INSTRUCTURE PPT 1
INTRODUCTION TO BANKING AND FINANCIAL INSTITUTIONS
LEARNING OUTCOMES:
At the end of the chapter the students should be able to:
➢ Understand what is Banking and Financial Institutions
➢ Recognize the role of Banking and Financial Institution in the economy
➢ Analyze How Banking and Financial Institutions Contribute to Economic Stability and Growth ➢ Explore the importance Philippine Financial System
Historical Context of the Origin
The word "banking" originates from the Latin term "banca" or "banque," which translates to "bench" or "table."
✓ During the Medieval period in Italy, money changers and early financiers conducted their trade at benches or tables in open marketplaces. These benches were used to display coins, exchange currency, and conduct financial transactions.
✓ The Italian word "banca" referred to these money-changing benches. When a banker failed to meet financial obligations, their "banco" or bench was often broken as a sign of bankruptcy, leading to the term "banca rotta," meaning "broken bench" (the root of the modern word "bankruptcy").
✓ The concept of a "bank" spread across Europe, with the term being adopted into English through the French word "banque" and the Italian word "banca." ✓ Over time, the term evolved to refer not just to the physical bench or table but to the institutions that facilitated financial services.
What is BANKING?
General Definition
➢ Banking is the business activity of accepting deposits and lending money or extending credit to individuals, businesses, and governments. It also involves offering a range of financial services, including wealth management, payment processing, and financial advisory.
Legal Definition
➢ According to Section 5 of the Philippine General Banking Law of 2000 (Republic Act No. 8791): Banking refers to the business of receiving deposits from the public and using these funds for lending, investment, or both
Economic Perspective
➢ Banking is a mechanism that facilitates the flow of funds from savers to borrowers, ensuring the efficient allocation of resources within an economy to promote growth and development.
Financial Definition
➢ Banking is the provision of financial services by institutions licensed to hold deposits, provide credit, and offer investment products while maintaining the safety of clients' funds.
Customer Service Definition
➢ Banking is the practice of providing financial solutions tailored to individuals' or businesses' needs, including managing money, accessing credit, and planning for future financial security.
Academic Definition
➢ Frederick H. Harbison defines banking as: ”An organized mechanism for pooling savings and channeling them into investments, which fosters economic productivity”. ➢ Paul Samuelson (Economist): “Banking is a system of financial intermediation where funds from surplus units are mobilized and allocated to deficit units, promoting economic activities”. ➢ Richard L. Scott (Author, "Money and Banking"): “Banking is the business of managing deposits, extending credit, and creating money to ensure efficient allocation of financial resources”.
➢ Walter Leaf (British Banker and Economist): “Banking is the business of dealing with other people’s money, enabling its safekeeping, transfer, and utilization in various investments”
➢ Howard D. Crosse (Author, "Management Policies for Commercial Banks"): “Banking is the process of providing financial services such as deposit acceptance, credit allocation, and monetary transactions that contribute to economic development”.
➢ William A. Scott (Economist): “Banking is the science of dealing in money and credit, aiming to maximize the efficient use of financial resources while minimizing risks”.
Modern Definition
➢ Banking is now considered a technology-driven service industry, providing both traditional services like loans and savings and modern offerings such as online banking, mobile payments, and cryptocurrency transactions.
Bank as a FINANCIAL INTERMEDIARY
A bank as a financial intermediary plays a critical role in connecting two primary economic agents: those with surplus funds (savers) and those in need of funds (borrowers). This function ensures the efficient allocation of resources within an economy.
How Banks Operate as Financial Intermediaries
1. Accepts Deposits
❖ Individuals and businesses deposit their surplus funds into banks. These funds may be placed in savings accounts, fixed deposits, or checking accounts. ❖ Banks provide safekeeping, liquidity, and in some cases, interest on deposits.
2. Providing Loans
❖ Banks use the deposited funds to lend to individuals, businesses, and governments who require money for consumption, investments, or other needs.
❖ Loans are issued in the form of personal loans, business loans, mortgages, or other credit facilities.
3. Facilitating Transactions
❖ Banks enable payments and settlements between parties, reducing the need for cash handling and fostering trust in transactions.
4. Managing Risk
By pooling funds from many depositors, banks diversify the risks associated with lending, reducing the likelihood of financial loss for individual depositors.
FUNCTIONS OF BANKS AS FINANCIAL INTERMEDIARIES
A financial intermediary is an institution or entity that acts as a bridge between individuals or entities with surplus funds (savers) and those in need of funds (borrowers). By pooling resources and allocating them efficiently, financial intermediaries facilitate the flow of money within an economy, ensuring liquidity, investment, and economic growth.
❖ Mobilizing Savings: Banks encourage individuals and businesses to save their excess funds, which are then channeled into productive uses.
❖ Allocating Resources: Banks assess creditworthiness and allocate funds to the most efficient and productive projects, driving economic growth.
❖ Facilitating Liquidity: While funds are loaned out, banks ensure that depositors can access their money when needed by maintaining reserves. ❖ Reducing Transaction Costs: Banks eliminate the need for direct negotiation between savers and borrowers, reducing time, cost, and complexity.
❖ Providing Expertise: Banks assess risks, monitor borrowers, and provide financial advice, ensuring better outcomes for both savers and borrowers.
What is FINANCIAL INSTITUTION?
A financial institution is an organization that provides financial services and products to individuals, businesses, and governments. These services include managing deposits, offering loans, facilitating payments, investing funds, and ensuring risk management. Financial institutions play a pivotal role in the functioning of the global and local economies by enabling the flow of capital and credit.
❖ Non-Banking Financial Institutions (NBFIs) refer to financial entities that offer financial services but do not have a full banking license or are not authorized to take deposits from the public. They focus on activities like lending, asset management, insurance, or capital market services, but they do not provide the broad range of services typically associated with banks
ROLES OF BANKING AND FINANCIAL INSTITUTION IN ECONOMIC DEVELOPMENT
Mobilization of Savings and Capital Formation- Banking and financial institutions encourage individuals and businesses to save and invest by offering a range of financial products like savings accounts, fixed deposits, and mutual funds. These savings are then pooled together and invested in various sectors of the economy, contributing to the formation of capital, which is crucial for funding economic growth and development.
Facilitating Investment-Banks and other financial institutions provide loans and credit facilities to businesses, industries, and individuals. By doing so, they facilitate investment in both productive activities (e.g., manufacturing, technology) and infrastructure projects (e.g., roads, bridges). Access to finance enables businesses to expand operations, innovate, and improve productivity, which contributes directly to economic growth.
Resource Allocation- Financial institutions efficiently allocate funds to productive sectors of the economy. They assess the potential of various projects and businesses, ensuring that capital is directed towards industries that offer the highest return on investment. This helps improve the overall efficiency of resource use and contributes to the economic development of a country.
Supporting Entrepreneurship and Job Creation-Access to finance is essential for entrepreneurs to start and grow businesses. Banking institutions provide loans, venture capital, and business support services to help small and medium enterprises (SMEs) thrive.
Promoting Financial Inclusion-Banking institutions are key players in ensuring financial inclusion by offering services such as microloans, mobile banking, and accessible savings accounts to underserved communities. This allows individuals and businesses that traditionally lacked access to financial services to participate in the economy, enhancing income equality and enabling economic development in underdeveloped areas.
Facilitating International Trade-Banks, particularly commercial and investment banks, facilitate international trade by offering services such as letters of credit, foreign exchange, and trade financing. This enables businesses to access global markets, secure financing for cross-border transactions, and reduce the risks associated with international trade. As a result, countries can expand their exports and attract foreign investment, driving economic growth.
Risk Management and Stability-Financial institutions provide products like insurance, derivatives, and hedging services to help businesses and individuals manage risks. By mitigating risks associated with natural disasters, market volatility, or business failure, financial institutions reduce uncertainty, encourage investment, and promote long-term economic stability.