow of funds among investors, businesses, and governments

• Investments involve the sale/marketing of securities, securities analysis, and investment risk management through portfolio diversification.

• Financial management enhances business value using financial planning, asset management, and fundraising decisions.

The Financial System

• Expedites the flow of financial capital from savings into investment
• It is a complex mix of financial intermediaries, markets, instruments, policymakers, and regulations
• The components are banks (banking sector) and non-bank financial institutions (non-bank sector)

Banking Laws

• The main laws governing banks in the Philippines are:
  • New Central Bank Act: defines the power of the Bangko Sentral ng Pilipinas (BSP) in administering monetary, banking, and credit systems
  • General Banking Act: regulates the operations of banks and other financial institutions

Regulatory and Supervisory Authorities

• Bangko Sentral ng Pilipinas (BSP): leads the Philippine Financial System and provides policy directions for money, banking, and credit
  • It supervises bank operations and regulates non-bank financial institutions performing quasi-banking functions.
  • Objectives: maintain price stability, promote monetary stability/peso convertibility, and strengthen commercial ties.
• Philippine Deposit Insurance Corporation (PDIC): the official insurance corporation of the banking system
  • It requires insured banks to pay an assessment rate.
  • Deposits are insured up to P500,000 per depositor.
  • It can examine insured banks and gather necessary reports.
• Specialized Government Banks: unique government banks subject to BSP supervision and regulation
  • Development Bank of the Philippines (DBP): Provides banking services for medium and long-term needs of agricultural and industrial enterprises
• Securities and Exchange Commission (SEC): issues certificates of incorporation to financial firms, votes on/approves amendments, and performs other related tasks

Types of Banks

• Institutions in the banking sector include commercial banks, specialized government banks, thrift banks, and rural banks.
• Commercial banks: offer a wide variety of banking services and can engage in underwriting activities and equity investments
• Land Bank of the Philippines (LBP): An expanded commercial bank that provides financial support for agrarian reform.
• Al-Amanah Islamic Investment Bank: It provides credit, commercial development, and savings banking to people in Muslim provinces in Southern Philippines
• Thrift Banks: include savings and mortgage banks, private development banks, and stock savings and loans association

Thrift Banks Examples

• These associations are corporations for accumulating savings and for lending/investing in productive enterprises or government securities.
• Savings and Mortgage Banks (SMBs): Accumulate savings and invest in bonds or loans secured by bonds, mortgages, and real estate
• Private Development Banks (PDBs): caters particularly to the medium and long-term financing needs of Filipino entrepreneurs
• Rural Banks and Cooperative Banks
  • The role of the rural bank is to promote comprehensive development with the end in view of attaining a more equitable distribution of opportunities, income and wealth and a sustained increase in the amount of goods and services.
  • Cooperative banks perform banking and credit services for the benefits of cooperative members

Component Institutions

• Investment Houses are stock corporations engaged in the underwriting of securities of other corporations on a guaranteed basis
  • Their principal role is capital formation that can engage in portfolio management, stockbrokerage, financial consultancy and lending operations.
• Financing Companies: extend credit facilities to consumers and industrial, commercial, or agricultural enterprises and for leasing moveable properties
• Investment Companies are issuers of securities primarily engaged in the business of investment companies
• Securities Dealers and Brokers: a securities dealer buys and sells shares of stock of another, or acquires securities for sale to the public, or trades securities for profit.
• Venture Capital Corporation: develops, promotes, and assists small and medium-scale enterprises through debt-to-equity financing.
• Pawnshops: lend money on personal property delivered as security or pledge, and can be formed as sole proprietorship, partnership, or a corporation
• Lending Investors make a practice of lending money, generally short term

Government Non-Bank Financial Institutions

• Investment or financing companies created under special charters such as the Veterans Investment Development, Philippine Export and Foreign Loan Guarantee Corporation, and Small Business Guarantee and Finance Corporation
• Mutual Building and Loan Association: These boost savings, industry, and home building among stockholders by accumulating stockholders' savings and repaying them with profits
• Non-Stock Savings and Loan Associations (NSSLAs): They operate under the Savings and Loan Associations Act, are licensed/supervised by the BSP, and serve a defined group of people.