Overview of the Financial System

Overview of the Financial System

• The financial system links savers and users of funds, channeling savings through financial intermediaries to borrowers and investors.
• Savings originate from households, individuals, companies, government agencies, or entities with more cash inflows than outflows.
• Financial instruments issued by users of funds include shares of stocks, corporate bonds of publicly listed companies, and debt securities issued by the National Government.
• The system transfers money between savers and borrowers via monetary contracts (financial instruments) such as cash, ownership evidence, currency interest, debt, equity or derivatives.
• The financial market creates and exchanges financial assets, linking savers and borrowers by transferring capital from those with surplus money to those needing investment.
• Investors are surplus units and business enterprises are deficit units; financial markets connect them through banks or financial markets. Funds can be allocated through Banks or Financial Markets.
• The Financial System constitutes varied financial activities performed by economic units, considering money, credit, and instruments.
• "Financial" refers to monetary matters, especially when large sums are involved, and includes banks, non-banks, businesses, and individuals.
• Financial intermediaries channel funds from savers to borrowers.
• Banks profit by charging borrowers higher interest rates than what they pay depositors

Reasons Households Borrow and Save

• Households borrow to purchase expensive assets like houses, cars, and consumer goods.
• Households save for retirement, to earn interest combating inflation, for working savings, and to finance future needs like education.

Firms Borrowing

• Firms borrow to afford otherwise unaffordable assets in cash, start/expand operations, and acquire capital goods.

Basic Functions of the Financial System

• Promotes savings by directing surplus units' savings into investments with relatively low risk through various financial institutions and markets.
• Facilitates payments for goods and services via checking accounts offered by commercial and other authorized banks, with plastic cards as a convenient payment method.
• Protects businesses, consumers, and governments from risks through life, property, and casualty insurance policies.
• Serves as a means to wealth accumulation through financial markets that offer high-interest rates and maturities to suit investors' plans, storing wealth and generating earnings.
• Offers liquidity through readily accessible financial instruments like checks, bonds, and shares with minimal risk, and provides perfect liquidity through cash deposits or savings.
• Provides credit facilities to financial consumers and investments; banks in financial markets are primary sources of formal credit.

Classification of the Philippine Financial System

• In the Philippines, there is a comprehensive banking system that includes large universal banks, small rural banks and non-banks.
• As of March 31, 2011, there are:
  • 19 universal banks
  • 19 commercial banks
  • 73 thrift banks
  • 595 rural banks
  • 40 credit unions
  • 15 non-banks (quasi-banking)
• All are licensed with Bangko Sentral ng Pilipinas under Republic Act No. 8791 (General Banking Act of 2000) and Republic Act 7653 (The New Central Bank Act).

Banking Institutions

• Private Banks:
  • Commercial Banks: Universal banks, commercial banks
  • Thrift Banks: Savings and mortgage banks, stocks savings and loan associations, private development banks
  • Rural Banks
  • Cooperative Banks
  • Islamic Banks
  • Other banks classified by The Monetary Board of the Bangko Sentral ng Pilipinas
• Government Banks:
  • Development Bank of the Philippines
  • Land Bank of Philippines

Non-Bank Financial Institutions

• Private Non-Bank Financial Institutions:
  • Investment banks
  • Investment companies
  • Securities dealers/brokers
  • Insurance companies
  • Credit unions
  • Pawnshops
• Government Non-Bank Financial Institutions:
  • Government Service Insurance System
  • Social Security System

Universal Bank

• Universal banks offer comprehensive financial services like retail, commercial, and investment services and can function as commercial banks and investment houses, with authority to invest in non-allied enterprises.
• Minimum capital requirement is P4.95 billion for the Philippines.
• Private-owned examples: BPI, Metrobank, PNB, BDO Unibank, Philippine Trust Company, Asia United Bank Corporation, Security Bank, Union Bank, RCBC.
• Foreign-owned examples: Standard Chartered, HSBC, Deutsche Bank, ING Bank, ANZ.

Commercial Bank

• Commercial banks handle transactions like deposits, checking accounts, and loans for individuals and businesses, offering savings accounts and CDs.
• The capitalization is next to a universal bank.
• Commercial banks possess powers of rural, cooperative, and thrift banks, with a capital requirement of P2.40 billion to open.
• Domestic examples: Bank of Commerce, BDO Private Bank, Philippine Bank of Communications, Philippine Veterans Bank, Robinsons Bank Corporation.
• Foreign Bank Subsidiaries examples: CTBC Bank (Philippines) Corporation, Maybank Philippines, Incorporated.
• Foreign Bank Branches examples: Bank of America, Citibank, Industrial Bank of Korea Manila Branch, JP Morgan Chase Bank, United Overseas Bank Limited Manila Branch.

Thrift Bank

• Primarily focuses on mobilizing savings and loans.
• Provides short-term working capital, medium and long-term financing, and diversified financial services to SMEs and individuals (RA 7906 Thrift Act of 1995).
• Thrift banks have powers of rural and cooperative banks.
• Capital requirement to open: P325 million (Metro Manila office) or P52 million (head office outside Metro Manila).
• Examples: BPI Family Savings Bank, China Bank Savings, City Savings Bank, Citystate Savings Bank, Equicom Savings Bank, HSBC Savings Bank (Phils), Philippine Savings Bank, Sterling Bank of Asia, UCPB Savings Bank, Bank of Makati.

Cooperative Bank

• Cooperative banks are owned, organized, and managed by cooperatives, federations, or credit unions; it accepts deposits and provides loans according to cooperative principles.
• Cooperative banking includes credit unions, mutual savings banks, building societies, and cooperatives in barangays, farms, and workplaces.
• Capital requirements for cooperative banks vary by location.
  • Within Metro Manila: Php 26 million.
  • Cities of Cebu and Davao: Php 13 million.
  • In 1st, 2nd, & 3rd class cities and 1st class municipalities: Php 6.5 million.
  • In 4th, 5th, & 6th class cities and in 2nd, 3rd, & 4th class municipalities: Php 3.9 million.
  • In 5th & 6th class municipalities: Php 2.6 million.
• Functions include loans to farmers/fishermen/cooperatives/merchants, savings/time deposits, current/checking accounts (if net assets exceed PHP5 million), NOW accounts, acting as trustee over estates, municipal/city/provincial deposits.
• Examples: Bataan Cooperative Bank, Consolidated Cooperative Bank, Cooperative Bank of Palawan, National Teachers & Employees Cooperative Bank, Negros Cooperative Bank.

Islamic Bank

• Islamic banking adheres to Islamic faith principles for commercial transactions, emphasizing adherence to Islamic law and fair play.
• Islam prohibits interest-based lending; Islamic banking operates on risk-sharing, profit sharing, safekeeping, joint venture, cost plus, and leasing concepts derived from the Quran and Shariah.
• Examples: Al Amanah Bank (state-owned, Development Bank of the Philippines subsidiary, established in 1973), CARD Bank (rural, Cotabato City-based).

Government Bank

• Government banks are controlled by the government and supplements the market, providing services to agriculture, small businesses, and underserved populations.
• Examples: Al-Amanah Islamic Investment Bank of the Philippines, Development Bank of the Philippines, Land Bank of the Philippines, Philippine National Bank (PNB).

Investment Bank

• Investment banks underwrite securities of entities (government and private), provide planning, consultancy, fund management, and raise funds via equity/borrowings.
• The minimum paid-in capital is P300 million pursuant to R.A. No. 129, amended by R.A. No. 8366.
• Examples: ABCapitalOnline.com, Asian Alliance Investment Corporation, Asian Focus Group Inc., BPI Capital Corporation, Eastgate Capital Partners, First Abacus Financial Holdings Corporation, First Metro Investment Corporation, FSG Capital Inc.

Investment Company

• Investment companies engage in buying/selling securities, investing pooled capital in financial securities through closed-end or open-end funds.
• Closed-end Funds: fixed share count offered via IPO, traded like stocks, bought via brokerage.
• Open-end Funds (Mutual Funds): unrestricted share issue, redeemable anytime with no fixed capital; funds issue shares based on demand and allow buybacks.
• Examples: Aethelmark Philippines Insurance Agency, Loan Star Lending Group Corporation, Caritas Financial Plans, OSG Global Consulting, DS FINANCE CORPORATION., Chevrolet BF Paranaque, Vigattin Insurance, Pru Life UK - Financial Wellness

Securities Dealers or Brokers

• Securities dealers trade stocks of other companies for profit, without commission but make money through trading
• Securities brokers are individuals or firms engaged in buying/selling stocks for commission.
• Examples: COL Financial Group, BDO Securities, Abacus Securities, Maybank ATR Kim Eng Securities, Asiasec Equities, CLSA Philippines, Philippine Equity Partners, Credit Suisse Securities (Philippines), Salisbury BKT Securities, UBS Securities Philippines.

Insurance Company

• Insurance companies provide coverage for losses, transferring the risk from one entity to another for a premium.
• Insurance covers life, health, real estate, fire, accident, and credit card risks.
• Minimum paid-up capital for insurance companies in the Philippines is Php 1 Billion.
• Examples: Pru Life Insurance Corp. of U.K., Sun Life of Canada (Philippines), Philippine AXA Life Insurance, FWD Life Insurance Corporation, Philippine American Life and General Insurance Company, Manulife Philippines, BDO Life Assce. Co., Allianz PNB Life Insurance, BPI-Philam Life Assurance Corporation, United Coconut Planters Life Assurance Corporation.

Credit Union

• Credit Unions consists of member-owned producers and consumers promoting thrift, short-term credit at competitive rates, and other financial services.
• Credit Unions support community and sustainable international development.
• Examples: Bayanihan Credit Union, Quedan and Rural Credit Guarantee Corporation, Gintong Pag-asa Credit Corporation, M Basa Credit Corporation, Zoe Credit Cooperative.

Pawnshops

• Pawnshops offer financing to low-income individuals, requiring collateral (rings, necklaces, gadgets) for guaranteed payment.
• Minimum Capital Requirements (BSP) for pawnshops in the Philippines:
  • Class "A": Php 100,000
  • Class "B": Php 1,000,000
  • Class "C" and "D": Php 50,000,000
• Examples: Cebuana Lhuillier, Palawan Pawnshop, Villarica Pawnshop, M Lhuillier, Tambunting Pawnshop, Raquel Pawnshop, RD Pawnshop, N-CA$H, Jerome's Pawnshop, CVM Pawnshop.

Explore the role of the financial system in linking savers and users of funds. Understand how savings are channeled through financial intermediaries to borrowers and investors. Learn about the financial instruments and the transfer of money between savers and borrowers.