Philippine Financial System

• The Philippine Financial System enables the flow of money between savers and borrowers.

Nature and Importance of Financial Systems

• Businesses typically spend more than they earn.
• Consumers usually spend less than they earn.
• Financial systems allocate savings to users effectively and safely.

Elements of a Financial System

• Financial institutions, financial markets, financial instruments, financial claims, financial services, financial practice & financial transactions

Financial Institutions

• These are organizations offering financial services.
• They consist of private and government organizations whose main assets are incomes/claims derived from performing financial services.
• They act as intermediaries between suppliers and users of funds.

Financial Market

• Allows the buying and selling of securities, including stocks, bonds, and commodities.
• It includes institutions that bring together parties involved in buying/selling financial claims.
• Matches capital from those who want it with those who have it.
• Includes entities like the Philippine Stock Exchange.

Financial Instruments

• Assets belonging to a person or company include cash, bonds, property, or valuables.

Financial Claims

• Cover the rights to receive money based on presented financial instruments.
• Instruments that serve as evidence for debt or equity claims.

Financial Services

• Offered by financial institutions
• Examples of what is included e.g., banking, insurance, loans, mortgages, and pensions.

Financial Practice

• Guidelines around how financial institutions should operate.

Financial Transactions

• These are the exchange of assets for goods/services, such as loan payments.

Types of Financial Markets

• Capital markets finance through shares or debt instruments.
• Stock markets finance through shares and facilitate trading.
• Bond markets finance through bonds and facilitate trading.
• Commodity markets facilitate trading in commodities.
• Money markets provide short-term debt financing/investment.
• Foreign Exchange Markets - facilitate the trading of foreign exchange

Foreign Exchange Swap

• It consists of currencies exchanged in spot date and the reversal of exchange of currencies at predetermined time in the future.

Instruments Offered in the Stock Market

• Common Stock includes voting rights, proportional dividends, and a share of remaining assets after liabilities are paid; includes right to vote on key matters
• Preferred Stock has preferences over common shares, including distribution of dividends and corporate assets upon dissolution.

Instruments Offered in Bond Markets

• Secured or Mortgage Bonds are backed by firm-owned property. In default, the bondholder can seize and sell the asset to settle the debt.
• Debentures Bonds are unsecured long-term corporate bonds paid after secured bondholders, making them riskier.
• Assumed Bonds are absorbed by the surviving corporation and remain unchanged.
• Guaranteed Bonds have payment of interest and principal guaranteed by individuals/corporations. This assures added protection for bondholders.
• Joint Bonds are owned by several companies.

Commodity Markets

• General Markets trade many commodities.
• Specialized Markets trade only one commodity.

Common Money Market Instruments

• Certificate of Deposits(CDs) are time deposits for consumers offered by banks.
• Repurchase agreements(Repos) are short-term loans secured by selling securities with an agreement to repurchase at a fixed price on a fixed date. Usually less than 2 weeks, and frequently for 1 day
• Commercial paper consists of unsecured promissory notes with a fixed maturity of 1-270 days, typically sold at a discount.
• Bank reserves earn interest and are held by banks and other depository institutions.
• Municipal notes are short-term notes issued by municipalities in anticipation of taxes or other revenues.
• Treasury bills are short-term obligations of a government that mature in 3-12 months.

The Philippine Financial System: Institutions & Oversight

• Bangko Sentral ng Pilipinas (BSP) is the central monetary authority.
  • Supervised Banking and Non-Banking Institutions

Bangko Sentral ng Pilipinas (BSP)

• Created by Republic Act No. 7653, also referred to as the New Central Bank Act of 1993, and began operating July 3, 1993.
• It provides policy direction for money, banking, and credit.
• Its powers are exercised by the Monetary Board, which consists of 7 members appointed by the President.
• The Governor, who is the chief executive officer, directs and supervises BSP operations.

BSP Functions

• As the Supplier of Money, BSP produces and prints paper bills and mints coins.
  • It ensures uniformity in design and content to prevent the circulation of fake money.
  • The money issued is guaranteed by the government and can be used to pay for goods/services.
• As the Money Manager, the BSP manages the amount of money available to the public to control price increases.
  • This preserves the value of money and savings by preventing abnormal increases in prices of goods/services.
  • The BSP assesses the state of the economy before printing money to maintain price stability.
• As the Bank of all Banks, BSP requires banks to reserve funds to protect creditors.
  • It grants loans to and accepts deposits from banks only
  • Lends cash in emergencies and can grant emergency loans to banks facing problems.
• As the Supervisor of all Banks, the BSP monitors bank operations and their compliance with banking regulations.
  • It may assign a conservator to financially troubled banks to prevent further losses.
• As the Main Bank of the Government, the BSP is the official depository of the government.
  • It deposits tax collections, government securities sales, and foreign loans.
  • It allows the government to repay debts or disburse money for expenses.

Private Banking Institutions

• Commercial Banks have the broadest range of functions, including:
  • Receiving, collecting, transferring, paying, lending, investing, dealing, exchanging, and safe deposit services.
• Thrift Banks include savings and mortgage banks, stock savings and loan associations, and private development banks.
  • They accept savings/time deposits and grant loans and invest in marketable bonds/securities.
  • Cannot engage in international banking operations.
• Rural Banks serve provinces/sub-urban areas.
  • Function is to fulfill investment through loans for capital or other uses for small farmers.

Government Banking Institutions

• Development Bank of the Philippines(DBP) develops agriculture and promotes private development banks.
  • Focuses on agriculture and low-cost housing projects.
• Land Bank of the Philippines provides financial support to the Agrarian Reform Program.
  • It gears its lending towards helping farmers acquire land under agrarian reform, finance land cultivation, and promoting crop marketing.
  • It grants loans to facilitate production/marketing/acquisition of commodities.
• Philippines Veterans Bank (PVB) is a medium-sized commercial bank owned by Philippine World War II veterans and their families.
  • It caters to corporate and retail markets.

Private Non-bank Institutions

• Investment Houses underwrite securities of other corporations.
  • As underwriters, they guarantee distribution/sales of corporate issued securities.
• Investment Companies raise funds in the capital market by selling their own securities (mainly common stocks) to investors for investment in other companies' stocks.
  • They provide long-term or fixed capital funds.
• Financing Companies extend credit to consumers and industrial, commercial, or agricultural enterprises.
  • They may perform services by discounting or factoring commercial papers/accounts receivable or by buying/selling contracts/leases/mortgages/other evidences of indebtedness.
• Security Dealers/Brokers act as intermediaries in the marketing process as brokers, dealers or underwriters.
  • Facilitate transactions by negotiating securities buying/selling/serving as merchants for stocks.
• Non-stock Savings and Loan Associations exist to build up savings for its members
• Pawnshops lend money on personal property delivered as security for loans.
• Act as an additional credit source, often used by small-scale borrowers who do not qualify to get a loan from any other financial institution
• Trust Corporations act as trustee/administrator of any property/trust/deposit.
  • Custodianship includes skill, care, prudence and diligence under prevailing circumstances.
• Insurance Companies offers distribution of losses among those subject to risk.
  • Unused premiums may be loaned.
• Fund Managers are financial institutions that perform quasi-banking functions.
  • Engaged in the administration and management of property of money

Private Non-Bank Institutions

• Lending Investors receiving funds from one group of individuals, issuing debt, then lending the capital out to other individuals/entities that cannot get loans from banks.

Government Non-Bank Financial Institutions

• Government Service Insurance System(GSIS) administers life insurance for government employees.
  • Extends broad life insurance coverage/provides social insurance along with economic development projects.
• Social Security System(SSS) grants benefits to private-sector members for sickness, disability, death, and old age.
  • Additional benefits also include hospitalization, compensation and maternity.

Credit Instruments

• These are written documents specifying the rights of the creditor and the obligations of the debtor.
• Checks consist of a written, signed order from a depositor to a bank to pay a certain sum of money to a bearer or designated person on demand.

Kinds of Credit

• Commercial Credit is the promise of businessmen to pay back funds borrowed to purchase goods for profitable ventures.
• Agricultural Credit is the promise of farmers/organizations to pay for borrowed funds to acquire farm inputs and facilities.
• Investment/Industrial Credit is the promise to pay on individual or business firms, for the loans they obtained in buying capital goods.
• Consumer Credit includes obligations to pay for money borrowed for consumption purposes.
• Speculative Credit used for dealing in securities or goods to gain a favorable price.

Classification Of Credit By Time Period

• Short-term Credit must be paid back in less than 1 year.
• Intermediate Credit matures in 1-5 years.
• Long-term Credit matures in 5+ years.

Types of Credit Instruments

• Charge Accounts consist of an arrangement between seller and buyer.
  • The buyer receives credit without a promissory note or other formal credit instrument.
  • This is often unsecured and used by partners/businesses with strong relationships.
• Promissory Notes a written commitment to pay money on demand or at a future time to a designated person.
  • The maker promises to pay, and the payee receives payment.
  • Notes that may be secured/unsecured, interest-bearing/non-interest, and negotiable/non-negotiable.
• Bonds acknowledging debt; act as certificate of debt.
  • Are typically used by governments/corporations for long-term financing.

Parties Involved in a Check

• Drawer is the one writing the check, with their signature, instructing the drawee to pay the payee the amount from their bank account.
• Payee receives the payment and is named on the check.
• Drawee is the bank that the check is drawn on.

Kinds of Checks

• Certified Check payment is guaranteed by the drawee bank, which stamps or writes "certified," "guaranteed”, or "accepted" on the check with date and signature.
• Personal Check the drawer is an individual and is commonly used by people in business.
• Manager's Check is issued by the bank on behalf of a client.
• Used often for operating expenses.
• Bank Drafts are drawn by a bank upon another bank where it has an account.
  • Used often for international payments.

Other Parts of the Check

• Date is normally the date written.
  • An antedated check is dated earlier.
  • A postdated check is dated later.
  • A payee cannot present the check before the date.
• A stale check has not been cashed for 6+ months from its date.
  • Assume today's date is October 1, 2018: A check written and dated October 1, 2018, is a regular check. A check written today and dated September 1, 2018, is an antedated check. A check written today and dated December 25, 2018, is a postdated check. If you have a check that is dated January 1, 2018, that check is a stale check.

Advantages of Using Checks

• Not susceptible to loss or theft
• Can be easily carried from one place to another
• The exact amount of money for payment can be written on the checks.

Disadvantages of Using Checks

• Signatures can be forged or amounts changed
• Can be inconvenient to encash
• Can potentially overdraft or bounce

Philippine Deposit Insurance Corporation (PDIC)

• Created in 1963 by Republic Act 3591 to insure bank deposits.
• Maximum insured amount is P500,000 per depositor.