Philippine Financial System Notes

Chapter 1: The Philippine Financial System
Overview of the Philippine Financial System

  • The financial system in the Philippines is crucial for facilitating economic development and maintaining financial stability. It acts as an intermediary that channels funds from savers to borrowers, thus enabling investments and consumption. The interactive relationship between financial institutions, markets, and regulatory frameworks ensures efficient functioning.

  • Key Institutions: The financial system comprises a mix of local banks, transnational banks, and development institutions such as the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB), which provide the necessary funding and technical assistance to support economic growth and development projects.

Financial Proverbs

  • Financial proverbs encapsulate the wisdom of effective money management and serve as guiding principles:

  • "Never spend your money before you have it," emphasizing the importance of living within one’s means.

  • "Spending is quick; earning is slow," reminding individuals of the challenges of generating income compared to the ease of expenditure.

  • "Creditors have better memories than debtors," highlighting the risks of indebtedness.

  • "Save for a rainy day," illustrating the importance of having an emergency fund.

  • "Lend your money and lose your friend," warning against the potential fallout of personal financial transactions.

Nature and Importance of Finance

  • A comprehensive understanding of core components and functions within the financial system is vital to grasp its significance for economic progression. Key components include:

  1. Financial Claims

  • Financial claims signify rights to receive money under specified conditions, serving as foundational instruments within the financial system.

  • Types of Financial Instruments:

    • Debts: Such as loans or bonds, which do not convey ownership but represent a promise to repay.

    • Equities: Such as stocks, which confer ownership interest and potential dividends to the holder.

  1. Financial Institutions

  • These include various organizations (both private and government) that facilitate financial claims and services, acting as intermediaries between savers (depositors) and borrowers (loan seekers). Key examples are:

    • Banks: Providing a range of services including checking accounts, savings accounts, and loans.

    • Credit Unions: Member-owned financial cooperatives that offer services similar to banks but often with better rates.

    • Insurance Companies: Providing risk management through policies that compensate for potential losses.

    • Pension Funds: Managing retirement savings and investments for individuals.

    • Microfinance Institutions: Fostering financial inclusion by providing small loans to low-income individuals or groups.

  1. Financial Markets

  • These platforms facilitate the buying and selling of financial claims, enabling price discovery and liquidity. A prime example is the Manila Stock Exchange, where equities are traded and market information is readily available.

  • Financial markets connect the forces of demand and supply, ensuring that capital flows efficiently to its most productive uses.

  1. Government Agencies

  • Key regulatory players include the Monetary Board, which is primarily responsible for crafting monetary policy through the Bangko Sentral ng Pilipinas (BSP).

  • Legislative oversight is provided by Congress, which enacts laws affecting money, credit, and banking, thereby shaping the economy's financial framework and stability.

  1. Laws and Policies

  • Stringent regulations are essential to ensure desired outcomes such as employment and investment. Examples include laws governing securities, banking practices, and consumer protection, all designed to uphold the integrity of the financial system.

Functions of Financial Institutions

  • Financial institutions serve several critical functions:

  • Facilitate efficient fund transfers from savers to spenders by pooling resources.

  • Overcome barriers to fund transfers, such as liquidity challenges and credit risks, ensuring that funds flow to productive uses.

  • Conduct comprehensive risk assessment and credit analysis, helping to evaluate the creditworthiness of borrowers and safeguard the financial system's integrity.

Development of the Philippine Financial System

  • Historical Overview:

    1. Obras Pias (Pious Works)

      • Initiated in 1754 by Father Juan Fernandez de Leon, it marked the establishment of the first credit institution, leveraging pious donations for funding. Initially aimed at financing the Galleon Trade, it laid the groundwork for modern banking.

    2. First Philippine Bank (1851)

      • Known as Banco Espanol-Filipino de Isabela II, this institution primarily catered to domestic transactions amidst limited foreign trade and significantly contributed to the rise in agricultural exports following the opening of the Suez Canal in 1869.

    3. Expansion of British and American Banking Presence

      • Establishment of British banks and the influx of American banking institutions post-war brought a new era of financial services and control over the economy, leading to the formation of key institutions like the Philippine National Bank (PNB) in the early 20th century.

Post-Colonial Financial Developments

  • Post-WWII: The establishment of the Rehabilitation Finance Corporation, which later transformed into the Development Bank of the Philippines, along with the setting up of the Central Bank of the Philippines in 1948, marked critical milestones in revitalizing and restructuring the financial landscape, essential for economic recovery.

Structure of the Philippine Financial System

  • The Bangko Sentral ng Pilipinas is at the helm of banking institutions, overseeing a diverse array:

  • Commercial Banks (Universal and Ordinary)

  • Thrift Banks (Savings and Mortgage)

  • Rural Banks

  • Non-Bank Institutions like:

    • Investment Houses

    • Pawnshops

    • Insurance Companies

    • Government Financial Institutions (e.g., GSIS, SSS)

Statistics (as of December 1993)

  • Total Financial Institutions: 9,767

  • Banking Institutions: 4,656

  • Non-Banking Institutions: 5,111

Assignment Questions for Reflection

  1. Discuss some of the important financial reforms. Do you agree with them?

  2. What is wrong with our financial system?