Banking Institutions, Classifications and Functions PDF

BANKING INSTITUTIONS, CLASSIFICATIONS AND FUNCTIONS FMGT55 – BANKING AND FINANCIAL INSTITUTIONS LEARNING OUTCOME After the completion of the chapter, students should be able to:  define money and its characteristics  know the definition of banks and identify their roles  trac...

BANKING INSTITUTIONS, CLASSIFICATIONS AND FUNCTIONS FMGT55 – BANKING AND FINANCIAL INSTITUTIONS LEARNING OUTCOME After the completion of the chapter, students should be able to:  define money and its characteristics  know the definition of banks and identify their roles  trace the history of banking in the Philippines  assess the development of the banking system  recall the overview of the Bangko Sentral ng Pilipinas  describe the main reason for the existence of banks TOPIC OUTLINE  Money and the characteristic of money  Definition of Banks  Role of Banks  Banking in the Philippines  The Bangko Sentral ng Pilipinas  Classifications of Banks  Functions of a Bank What is Money? Money can be defined as an object that is readily accepted from anybody as full payment for purchase of a certain commodity or for a service rendered by an individual. This may take the form of metal coins, paper money issued by the government, banks or personal checks. How did money come into use? Barter System the direct exchange of goods for goods, services for services, goods for services and services for goods. It is the earliest system of trading. With the passage of time, the barter system presented difficulties which tended to slow down exchange. This lead to use of one object as a medium of exchange for other goods came into use. This system can be known as Money Economy. Disadvantages of Barter System 1. Burdensome 2. Inconvenient due to difficulty in finding goods which one directly needs. 3. Does not have proper measure for the goods being exchanged. 4. Indivisibility of some goods. Different forms of money 1. Commodity Money 2. Metallic Money 3. Representative Money 4. Paper Money 5. Banks Drafts or Checks Characteristics of Money ▪An item must have six key characteristics to be considered as “Money” ▪These Characteristics are ▪Durability ▪Portability ▪Divisibility ▪Uniformity ▪Limited supply ▪acceptability Durability ▪Durability means that the item must be able to withstand being used repeatedly ▪Items that are considered Currency, coins and paper bills used as money meet this requirement. Portability ▪Portability means that individuals are able to carry money with them and transfer it easily to other individuals. ▪This is why coins and paper money have historically proved popular. Divisibility ▪Divisibility means that the money can easily be divided into smaller units of value ▪Today, different coins and notes convey these fractional values. Uniformity ▪Uniformity means that all versions of the same denomination of currency must have the purchasing power. Limited Supply Limited supply means that restrictions on the amount of money in circulation ensure that values remain relatively constant for currency. Acceptability Good money requires acceptance to all without any hesitation. Since the law declares Money as the legal tender, it has an inherent quality of general acceptability. Why is money important? There are many uses or functions of money and these are money as a: ▪Medium of exchange. The money is the medium of exchange because it is always in the middle between the buyer and the seller. ▪Standard Value. This is being performed when all articles or services are given a value in terms of a certain number of units of one particular type of goods. ▪Standard for postponed Payments. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future. BANKS - DEFINED The term bank refers to“ an entity duly authorized by the Monetary Board of the Central Bank that may engage in the lending of funds obtained from the public through receipts of deposits of any kind and all entities regularly conducting such operations”. - According to the General Banking Act Abank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange and safe deposit boxes. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or ROLES OF BANK  Banks serve as depository of idle funds.  Banks serve as major source of loanable funds.  Bank also gives counsel on financial matters BANKING HISTORY AND DEVELOPMENT BANKING HISTORY AND DEVELOPMENT 2000 B.C - In the temples of Babylon, gold, silver and items of wealth were left for safekeeping. Credit transactions were known during the reign of King Pharaoh Nebuchadnezzar and were recorded and found during the early ninth century. Ancient Greek Greek temples became depositories of community wealth. Greek priests loaned money to the people. “Moratorium”,which means an authorization to the debtor permitting temporary suspension of payment or delay of any action, was already used in financial transactions BANKING HISTORY AND DEVELOPMENT 1157 AD - The Bank of Venice was established. During seventeenth and eighteenth centuries - Many banks were established in Europe. The Bank of Barcelona in Spain in 1401, the Bank of Venice 1587, the Bank of Amsterdam in 1609, the Bank of Hamburg in 1619, the Bank of Nuremberg in 1621, and the Bank of Stockton in 1688. 1641 - Modern Banking was introduced to the world by Bank of England. During the nineteenth century - Banking in Europe was in the hands of powerful statement and wealthy private bankers for more than three centuries. Bank of North America was the first important bank of the BANKING HISTORY AND DEVELOPMENT In 1791, Federal Government chartered the First Bank of the United States to serve the government and the public 19th century - Germany established several joint stocks, which were publicly owned. Goldsmith was attributed to have started banking because of their best facilities for safekeeping. The idea of lending also came from them. They issued promissory note that is payable on demand, in modern banking, this notes are equivalent to paper money. 1800 - Bank of France was organized by Napoleon Bonaparte 1822 - Canadian Banking, charter of the Bank of Montreal was based on the charter of the bank of US and later provisions of the charter were based on English Banking Law. BANKING HISTORY AND DEVELOPMENT In 1838, New York passed a free Banking Law. New York State developed safety fund system. In 1842, Louisiana enacted legislation to limit the number of banks and require them to maintain one third of their assets in cash and two-thirds in short-term obligation.. Civil war, greenbacks, irredeemable paper money National Banking Act of 1863. It produced unified national paper currency consisting of US notes issued by the treasury and national bank notes. In 1907 - Federal Act of 1913. Federal Reserved System has control over minimum amount reserve that member banks must keep for each dollar of deposit and it also regulated the types of asset that they can hold. BANKING HISTORY AND DEVELOPMENT There is a depression in 1930 that the number of commercial banks declined since then. In 1933, the federal government closed all banks for four days. In the same year the Federal Deposits Insurance Corporation (FDIC) was created. Federal Reserve banks were required to join FDIC and the banking system began to recover in 1934. To finance World War II expenditures, government sold bonds to banks in exchange of deposits. Deposits continued to increase in the year following World War II BANKING IN THE PHILIPPINES BANKING IN THE PHILIPPINES During the Spanish Period, Obras Pias was organized Father Juan Fernandez De Leon in 1594. In 1930, Francisco Rodriguez organized Rodriguez Bank. El Banco Espanol - Filipino de Isabel II is thee first commercial bank organized in the Far East. They are the first to start formal banking. The bank financed production of abaca, sugar, tobacco and copra for exports. Monte de Piedad y Caja de Ahorros de Manila founded by Father Felix Huertas, is the first savings bank. BANKING IN THE PHILIPPINES During the American period, Philippine National Bank was organized in 1916 under Act no 2612. It was made sole depository of government fund and had the authority to issue currency notes. In 1938, Philippine Bank of Commerce opened. It was the first private commercial bank wholly owned by Filipinos. It was absorbed by the Philippine Commercial and Industrial Bank. At the outbreak of World War II, during Japanese occupation, only three domestic banks were allowed to resume operations. 1. Philippine National Bank 2. Bank of the Philippine Islands 3. Philippine Bank of Commerce. BANKING IN THE PHILIPPINES In 1948, upon the enactment of RA#265 the Central Bank of the Philippines was created and the banking system of the country continued to grow and expand. In 1979, Joint IMF/ WB Mission was formed, a group consisting of representatives from International Monetary Fund and World Bank decided to have further studies about the Philippine Financial system. The findings of the study were: 1. Legislated specializations in the Philippine banking system prevents banks from responding to the needs of the growing economy and thus hampers them from meeting the demands of their clientele. 2. There is more preference for short-term lending and slow growth BANKING IN THE PHILIPPINES The mission recommended the following: 1. The legislated specialization in the Philippines should be removed. Banks should be given the chance to offer a wide range of financial services to the public. 2. Financial institutions were to be encouraged to extend more of long-term funds. This is referred to as term transformation. The financial institutions may also invest in equities of business firms. 3. An active capital market was to be developed and the lender-of- last resort facility of the Central Bank should be fully utilized to maintain the liquidity of banks. These finding resulted to seven amendatory laws namely, Batas Pambansa Nos. 61 to 67, and the Implementing Circulars Nos. 739 to 742 was issued by the Central Bank of the BANKING IN THE PHILIPPINES The Banking Reforms of 1980 effected revision in the Philippine banking structure including administrative regulations. Expanded commercial banking or universal banking was introduced. It involves a combination of commercial banking with the power of an investment house. This concept of banking is known as “one-stop banking” or “department store banking“ enables the clientele to avail of all banking services they need from only one bank BANGKO CENTRAL NG PILIPINAS: THE NEW CENTRAL BANK On June 14, 1993, President Ramos signes into law RA 7653 entitled “the New Central Bank Act”, pursuant to the requirement of the 1987 Constitution for the establishment of an independent Central Monetary Authority. Among the major changes incorporated in the law are the following: 1. Change in the composition of the Monetary Board 2. Its primary objective is to adopt price stability, maintenance of monetary stability and the convertibility of peso. 3. Strengthening of the regulation and supervision framework for banks and quasi-banks through 4. Abolition of Monetary Adjustment Account and Exchange Stabilization Account in the balance sheet to which have been lodged expenses related to printing and minting of BANGKO CENTRAL NG PILIPINAS: THE NEW CENTRAL BANK 5. Phase-out of fiscal agency function 6. Phase-out of regulatory functions 7. Require additional mandatory reports to assure accountability. 8. The financial restructuring of the CB 9. The imposition of requirements on trust accounts by the Monetary Board or authorized under the new law. 10. Loans and advances made by the CB to any bank, which has been placed under receivership, even after the bank is closed shall be subjected to interest. CLASSIFICATIONS ACCORDING TO FORM OF ORGANIZATION 1. Unit Bank. A single banking corporation which makes and implements its own policies. It has only one place of business 2. Branch Banking System. This is a bank with branches and extension offices located in various places to extend banking services to other areas of the country. 3. Group Banking. These are unit banks or branch banks whose majority shares of stocks are held by a holding company 4. Chain Banking. These are independent unit banks which are owned by a group of people. TRADITIONAL CLASSIFICATION OF BANKS Government Owned Privately Owned Banks Banks Banks owned by private Banks owned by the state or individuals Personalized banks with a minimum private financial and banking services capital. that are traditionally offered to a bank’s wealthy high net Examples are Philippines worth individual clients. National Bank, Al-Amanah Islamic Investment Bank of the The main purpose is not only Philippines, Land Bank of the to provide the needed banking Philippines, Development Bank services but also to provide of the Philippines, and Central commensurate returns of the Bank of the Philippines. investors’ capital. Most of the banks in the CLASSIFICATIONS OF BANKS ACCORDING TO PLACE OF INCORPORATION Domestic Bank Foreign Bank A bank incorporated under A bank incorporated under the the laws of the country laws of other countries that do where it is doing business. business in the Philippines. It is subsidiary and branch of a Under the Philippines Law, foreign bank operating in the banks Should at least have Philippines. 60% Filipino capital 20% of President Fidel V. Ramos on the authorized capital stock April 17, 1994 signed into law could only be owned by Republic Act 7721 liberalizing people related to one the entry of foreign banks into another up to the third degree of consanguinity and affinity the country. FUNCTIONS OF A BANK  DEPOSITORY FUNCTION  TRUST FUNCTION  COLLECTION AND REMITTANCE FUNCTION  LOANS AND DISCOUNT FUNCTION  ADVISORY FUNCTION FUNCTIONS OF A BANK: DEPOSITORY Banks accept deposits from the public and make these funds available for lending to those that need the fund. Deposits may come in the form of cash, checks, money orders and items for collection. These are referred to as primary deposits. On the other hand, deposits created out of proceeds of loans and interest on deposits is called derivative deposits. CLASSIFICATION OF DEPOSITS ACCORDING TO A DIFFERENT CRITERION 1. Deposits from the Private Sector: Are deposits made for the account of private individuals, partnership and corporations FUNCTIONS OF A BANK: DEPOSITORY The Automated Teller Machine Anautomated teller machine (ATM) is an electronic channel that provides bank customers an alternative method of doing their financial transactions in a public area without the assistance of a human clerk or bank teller. Types of Bank Accounts 1. Partnership Account. This account is opened by a partnership- an organization, which is composed of two or more owners who agreed to conduct business and divide the profits among themselves 2. Corporate Account. This type of account is opened by FUNCTIONS OF A BANK: DEPOSITORY 3. Fiduciary Account. Opened by a trustee in behalf of another person 4. Unincorporated group of Account. An account that is open by associations, social clubs, civic organizations, professional, and charitable organizations which are not registered with the Securities and Exchange Commission 5. Inactive Deposit Account (Dormant Account). This is an account which does not have any activity through deposits or withdrawals over a period of time. If the account remains dormant for ten years, the deposit will be transferred to the account of the Philippine Treasury. 6. Insurance on Deposits. Republic Act no. 3591- this law provides the establishment of the Philippine Deposit FUNCTIONS OF A BANK: LOANS TYPES OF LOANS GRANTED BY BANKS According to the form on how credit is granted 1. Demand or Callable Loan Direct loan 2. Time Loan Discount loan and rediscount loan Overdraft line According to purpose Commercial or mercantile credit According to Maturity Investment credit Short-term loan Agricultural credit Medium-term loan or Real estate credit intermediate-term loan Long-term loan Personal credit FUNCTIONS OF A BANK: LOANS According to security Secured loan or collateralized loans Unsecured loan or Character loan According to release of the loan Lump sum release Installment release as the project progresses According to manner of repayment Lump sum basis Installment basis FUNCTIONS OF A BANK: ADVISORY FUNCTION The banks employ experts and have a variety of financial assistance to assist distressed businessmen in their needs. An example of these experts is a financial planner. A financial planner is a qualified investment professional who helps individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve that client's goals. Financial planners specialize in tax planning, asset allocation, risk management, retirement and/or estate planning