THE P H IL I P PI N E

FINANCI A L S Y S T E M
DEFINITION
• Bank- is a financial institution licensed to receive deposits and make loans.
 
• A financial institution (FI)- is a company engaged in the business of dealing with
financial and monetary transactions such as deposits, loans, investments, and currency
exchange.
 
• Banking Financial Institutions- a financial institution licensed to receive deposits and
make loans.

• Non-banking financial institutions- are financial institutions that offer various banking
services but do not have a banking license.
 
 WHAT IS FINANCIAL SYSTEM?
• For an economy to function properly, various systems need to be put in place. One
of these refers to the financial system. As a functioning financial system is a pre-
requisite to economic development.

• The financial system of the Philippines is composed of banking institutions and

nonbank financial intermediaries, including commercial banks, specialized
government banks, thrift banks, and rural banks. It is also composed of offshore
banking units, building and loan associations, investment and brokerage houses,
and finance companies.
 WHAT IS FINANCIAL SYSTEM?
• According to Kaufman, the financial system encompasses the instruments,
institutions, markets, and rules governing the conduct of the trade that expedite the
routing of funds from buyers to sellers and savers to lenders.

• Financial System describes collectively the financial markets, the participants, and
the instruments and securities that are traded in the said markets. The functions of
the financial system are to channel the funds from lenders to the borrowers, provide
a medium of exchange, provide a mechanism for risk sharing and provide a channel
through which the central bank can influence the economy, in general, and the
financial system in particular.
  
THE FINANCIAL SYSTEM

• It provides a channel to transfer funds from individuals and groups who have saved
money to individuals and groups who want to borrow money.

• Savers are suppliers of funds to borrowers in return for promises of repayment of even
more funds in the future.

• Borrowers are demanders of funds for consumer durables, houses, or business plants
and equipment, promising to repay borrower funds based on their expectation of having
higher incomes in the future. These promises are financial liabilities for the borrower—
that is, both a source of funds and a claim against the borrower's future income.
 FUNCTIONS OF THE FINANCIAL SYSTEM

1. Credit
Generally, it is defined as a contractual agreement in which a borrower
receives something of value now and agrees to repay the lender at a later date
generally with interest.

2. Payments
All transactions between the buyers and sellers of goods and services are
affected smoothly because of the financial system.
 FUNCTIONS OF THE FINANCIAL SYSTEM
3. Money Creation
Risk transformation by diversification, as in the case of mutual funds. The financial system
enhances the liquidity of financial claims.
• The financial system helps price discovery of financial assets resulting from the interaction of
buyers and sellers; asset-liability transformation. Banks create claims (liabilities) against
themselves when they accept deposits from customers but also create assets when they provide
loans to clients.

4. Savings
Establishing a link between the savers and the investors; the amount left over after an individual's
consumer spending is subtracted from the amount of disposable income earned in a given period
of time.
 FINANCIAL SYSTEM PARTICIPANTS
1. Households. Or consumers are generally described as that group receiving income, majority of which
typically come from wages and salaries.

2.Financial Institutions/Intermediaries. They channel the funds from lenders to borrowers. They can also be
the lenders and borrowers themselves.
a. Direct Finance. Refers to lending by ultimate borrowers with no intermediaries. 
Methods of Financing
 i. Private Placement
 ii. Brokers and dealers
 iii. Investment bankers 
 b. Indirect Finance. Refers to lending by an ultimate lender to a financial intermediary that then lends to
ultimate borrowers.

Financial institutions can vary by size, scope, and geography.

 FINANCIAL SYSTEM PARTICIPANTS
Benefits of Financial Institutions/Intermediaries:
1. Reduction of Transaction Costs. 
2. Reduction of Moral Hazard 

Categories of Financial Intermediaries:  

• Depository. The sources of their loanable funds consist of deposits received from businesses, households, and
government. 
 
• Contractual. This type enters into contracts with their customers to promote savings and/or financial
protection against loss of life or property. 
 
• Secondary. They depend heavily on other financial intermediaries like commercial banks for loanable funds.
 
• Investment. This type offers the public securities that can be held indefinitely as a long-term investment.
 FINANCIAL SYSTEM PARTICIPANTS
3. Non-Financial Institutions. Are businesses such as trading. manufacturing, extractive industries,
construction and generic industries.

4.The Government. The government also has its income coming from taxes paid by households and
firms. It also borrows money from various sources.

5.The Central Bank. Is an institution that manages a state's currency, money supply and interest rate.
Central banks also usually oversee the commercial banking system of their respective countries.

6.Foreign Participants. They exchange goods and services across national boundaries.
COMPONENTS OF THE FINANCIAL SYSTEM
Components of the Financial System
1.Financial Instruments
Are assets that can be traded, or they can also be seen as packages of capital that may be traded? These assets
can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence
of one's ownership of an entity.
Examples of financial instruments
• Cash at bank
• bank overdrafts
• term deposits
• trade receivables and payables
• investments
• options
• forward foreign exchange agreements
• foreign currency swaps
2. The financial sector
is a section of the economy made up of firms and institutions that provide financial services to
commercial and retail customers. This sector comprises a broad range of industries including banks,
investment companies, insurance companies, and real estate firms.

The financial markets are structures to which funds flow.

 
Types of Financial Markets:
✓ Primary market markets in which corporations raise funds through new issues of securities that
are sold to investors for the very first time. (ex. Initial Public Offering - IPO)
✓ Secondary market markets that trade financial instruments; where investors buy and sell
securities they already own.
✓ Capital market markets that trade debt and equity instruments with maturities of more than 1 year.
These are venues where savings and investments are channeled between the suppliers who have capital
and those who need capital.

✓ Foreign exchange market

The foreign exchange market (also known as forex, FX, or the currency market) is an over-the-counter
(OTC) global marketplace that determines the exchange rate for currencies around the world. Participants
can buy, sell, exchange, and speculate on currencies. Foreign exchange markets are made up of banks,
forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail
forex dealers, and investors.
✓ Derivatives market - The derivatives market refers to the financial market for financial
instruments such as underlying assets and financial derivatives. There are four kinds of
participants in a derivatives market: hedgers, speculators, arbitrageurs, and margin traders.
There are four major types of derivative contracts: options, futures, forwards, and swaps.
 
3. Rules governing the conduct of trade.
a. Pertinent laws concerning financial institutions
b. Memoranda, circulars, and issuances of concerned government agencies
c. pertinent ordinances of local government units where the financial institution is situated.
d. Customs and traditions inherent to the area where the financial institution is situated
MONETARY POLICY AND THE
FINANCIAL SYSTEM
Monetary Policy and the Financial System
Monetary policy refers to the manipulation of the money supply to affect the
economy of the country as a whole. Among the tools of monetary policy are
money supply, open market operations, reserve requirements on banks,
discount rates, interest rates, and credit control, among others.
 
THE BANGKO SENTRAL NG PILIPINAS
The Bangko Sentral ng Pilipinas
• The Bangko Sentral ng Pilipinas (BSP) was created by 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 Bangko Sentral ng Pilipinas

• 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 interim administration of the BSP.
 
• The BSP is aided in its bank monitoring and examination processes by credit rating agencies and
financial conglomerates.
 
• The BSP is also upgrading 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 of 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.
 BSP ORGANIZATIONAL STRUCTURE
BANKO SENTRAL NG PILIPINAS

BANKING INSTITUTION NON-BANK FINANCIAL

INSTITUTION
PRIVATE BANKING INSTITUTION GOVERNMENT BANKING INSTITUTION

COMMERCIAL BANKING
THRIFT BANKS RURAL BANKS
INSSTITUTION

SAVINGS & MORTGAGE BANKS

ORDINARY
UNIVERSAL
COMMERCIAL PRIVATE DEVELEPMENT BANKS
BANKS
BANKS
SAVINGS & LOAN ASSOCIATION
 BANKO SENTRAL NG PILIPINAS

NON-BANK FINANCIAL INSTITUTIONS

PRIVATE NON-BANK FINANCIAL INSTITUTIONS

GOVERNMENTNON-BANK FINANCIAL
INVESTMENT BANKS
INSTITUTION
FINANCE COMPANIES

SECURITIES: DEALERS/BROKERS
GOVERNMENT SERVICE INSURANCE SYSTEM
PAWNSHOPS
(GSIS)
LENDING INSVESTORS

FUND MANAGERS

TRUST COMPANIES SOCIAL SECURITY SYSTEM (SSS)

INSURANCE COMPANIES
ETC.
 THE BANKING INSTITUTION

• The Banking institutions in the Philippines can be categorized as private banking and
government banking.
 
• Private banking institutions are comprised of commercial banking such as universal
banks and ordinary commercial banks; thrift banks like savings and mortgage banks,
private development banks, stock savings and loan associations; and rural banks.
 
• The government banking institutions, on the other hand, consist of the Philippine
National Bank, Development Bank of the Philippines, Land Bank of the Philippines, and
the Philippine Amanah Bank
 PRIVATE BANKING INSTITUTION

1. Commercial Banking Institutions.

The banks that fall under commercial banking institutions are ordinary commercial banks or non-expanded
commercial banks. These banks continue to account for the bulk of the total resources of the banking industry.
 
2. The Thrift Banks.
Thrift banks are primarily engaged in mobilizing the small savings of the people. They provide funds for
agriculture and industry at reasonable interest rates. Small producers like farmers, fishermen, craftsmen, and
poor consumers can rely on such banks for financing their production and consumption inputs. The following
banks fall under the category of Thrift Banks

• The Savings and Mortgages Banks.

The primary functions of a savings and mortgage bank is to receive time deposits of different types and to invest
its funds in long-term investments.
 
 
 
• The Savings and Loan Association.
Very similar to the savings and mortgage banks are the savings and loans associations
nowadays. However, these institutions may either be stock or non-stock corporations.
 
• The Private Development Banks.
This is quite different from the government institution of the same name. It is a government
entity, formerly the Rehabilitation Finance Corporation.
 
• The Rural Banks.
Rural Banks fulfill the investment function by allowing small farmers to finance their needs
through the granting of loans for capital or other uses.
 GOVERNMENT BANKING INSTITUTIONS

1. The Philippine National Bank.

The Philippine National Bank (PNB) operates under the provisions of Executive Order No. 80, the 1996
revised charter of PNB.
 
2. The Development Bank of the Philippines.
The Development Bank of the Philippines (DBP) started operating in 1935 as the National Loan and
Investment Board. Its first mission was to coordinate and manage trust funds.
 
3.The Land Bank of the Philippines
The Agrarian Reforms Code created the Land Bank of the Philippines (LBP) to finance the acquisition and
distribution of agricultural estates for division and resale by small landholders.
. The Al-Amanah Islamic Investment Bank of the Philippines.
4

The Al-Amanah Islamic Investment Bank of the Philippines

(Islamic Bank) was created under Republic Act No. 6848 for the
purpose of promoting and accelerating the socio-economic growth
of Mindanao, particularly the provinces of Cotabato, Lanao del Sur,
Lanao del Norte, Zamboanga del Sur, Zamboanga del Norte, and
Sulu.
 NON-BANK FINANCIAL INSTITUTIONS

 These are other financial institutions that engage in specific functions. They provide
services related to claims, financial information, and advice, manage portfolios of
financial assets on behalf of other economic units, buy and sell claims on institutions
from clients; and assist in finding sources for those economic units seeking loans.
These are either private or government-run non-bank financial institutions.
 Private Non-Bank Institutions

Investment Houses
• is any enterprise, which engages in underwriting securities of other corporations. It also generates
income from sale of investments in securities.
Financing Company
• is any business enterprise where the primary purpose is to extend credit facilities to consumers and
to industrial, commercial or agricultural entities
Securities dealers/brokers
• Any person or entity engaged in the business of buying and selling securities for his own or its client’s
account thereby making a profit from the difference between the purchase prices and selling price of
securities.
 Private Non-Bank Institutions

Savings and Loan Associations (S&Ls)

• Which have traditionally served individual savers and residential and commercial mortgage borrowers,
accumulate the funds of many small savers and then lend this money to home buyers and other types
of borrowers.
Mutual funds
• Are corporations which accept money from savers and then use these funds to buy stocks, long-term
bonds, or short-term debt instruments issued by businesses or government units.
Pawnshops
• Persons or entities engaged in the business of lending money with personal property, jewelry, and other
durable goods as collateral for the loans given.
 Private Non-Bank Institutions

Lending investor
• Any person or entity engaged in the business of effecting securities transactions, giving loans and earns
interest from them.
Pension funds
• Retirement plans funded by corporations or government agencies for their workers and administered
primarily by the trust departments of commercial banks or by life insurance companies.
Insurance companies
• Take savings in the form of annual premiums, then invest these funds in stocks, bonds, real estate, and
mortgages, and finally make payments to the beneficiaries of the insured parties.
 Private Non-Bank Institutions

Credit unions

• Are cooperative associations whose members have a common bond, such as being employees of
the same firm. Members’ savings are loaned only to other members, generally for auto
purchases, home improvement loans, and even home mortgages.
 Government Non-Bank Institutions

Government Service Insurance System (GSIS).

• Provides retirement benefits, housing loans personal loans, emergency and calamity loans to
government employees.

Social Security System (SSS)

• Provides retirement benefits, funeral benefits, housing loans, personal loans and calamity loans
to employees who are working in private companies.

Pag-ibig
• Provides housing loans to both government and private employees.
The different institutions governed by the BSP are divided into Banking systems and Non-banking Systems.

MONETARY BOARD

GOVERNOR

MONETARY STABILITY SUPERVISION AND RESOURCE MANAGEMENT SECURITY PLANT

SECTOR EXAMINATION SECTOR SECTOR COMPLEX
 THE MONETARY BOARD

The power and functions of the Bangko Sentral ng Pilipinas are exercised by its Monetary Board, which has 7 members
appointed by the President of the Philippines. Under the "New Central Bank Act." Establishes certain qualifications for
the members of the Monetary Board and also prohibits members from holding certain positions with other governmental
agencies and private institutions that may give rise to conflict of interest. With the exception of the members of the
Cabinet, the Governor and other members of the Monetary Board serve terms of 6 years only to be removed for cause.

THE BSP Monetary Board

CHAIRMAN: Felipe M. Medalla
MEMBERS: Benjamin E. Diokno
Peter B. Favila
Antonio S. Abacan, Jr.
V. Bruce J. Tolentino
Anita Linda R. Aquino
Eli M. Remolona
 OBJECTIVES OF BSP

1. Maintain monetary policies conducive to a balanced and sustainable growth of the economy. -
It is about maintaining the rule of conduct or policies in order to have a good supervising and
regulating the financial system of the Philippines.

2. Maintain price stability in the country. - One of the goals in the economy is to attain price level
stability, or stable in general price level, and the failure to achieve this may mean a problem if
inflation.

3. Promote and maintain monetary stability and the convertibility of the peso. -It should maintain
monetary stability to regulate the supply of money in the economy. It is about influencing the timing,
cost, and availability of money and maintaining the convertibility of the peso, the conversion of
money.
4. Maintain stability of the financial system - They ensure that financial institution
encourage people and companies to save for the future, make deposits, etc., to oversee
that will maintain its permanence in the financial system.

5. They provide payment and other financial services to the government, the
public, financial institutions, and foreign official institutions. They continue to
meet the needs in the financial environment by offering financial services like the
following: government-issuing treasury bills; public-making deposits, borrowing and
investing; withdrawals; financial institutions-acquiring capital for investment; foreign
official institutions-letter of credit

6. Supervise and regulate depository institutions. - It is about directing and

controlling the fund that was accepted as deposits from surplus units.
1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities. -They issue
THE FUNCTION OF THE MONETARY BOARD

rules and regulations to direct and guide conduct that needs to fulfill their responsibilities well enough for the good run
of the BSP.
2. Direct the management, operations, and administration of Bangko Sentral. - They are the ones to plan for
management, operation, and administration. They are the ones to know how to manage it, to provide an orderly
structure for Bangko Sentral, and to have a clean arrangement of all the parts as a whole.
3. Establish a human resource management system. -They are in charge of setting up the employees, which includes
the need for financial and physical resources, including selecting, hiring, and appointing, transfer, promotion, and even
dismissal of all personnel.
4. Adopt an annual budget for and authorize such expenditures in the Bangko Sentral. -They have the power to
give the annual budget, and the expenses, which are the financial resources for the effective operation of Bangko
Sentral.
5. Indemnify its members and other officials of Bangko Sentral. -They ensure the members and officers in any
damage or loss of Bangko Sentral that every person was monitored for compliance with banking laws to promote a
sound and healthy banking system.
Mandate of BSP Three Pillars:
1. Price Stability. The BSP's main responsibility is to formulate and implement policies
in the areas of money, banking, and credit with the primary objective of preserving price
stability, which is the condition of low and stable inflation.

2. Financial Stability. BSP supervises banks, quasi-banks and their subsidiaries as ell
affiliates, making sure they comply with rules and regulations.

3. Efficient Payments and Settlement System. The BSP supervises transactions on

interbank loans, purchases and sales of government securities, foreign currency sales and
purchases, and high-value customer payments.
 FUNCTIONS OF BANGKO SENTRAL NG PILIPINAS (BSP)

The Bangko Sentral ng Pilipinas has 7 functions, such as (1) Bank of Issue. (2) the
government's banker, agent, and adviser, and (3) custodian of the cash reserves of banks. (4)
Custodian of the nation's reserves of international currency, (5) Bank of rediscount and lender
of last resort, (6) Bank of central clearance and settlement, and (7) Controller of Credit.

1. Bank of Issue
The BSP is the only one of the financial institutions that has the rights to produce, print out
paper bills and mint coins. This is enacted to ensure the uniformity in design and content of
money, for the people to prevent the circulation of fake money, and for us to know if the
money is either fake or real. It can also affect the government's supervision over money
supply, give prestige or honor to the central bank, and become a good source of income for the
government.  
2. The government's bankers, agents, and advisers
All the money of all the agencies of our country will be handled by BSP if ever there is a
transaction about money to other parties. BSP is the one who will transact or talk to them.

3.Custodian of the cash reserves of banks

Banks are required to have funds reserved for BSP because if the bank needs money, it will
have money that is reserved for BSP. The bank has reserved money for problems like a money
crisis or when a client withdraws all his/her money, the bank can use it for that problem.

4. Custodian of the nation's reserves of international currency

The BSP is the one who handles all the international currencies, gold, and more that are owned
by our country and that international currency and gold are a requirement for printing out
money.
 
 
5.Bank of rediscount and lender of last resort
Banks can borrow money from BSP and, in that way, they can be a lender of last resort and about
rediscounting, it is a process where a discounted amount will be discounted again.

6.Bank of Central Clearance and Settlement

We all know that BSP is the mother of all banks; it means that in every disagreement between two
banks, BSP is responsible for settling things between the two banks.

7.The Controller of Credit

BSP needs to control credit because controlling credit can control the money supply and if we
control the money supply there is a possibility that the prices of goods and services will just be
balanced. BSP needs to limit the credit; they need to prevent the high percentage of credit because
if the credit is high then the money supply is high.

 
REFERENCES:
• HTTPS://WWW.STUDOCU.COM/PH/DOCUMENT/ATENEO-DE-DAVAO-UNIVERSITY/FINANCIAL-MARKETS-AND-
INSTITUTIONS/3-THE-PHILIPPINE-FINANCIAL-SYSTEM/16659439

• HTTPS://WWW.BSP.GOV.PH/PAGES/ABOUTTHEBANK/WHOWEARE/ORGANIZATIONANDGOVERNANCE/
THEMONETARYBOARD/THEMONETARYBOARD.ASPX

• HTTPS://WWW.STUDOCU.COM/PH/DOCUMENT/ICCT-COLLEGES-FOUNDATION/ACCOUNTANCY/CHAPTER-1-
INTRODUCTION-TO-PHILIPPINE-FINANCIAL-SYSTEM/18266026