Module 4

NON-BANK FINANCIAL
INSTITUTION

PFBFI
BANKING AND FINANCIAL
INSTITUTION

LEAH S. ORNOPIA, LPT

Instructor

No part of this module may be reproduced

in any form without prior permission in
writing from the Instructor.

August 23, 2023

Date Initiated
September 11, 2023
Date of Completion
 NON-BANK FINANCIAL INSTITUTION
MODULE 4

TABLE OF CONTENTS

MODULE OUTLINE

• Non-Bank Financial Institutions

ASSIGNMENT:

QUIZ:

RECITATION:

PROJECT:

FINAL EXAM:

LEARNING RESOURCES
Book/E-book:

NON-BANK FINANCIAL INSTITUTION

A. Non-Stock Savings and Loan Associations (NSSLA). An NSSLA shall include any
nonstock, non-profit corporation engaged in the business of accumulating the savings of
its members and using such accumulations for loans to members to service the needs of
households by providing long-term financing for home building and development and for
personal finance.

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 An NSSLA may also engage in a death benefit program meant exclusively for the benefit
of its members. An NSSLA shall accept deposits from and grant loans to its members only
and shall not transact business with the general public.

NSSLAs are engaged exclusively in the business of collecting savings from their members
and financing their personal loans. Profits are generated primarily from lending and
investing activities, which are given back to members through net income distribution.

Example:

https://www.psslai.com/company-information/

B. Insurance Insurance is a contract, represented by a policy, in which a policyholder

receives financial protection or reimbursement against losses from an insurance company.
The company pools clients’ risks to make payments more affordable for the insured. Most
people have some insurance: for their car, their house, their healthcare, or their life..

There are many types of insurance policies. Life, health, homeowners, and auto are among
the most common forms of insurance.

The core components that make up most insurance policies are the premium, deductible,
and policy limits.

How Insurance Works

https://www.youtube.com/watch?v=3ctoSEQsY54

How Insurance Works

Many insurance policy types are available, and virtually any individual or business can
find an insurance company willing to insure them—for a price. Common personal
insurance policy types are auto, health, homeowners, and life insurance. Most individuals
in the United States have at least one of these types of insurance, and car insurance is
required by state law.

Businesses obtain insurance policies for field-specific risks, For example, a fast-food
restaurant's policy may cover an employee's injuries from cooking with a deep fryer.
Medical malpractice insurance covers injury- or death-related liability claims resulting
from the health care provider's negligence or malpractice. A company may use an insurance
broker of record to help them manage the policies of its employees. Businesses may be
required by state law to buy specific insurance coverages

There are also insurance policies available for very specific needs. Such coverage includes
business closures due to civil authority, kidnap, ransom, and extortion (K&R) insurance,
identity theft insurance, and wedding liability and cancellation insurance.

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 Insurance Policy Components

Understanding how insurance works can help you choose a policy. For instance,
comprehensive coverage may or may not be the right type of auto insurance for you. Three
components of any insurance type are the premium, policy limit, and deductible.

Premium

A policy’s premium is its price, typically a monthly cost. Often, an insurer takes
multiple factors into account to set a premium. Here are a few examples:

1. Auto insurance premiums: Your history of property and auto claims, age and
location, creditworthiness, and many other factors that may vary by state.
2. Home insurance premiums: The value of your home, personal belongings, location,
claims history, and coverage amounts.
3. Health insurance premiums: Age, sex, location, health status, and coverage levels.
4. Life insurance premiums: Age, sex, tobacco use, health, and amount of coverage.

Types of Insurance

There are many different types of insurance. Let’s look at the most important.

1. Health Insurance

Health insurance helps covers routine and emergency medical care costs, often with the option to
add vision and dental services separately. In addition to an annual deductible, you may also pay
copays and coinsurance, which are your fixed payments or percentage of a covered medical
benefit after meeting the deductible. However, many preventive services may be covered for free
before these are met.

Health insurance may be purchased from an insurance company, an insurance agent, the federal
Health Insurance Marketplace, provided by an employer, or federal Medicare and Medicaid
coverage.

If you have chronic health issues or need regular medical attention, look for a health insurance
policy with a lower deductible. Though the annual premium is higher than a comparable policy
with a higher deductible, less-expensive medical care year-round may be worth the tradeoff.

2. Home Insurance

Homeowners insurance (also known as home insurance) protects your home, other property
structures, and personal possessions against natural disasters, unexpected damage, theft, and
vandalism. Homeowner insurance won't cover floods or earthquakes, which you'll have to protect
against separately. Policy providers usually offer riders to increase coverage for specific

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properties or events and provisions that can help reduce deductible amounts. These adders will
come at an additional premium amount.

3. Renter's insurance is another type of homeowners insurance.

Your lender or landlord will likely require you to have homeowners insurance coverage. Where
homes are concerned, you don't have coverage or stop paying your insurance bill your mortgage
lender is allowed to buy homeowners insurance for you and charge you for it.

4. Auto Insurance

Auto insurance can help pay claims if you injure or damage someone else's property in a car
accident, help pay for accident-related repairs on your vehicle, or repair or replace your vehicle
if stolen, vandalized, or damaged by a natural disaster.

Instead of paying out of pocket for auto accidents and damage, people pay annual premiums to
an auto insurance company. The company then pays all or most of the covered costs associated
with an auto accident or other vehicle damage.

If you have a leased vehicle or borrowed money to buy a car, your lender or leasing dealership
will likely require you to carry auto insurance. As with homeowners insurance, the lender may
purchase insurance for you if necessary.

5. Life Insurance

A life insurance policy guarantees that the insurer pays a sum of money to your beneficiaries
(such as a spouse or children) if you die. In exchange, you pay premiums during your lifetime.

There are two main types of life insurance. Term life insurance covers you for a specific period,
such as 10 to 20 years. If you die during that period, your beneficiaries receive a payment.
Permanent life insurance covers your whole life as long as you continue paying the premiums.

6. Travel Insurance

Travel insurance covers the costs and losses associated with traveling, including trip cancellations
or delays, coverage for emergency health care, injuries and evacuations, damaged baggage, rental
cars, and rental homes.

However, even some of the best travel insurance companies do not cover cancellations or delays
due to weather, terrorism, or a pandemic. They also don't often cover injuries from extreme sports
or high-adventure activitie

C. Currency Exchange

A currency exchange is a licensed business that allows customers to exchange one currency
for another. Currency exchange of physical money (coins and paper bills) is usually done
over the counter at a teller station, which can be found in various places such as airports,

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 banks, hotels, and resorts. Currency exchanges make money by charging a nominal fee and
through the bid-ask spread in a currency.

Also known as a "bureau de change" or "casa de cambio," a currency exchange should not
be confused with the foreign exchange (forex) market where traders and financial
institutions transact in currencies.

Currency exchanges are businesses that allow customers to swap one currency for another.

Currency exchanges can be found in physical locations, such as in banks or airports, but
are increasingly common online.

Currency exchange fees vary so much that credit card fees may be less than the fees paid
through adjusted exchange rates.

How a Currency Exchange Works

https://www.youtube.com/watch?v=-7ZSav8xvMU

Currency exchange businesses—physical, online, and peer-to-peer—allow you to

exchange one country's currency for another by executing buy and sell transactions. For
example, if you have U.S. dollars and you want to exchange them for Australian dollars,
you would bring your U.S. dollars (or bank card) to the currency exchange store and buy
Australian dollars with them. The amount you would be able to purchase would be
dependent on the international spot rate, which is basically a daily changing value set by a
network of banks that trade currencies.

The currency exchange store will modify the rate by a certain percentage to ensure that it
makes a profit on the transaction. For example, suppose the spot rate for exchanging U.S.
dollars into Australian dollars is listed as 1.2500 for the day. This means that for each U.S.
dollar spent, you can buy 1.25 Australian dollars if traded at the spot rate. But the currency
exchange store may modify this rate to 1.20, meaning you can buy 1.20 Australian dollars
for 1 U.S. dollar. With this hypothetical rate change, their fee would effectively be 5 cents
on the dollar.

Because the transaction is not conducted at the spot rate and depends on the profit that the
exchange wants to make, consumers may find that it is less expensive to incur ATM or
credit card fees at the foreign destination, rather than use exchange services ahead of time.
Travelers are advised to estimate how much money they will spend on a trip and compare
the amounts saved through typical transactions.

History of Forex

https://www.youtube.com/watch?v=IZDiRHYB5Fs

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 Best Money Changer in the Philippines: Where to Exchange Currency

https://www.moneymax.ph/personal-finance/articles/best-money-changer-philippines

D. Microfinance

Also called microcredit, microfinance refers to small loans an entity (public or private
organization) grants to poor and low-income individuals or households. The goal is to
provide financial assistance for microenterprises and small business purposes. Through
this, they may be able to raise the household’s income levels and living standards.

Microfinance provides various financial services, though loans are the most common.
Others are savings, deposits, transfers, and insurance. With microfinancing, Filipinos need
not rely on meager self-funding or informal funding sources such as 5-6. Unfortunately,
Filipinos are more familiar with this unorthodox lending than microfinance.

How does microfinance work?

Traditional financial institutions such as banks and commercial service providers do not
necessarily extend loans to poor and low-income households because they are considered
high-risk borrowers. This is because they do not have a credit history to back their loans,
and they cannot always offer collateral. Moreover, the costs involved in smaller
transactions mean lower perceived profitability.

Microfinance programs in the Philippines provide them access to financial opportunities

that are not otherwise available to them. Speaking of which, there are two types of
microfinance services:

Individual lending – This is a loan provision for one client, and there is no need for a
guarantor or collateral.

Group lending – Also called solidarity lending, this loan provision is intended for several
individuals. Collateral or guarantor is required through a group repayment pledge. A joint
liability scheme wherein paid members must cover unpaid members is also implemented.

Speaking of providers, there are at least three microfinance providers in the Philippines,
namely:

1. Banks (mostly thrift and rural banks)

Banks can offer various microfinance products for local enterprises, especially agro-
entrepreneurs. The services require no collateral and usually simpler requirements.

2. Credit cooperatives

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 Cooperatives are quasi-banks, and one of their main products is microfinance. While these
entities are community-based, they also extend financial services to their members as part
of their capital contributions. A portion of the loanable amount is put into the members’
savings accounts

3. Microfinance NGOs

Non-government organizations whose principal mandate is to empower the community

where it operates through social development. One key aspect is financial inclusion through
microfinance, supporting local enterprises through individual, group lending, or a
combination of both.

How can microfinance programs in the Philippines help Filipinos?

The Filipinos are known for their resourcefulness, wherein they would do anything to
alleviate the hardships they experience. Microfinance programs provide them an impetus
to raise their living standards with the help of the government or NGO. Here are other ways
by which microfinance programs help Filipinos.

1. Microfinance ensures funds for low-income borrowers, especially Filipinas.

Most micro, small and medium enterprises (MSMEs) in the Philippines are women-
owned and run. Therefore, providing them access to funds for their entrepreneurial
endeavors improves their livelihoods and income sources. In addition, long-term
financial support also ensures the development and sustainability of their livelihood.
This is especially true for women living in rural areas who are slowly gaining
financial independence. What’s more, microfinance programs in the Philippines do
not act as dole-outs. Instead, women are educated under these programs so they can
be more competitive in making financial decisions. Programs usually offer financial
literacy, including financial planning skills enhancement.

2. Microfinance meets the risk protection needs of Filipinos. - Microfinance

services are offered at lower-than-bank interest rates since the basic target is
community development. This figures in the loanable amount — the maximum
guaranteed sum must not exceed 1,000 times an individual’s daily minimum daily
wage rate. Furthermore, the amount of daily repayments, contributions, fees, and
charges must not exceed 7.5% of the daily minimum daily wage rate.These programs
do not intend to take advantage of people’s financial illiteracy by charging them with
loanable amounts with the highest interest rates. Instead, it is quite the opposite—
providing them with financial assistance so they can help themselves alleviate
poverty in meaningful ways. For one, poor people are vulnerable to income
fluctuations and inflation rates. There should be a way to minimize their exposure to
risks, and this is where the role of microfinance programs has been a great help.

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 3. Microfinance helps rebuild and revive livelihoods.- Development is hampered
when communities are disrupted by economic or health (such as the coronavirus
pandemic of 2020) disparities or conflicts. Microfinance programs are instrumental
in reviving livelihoods and rebuilding the communities or areas they serve. This is
specifically helpful among micro entrepreneurs in the Visayas and Mindanao
regions. Building or improving these communities’ economic base gives the locals
the drive to participate more economically. Additionally, the more entrepreneurs are
able to recover and maintain their business operations, the better the employment
prospects and other income-generating activities in the areas.

4. Microfinance diversifies economies.-With microfinancing, small businesses are

nurtured. This supports efforts to diversify business activities and the overall
Philippine economy beyond capitalistic and industrialized undertakings. As such,
capacity-building provides Filipinos with an opportunity to contribute to the
strengthening of the economy. Microfinance programs serve as an intermediary
through which people can expand opportunities and mitigate poverty. Microfinance
is not just an alternative but a chance to improve the quality of life of the Filipino
people. With it, they may enhance their earning capacity and build assets that will
take them out of poverty. Contrary to common belief, Filipinos can get out of poverty
given suitable financial instruments in a dignified manner. Microfinance programs
in the Philippines are the financial instrument that addresses this purpose. These
programs can effectively strengthen the Filipino people’s social and human capital.
Moreover, such programs effectively financially include the citizens and provide
them with various ways to mobilize funds and earn for themselves.

E. Pawnshop

• The two primary ways pawnshops make money is by making personal loans and by
reselling retail items.
• A pawnshop owner makes a loan to a customer who turns over the custody of an item that
acts as collateral for the loan.
• Because the risk of loan default is high, the pawnshop owner will charge the customer a
higher interest rate for the loan than a traditional bank loan.
• If the customer fails to repay the loan plus the interest (or at the very least, the interest
charge), the customer forfeits the property put up as collateral to the pawnshop.
• Pawnshops can also make money from retail sales, either selling merchandise purchased
directly from customers or items pledged as loan collateral from customers who
subsequently defaulted on their loans.

Providing Personal Loans

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The first revenue source for a pawnshop is income derived from making loans and earning interest
on the loan balances. A pawnshop makes a loan to an individual who turns over custody of an
item, such as a television or a computer, that serves as collateral for the loan. The amount a pawn
shop is willing to lend is based primarily on the value of the item, but it can also be substantially
affected by the pawnshop's current inventory at the time of the loan.

For example, if a person is looking to borrow money using a television as collateral and the
pawnshop's inventory is already overflowing with similar televisions, it will generally offer to
lend considerably less money than if it were low on inventory for televisions.

Terms for a Pawnshop Loan

Pawnshops make loans at substantially higher interest rates than banks typically charge for
personal loans. The risk of loan default is much higher, and many individuals seeking loans from
a pawnshop cannot qualify for traditional bank loans. Interest rates charged by pawnshops
generally vary between 5% and 25%. State law governs the amount of interest that a pawnshop
is allowed to charge, and regulations vary widely from state to state.

Loans are generally made on a monthly or 30-day basis. By the end of the month, to avoid
forfeiting the property put up as collateral, the individual must either pay back the loan in full
plus the interest charge or simply pay the monthly interest charge, which allows the individual to
extend the loan for another month. Pawnshops are generally willing to extend loans indefinitely
as long as the interest is being paid, as they may eventually collect more in interest charges than
the amount of the loan itself, while still holding the loan collateral against default.

As far as how much a person can borrow against an item, pawnshops typically look to lend no
more than 25% to 50% of the projected resale value of the item pledged as collateral.

The pawnshop owner also has to factor in potential costs of storage, cleaning, repair, and
advertising, as well as covering general overhead expenses.

Should you find yourself in need of a small personal loan and are unable to provide any collateral,
or if you are hesitant to work with a pawnshop, there are several unsecured options that may fit
the bill.

Reselling

The second primary source of income for a pawnshop is retail sales. Merchandise includes items
that the pawnshop has purchased outright from individuals and items that were pledged as
collateral by loan customers who then subsequently defaulted on their loans, thereby forfeiting
the pledged collateral property to the pawnshop.

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Pawnshops offer a bit more money to outright purchase items than they offer to lend against the
items—perhaps 10% to 15% more—because they know that they will have the items available
for immediate resale and can more accurately project their likely profit margins on reselling the
items. Items that the shop eventually acquires through loan defaults may offer them higher or
lower profits in the end, depending on the items and the length of time the loans were carried
prior to default.

If a loan was maintained for a lengthy period of time, the pawnshop may have already made a
profit just from collecting the interest payments made prior to default. However, the length of
time may also mean that the item has deteriorated in value to the point where it has little or no
resale value.

Auxiliary Services

Pawnshops commonly supplement their income by offering auxiliary services for which the shops
charge fees. Typical extra services offered by pawnshops include check cashing, cell phone
activation, Western Union or other money transfer services, and bill payment services.

https://www.moneymax.ph/personal-finance/articles/pawnshops-philippines

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