Financial Markets – Chapter 2

CHAPTER 2: THE PHILIPPINE FINANCIAL SYSTEM

At the end of this chapter, I can:

 Explain the structure of the Philippine Financial System
 Describe the nature and basic functions of
 Banking Institutions
 Non-Bank Financial Institutions

INTRODUCTION

Well-functioning financial system is crucial to a country's economic health so much so that

when the -financial system breaks down, as it has in Russia and in Southeast Asia recently,
severe economic hardship results.
The financial system, through the various financial markets and financial intermediaries has the
basic function of moving funds from those who have a surplus to those who have a shortage of
funds.
To study the effects of financial markets and financial intermediaries on the economy, we need
to acquire an understanding of their general structure and operation.

STRUCTURE OF THE PHILIPPINE FINANCIAL SYSTEM

I. Bangko Sentral Ng Pilipinas
II. Banking Institutions
A. Private Banking Institutions
1. Expanded Commercial Banks/Universal Banks (EKB/UB)
2. Commercial Banks (KB)
3. Thrift Banks (TB)
a. Savings and Mortgage Banks (SMB)
b. Private Development Banks (PDB)
c. Stock Savings and Loan Associations (SSLA)
4. Rural Banks (RB)
5. Cooperative Banks
B. Government banking institutions
1. Development Bank of the Philippines (DBP)
2. Land Bank of the Philippines (LBP)
3. Philippine Al-Amanah Islamic Investment Bank
III. Non-Bank Financial Institutions
A. Private non-bank financial institutions
1. Investment houses
2. Investment banks
3. Financing companies
4. Securities dealers/brokers
5. Savings and loan associations
6. Mutual funds
7. Pawnshops
8. Lending investors
9. Pension funds
10. Insurance companies
11. Credit union
B. Government Non-bank financial institutions
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Pag-ibig

Book:
Financial Markets and Institutions
By: Cabrera, Ma. Elenita Balatbat, BBA, MBA, CPA, MBA
Cabrera, Gilbert Anthony B., BBA, MBA, CPA
Financial Markets – Chapter 2 7

DESCRIPTION OF THE FINANCIAL INSTITUTIONS

I. Bangko Sentral ng Pilipinas (to discussed in a separate chapter)

II. Banking Institutions
A. Private Banking Institutions
1. Universal Bank (UB) or Expanded Commercial Bank (EKB) is any commercial bank,
which performs the investment house function in addition to its commercial banking
authority. It may invest in the equities of allied and non-allied enterprises. Allied
enterprises may either be financial or non-financial.
2. Commercial Bank or Domestic Bank (KB) is any commercial bank that is confined
only to commercial bank functions such as accepting drafts and issuing letters of
credit, discounting and negotiating promissory notes, drafts and bills of exchange,
and other evidences of debt, accepting or creating demand deposits, receiving other
types of deposits and deposit substitutes, buying and selling foreign exchange, and
gold or silver bullions, acquiring marketable bonds and other debt securities, and
extending credit subject to such rules that the Monetary Board may promulgate.
3. Thrift Banks (TB) - shall include savings and mortgage banks, stock savings and loan
associations and private development banks. Their function is to accumulate the
savings of depositors and invest them together with their capital, loans secured by
bonds, mortgages in real estate and insured improvements thereon, chattel
mortgages, bonds and other forms of security or loans for personal or household
finance, whether, secured or unsecured, or in financing for home building and home
development; in readily marketable and debt securities; in commercial papers and
accounts receivables, drafts, bills of exchange, acceptances or notes arising out of
commercial transactions; and in such other investments and loans which the
Monetary Board may determine as necessary in the furtherance of national
economic objectives.
a. Stock Savings and Mortgage Bank (SSMB) is any corporation organized for the
purpose of accumulating the savings of depositors and investing them, together
with its capital, in readily marketable bonds and debt securities; checks, bills of
exchange, acceptances or notes arising out of commercial transactions or in
loans secured by bonds, mortgages or real estate and insured improvements
thereon and other forms of security or in loans for personal or household
finances whether secured or unsecured, and financing for home building and
home development.
b. Private Development Bank (PDB) is a bank that exercises all the powers and
assumes all the obligations of the savings and mortgage bank as provided in the
General Banking Act except as otherwise stated. The private development bank
helps construct, expand and rehabilitate agricultural and industrial sectors. The
Development Bank of the Philippines is the government counterpart of the
private development banks and helps the private development banks augment
their capitalization as provided under R.A.4093 as amended.
c. Stock Savings and Loan Association (SLA) is any corporation engaged in the
business of accumulating the savings of its members or stockholders and using
such accumulated funds, together with its capital for loans and investment in
securities of productive enterprises, or in securities of the government and its
instrumentalities, provided that they are primarily engaged in servicing the
needs of households by providing personal finance and long term financing for
home building and development.
4. Rural Bank (RB) is an any bank authorized by the Central Bank to accept deposits and
make credit available to farmers, businessmen and cottage industries in the rural
areas. Loans may be granted by the rural banks on the security of land without

Book:
Financial Markets and Institutions
By: Cabrera, Ma. Elenita Balatbat, BBA, MBA, CPA, MBA
Cabrera, Gilbert Anthony B., BBA, MBA, CPA
Financial Markets – Chapter 2 8

Torrens title where the owner of private property can show five (5) years or more of
peaceful continuous and uninterrupted possession of the land in the concept of
ownership. This will include portions of friar land estates or other lands
administered by the Bureau of Lands that are covered by sale contracts and
purchases and have paid at least five (5) years installment thereon, without the
necessity of prior approval and consent of the Director of Lands or portions of other
estates under the administration of the Department of Agrarian Reform.
5. Cooperative Banks are banks established to assist the various cooperatives by
lending those funds at reasonable interest rates.
B. Government Banks or Specialized Government Banking Institutions
1. Development Bank of the Philippines- (DBP) provides loans for developmental
purposes, gives loans to the agricultural sector, commercial sector and the industrial
sector.
2. Land Bank ofthe Philippines (LBP) is a government bank, which provides financial
support in the implementation of the Agrarian Reform Program (CARP) of the
government.
3. Al-Amanah Islamic Investment Bank: Republic Act No. 6048. provides for the charter
of the Al-Amanah Islamic Investment Bank. This Act authorizes the bank to promote
and accelerate the socio-economic development of the Autonomous Region of
Muslim Mindanao by performing banking, financing and investment operations, and
to establish and participate in agriculture, commercial and industrial ventures based
on the Islamic concept of banking.
III. Non-bank Financial Institutions
A. Private non-bank Financial Institutions
1. Investment House is any enterprise, which engages in underwriting securities of
other corporations. It also generates income from sale of investments in securities.
2. Investment Banks. Investment banks, such as Goldman Sachs and Morgan Stanley,
differ from commercial banks in that they do not take in deposits and until very
recently rarely lent directly to households. They provide advice to firms issuing
stocks and bonds or considering mergers with other firms. They also engage in
underwriting, in which they guarantee a price to a firm issuing stocks or bonds and
then make a profit by selling the stocks or bonds at a higher price.
3. Financing Company is any business enterprise where the primary purpose is to
extend credit facilities to consumers and to industrial, commercial or agricultural
entities either by discounting or factoring commercial papers or accounts, or by
buying installment contracts, leåses, chattel mortgages, or other evidences of
indebtedness, or by leasing motor vehicles, heavy equipment and industrial
machineries and business and office equipment, appliance and other movable
properties.
4. Securities Dealer is any person or entity engaged in the business of buying and
selling securities for his own or its client's account thereby making a profit from the
difference between the purchase prices and selling price of securities.
5. Savings and Loan Associations (S&Ls), which have traditionally served individual
savers and residential and commercial mortgage borrowers, accumulate the funds
of many small savers and then lend this money to home buyers and other types of
borrowers. Because the savers obtain a degree of liquidity that would be absent if
they bought the mortgages or other securities directly, perhaps the most significant
economic function of the S&Ls is to "create liquidity". Also, the S&Ls have more
expertise in analyzing credit, setting up loans, and making collections than individual
savers, so they reduce the transaction costs and increase the availability of real
estate loans.

Book:
Financial Markets and Institutions
By: Cabrera, Ma. Elenita Balatbat, BBA, MBA, CPA, MBA
Cabrera, Gilbert Anthony B., BBA, MBA, CPA
Financial Markets – Chapter 2 9

6. Mutual funds are corporations which accept money from savers and then use these
funds to buy stocks, long-term bonds, or short-term debt instruments issued by
businesses or government units. These organizations pool funds and thus reduce
risks by diversification. They also achieve economies of scale, which lower the costs
of analyzing securities, managing portfolio, and buying and selling securities.
Different funds are designed to meet the objectives of different types of savers.
Hence, there are bond funds for those who desire safety, stock funds for savers who
are willing to accept significant risks in the hope of higher returns, and still other
funds that are used as interest-bearing checking accounts (the money market funds).
There are literally hundreds of different mutual funds with dozens of different goals
and purposes.
7. Pawnshops refer to persons or entities engaged in the business of lending money
with personal property, jewelry, and other durable goods as collateral for the loans
given.
8. Lending investor is any person or entity engaged in the business of effecting
securities transactions, giving loans and earns interest from them.
9. Pension funds are retirement plans funded by corporations or government agencies
for their workers and administered primarily by the trust departments of
commercial banks or by life insurance companies. Pension funds invest primarily in
bonds, stocks, mortgages, and real estate.
10. Insurance companies take savings in the form of annual premiums, then invest these
funds in stocks, bonds, real estate, and mortgages, and fihally nake payments to the
beneficiaries of the insured parties. In recent years, life insurance companies have
also offered a variety of tax-deferred savings plans designed to provide benefits to
the participants when they retire.
11. Credit unions are cooperative associations whose members have a common bond,
such as being employees of the same firm. Members' savings are loaned only to
other members, generally for auto purchases, home improvement loans, and even
home mortgages. Credit unions often are the cheapest source of funds available to
individual borrowers.
B. GOVERNMENT non-bank Financial Institutions
1. Government Service Insurance System (GSIS). Provides retirement benefits, housing
loans personal loans, emergency and calamity loans to government employees.
2. Social Security System (SSS). Provides retirement benefits, funeral benefits, housing
loans, personal loans and calamity loans to employees who are working in private
companies and offers.
3. Pag-lbig. Provides housing loans to both government and private employees.

Book:
Financial Markets and Institutions
By: Cabrera, Ma. Elenita Balatbat, BBA, MBA, CPA, MBA
Cabrera, Gilbert Anthony B., BBA, MBA, CPA