Unit I: Philippine Money

Introduction

The present-day notion or idea about money say that it is a unique kind of
product accepted worldwide, whose value is pegged at or determined as value of all
other products. It is a special commodity that acts as a trading equivalent able to be
exchanged with anything, accepted as payment, and for the increase of wealth. In
contemporary society, the flow of money is constant condition representing the
cyclical flow of almost all types of goods. The nature of money is not static or dormant
in its evolution. In the 1950s, bitcoin was not accepted for payment but now, it is
already tolerable. A prime example of money’s capacity to change in form over
time. Presently, it is specifically significant as a feature of market relations.
Meanwhile, in the progress of trade relations, and continual fine-tuning of
management methods, a thorough study of the use and value of money is needed to
ensure the efficacy of social production. Highly demanding requisites for
accumulative s y s t e m s r e q u i r e t h e e x a m i n a t i o n o f m o n e t a r y
t o o l s a s one of the essential parts of the whole economic system. In the cut-throat
rivalry among participants in the process of development, those who are more aware
of modern ways and systems in the use of money and banking technology has an added
advantage.

Learning Outcomes:
At the end of the unit, you expected to:
1. explain the different functions and characteristics of good money;
2. identify the different types of coinage;
3. determine the different types of money
4. discuss the role of the Bangko Sentral ng Pilipinas

Lesson 1: Concept of Money

Our currency system came about to meet the varying and arising needs of the
economy. Primitive economies are backward. They consisted mostly of self-sufficient
units or groups that lived by means of hunting, fishing, and simple agriculture. What
they farm and hunts are solely for their consumption. They live nomadic lives and are
content to meet their daily subsistence needs.
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 There was a need to exchange goods and services. Their prime concern is
simply to have enough just to get by.

Money
Can be defined as anything of value that is readily acceptable from anybody
as pa ym en t for the acquisition or purchase of a certain commodity or for service
rendered by an individual to fill a certain longing. This money may take the form of metal
coins, paper money issued by the government, banks or personal checks.
It is anything that is generally acceptable as means of paying for goods and
services and for paying off debts.

Origin and Evolution of Money

Bangko Sentral ng Pilipinas - nation’s central monetary authority

Museo ng Bangko Sentral ng Pilipinas

 formely Central Bank Museum 1974.
 d i s p l a y s the banks collection of currencies.
 K e e p s f o r p o s t e r i t y , examines/probes, maintain coins, paper notes
& currency items.

Pre- Hispanic Era

Barter System o r t h e o u t r i g h t p h y s i c a l e x c h a n g e o f g o o d s
w i t h o t h e r g o o d s has b e e n used for centuries and long before money c a m e
t o b e . People exchanged services and goods for other services and goods in return.
Piloncitos – are tiny engraved gold coins found in the Philippines d u r in g
t h e Archaic period. It is the first recognized form of mint/coinage in the country.

Spanish Era (1521-1897)

Galleon Trade – was responsible for transforming Manila into a trade center
for oriented goods.
Cobs or macuquinas – earliest coins introduced for usage by the galleons.
Silver dos mundos or pillar dollar – is s a i d t o b e o n e t h e w o r l d ’ s
m o s t b e a u t e o u s coins.

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18th Century – Spain R o y a l ’ s authorized the production of copper coins by
the municipal administration of Manila or Ayuntamiento.
Barilla – was the first coin struck in the country.
Pesos fuertes – first bank notes that were issued in 1852.
Casa de Moneda de Manila –minted the first gold coins with the word “Filipinas”
inscribed, which were called Isabelinas and Alfonsinos.

American Period (1900-1941)

Us Congress passed the Philippine Coinage Act, which authorized the
mintage of silver coins from 1903 to 1912.
Silver Certificate – where issued until 1918
Treasury Certificate – replaced Silver Certificate from 1918 to 1935
Manila Mint – produced coins until the Commonwealth period

Japanese Occupation (1942-1945)

Japanese Invasion Money - the Japanese Military Authority, replaced the
local currency after the colonies and other states were captured in World War II. The
currency used during this time was called War Notes and Mickey Mouse money.
Guerrilla notes – guerrillas (Filipino rebels) issued their own money.

Republic Period
Central Bank of the Philippines –created by the Republic Act No. 265,
January 3, 1949.
Victor Notes – issued by CBP with overprint “Central Bank of the Philippines”
English Series Notes – first bank notes issued by CBP
Ang Bagong Lipunan (ABL) Series Notes – which were printed at the
Security Printing Plant starting 1978.
New Design series – the ABL series was replaced in 1985.
A new set of coins and notes were issued bearing the logo of the Bangko Sentral ng
Pilipinas.

Characteristics of Good Money

1. General acceptability – money is accepted by all as a medium of

exchange.
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 2. Durability – money can stand the wear and tear.
3. Portability – money can be brought anywhere you go.
4. Divisibility – it can be divided in small or large quantities.
5. Stability of Money Value – money’s value does not change over time.
6. Cognizability – it can be easily identified.
7. Homogeneity – uniform in form and design.
8. Malleability – it can be easily bent and formed into any other design.
9. Elasticity – its supply can be increased or decreased.

Importance of Money

1. Money and Production – the different production processes is aided by

money. It can help producers decide, plan, execute, and manage the production
activities.
2. Money and Consumption – using money consumers can easily decide,
what and how much of goods to buy.
3. Money and Distribution – payment for the use of the various factors of production
is made possible with the rewards distributed easily and accurately with money. The
reward can be distributed in terms of wages, rent, interest and profit in the form of
money.
4. Removal of Barter Difficulties - some difficulties associated with the
barter system of exchange were removed. Through the Invention of money all
difficulties of the barter system was addressed.
5. Money and Capital Formation – to build up capital, money is necessary. With
money we can conveniently mobilize the savings of people a n d g e t t h e s e m o n e y
in v es te d in m o re p ro fita b le p u rs u its o r v e n tu re s .
6. Money and Public Finance – the scope of public finance is how the
government handles its income and expenditures. The government receives its income
through taxes and other means and make expenditures for infrastructure built,
healthcare, social services and the administration of its bureaucracy.
7. External Trades – trade is done through money. When the country buys goods
from other countries for its use,(importation), it is done with money and when it sells goods to
other countries (exportation), the trade is also facilitated by money.
8. Money and Economic Development – the economic development of the
country is bankrolled by money. The money supply in a country affects its economic

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development. If the money supply is excessive, then it may lead to an inflationary
situation in the economy. Conversely, if the money supply is lesser than what is required,
there will be a shortage of liquidity which can lead to lesser investments and as a
consequence lesser employment.

Functions of Money
1. Medium of Exchange – money is used to facilitate as a means of payment
the exchange of goods and services through its characteristic of general acceptability.
2. Standard of Value – money is used as a yardstick for values. Through the
pricing system, the values of objects to be traded or exchanged are pegged.
3. Store of Value – money’s value as held for some time before it is spent is
retained..
4. Standard of Deferred Payment – money is used as basis for computing
the value of loans and obligations in the future.

Types of money
1. Commodity Money – the value of money is based on a commodity.
Commodities are objects that by itself have an intrinsic value aside from when it is
used as currency. Examples of these are bow and arrow, gold and silver, cowrie
shells, precious stones, decorated belts, cigarettes, copper, etc. But, commodity
money had various drawbacks since there cannot be any standardization of value
for money. It lacks the property of indivisibility.
2. Metallic Money – money that is made of metal like gold and silver.
Example: coins.
3. Representative Money – paper money that is supported or backed by
an amount of precious metal whose value is equal to the face value of the paper
money. Example: gold certificates.
4. Paper Money – money made of paper, such as currency notes.
5. Electronic Money – involves computer networks to perform financial
transactions electronically. Examples are electronic cash, electronic currency, digital
money, and digital cash.
6. Fiat Money – money whose value is determined by legal means. It
usefulness results not from any intrinsic value but a guarantee by a government that it
can be converted into gold or another currency upon its order and that by
pronouncement of law, it must be accepted as a means of payment.

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Modern Forms of Money
1. Metallic Money – coins are one of the oldest forms of money.
Two types:
a. Full bodied Coins – the face value matches the value of the metal in the
coin. Ex. Gold, Silver Coins etc.
b. Token Coins – the face value is much more than the value of the metal in
the coins. Ex: Regularly Used Coins
2. Paper Money – this small piece of paper or cash can hold a lot of value.
3. Bank Money – banks store our money that we can use through some monetary
instruments.
4. Plastic Money – is the trend now. People go cashless, and use debit or credit cards.
5. Electronic Money – new forms-Electronic Cash and Cryptocurrency have
been developed.

Kinds of Monetary Standards

1. Monetary Standards
The Monetary Unit – this refers to the type of money expressed by law as
the standard of value and the circulating medium. It is made of a particular metal or
commodity with a fixed weight and fineness.
The System of Coinage – the government has undertaken sole responsibility
for the manufacture of metals into coins to avoid difficulties such as varied sizes and
shapes, designs, weights and counterfeiting.
Circulating Media – all matters related to the issuance, value, conversion and
control in the use of paper bills or metallic coins are spelled out by the law.
Monetary Reserves – it is important in controlling credits. The security of the
depositors and as an instrument of control by the government in cases of economic
instability due to too much credit or to an imbalance in foreign payments.

2. Commodity Standards
It has several types namely:
a. Monometallism – a commodity standard based on one metal.
b. Bimetallism – based on two metals which are standard money at a fixed
value in terms of one another.

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 c. Symmetallism – based on a single metallic unit which is a mixture of different
metals legally proportioned.
d. Composite Commodity/Commodity Reserve Standard – consists of an
assorted list of staple commodities which will serve as the standard unit.
3. Paper Standards
The paper standard is one which does not use gold or any metal as the basis
of value. This is also called as Credit or Fiduciary Standard because it is dependent
on the people’s trust in the government.
Flat Standard – the money circulation assumes its values by decree of the
government.
Money Paper Standard – the government surprises the circulation of the money
to the public.

CLASSIFICATIONS OF MONEY
Money can be classified according to the following:
Money According to Material Used
Commodity money. This can be metallic in nature. It is used for purposes other
than as a medium of exchange. Precious metals like gold and silver are used as
commodity money.
Paper money. High quality paper materials are used to withstand wear-and-
tear over a long period of time and to minimize counterfeiting.
Bank money. These are checks or other paper notes issued by financial
intermediaries.
Money According to the Character of the Issuer
Treasury money. These were issued by the National Treasury before 1949.
They are notes and coins of various denominations.
Central Bank money. These were issued by the Central Bank after 1949. They
are the Central Banknotes and coins circulating in the Philippines.
Commercial bank money. These are issued by the Philippine National Bank
and other commercial banks as promises to pay, legal tender, payable on demand at
a future time to the bearer or order.
Money According to Popularity
Paper money has no commodity value.
Fiat money. They are inconvertible paper money with no reserve. Face value
is higher than the value of paper used. Subsidiary coins. These are representative full-

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bodied money made of base metals to settle small transactions. These are not
advisable for use in big transactions and have limited legal tender power.

Money According to Face Value

Standard money. This is full-bodied money, authorized by law and having the
weight fineness,denominations, and designs prescribed by the government as
standard basis for coinage

LEGAL TENDER
Any kind of money which, according to law, must be generally accepted when
offered payment for any obligation expressed in terms of the country's monetary unit.
In the Philippines, "peso" is legal tender.

CURRENCY
This is any kind of money that has limited acceptability expressed in a monetary
unit. Money of other countries is currencies because of their limited acceptability in the
Philippines.

KINDS OF MONETARY STANDARDS

Monometallic Standard
1. Gold Standard
This is a monetary system in which the monetary unit is kept at par with a fixed
weight or value of gold. Money was backed up by gold coins and gold bullion. Stability
of money value and exchange rates were observed under this standard because of
fixed gold value.
Gold coin standard. Monetary unit is defined in terms of coins containing a
certain amount of gold with prescribed purity of fineness. Gold coins were an alloy of
gold and other base metals. Such coins are referred to as nine-tenths fine. It was also
legal to melt down gold coins of any quantity. Gold presented to the mint was made
into coins at little or no cost to the supplier of metal. The legal and institutional elements
of this concept were gradually pieced together over a century and are as follows:
A standard unit of account and of value was defined by law as consisting of a
fixed weight of gold of specified fineness. For instance, the dollar was defined as 25.8
grains of gold and 0.9 fineness.

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The gold unit was made a full and unlimited legal tender in payments between citizens
and payments to and by the government.
The free and unlimited coinage of gold was provided for holders of gold-bullion,
subject to such brassage or seigniorage charges as the government might make.
Subsidiary and token coinage was on government account, and, for these
coins, the legal tender was limited and the market value of the metal content was less
than the nominal value of the coin. These coins were convertible to gold coins.
No effort was made by the government to control the supply of gold coins; this
was left to the will and convenience of bullion holders, varying with the output of the
mines, the consumption of the industrial arts, the balance of international payments,
the relative popularity of gold coins, and credit substitutes.
Gold reserves were maintained to provide for the free and unhindered
convertibility of all forms of government paper money, banknotes, and deposits into
gold coin at par. The free and unrestricted circulation of gold coins was permitted: the
relative proportion of gold coins to the total circulation varied according to its
convenience for people.
The government stood ready to purchase at a fixed price unlimited quantities
of gold from anyone presenting it as well as to sell to any applicant.
No penalty of any kind-moral, civil or criminal-was imposed on hoarders of gold.
The free movement of gold from money into the industrial arts and from the arts
into money was authorized. If convenient, the holder of paper or other currency might
redeem it in gold coins and convert them to bullion, and the holder of surplus bullion
might sell it to the mint at a fixed price.
Gold was free to move internationally, exported or imported by bankers
merchants, or others. Since the cost of transportation was low, gold tended to have an
equal value (purchasing power) in all countries.
The international movement of gold was the result of all the factors determining
the international balance of payments. There was an automatic stabilization of
exchange rates.
Gold bullion standard. All gold is under the control of government, which
decreased the demand for gold and made it possible to issue a larger amount of money
on the same gold base. This gives the monetary authorities more flexibility in regulating
the money supply and makes international monetary management easier.
This transition from gold coin standard to gold bullion standard marks a decided
change in the concept of the gold reserve. It is no longer designed to meet withdrawals
for domestic circulation but merely for export or the arts.

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 Gold exchange standard. Under this system, the money of a country is
redeemable, not in gold, but in the currency of a foreign country. Philippine money was
then redeemable in dollars to which the Philippine government had a claim because it
had deposits in American banks.
The gold exchange standard was born from some experiments in sterling rupee
exchange, the pound sterling, gold, and the Indian rupee silver. In the early part of the
twentieth century, it was frequently used between parent countries and their colonies
as well as between older countries and newly developed countries.

2. Silver Standard
This monetary standard uses silver as 'the standard metal. The set-up under
silver standard and its operation are the same as those for gold standard. Types are
silver coin standard, silver bullion standard, and silver exchange standard.
In most respects, the demand for silver is like that for gold. In fact, they have
been substitute articles on the demand side of the market whether for use as money,
raw material for industry, or jewelry or ornament. Being substitutes, one tends to
support the value of the other. The most important change in demand is the tendency
to demonetize silver Re England led the way i 1816 and particularly after 1873. This
tendency made silver more dependent upon industrial output, except during 1933
when the United States started a campaign to demonetize silver by purchasing more
than the world's annual output. In any case the monetary demand is very capricious
and erratic, depending as it does upon legislation and administrative discretion as well
as upon the cyclical and other changes in the need for subsidiary coins. The demand
is rendered even more erratic by the government's habit of substituting fractional paper
money for silver coins, using base metals, lowering fineness, or using smaller coins.

3. Bimetallic Standard
Using both gold and silver in coinage, this monetary standard provides for a
broader: metallic base if there is a shortage of gold. Thus, the purchasing power of
money is more stable due to non-dependence on a single metal value. Government
freely coins both metal and makes them available in the quantities required. This
standard illustrates Gresham's Law, which states that, when several types of money
exist in an economy, the one which is overvalued as money in relationship to the others
will circulate while the others will disappear from circulation.
Both gold and silver have the same nominal or face value in a bimetallic
standard. The real value of gold or silver will depend on the supply; if there is a great

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supply of silver, the real value or price of silver will decline. For example, if the nominal
value of silver as coin money is Php10.00, but its real value as a metal is only Php5.00,
and then silver is overvalued as money. If both gold and silver have the same nominal
value of Php 10.00, people will not use gold as money and instead sell it as a
commodity since its real value is higher than its nominal value. This is also in keeping
with Gresham's Law.
Bimetallism is based upon the assumption that it is desirable to use both metals
simultaneously as the standard of value. It was argued that a higher stability of price
levels would result since price levels could rise or fall as the combined volume of the
two metals rose or fell. This would ensue as long as price levels are determined by the
volume of the metals devoted to monetary uses and that the probability is small that
the two metals would change in value in the same direction and in the same degree
'at the same time.
The bimetallic system of alternate gold or silver contrasts with the so-called
limping standard in which one metal, the undervalued one, remains the standard metal
while the coins of the other metal possess a fiduciary character. Under the limping
system, the minimum value of the silver coins would be the market value of their silver
content, the maximum value would be their face amount, and they would circulate at
their face value because they would be a full legal tender.

4. Fiat Standard
This is a monetary system in which the face value of money is higher than the
value of materials used for coinage. Types include the utopian paper standard, the
involuntary fiat standard, and the managed currency standard. Under the utopian
paper standard, the seal of the government and the mark of legal tender make money
acceptable as payment for goods and services. The involuntary fiat standard emerged
when the government was unable to race in money under the gold standard and
accepted paper money as another form of legal tender. The inconvertible paper
standard accepts paper bills as a medium of exchange, and these are inter-convertible
with other denominations of money on demand. The managed currency standard
makes use of inconvertible paper money that is irredeemable because it this was the
time that the country's monetary system came under the administration it was issued
against no reserve. In 1949, the Philippines Central Bank of the Philippines.

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The Bangko Sentral ng Pilipinas
 The Bangko Sentral ng Pilipinas (BSP) was created by the Republic Act
No. 7653, otherwise known as the New Central Bank Act of 1993.
 The BSP is now the Philippines’ central monetary authority that provides policy
directions in the areas of money, banking and credit.
 The BSP’s powers and functions are exercised by its Monetary Board,
consisting of seven members appointed by the president of the Philippines.
 One of the government sector members of the Monetary Board must be a
member of the Cabinet designated by the President of the Republic, which
position is currently held by the Secretary of Finance.
 The New Central Bank Act authorizes the Governor of BSP to appoint up to
three Deputy Governors, subject to the approval of the Monetary Board.
 The Governor is the chief executive officer of the BSP and is required to
direct and supervise the operations and interval administration of BSP.
 The BSP is aided in its bank monitoring and examination processes by
credit rating agencies and financial conglomerates.
 The BSP is also into the upgrading of its domestic prudential standards
in areas of capitalization, connected or pooled lending, loan provisioning, data
disclosure, and qualifications of owners and managers.
The BSP likewise imposes the requirements on the operations on e-bankers.
 The BSP is backstopped in this regard by the passage of e-commerce law in
June 2000 which facilitated the exchange of information and promoted the
security of electronic transactions.

The BSP Vision and Mission

Vision – aims to be a world - class monetary authority and catalyst for a

globally competitive economy and financial system that delivers a high quality of life for
all Filipinos.
Mission – is committed to promote and maintain price stability and provide
proactive leadership in bringing about a strong financial system conducive to a
balanced and sustainable growth of the economy. Towards this end, it shall conduct
sound monetary policy and effective supervision over financial institutions under its
jurisdiction.

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BSP 3 Pillars
 Promote and maintain price stability.
 Promote financial stability through effective supervision and regulation.
 Ensure safety, soundness and efficiency of the payments and settlements
system.

Roles and Responsibilities

1. Liquidity Management, by formulating and implementing monetary policy aimed at
influencing money supply, consistent with its primary objective to maintain price
stability.
2. Currency issue, the BSP has the exclusive power to issue the national currency. All
notes and coins issued by the BSP are fully guaranteed by the government and are
considered legal tender for all private and public debts.
3. Lender of last resort, by extending discounts, loans and advances to banking
institutions for liquidity purposes.
4. Financial supervision, by supervising banks and exercising regulatory powers over
non-bank institutions performing quasi-banking functions.
5. Management of foreign currency reserves, by maintaining sufficient international
reserves to meet any foreseeable net demands for foreign currencies in order to
preserve the international stability and convertibility of the Philippine peso.
6. Determination of exchange policy rate, by determining the exchange rate
policy of the Philippines.
7. Being the banker, financial advisor and official depository of the Government,
its political subdivisions and instrumentalities and GOCCs.

Assessment
Directions: Write your answer on a separate sheet of paper.

I. Choose and encircle the correct answer.

1. 1. It is anything recognized by law to be valid payment for debts and financial
obligations.
a. Fiat Money c. Legal Tender
b. Fiduciary Money d. Coinage

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 2. Does not have significant intrinsic value or use value.
a. Fiat Money c. Commodity Money
b. Portable d. Coinage

3. It is a function of money used as a medium of delayed payment.

a. a. Standard Value c. Standard of Deferred Payment
b. Fiduciary Money d. Fiat Money

4. Types of commodity money based on a single metallic unit which is a

mixture of different metals legally proportioned.
a. Symmetallism c. Coinage
b. Monetary Standards d. Composite Commodity

5. Defined as anything that people use to buy goods and services.

a. Barter System c. Medium of Exchange
b. Paper Money d. Money

II. Essay. (5 points each)

1. To understand the usefulness of money, we must consider what the world
would be like without money. How would people exchange goods and
services?

2. How does the existence of money simplify the process of buying and selling?

3. What is the role of the BSP in the economy? Explain.

Lesson 2: Philippine Banking System

Banks play an important role in the financial system and the real economy.
They intermediate between all sectors of the economy and other financial
intermediaries and institutions, and some of them provide the payments system, which
most of us use every day.
The network of institutions and laws that provide a great variety of financial
service. At its most basic, banking involves an institution holding money on behalf of
customers that is payable to the customer on demand, either by appearing at the bank
for a withdrawal or by writing a check to a third party. The banking system also provides
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loans to businesses and individuals. Many banks also perform other services for a fee;
for instance, they offer certified checks to customers guaranteeing payment to third
parties. In some countries, they may provide investment and insurance services.
Banking almost always involves the payment of interest on deposits and reception of
interest on loans. Banking is regulated by the laws and central banks of individual
countries.

Lesson Proper
History of Banking in the Philippines
The first organized credit institutions were established in the Philippines
th
during the 16 century Spanish colonial era. These were the OBRIAS PIAS.
Obrias Pias was charitable foundation during the Spanish period. The word
itself means works of piety in Spanish. The Church directed a share of personal
fortunes to its charities such as the Obras Pias. Donors had specified that the funds
are to be used for charitable, religious and educational purposes. However, some
of the funds were managed by confraternities that invested capital in secular
activities like underwriting cargoes for the galleon trade.
In 1869, the opening of the Suez Canal facilitated trade between the
Philippines and Europe. The Philippines then attracted British capital, and in the years
that followed, the Chartered Bank of India, Australia, and China (now known as the
Standard Chartered Bank) and the Hong Kong and Shanghai Banking Corporation
(HSBC), both British-owned banks, opened their branches in Manila.
By the end of the Spanish regime, the banks in existence were: El Banco
Espaῄol Filipino de Isabel II ( now the Bank of Philippine Islands or BPI) which was
given the sole mandate under a Spanish Royal Decree of 1854 to issue banknotes
called Pesos Fuertes; the Chartered Bank of India, a branch of the HSBS; the
Monte de Piedad; and the Banco

Peninsular Ultamarino de Madrid.

During the American colonial period, banks from USA started to establish local
branches that would cater to growing American economic interests and capital
inflow into the country.
The American Bank was first to open a branch in 1901. However, it was
placed under receivership by the Insular Treasurer for making doubtful loans after
only 4 years of operations.

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 In 1916, the Philippine National Bank was established with the Philippine
Government as the majority stockholder. This is to break the foreign banking monopoly
and remedy the lack of credit facilities.
The PNB was meant to function as a government enterprise that would widen
the variety of banking services “beyond trade finance in exportation and importation,
money changing of foreign currency, and fund transfers, all of which, while useful in
the short term, failed to mobilize capital in the development of natural resources.”
Its charter at that time empowered PNB to issue bank notes and act as a
depository of government funds.

At the turn of the 20th century, the Americans established the Guaranty Trust
Corporation (GTC) and International Banking Corporation (IBC). The existence of GTC
was short-lived, while IBC was eventually taken over by the National City Bank of New
York (now known as Citibank).
In 1918, the Manila Branch of the Yokohama Specie Bank was given license to
do business in the Philippines. Between 1935 to 1946, more foreign bank branches
were established in the Philippines. These include the Bank of Taiwan, and the
Nederlandsche Indische Handelsbanks.
In 1939, the government created the Agriculture and Industrial Bank to
absorb the functions of the National Loan and Investment Board and to harness
government resources.
The Philippine Bank of Communications is the first bank with genuine
Filipino private capital. However, it was temporarily closed at the outbreak of WWII.
Only Filipino-owned and Japanese banks were allowed to operate during WWII;
The Chartered Bank of India, Australia, and China, HSBC, and the National City Bank
of New York were all treated as enemy properties and placed under liquidation by the
Japanese Military Government.
In1947, a branch of the Bank of America was allowed to establish a branch in
Manila and in the following year, it absorbed the assets and liabilities of the local
branch of the Nederlandsche Indische Handelsbanks.
In 1952, the Rural Bank Act was enacted and two years later, the
Agricultural and Industrial Bank merged with the Reconstruction and Rehabilitation
Fund to form the Development Bank of the Philippines.

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What are Banks?
Banks shall refer to entities engaged in the lending of funds obtained in the
form of deposits. The essence of banking is the taking of deposit from public and
lending out these funds.

Two characteristics of bank:

1. It raises funds by accepting deposits, including savings deposits and checking
deposits that people and firms use to make payments. Both types of deposits
earn interest; savings deposits earn more than checking.
2. It uses its funds to make loans to companies and individual. These are
private loans: each is negotiated between one lender and one borrower.

Banks are classified into:

1. Universal banks;
2. Commercial banks;
3. Thrift banks, which are composed of (i) Savings and mortgage banks, (ii) Stock
savings and loan associations, and (iii) Private development banks;
4. Rural banks;
5. Cooperative banks; and
6. Islamic banks

MONETARY POLICY
 It can be defined as a set of guidelines and plans of action designed to achieve
stability and reliability of the financial system so that it automatically responds
and adjusts to the changes and dynamics of an economy.
 The primary objective of the monetary policy is to provide financial stability that
promotes growth and development of the economy with minimal inflation.
 Refers to actions that the Bangko Sentral takes in order to change the
equilibrium of money market. This is to alter the money supply, move interest
rate, or both.

QUANTITATIVE AND QUALITATIVE INSTRUMENTS OF MONETARY CONTROL

QUANTITATIVE OR GENERAL METHODS

1. Bank Rate or Discount Rate:

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 Bank rate refers to that rate at which a central bank is ready to lend money to
commercial banks or to discount bills of specified types. Thus by changing the bank
rate, the credit and further money supply can be affected. In other words, rise in bank
rate increases rate of interest and fall in bank rate lowers rate of interest.
2. Open Market Operations
By open market operations, we mean the sale or purchase of securities. As is
known that the credit creating capacity of the commercial banks depend on the cash
reserves of the banks. In this way, the monetary authority (Central Bank) controls the
credit by affecting the base of the credit-creation by the commercial banks. If the credit
is to be decreased in the country, the central bank begins to sell securities in the open
market.
3. Variable Reserve Ratio
The commercial banks have to keep given percentage as cash-reserve with the
central bank. In lieu of that cash ratio, it allows commercial banks to contract or expand
its credit facility. If the central bank wants to contract credit (during inflation period) it
raises the cash reserve ratio.
4. Change of Liquidity
According to this method, every bank is required to keep a certain proportion
of its deposits as cash with it. When the central bank wants to contract credit, it raises
its liquidity ratio and vice versa.

QUALITATIVE OR SELECTIVE METHODS

1. Change in Marginal Requirements
Under this method, the central bank effects a change in the marginal
requirement to control and release funds. When the central bank feels that prices
are rising on account of stock - piling of some commodities by the traders, then the
central bank controls credit by raising the marginal requirements. (Marginal
requirement is the difference between the market value of the assets and its maximum
loan value).

2. Regulation of consumer credit

During inflation, this method is followed to control excess spending of the
consumers. Generally the hire purchase facilities or installment methods are used to
reduce to the minimum to curb the expenditure on consumption. On the contrary,
during depression period, more credit facilities are allowed so that consumer may
spend more and more to pull the economy out of depression.

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 3. Direct Action
This method is adopted when some commercial banks do not co-operate with
the central bank in controlling the credit. Thus, central bank takes direct action against
the defaulter. The central bank may take direct action in a number of ways as under.
It may refuse rediscount facilities to those banks who are not following its directions. It
may follow similar policy with the bank seeking accommodation in excess of its capital
and reserves. It may change rates over and above the bank rate. Any other strict
restrictions on the defaulter institution.

4. Rationing of the credit

Under this method, the central bank fixes a limit for the credit facilities to
commercial banks. Being the lender of the last resort, central bank rations the
available credit among the applicants.
 Generally, rationing of credit is done by the following four ways.
 Central bank can refuse loan to any bank.
 Central bank can reduce the amount of loans given to the banks.
 Central bank can fix quota of the credit.
 Central bank can determine the limit of the credit granted to a particular
industry or trade.

5. Moral Suasion or Advice

In the recent years, the central bank has used moral suasion also as a tool of
credit control. Moral suasion is a general term describing a variety of informal methods
used by the central bank to persuade commercial banks to behave in a particular
manner.

6. Publicity
Publicity is also another qualitative technique. It means to force them to follow
only that credit policy which is in the interest of the economy. The publicity generally
takes the form of periodicals and journals. The banks are not kept informed about the
type of monetary policy, the central bank regards goods for the economy. Therefore,
the main aim of this method is to bring the banking community under the pressure of
public opinion.

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Depository Institutions
Depository institutions, which are usually just called banks, are categorized as
such because their primary source of funding is the deposits of savers. Their savings
accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to
certain limits. Banks are further subcategorized depending on the markets they serve,
their primary sources of funding, type of ownership, how they are regulated, and the
geographic extent of their market.

Deposit – represents the liabilities (debt) of the deposit-accepting institution.

Their income is derived in two sources:
1. Income generated from the loans they make and the securities they purchase.
2. Fee Income

Types of Depository Institutions

1. Savings institutions, sometimes called thrift institutions, are banks that
serve a local community. They take the deposits of local residents and lend
the money back in the form of consumer loans, mortgages, and small business
loans. Savings institutions include savings and loan institutions, savings banks,
and credit unions.
 Savings and Loan Associations It first appeared in the 1800s so that
factory workers could save money to buy a home. They were loosely
regulated until the Great Depression, when Congress passed several
major laws to shore up the banking industry and to restore the public's trust
in them. Before 1980, SLAs were restricted to mortgages and savings and
time deposits, but the Monetary Control Act extended their permitted
activities to commercial loans, non-mortgage consumer lending, and
trust services. Many S&Ls have been owned by depositors, which was their
main source of funding—thus they were called Mutual Savings and Loans
Associations or just Mutual Associations. Mutual S&Ls, like credit unions,
used their earnings to lower future loan rates, raise deposit rates, or to
reinvest while corporate S&Ls either reinvested profits or returned profits to
their owners by paying dividends. Nowadays, most S&Ls are corporations,
giving them access to additional capital funding to compete more
successfully and to facilitate mergers and acquisitions.
 Savings banks (mutual savings banks) It began as mutual companies
that were owned by the depositors and were restricted to mortgages. They

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 were governed by a local board of trustees. When interest rates were
limited by law, mutual savings banks distributed their earnings back to the
depositors.
 Credit unions It is a non-profit depository institutions that are financial
cooperatives owned by people belonging to a particular group, such as the
employees of a particular company, a union, or a religious group, or who
live in a specific area such as a county, and they are governed by a board
of volunteers. Because they are non-profits and owned by their customers,
they charge lower loan rates and pay higher interest rates on savings, and
they offer a wide variety of financial services for their owners.
2. Commercial Banks are institutions which individuals or firms may consider as
source for short-term financing. This is an institution that accepts or creates
demand deposits subject to withdrawal by check. This is a bank that provides
checking account, savings account and money market account and that
accepts time deposits.
There are three different types of commercial banks.
 Private Bank – It is one type of commercial banks where private
individuals and businesses own a majority of the share capital. All
private banks are recorded as companies with limited liability.
 Public Bank – It is that type of bank that is nationalised, and the
government holds a significant stake.
 Foreign Bank – These banks are established in foreign countries and
have branches in other countries.
Here is the list of the Top Philippine commercial banks:
 BDO Unibank, Inc.
 Metropolitan Bank and Trust Company (Metrobank)
 Bank of the Philippine Islands (BPI)
 Land Bank of the Philippines
 Philippine National Bank (PNB)
 Security Bank Corporation (Security Bank)
 China Banking Corporation (Chinabank)
 Development Bank of the Philippines (DBP)
 Union Bank of the Philippines, Inc. (Unionbank)
 Rizal Commercial Banking Corporation (RCBC)
 United Coconut Planters Bank (UCPB)
 East West Banking Corporation (EastWest Bank)

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  Citibank Philippines
 Asia United Bank Corporation (AUB)
 The Hongkong and Shanghai Banking Corporation Limited (HSBC)
 Philippine Trust Company (Philtrust Bank)
 Bank of Commerce (a subsidiary of San Miguel Corporation)
 Maybank Philippines, Inc.
 Robinsons Bank Corporation
 Philippine Bank of Communications (PBCom)
 Mizuho Bank, Ltd. Manila Branch
 MUFG Bank, Ltd.
 BDO Private Bank (subsidiary of Banco de Oro)
 Standard Chartered Bank Philippines
 Deutsche Bank
 Philippine Veterans Bank (Veterans Bank; PVB)
 CTBC Bank (Chinatrust)
 JPMorgan Chase & Co. (JPMorgan Chase)
 Australia and New Zealand Banking Group (ANZ)
 Sumitomo Mitsui Banking Corporation Manila Branch
 ING Group N.V.
 Bank of America, N.A.
 Bank of China – Manila Branch
 Mega International Commercial Bank Co. LTD
 KEB Hana Bank – Manila Branch
 Bangkok Bank Co. Ltd.
 Industrial Bank of Korea Manila Branch
 United Overseas Bank Limited Manila Branch
 Cathay United Bank Co. Ltd. – Manila Branch
 Shinhan Bank – Manila Branch
 Hua Nan Commercial Bank Ltd. Manila
 First Commercial Bank Manila
 Al-Amanah Islamic Investment Bank of the Philippines

3. Bank and Financial Holding Companies

Many of the largest banks are actually bank holding companies, which is a
company that controls 2 or more banks. A holding company is a company whose only

22
purpose is to own a controlling interest in other companies. A bank holding company
can more easily expand its market through acquisitions than a bank can.
Another benefit enjoyed by bank holding companies is the removal of the
geographic restriction imposed by most state laws on banks that required all branches
of a bank to be within a certain geographic location.
The Financial Services Modernization Act of 1999 deregulated the financial
industry even more by creating the legal entity known as the financial holding
company that can control banks, securities firms, and insurance companies.
The primary purpose of restricting banks to banking is to limit their risk
because the government insures their customers' deposits and because solvent
banks are essential to any modern economy as best evidenced by the 2007-2009
credit crises. Consequently, for a bank holding company to qualify as a financial
holding company, its subsidiaries must be well managed and well capitalized. All of
its depository institutions must have satisfactory ratings, which requires banks to lend
back to the community of its depositors.
The largest financial holding company in the world is Mitsubishi UFJ Trust and
Banking Corporation (MUFG Bank) located in Tokyo Japan, and was founded in 1927.
It has current assets of $2,805,880,000,000.
BDO Unibank, also known as BDO and Banco De Oro, is the largest bank in
the Philippines belonging to the SM Group of Companies. It is a universal bank with
subsidiaries operating in leasing and financing, investment banking, private banking,
insurance, and stock brokerage.

Non-depository Institutions
This greater aggregate wealth of the lower-income people is made available
to the economy through financial non-depository institutions, which are financial
intermediaries that cannot accept deposits but do pool the payments in the form of
premiums or contributions of many people and either invest it or provide credit to
others. Hence, non-depository institutions form an important part of the economy.
These non-depository institutions are sometimes referred to as the shadow banking
system, because they resemble banks as financial intermediaries, but they cannot
legally accept deposits. Consequently, their regulation is less stringent, which allows
some non-depository institutions, such as hedge funds, to take greater risks for a
chance to earn higher returns. These institutions receive the public's money because

23
they offer other services than just the payment of interest. They can spread the financial
risk of individuals over a large group, or provide investment services for greater returns
or for a future income.
Non-depository institutions include insurance companies, pension funds,
securities firms, government-sponsored enterprises, and finance companies. There
are also smaller non- depository institutions, such as pawnshops and venture capital
firms, but they constitute a much smaller portion of sources of funds for the economy.

Types of Non-Depository Institutions

1. Insurance Companies
Insurance companies protect their customers from the financial distress that can
be caused by unforeseen events, such as accidents or premature death. They pool
the small premiums of the insured to pay the larger claims to those who have losses.
The premium payments are regular while the losses are irregular, both in timing
and amount. An insurance company can profit because it can accurately estimate
the payment of claims over a large group by using statistics and it can invest its surplus
for greater returns, which helps to lower premiums to be competitive.
Like banks, insurance companies are confronted with the informational
asymmetry problems of adverse selection and moral hazard. An insurance
company solves the problem of adverse selection by screening applicants—verifying
information in the application, checking the applicant's history, and by applying
restrictive covenants in the insurance contract, such as not covering a pre-existing
condition. Adverse selection is also reduced by grouping—placing the insurance
applicant into specific classes where there is a difference in claims history for the
group, then charging the appropriate premium.

There are 2 major types of insurance:

1. Property and casualty insurance – offers financial protection against
damage or loss to property or people caused by accidents, natural disasters, or from
the action of others. The most common type of this insurance is auto insurance, since
it is legally required by every driver in every country.
Property and casualty insurance covers many more types of events, so claims
can vary greatly in amount. Hence, these insurance companies must maintain liquidity

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by investing the premiums in short-term securities, most of which are money market
securities that can be sold quickly at little cost and are very safe.
Although there are several methods to reducing moral hazard, property and
casualty insurers use the principle of indemnity, which is to pay for financial losses
suffered by the insured—but no more. After all, if people could profit from insurance,
that would motivate them to cause losses for profits. For this same reason, insurance
companies will not pay for losses that are covered by other insurance or other forms
of compensation.
2 . Life insurance – while the death of a single individual is an uncertain
event, the number of deaths in a large group is very predictable. Furthermore, the
amount of the claim for any single death is certain since it is specified in the contract.
There isn't much of a moral hazard problem in life insurance because most
people want to live and would not be able to benefit directly from the proceeds unless
it is a whole life policy that also has a savings portion. However, this living benefit is
limited by what the insured has paid in.
The only real moral hazard to life insurance is the possibility that the insurance
applicant is buying insurance to provide for his beneficiaries after he commits suicide.
This moral hazard is reduced by a suicide clause—not paying for suicides within the

1s t 2 years of the policy, or 1 year in some policies. The reasoning behind this is that
most people who commit suicide are mentally ill, which is an affliction that should be
covered, while the waiting period prevents someone who is suicidal from taking out a
policy just before committing suicide.

2. Pension Funds
Pension funds receive contributions from individuals and/or employers during
their employment to provide a retirement income for the individuals. Most pension
funds are provided by employers for employees. The employer may also pay part or
all the contribution, but an employee must work a minimum number of years to be
qualified to receive the benefits of the pension. Self-employed people can also set up
a pension fund for themselves through individual retirement accounts (IRAs) or other
types of programs sanctioned by the government.
While an individual has many options to save for retirement, the main benefit
of government-sanctioned pension plans is tax savings. Pension plans allow either
contributions or withdrawals that are tax-free.

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3. Securities Firms
Securities firms are companies that provide institutional support for the buying
and selling of securities. The major types of securities firms are:
Investment companies pool the investments of many people into a single portfolio that
is managed by professional managers. Investment companies, such as mutual funds,
provide expertise and economies of scale that small individual investors would not be
able to afford otherwise.
a. Brokerages provide an institutional framework that allows retail investors
to invest in stocks, bonds, options, futures, and other financial instruments directly.
Brokers provide trading software that allows traders to select their trades, and
settlement and clearing services to effect the transactions.
b. Investment banks help businesses and other organizations to sell their
own stocks and bonds to the investing public. Investment banks offer advice to the
issuer, register the securities with the Securities and Exchange Commission, and sell
the securities to their customers.
4. Finance Companies
Finance companies provide loans to people or businesses using the issuance
of short-term securities, especially commercial paper, as a source of funds. Consumer
finance companies provide consumer loans and sometimes mortgages. They also
provide the instant credit offered by so many retail stores, where the customer
receives the item but doesn't have to pay for a stipulated amount of time.
a. Business finance companies provide loans to businesses but are
especially prominent in the equipment leasing business, where the finance company
will buy equipment that a particular business wants, and lease it to the business. This
saves the business the upfront purchase cost, and allows it to treat the equipment as
a current deduction for taxes rather than as a capital expense that must be
depreciated over a number of years.
Business finance companies also provide businesses with short-term liquidity
by financing inventory until it is sold and with accounts receivable loans, which are
short- term loans backed by accounts receivable.
b. Sales finance companies specialize in making loans to customers of
a particular retailer or manufacturer.

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Functions of Commercial Banks
- are primarily based on a business model of accepting public deposits and
utilizing that fund for various investment purposes. Such functions can classified into
categories, primary and secondary functions.

Primary Functions
1. Acceptance of Deposits- it is the most important function of commercial
banks.
They accept deposits in several forms according to requirement of different
sections of the society.

Kinds of Deposits
 Current account deposits or Demand deposits - is a basic checking account.
Consumers deposit money and the deposited money can be withdrawn as the
account holder desires on demand. These accounts often allow the account holder to
withdraw funds using bank cards, checks, or over-the-counter withdrawal slips.
 Fixed deposits or time deposits - is an investment vehicle for consumers.
Also known as certificates of deposit (CD), time deposit accounts tend to
offer a higher rate of return than traditional savings accounts, but the money
must stay in the account for a set period of time.
 Savings deposits - savings accounts offer account holders interest on
their deposits. However, in some cases, account holders may incur a
monthly fee if they do not maintain a set balance or a certain number of
deposits. Although savings accounts are not linked to paper checks or
cards like current accounts, their funds are relatively easy for account
holders to access.

2. Advancing of Loans – this is the second primary function of a commercial

bank is to make loans and advances to all types of persons, particularly to
businessmen and entrepreneurs.
Types of Loans
 Cash credit - is a short-term loan extended to a company by a bank. It
enables a company to withdraw money from a bank account without
keeping a credit balance. The account is limited to only borrowing up to

27
 the borrowing limit. Also, interest is charged on the amount borrowed and
not the borrowing limit.
 Demand loans - is a rare form of loan that can be called for complete
repayment. For a lender a demand loan can be quite secure and lucrative.
The longer the borrower takes to pay it back, the more interest is earned.
However the lender doesn't have to wait until a maturity date, and if they fall
on hard times they can call the loan, or if they suspect the borrower will fall
on hard times or is deliberately avoiding paying the loan they can demand
repayment.
 Short-term loans – are usually pledged without any security, offering a
smaller loan amount and repayment tenor. These are also referred to as
personal loans.

3. Creation of Credit – is most significant function of commercial banks. While

sanctioning a loan to a customer, they do not provide cash to the borrower.
Instead, they open a deposit account from which the borrower can withdraw.
4. Clearing of Cheques – it is a process of moving a cheque from the bank in
which it was deposited to the bank on which it was drawn, and the movement of
the money in the opposite direction. This process is called the clearing cycle.

Secondary Functions
Agency Functions – banks act as an agent to their customers in different ways.
1. Collection and payment of various items – banks collect cheques, rent, interest
etc. on behalf of their customer and also make payment of taxes, insurance premium
etc.
2. Purchase and sale of securities – banks normally are more knowledgeable with
regard to stock and share business. As such they buy, sell and keep in safe custody
the securities on behalf of their customers.
3. Letter of references – banks also give information about economic position of
their customers to domestic and foreign traders and likewise provide information about
economic position of domestic and foreign traders to their customers.

General Utility Services

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1. Locker facilities – banks provide locker facilities to their customers. People can
keep their gold or silver jewelry or other important documents in these lockers.
2. Travellers cheque and letters of credit – banks issue travellers cheque and
letters of credit to their customers so that they may be spared from the risk of carrying
cash during their journey.

Assessment
Directions: Write your answer on a separate sheet of paper.

I. Identify the following:

1. It is a kind of deposit account in a bank that pays interest on your
balance.
2. It is a short-term loan extended to a company by a bank.
3. These accounts often allow the account holder to withdraw
funds using bank cards, checks, or over-the-counter withdrawal slips.
4. This is an institution that accepts or creates demand deposits
subject to withdrawal by check.
5. It is a process of moving a cheque from the bank in which it was
deposited to the bank on which it was drawn, and the movement of the money in the
opposite direction.
6. It is a kind of deposit account t h a t tend to offer a higher rate
of return than traditional savings accounts, but the money must stay in the
account for a set period of time.
7. It is a type of loan usually pledged without any security, offering a
smaller loan amount and repayment tenor.
8. It is a type of loan that can be called for complete repayment.
9. A financial institution legally allowed accepting monetary
deposits from consumers.
10. A financial intermediary that cannot accept deposits but do
pool the payments in the form of premiums or contributions of many people and either
invest it or provide credit to others. It is also referred as shadow banking.

II. Essay.(5 points each)

1. What is the significance of banks in the economic life of the country?

29
 2. What are the common and differences between commercial banks,
savings and loans and credit unions?

Suggested Readings:
1. http://www.bsp.gov.ph
2. https://www.bsp.gov.ph/SitePages/MediaAndResearch/Multimediaresources.
aspx

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Unit II: The Philippine Money Market

Introduction
Aside from the need to have an efficient network to carry out monetary
transactions, it is imperative the financial system be comprised with instruments that
meet the muti-faceted and varied needs of the clientele. As time passes by it is but
normal to expected that novel monetary instruments emerged and as well as new ways
of doing things.

Learning Objectives
At the end of the unit, you are expected to:
1. explain the different money market instruments; and
2. determine the Pros and Cons of the different instruments

Lesson 1: Basic Requirements of an Effective Financial System

A pecuniary system requires an efficient framework and facilities to encourage
savings and investment and trading areas to do the investment process. It is
imperative that a financial system can provide effective channels for the interchange
of products and services. There should be a center where prices are monitored or a
unit of account.
A pecuniary system should allow the generation of capital big enough to meet
the needs of the economy. It must provide the channels and methodologies for the
exchange of ownership, such as proof of claim and stock certificates to a business,
and if necessary, for the claimed to be turned into cash. A pecuniary system has the
following features:
Monetary claims. Included in this category is the right to receive money on
specific conditions. They can be claims on debt or claims on capital. A claim on
indebtedness is the privilege to be recompensed for the principal and accrued interest.
A claim on capital is the privilege to receive earnings on investments.
Monetary institutions. These are commercial banks, savings and loan
associations and finance businesses. They act as mediators and facilitators between
owners and users of money. They can grant monetary loans.
Financial trading places. They act as instruments of getting the forces of
demand and supply to interact for monetary claims in the Philippine Stocks Exchange.

31
 Government agency. This is the Bangko Sentral ng Pilipinas and its Monetary
Board.
 These monetary organizations discharge the following functions:
 Allow the transfer of money from depositors to borrowers.
 Examination and analysis of credit.
 As broker by matching supply and demand for money.
The following figure shows the flow of money in the economy. This presents
the money that is there in the economy, from cold cash and deposits to demand deposit
accounts or checking accounts.
Money passes through producers to the consumers. The consumers are
employed by the producers who give them money for their service, which goes back
from the consumers to the producers for the purchase of goods and services provided.
We can even liken the workings of the Financial Markets to the workings of the
Flow of funds in the Economy. The producers are the sellers of the various investment
products and instruments. The public are the consumers of these instruments. As
proof of purchase, the households get stock certificates or Statement of Account
proving ownership. The producers maintain and monitor these products with the
added responsibility to make sure that monetary claim for these instruments are not
embezzled by unscrupulous traders. In the Philippines, the Securities Exchange
Commission and the Bangko Sentral ng Pilipinas serve as watchdogs in the making
sure that funds entrusted to producers or financial markets sellers are managed
properly and not misappropriated.
In a nutshell, the Circular flow is composed of two distinct movements:
clockwise, is the product flow while counter-clockwise is the money-flow.

32
 The circular flow of funds will work smoothly when consumers use and disburse
all their income for the purchase of goods and services. Unless there is a strong
compulsion to the contrary, the urge to spend is natural. There are three fundamental
ways in which the saving of an advanced economy can reach user of funds or
borrowers: the intentional assembly of money-and-capital market borrowers and
lenders. the purchase by the borrower in the organized money and capital markets of
bonds and other public investment mediums, which as a matter course directly bought
by savers.
The use of commercial organizations that pool the savings of persons, that
place portion of the collected money straight into loans to other persons, and assemble
the remainder into blockds of money, which are put in securities sold in institutions for
money and capital markets.

Lesson 2: The Philippine Money Market

The Philippine money market is practically organized with an active commercial
paper and government securities to add the more characteristic interbank market. The
Bangko Sentral ng Pilipinas has a lot of authority over the money market. As
enunciated by its legal purpose, the main objective of monetary policy is the upkeep of
price stability that guarantees and allow a balanced and sensible growth of the
economy. Through the BSP’s monetary products and instruments, inflation is
controlled.
Open market deals appertain to the sale or acquisition of securities by the BSP
to lessen or enhance liquidity in the system. Particularly, it is done through the direct
purchase or sale of government securities by the BSP in the secondary market and/or
repurchase or reverse purchase transactions. Enumerated are the types of money
market products offered:
1. Call money are overnight deposits by one bank with extra cash in another bank
with short-term reserve shortfalls. This the perennially traded product in the
Philippine money market.
2. Fixed term deposit the same with call money, when there is excess cash in a
bank, they can choose the deposit it for a fixed term from one to twelve months
at an arranged interest rate.
3. Repurchase agreements are typically short-term sales of government
securities on condition that it will bought back at an agreed future date.

33
 4. Treasury bills are government indebtedness with term of less than a year.
These are issued weekly through auction sale. Treasury bills are extremely
liquid assets that can be quickly bought and sold without diminution in price.
5. Bank Certificates of Deposits are negotiable instruments issued by banks for
a period of one month to twelve months at an arranged rate of return. These
certificates are a major source of funds for commercial banks.
6. Bankers’ Acceptances are short-term debts guaranteed by large banks. A
commercial Paper is a note of obligation issued by large well-known
corporations with good credit ratings. The money market partakers are the
Bureau of Treasury, Bangko Sentral ng Pilipinas, the government securities
dealers, and banks. Corporate and private persons are parties in the money
market as investors.

The Bureau of Treasury issues Treasury bills. These short-term instruments

enable the government to generate money to meet needed expenditures while
awaiting tax receipts.

The Bangko Sentral ng Pilipinas shares in the money market while conducting
open market operations. If the money supply is to be diminished, the BSP will come
into the money market and sell government sureties, thus increasing the securities
held by private citizens and decreasing money supply as a result. If money supply
needs to be increased, the BSP buys securities. Its prime responsibilities for the
money supply renders the BSP the most powerful player in the money market.

The Government Securities Eligible Bidders create markets in Treasury

instruments by purchasing big blocks of securities in the primary market and
apportioning them to consumers. These may be banks, non-banks, financial
intermediaries, insurance companies, securities dealer or brokers, investment houses,
or finance companies licensed by the proper government agency and also meet
requisite eligibility requirements.

34
Commercial banks main money market participants.
Corporate and institutional investors sometimes have sizable excess funds that
are put in short-term money market products. Non-residents have direct foreign
investments in the money market or deposits in banks.
The process of delivery for interbank call loans are done through the Multi-
transaction Interbank Payment System (MIPS), a system of delivery purported to
supplant the manual instructions through secure, electronically transmitted
instructions. The MIPS was organized by the BSP’s Accounting Department and the
Information Technology Department.
The Burueau of Treasury (BTr) has made-up its own process to clearly register
the ownership of different government securities from the time of origination to
redemption to make sure there is a clear and lucid system in the government securities
market and maintain investor trust and confidence and preserve the integrity and
effectiveness of this market. Earmarking of government securities is done through the
Registry of Scriptless Securities (RoSS), which is managed by BTr. All government
sureties issued by the government in its scriptless policy is recorded in the registry
under the name of the Government Securities Eligible Biddeer (GSEB) through the
bidding award made by the auction committee.

Lesson 3: The Philippine Bond Market

The Philippines debt market is extensively divided into public sector debt
products and private sector debt issues. Public debt instruments are issued by the
National Government. Bangko Sentral, and other government instrumentalities while
private debt instruments are primarily issued by commercial banks and corporations.
The products commonly issued by both sectors are:
1. Treasury Bills (T-Bills). These are focused, without condition and general
payables of the national government with an original term of one year or less.
2. Floating Rates Treasury Notes (FRTNs). These are direct, without condition
and general payables of the national government with a term of three (3) years
mainly aimed at long-term modification of treasury bills that are due. Interest
payment is quarterly based on the weighted average rate of the 91-day T-Bills
as determined by two competitive biddings before the rate-setting date.
3. Fixed-rate Treasury Notes. These are government issues aimed mainly to
develop the capital markets by offering different products and to support the

35
 incumbent short-term issues with longer term maturity. The product have
maturities of 2, 6,7, and 10 years. Similar to the treasury bills, these are offered
to the public through biddings conducted by the BTr. Its coupons rely on the
market and interest is payable twice a year. As of 1996, total live issues totaled
Php125.225 billion. The bond market issuers are Bangko Sentral ng Pilipinas.
National Government and Commercial Banks. To afford the BSP with effective
products for open market operations, the BSP, according to rules promulgated
by the Monetary Board may dictate in relation to its main objective of achieving
price stability, can issue, purchase, and offer for sale freely transferable
evidence of obligations of the BSP.

The National Government issues instruments to defray public expenditures.

Government sureties are straightforward and without conditions burdens of the
Republic of the Philippines that it must honor.

Commercial Bonds are allowed to float bonds inherent to their lending activities.
The main participants as investors in the Philippine bond market are banks, insurance
firms, and partly, corporate and institutional players that have funds which they are
willing to put longer-term securities. Foreigners are likewise allowed to invest their
money in certificates of obligations issued by the Philippine government or its political
subdivisions.

Lesson 4: Mutual Funds

A mutual fund is an investment organization that takes money from people who
commit money in order to earn a financial return and pools it together in one large pot.
It is then managed by a professional manager who invests the money in different types
of assets including stocks, bonds, commodities, and even real estate. An investor buys
shares in the mutual fund. These shares represent an ownership claim in a portion of
the assets owned by the fund. Mutual funds are designed for long-term investors and
are not intended to be bought and sold constantly due to their fee structures.
Mutual funds are often attractive to investors because they are widely
diversified. Diversification helps to minimize risk to an investment. Instead of
researching and making an individual decision as to each type of asset to allocate or
include in a portfolio, mutual funds present a single exhaustive investment medium or

36
instrument. Some mutual funds can have thousands of different sub-classifications.
Mutual funds are also very liquid. It is easy to buy and redeem shares in mutual funds.
There is a wide variety of mutual funds to consider. A few of the major fund
types are:
1. Bond funds. These funds hold fixed-income instruments as assets. These
bonds pay regular interest to their holders. The mutual fund makes distributions
to mutual fund holders of this interest income.
2. Stock funds. These funds make investments in the shares of ownership in
different companies. Stock funds aim to profit primarily the appreciation of the
shares prices over time, and at the same time dividend payments. Stock funds
often have a strategy of investing in companies based on their market
capitalization, the total value of a company’s outstanding shares of stock. For
example, large-cap stocks are defined as those with market capitalizations over
$10 billion. Stock funds may concentrate in large-, mid-or small-cap stocks.
Prices of small-cap funds have a tendency to change quickly and unpredictably
compared to large-cap funds.
3. Balanced funds hold a mixture or combination in its holdings of bonds an
stocks. The ratio between stocks and bonds in these funds differ depending on
the fund’s strategy.
4. Index funds track the performance of an index such as the Philippine Stocks
Exchange or S&P 500. These funds are passively managed since they simply
rely on the performance of the index. They hold similar assets to the index
being tracked. Fees for these types of funds are lower due to infrequent
turnover in assets and passive management.

How Mutual Funds Trade

The manner of trading mutual funds are distinct from those of ETFs and stocks.
Mutual funds require minimum investments of anywhere from Php1,000 to Php5,000.
This is unlike stocks and ETFs where the minimum investment is one share. Mutual
funds move only once a day after the markets close. Stocks and ETFs can be bought
and sold any time during the trading day.
The price for the shares in a mutual fund is determined by the net asset value
(NAV) computed after the market closes. The NAV is calculated by dividing the total
value of all the assets in the portfolio, less any liabilities, by the number of outstanding

37
shares. This varies from stocks and ETFs, wherein prices changes during the trading
day.
An investor is buying or redeeming mutual fund shares in the mutual fund from
the fund itself. As opposed to stocks and ETFs, wherein the counterparty to the buying
or selling of a share is another participant in the market. Mutual funds charge non-
identical fees for buying or redeeming shares.

Mutual Fund Charges and Fees

It is important for investors to comprehend the type of fees and charges
associated with buying and redeeming mutual fund shares. These fees vary widely
and can have a dramatic impact on the performance of an investment in the fund.
Some mutual funds charge load fees when buying or redeeming shares in the
fund. The load is similar to the commission paid when buying or selling a stock. The
load fee pays the intermediary to the sale for the time and expertise in managing the
fund for the investor. Load fees can be anywhere from 4% to 8% of the amount
committed to the fund. A front-end load is charged the instant when an investor first
buys shares in the fund.
A back-end load is also referred to as a deferred sales charge, is taken if the
fund shares are redeemed within a certain time period after initially buying them. The
back-end load is usually higher in the first year after acquiring the shares but then goes
down each year after that. For example, a fund may ask 6% if shares are redeemed in
one year from acquisition , and then it may reduce that fee by 1% each year up to the
sixth year when no fee is charged.
A level-load fee is an annual charge deducted from the assets in a fund to pay
for distribution and marketing costs for the fund. These fees are also known as 12b-1
fees. They are a fixed percentage of the fund’s average net assets and capped at 1%
by law. To note, 12b-1 fees are considered part of the expense ratio for a fund.
The expense ratio includes continuing fees and expenses for the fund. Expense
ratios can vary widely but are generally 0.5 to 1.25%. Passively managed funds, such
as index funds, usually have lower expense ratios than actively managed funds.
Passive funds also have a lower turnover in their holdings. They are not attempting to
outperform or better a benchmark index, but just try to duplicate it, and thus do not
need to pay the fund manager for his skill in choosing investment assets.

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 Load fees and expense ratios can be a consequential pull on investment
performance. Funds that charge loads must outperform their benchmark index or
similar funds to account for the fees. Many studies show that load funds often do not
perform better than their no-load counterparts. Thus, it makes little sense for most
investors to buy shares in a fund with loads. Similarly, funds with higher expense ratios
also tend to perform worse than low expense funds.
Due to their higher expenses tending to pull down returns, actively managed
mutual funds are sometimes looked at unfavorably as a group on the whole. But many
international markets (especially the emerging ones) are just too difficult for direct
investment – they're not highly liquid or investor-friendly – and they have no extensive
index to follow. In times like this, it pays to have a professional manager go through all
the intricacies, and who is worth paying an active fee for.

Risk Tolerance and Investment Goals

The first step in judging the suitability of any investment product is to
assess capacity for risk. This is the quality and propensity to take on risk in exchange
of higher returns. Although mutual funds are often touted as one of the safer
investments on the market, certain types of mutual funds are appropriate for those
whose main goal is to avoid losses at all costs. Aggressive stock funds, as an example,
are not right for investors with very low-risk tolerances. In the same manner, some
high-earning bond funds may also be too dangerous if they invest in low-rated or junk
bonds to generate higher returns.
Your specific investment goals are the next most important concern when
assessing the acceptability of mutual funds, making some mutual funds better than
others.
For a person investing whose main goal is to preserve capital, meaning she is
willing to accept lower returns in exchange for the security of knowing her principal
investment is safe, high-risk funds are not a good fit. This type of investor has a very
low-risk tolerance and should avoid most stock funds and many more aggressive bond
funds. Instead, look to bond funds that invest in only highly rated government or
corporate bonds or money market funds.
If an investor's primary aim is to generate high returns, she is likely inclined to
take on more risk. In this case, high-yield stock and bond funds can be excellent
choices. Though the potential for loss is greater, these funds have professional

39
managers who are more likely than the average retail investor to generate substantial
profits by buying and selling cutting-edge stocks and risky debt securities. Investors
looking to aggressively grow their wealth are not well suited to money market funds
and other highly stable products because the rate of return is often not much greater
than inflation.

Income or Growth?
Mutual funds generate two kinds of income: capital gains and dividends.
Although the net profits generated by a fund must eventually go to shareholders at
least once a year, the frequency with which different funds make income distributions
varies widely.
If you are looking to grow your wealth for the long haul and is not too particular
with making income right away, funds that concentrate on growth stocks and use a
buy-and-hold strategy are best suited because they generally incur lower expenses
and have a lower tax impact than other types of funds.
If you want to use your investment to generate a regular passive income,
dividend-bearing funds are an excellent choice. These funds invest in different
dividend-bearing stocks and interest-bearing bonds that pay dividends at least yearly
but oftentimes quarterly or semi-annually. Though stock-heavy funds are riskier, these
types of balanced funds come in a range of stock-to-bond ratios.

Tax Strategy
When looking at the suitability of mutual funds, it is important to consider taxes.
Contingent on an investor's current financial condition, income from mutual funds can
have a serious impact on an investor's yearly tax liability. The more income she earns
in a given year, the higher her ordinary income and capital gains tax brackets.
Dividend-bearing funds are a poor option for those looking to lessen their tax
liability. Though funds that make use of a long-term investment strategy may pay
qualified dividends, which are taxed at the lower capital gains rate, any dividend
payments increase an investor's income subject to tax for the year. The best way is to
focus on funds that are more partial to long-term capital gains and avoid dividend
stocks or interest-bearing corporate bonds.
Funds that invest in tax-free government or municipal bonds generate interest
that is not subject to income tax. So, these products may be a good choice. However,

40
not all tax-free bonds are completely tax-free, so make sure to verify whether those
earnings are subject to state or local taxes.
Many funds offer products managed with the specific goal of tax-efficiency.
These funds employ a buy-and-hold strategy and shun dividend- or interest-paying
securities. They come in many forms, so it's important to consider risk tolerance and
investment goals when considering a tax-efficient fund.
There are a lot of metrics to study before deciding to invest in a mutual fund. In
the United States, mutual fund rater Morningstar (MORN) offers a great site to analyze
funds and offers details on funds that include details on its asset allocation and mix
between stocks, bonds, cash, and any alternative assets that may be held. It also
popularized the investment style box that breaks a fund down between the market cap
it focuses on (small, mid, and large cap) and investment style (value, growth, or blend,
which is a mix of value and growth). Other key categories cover the following:
 A fund’s expense ratios
 An overview of its investment holdings
 Biographical details of the management team
 How strong its stewardship skills are
 How long it has been around

For a fund to be a buy, it should have a mix of the important characteristics: a

great long-term (not short-term) track record, charge a reasonably low fee compared
to the peer group, invest with a firm and regular approach based off the style box and
possess a management team that has been in place for a long time. Morningstar sums
up all of these metrics in a star rating, which is a good place to start to get a feel for
how strong a mutual fund has been. However, keep in mind that the rating is backward-
focused and not prospective. It is based on past performance.

Investment Strategies
Individual investors can look for mutual funds that follow a specific investment
strategy that the investor prefers, or apply an investment strategy themselves by
purchasing shares in funds that fit the criteria of a chosen strategy.

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 1. Value Investing
Value investing, popularized by the legendary investor Benjamin Graham in the
1930s, is one of the most well-established, widely used and respected stock market
investing strategies. Buying stocks during the Great Depression, Graham was focused
on identifying companies with genuine value and whose stock prices were either
undervalued or at the very least not overinflated and therefore not easily susceptible
to a sudden fall.
The classic value investing metric used to identify underrated stocks is
the price-to-book (P/B) ratio. Value investors prefer to see P/B ratios at least below 3,
and ideally below 1. However, since the average P/B ratio can vary to a large degree
among sectors and industries, analysts commonly evaluate a company's P/B value in
relation to that of similar companies engaged in the same business or found in the
same category.
While mutual funds themselves do not technically have P/B ratios, the average
weighted P/B ratio for the stocks that a mutual fund holds in its portfolio can be found
at various mutual fund information sites, such as Morningstar.com. There are
hundreds, if not thousands, of mutual funds that identify themselves as value funds, or
that state in their descriptions that value investing principles guide the fund manager's
stock selections.
Value investing transcends merely accounting for a company's P/B value. A
company's value may also exist in the form of having strong cash flows and relatively
little debt. Another source of value is in the kind of products and services that a
company offers, and how they are projected to operate in the marketplace.
Brand name recognition, while not specifically measurable in amount,
represents a potential value for a company, and as basis or reference point for
assessing that the market price of a company's stock is currently undervalued as
compared to the true value of the company and its operations. In essence, any
advantage a company has over its competitors or within the economy as a whole
provides a source of value. Value investors are likely to examine the relative values of
the individual stocks that make up a mutual fund's portfolio.

2. Contrarian Investing
Contrarian investors go against the popular market sentiment or trend. A
classic example of contrarian investing is selling short, or at least avoiding buying, the

42
stocks of an industry when investment analysts across the board are somehow all
projecting above-average gains for companies operating in the specified industry. In
short, contrarians often buy what the majority of investors are selling and sell what the
majority of investors are buying. Or, they go against the grain of majority of investors.
Since contrarian investors typically buy stocks that are out of favor or whose
prices have declined, contrarian investing can be seen as similar to value investing.
However, contrarian trading strategies tend to be driven more by market sentiment
factors than they are by value investing strategies and to rely less on specific
fundamental analysis metrics such as the P/B ratio.
Contrarian investing is often misunderstood as consisting of simply selling
stocks or funds that are going up and buying stocks or funds that are going down, but
that is a misleading oversimplification. Contrarians are often more likely to go against
prevailing opinions than to go against prevailing price trends. A contrarian move is to
buy into a stock or fund whose price is rising despite the continuous and widespread
market opinion that the price should be falling.
There are plenty of mutual funds that can be identified as contrarian funds.
Investors can seek out contrarian-style funds to invest in, or they can employ a
contrarian mutual fund trading strategy by selecting mutual funds to invest in using
contrarian investment principles. Contrarian mutual fund investors seek out mutual
funds to invest in that hold the stocks of companies in sectors or industries that are
currently out of favor with market analysts, or they look for funds invested in sectors or
industries that have underperformed compared to the overall market.
A contrarian's attitude toward a sector that has been underperforming for
several years may well be that the protracted period of time over which the sector's
stocks have been performing poorly (in relation to the overall market average) only
makes it more probable that the sector will soon begin to experience a reversal of
fortune to the upside.

3. Momentum Investing
Momentum investing aims to profit from following strong existing trends.
Momentum investing is closely related to a growth investing approach. Metrics
considered in evaluating the strength of a mutual fund's price momentum include the
weighted average price-earnings to growth (PEG) ratio of the fund's portfolio holdings,
or the percentage year-over-year increase in the fund's net asset value (NAV).

43
 Appropriate mutual funds for investors seeking to employ a momentum
investing strategy can be identified by fund descriptions where the fund manager
clearly states that momentum is a primary factor in his selection of stocks for the fund's
portfolio. Investors wishing to follow market momentum through mutual fund
investments can analyze the momentum performance of various funds and make fund
selections accordingly. A momentum trader may look for funds with accelerating profits
over a span of time; for example, funds with NAVs that rose by 3% three years ago,
by 5% the following year and by 7% in the most recent year.
Momentum investors may also seek to identify specific sectors or industries
that are demonstrating clear evidence of strong momentum. After identifying the
strongest industries, they invest in funds that offer the most advantageous exposure
to companies engaged in those industries.

The Bottom Line

Benjamin Graham once wrote that making money on investing should depend
“on the amount of intelligent effort the investor is willing and able to bring to bear on
his task” of security analysis. When it comes to buying a mutual fund, investors must
do their homework. In some respects, this is easier than focusing on buying individual
securities, but it does add some important other areas to research before buying.
Overall, there are many reasons why investing in mutual funds makes sense and a
little bit of due diligence can make all the difference – and provide a measure of
comfort.

Lesson 5: Stock Market

Stocks are proof of proprietorship and dominion over an incorporated company
and an interest in the said company’s properties and income. It is the legitimate capital
of the business firm split into shares.
Companies get extensive and external monetary capital for its operations either
by securing equity money on its own or by appropriating from others by way of loans.
When you borrow, you avail of a credit accommodation.
Equity capital may be secured by getting new partners, co-owners, willing to
put money into the commercial entity. Another way of raising capital is also by utilizing
public markets by issuing shares. This way, instead of borrowing from lenders, you
raise your capital across bourses in exchange for making the buyers of shares part-

44
owners of your oexample, you can purchase shares from San Miguel Corporation. In
turn, San Miguel Corporation will issue you a stock certificate to proving that you have
a rightful claim to San Miguel’s properties and earnings. You become therefore a
stockholder of San Miguel Corporation.

Some Terms to Remember

Stock – proof of ownership in a company
Stockbroker – a person/entity who handles stocks and shares
Stock certificate – a document representing an ownership claim in a corporation
Stock dividend – proportionate division of additional shares issued among
shareholders of a company.
Shareholder – a person or business who own shares in a corporation
Stockholder’s equity – ownership claim and interest of stockholders in a corporation.
Stock Market – a bourse or stock exchange: the place for buying and selling stocks
and shares.

Why do Individuals/Companies Buy Stocks

Make no mistake, individuals and companies buy stocks for gain or profit. As
is typical for human beings, individuals seeks to add value to his money. He can earn
interest income by placing his money in the bank. Or he can look around for companies
offering stocks to the public. If the company is yielding profits, he can enjoy dividen
ds.
Investors can make a lot of money if they choose to buy the right stocks and
after a time selling them at a higher price. At this point, the adage that says “buy low
and sell high” will be a reality. Of course it is possible that the price of stocks can go
down. The onset of the pandemic in 2020 saw the prices and stocks declined sharply
to as low as 50%. But we must understand that the stock market as a concern
historically has been appreciating. Just like in the business cycle, it has its ebbs and
flows, but always, it will rebound and get higher. That is why as strongly touted by
value investors, if you are invested for the long haul, in the end you will stand to gain.
Similar to the bond market, earning in the stock market is attained in two ways:
(1)Capital gain – through the appreciation of the value of the stocks as depicted in its
price; and (2)Dividends – distribution of income of the corporation among its
shareholders.

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Common Stock
Common stock symbolizes and ownership claim in a corporation. Common
stockholders have voting and dividend rights.
The common shareholders have a share in all business gains net of payment
to holders of other types of debts equity guarantees have received their coupon dues
or returns. The dividend is generally a cash payment that permits shareholders to
receive some gain or return for their investment.
In case of corporate bankruptcy, common shareholders receive their payment
after bondholders and preferred shareholders. However, there is a greater opportunity
for capital appreciation if it is common stock that you own.

Preferred Stock
Preferred stock is a type of capital stock that has preferential lien to the firm’s
gains and properties over common stock.
Elements of Preferred Stock
 Does not symbolize a claim of ownership.
 Owner do not have voting rights not unless dividend payments are missed.
 Par value is computed through a fixed annual dividend.
Dividends:
- Annual dividends are reflected as pro amount or a percentage per value
- Given only if declared by the firm’s Board.
- Are paid out after tax earnings and each flow
- Are subject to tax once received by shareholders.

Assessments
Directions: Write your answer on a separate sheet of paper.

I. Identify the following:

_________________1. Needed to provide effective channels for the trade of goods
and services.
_________________2. The right to received money based on specific conditions.

46
_________________3. The movement of goods and services and money in the
economy.
_________________4. The government entity that has authority over the financial
market.
_________________5. Deposit overnight by banks with excess cash to banks that
lack reserves.
_________________6. Short-term government securities that will be bought back at a
later date.
_________________7. Debt obligations issued by the government and large
corporations.
_________________8. Act of minimizing investment risk by putting money in different
kinds of investments.
_________________9. Money pooled from the public and managed by a professional
for investment in specific instruments.
_________________10. Ownership claim to a public company traded in bourses.

II. Essay (5 points each)

1. Differentiate between front-end load and back-end load in mutual funds. Which
is better for a mutual fund that appreciates in value over time? Explain.

2. If given the choice, which investment strategy will you employ? Explain your
position.

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Unit III – Non-Bank Financial Institutions
Introduction
The Financial System of the Philippines is the catalyst in the country’s growth
and development. It is the custodian of the country’s liquid reserves and relies on the
trust and confidence of the public.
Financial institutions, particularly banks, serves two major roles:
 As participants, in the money creation process; and
 As intermediaries in the Savings-Investment process.

Learning Objectives:
At the end of the unit you are expected to:
1. break down the Philippine Financial System and its functionalities;
2. determine the functions of each part of the financial system;vand
3. explain the role of each functionality in the economy.

Lesson 1. The Philippine Financial System

Lesson Proper
Banks accept deposits from the public and provide these depositors with
modest earnings and access to their funds. Through their lending operations, they are
able to create money and provide loans to investors and entrepreneurs who in turn use
this fund to produce goods and services.

History
The Philippines Banking System traces its origin to the 16 th century with the
organization of the obras pias which are religious foundations that amassed large
funds from the legacies of wealthy Catholics who bequeathed their estates to the
Catholic church before embarking on dangerous expeditions.
The first bank, Español-Filipino de Isabel II (now the Bank of the Philippine
Islands), was established in 1851, and since then the banking mechanism has evolved
into a complex system to parallel the growth and development of the country’s
development.

48
 Non-bank financial institutions, as they are properly known today are
comparatively new. These are the other parts of financial institutions which together
with banks redistribute the country’s financial resources.
These institutions operate within the supervision of the Bangko Sentral ng
Pilipinas (BSP) and other regulatory and supervisory authorities.

The Financial System

The components of the financial system are:
Banks (Banking sector)
Non-Bank Financial Institutions (Non-Bank Sector)

Figure 1. Philippine Banking System

49
 The Bangko Sentral ng Pilipinas is at the top and all the major institutions are
under its regulations. Today, there are distinction established between banking
institutions, which include commercial banks, non-bank financial institutions and non-
bank thrift institutions. The commercial banks (with resources of Php4,646.20 billion)
account for 81% of total resources of the financial system in 2005. Commercial banks
account for Php 3.926 billion or 72% of the assets of the banking sector.
Non-monetary financial institutions such as insurance companies and
investment banks account for a large component of the system (19% in 2005). Of
these 18.6% are insurance companies.
*with Quasi-Banking Functions

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Non-Bank Financial Institutions
The Philippine banking system has grown in diversity with banking system
being specialized.

Government Non-Bank Financial Institutions

As the banking system was evolving, there was a parallel development of the
other financial institutions. Insurance for workers under the Government Service
Insurance System was in operation by 1936. Compulsory social security insurance in
the private sector was founded in 1957 with the creation of the Social Security System.
These institutions were created basically to protect the welfare of employees. As a
result, they set up large funds that were generated from the insurance premiums of
members and their counterpart institutions. A logical result was the corresponding
effort to administer the welfare programs and to protect the insurance funds that are
generated. The GSIS and SSS generate forced savings, which are intended to fund
the retirement benefits of its members. Funds that are collected from members which
are the contributions of members and employers are plowed into other parts of the
financial system.
Both systems provide benefits to for their members. They invest the trust funds
generated from the social security contributions from their members. The two systems
utilize different methods for investing their funds. GSIS is more heavily engaged in
direct purchase of bonds of government institutions, phasing out its housing loans to
expand its business and direct investments. SSS on the other hand has invested 60%
of its portfolio in interest earning notes receivables (mostly issued by PNB, DBP, and
the Treasury), the balance devoted to other loans for its members including housing
loans.
With the advent of other social welfare programs, new social welfare programs,
new social insurance institutions were created. The Workmen’s Compensation
Programs generate and administer a trust fund to insure workers against accidents.
Medicare also generates funds to pay for the medical care programs of its members.
Among the latest of these financial institutions is the PAG-IBIG fund. It is like the other
social insurance schemes, is based on a payroll deduction for a specific purpose,
which in this case is to provide housing loans to its members. The government also
recently created the National Home Mortgage Financing Corporation, which is

51
designed as a national mortgage bank that could refinance the mortgage papers of
other financial institutions.
These large funds provide primary savings that are plowable into other parts of
the financial system. The private insurance companies also generate savings that can
be mobilized into other forms of investment.

The Non-Bank Financial Institution Sector

These are also subject to the supervision of the BSP. They are subdivided into
two groups: (1) those engaged in the lending of funds obtained from the public by
issuance of their own debt instruments (quasi-banking), and (2) those engaged in the
lending of funds from sources other than the public. However, under the New Central
Bank Act (R.A No 7653), the BSP regularatory powers over non-bank financial
institutions without quasi-banking function are to be phased-out for a period of 5 years
from 1993.

Component Institutions
Investment House
Investment houses are stock corporations that engage 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
These are corporations or general partnerships extending credit facilities to
consumers and to industrial, commercial or agricultural enterprises and leasing
movable properties.

Investment Companies
These are issuers of securities primarily engaged in the business of investing
or trading in securities. They are of two types: (1) the open-ended company, also
known as the mutual fund, of which it offers for sale or has redeemable securities of
which it is the issuer; and (2) the close company, which is an investment company
whose shares issued are not redeemable.

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Securities Dealers and Brokers
A securities dealer buys and sells shares of stock of another, or acquire
securities for profit. A securities broker facilitates transactions between a buyer and
seller of securities for a commission.

Venture Capital Corporations

These develop, promote and assist small and medium scale enterprises
through debt to equity financing.
Pawnshops
These are businesses engaged in lending money on personal property
delivered as security or pledge. These may be organized as sole proprietorship of
Filipinos, or partnership/corporation with 70% of the equity owned by Filipinos.

Lending Investors
These are those who make a practice of lending money for themselves or
others. They extend all types of loans, generally short term, often without collateral,
using their own capital.

Government Non-Bank Institutions

These are investment or financing companies created under special charters.
They are the National Development Corporation, Philippine Veterans Investment
Development, Philippine Export and Foreign Loan Guarantee Corporation, and Small
Business Guarantee and Finance Corporation.

Mutual Building and Loan Associations

These are corporations whose capital stock must be subscribed by the
stockholders in regular equal installments with the purpose of accumulating the
stockholders’ savings and profits upon surrender of their shares in order to encourage
industry, savings and home building among its stockholders.

Stock Savings and Loan Associations (SSLAs)

These are associations operating under the Savings and Loan Association Act
and are licensed and supervised by the BSP. Their membership is limited to a well-

53
defined group of persons. SSLAs are not allowed to do business with the general
public but accept deposits from and grant loans to their member depositors only.
The investment houses are also called “quasi-banks” or investment banks
because they behave like deposit-taking companies for their own or borrower’s
account, through the issuance, endorsement, or acceptance of debt instruments.

Assessment
Directions: Write your answer on a separate sheet of paper.

I. Identify the following:

_________________1. Is the overseer and conducts periodic and special examination
of banks.
_________________2. Serves as the catalyst in the country’s growth and
development.
_________________3. Largest commercial banks.
_________________4. Represents the bulk of the banking system.
_________________5. Buys and sells shares of stock of another company.
_________________6. They are created under special laws.
_________________7. The practice lending money for themselves or others.
_________________8. Businesses engaged in lending using personal property as
pledge or security.
_________________9. Corporations that extend loan facilities to consumers.
_________________10. Origin of the banking system in the Philippines.

II. Essay (5 points each)

1. Differentiate how the SSS and GSIS invest the funds of their members?
Explain your answer..

2. Explain the concept of financial intermediation? What is the important role for
it in the financial system?

3. What are the basic sources of banks earnings?

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References:

Book References:
1. Alminar Mutya, R. (2017). Introduction to Philippine Money, Credit and
Banking. Anvil Publishing, Inc. Mandaluyong City, Philippines
2. Brandl, M. (2017). Money, Banking, Financial Markets and Institutions. Cengage
Learning, Boston, USA.
3. Larry P. Ignacio (2007). Notes & Cases on Banking and Allied Laws

Internet References

1. https://www.pdfdrive.com/strategies-of-banks-and-other-financial-institutions-
theories-and- cases-d187159582.html
2. https://www.pdfdrive.com/financial-markets-banking-and-monetary-policy-
d188112849.html

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