TRANSFERRING FUNDS

FROM LENDERS TO
BORROWERS
By: Myla Jenn L. Constantino

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 The financial system is concerned with
transferring funds from lenders to
borrowers.

The lenders are those revenues exceeded their

expenditures providing enough reasons to be
referred to as surplus spending units (SSU) s.

The borrowers, on the other hand, have

expenditures exceeding their revenues, and
thus, are referred to as deficit spending
units.
DIRECT FINANCE
Refers to lending by ultimate borrowers with no intermediary.

Under this method, the SSU gives money to the DSU in exchange for
financial claims on the DSU.

The claims issued by the DSU are called direct claims and are typically sold in
direct credit markets such as money or capital markets.

Direct financing provides SSUs with a venue for savings with expected
returns.

The DSUs are provided with source of funds for consumption or

investment.
 Disadvantages
01 There are few DSUs which can transact in
the direct market because the
denomination of securities sold are very
large (usually millions of pesos)

It is difficult to match the

02 requirements of SSUs and DSUs in
terms of denomination, maturity
and others.
Methods of Direct Financing

1. PRIVATE PLACEMENTS
Refers to the selling of securities by private negotiation directly to insurance
companies, commercial banks, pension funds, large-scale corporate
investors and wealthy individual investors.

2. BROKERS AND DEALERS

BROKERS – one who acts as an intermediary between buyers and sellers
but does not take title to the securities traded.

DEALER – one who is in the security business acting as a principal rather

than an agent. The dealer buys for his account and sells to customers from
his inventory. He makes profit by selling his inventory of securities at a price
higher than the acquisition cost.

3. INVESTMENT BANKERS
A person who provides financial advise and who underwrites and distributes
new investment securities.
 EXAMPLE:

Private strong Soriano

BONDS
Individuals Company
Bondholder Bond Issuer

Borrowers
Lenders Spenders
Savers Financial
Households Households
Funds Markets Funds Business firms
Business (Marketplace that provides a venue

Governments
for the sale and purchase of assets Governments
such as bonds, stocks, etc.)
Foreigners Foreigners

DIRECT FINANCE
 INDIRECT FINANCE

Financial
Funds Intermediaries
Funds

Funds
Lenders Borrowers
Savers Spenders
Households Financial Households
Business Funds Funds Business firms
Markets
Governments Governments
Foreigners Foreigners

DIRECT FINANCE
 INDIRECT FINANCE
(Financial Intermediation)

Refers to lending by ultimate lender to a financial intermediary that

the relends to ultimate borrowers.

Financial intermediaries include commercial banks, mutual savings

banks, credit unions, life insurance companies and pension funds.

Direct claims with one set of characteristics are purchased from borrowers, then
transformed into indirect claims with a different set of characteristics and then
sold to lenders.
 THE BENEFITS OF FINANCIAL
INTERMEDIATION

1. Financial intermediaries can

substantially reduce transaction
costs.

2. Reduction of Moral hazard.

 Kinds of Financial Intermediation

MATURITY
INTERMEDIATION
Practice of borrowing comparatively
short-term funds from savers and
making long-term loans to borrowers
who require a lengthy commitment of
funds.
DENOMINATION
INTERMEDIATION
04 03 02 01
Process whereby small investors are
able to purchase pieces of assets that
normally are sold in large denominations.

DEFAULT RISK
INTERMEDIATION
Intermediation performed by the financial intermediary
where risky claims in the form of loans and securities are
INFORMATION
accepted against borrowing customers while
simultaneously issuing relatively safe financial
INTERMEDIATION
instruments to savers to attract funds. Process by which financial intermediaries substitute their skill in the
marketplace for that of savers who frequently have neither the time
nor the access to relevant information about market conditions and
investment opportunities.
 CATEGORIES OF FINANCIAL INTERMEDIARIES

DEPOSITORY CONTRACTUAL SECONDARY INVESTMENT

Enter into contracts They depend Offers the public
Sources of their loanable
with their customers securities that can be
funds (secondary heavily on other held indefinitely as a
securities) consist of to promote saving
and/or financial
financial long-term investment
deposits received from
protection against intermediaries like and which can be sold
businesses, households
and government. loss of life or commercial banks quickly when the
property for loanable funds. customer needs his
funds returned.
 REGULATION OF THE FINANCIAL SYSTEM

OFFSHORE
BANKING LAW GENERAL
BANKING ACT
UNIFORM
CURRENCY ACT
REVISED
SECURITIES
PHILIPPINE ACT
DEPOSIT
INSURANCE
CORPORATION
CODE TRUTH IN
NEGOTIABLE
LENDING ACT
INSTRUMENTS
LAW

FIRST AREA OF GOVERNMENT CONTROL

 REGULATION OF THE FINANCIAL SYSTEM

SECURITIES AND
EXCHANGE
MONETARY COMMISSION
BOARD (IRR of the Financing Act of 1998
or R.A. No. 8556)

BANGKO
SENTRAL NG
PILIPINAS

SECOND AREA OF GOVERNMENT CONTROL

 FINANCIAL INTERMEDIARIES AND THEIR
SOURCES OF FUNDS
TYPE OF INTERMEDIARY SOURCES OF FUNDS

Commercial banks Deposits (checking, savings, and time)

Savings and loan association Deposits (checking, savings, and time)

Mutual savings banks (or Cooperatives) Deposits (checking, savings, and time)

Credit unions Deposits (checking, savings, and time)

Life Insurance Companies Premiums from policyholders

Nonlife Insurance Companies Premiums from policyholders

Pension fund companies, GSIS, SSS Employer and employee contributions

Finance companies Issue of commercial paper, stocks, bonds

Mutual Funds Issue of shares

Money market mutual funds Issue of shares

Thank you!