“Understanding Financial System and their Importance in the Philippines”

Financial Systems
- is a set of institutions, such as banks, insurance companies, and stock exchanges, that permit the
exchange of funds.
- a system of complex and closely linked institutions, agents, markets, and others which enables the
transfer of money between investors and borrowers.

Financial System Consists of the Following:

Money
Financial Institutions
Financial Instruments
Financial Market
Financial Services

FINANCIAL INSTITUTIONS
Financial Institutions or Financial intermediary
- are company/institutions engaged in the business of dealing with financial and monetary transactions
such as deposits, loans, investments, and currency exchange. Financial intermediary means is that an
institution serves as a link between the depositor who has the money and the lenders who needs
money.

Importance of Financial Institutions in Philippines

Financial institutions play a crucial role in the economy by providing services such as lending,
investing, saving, and facilitating transactions. They help allocate resources efficiently, manage risks, and
support economic growth. Additionally, they contribute to the stability and functioning of financial markets,
which are essential for businesses and individuals to access capital and manage their finances effectively.

How do Financial Institutions work in the Philippines?

Financial institutions collect funds from depositors or investors and channel them to borrowers or
investment opportunities through various financial products and services such as loans, savings account,
investments, and insurance.

Users of Financial Institutions

Individuals
Businesses
Governments
Lending Services
Investors
Who Regulate the Financial Institution?
The Bangko Sentral ng Pilipinas is the primary regulator of financial institution in the Philippines. It
oversees the operations of banks, non-bank financial institutions, and other financial entities to ensure
compliance with regulatory requirements and financial stability

2 Types of Financial Institutions

Banking
Non-banking

Banking Financial Institutions

- are in the business of taking deposits from the public and making loans. In addition, they provide
other services such as investment banking, foreign exchange, and safe deposit boxes. These
institutions are heavily regulated by governments to protect consumers and ensure that the banking
system is stable.

Examples of banking institutions in the Philippines include:

a. Universal Banks
These offer a wide range of financial services, such as commercial banking, investment banking, and
insurance. Examples are BDO Unibank, Metrobank, and Land Bank of the Philippines.
b. Commercial Banks
These are privately-owned banks that provide a wide range of banking services to individuals,
businesses, and government entities. Examples are RCBC, UnionBank, and EastWest Bank.
c. Rural Banks
These cater to the financial needs of rural communities and are regulated by the BSP and the
Department of Agriculture.
d. Thrift Banks
These focus on providing savings and small loans to individuals, particularly for housing. Examples
are PSBank and Cebuana Lhuillier Rural Bank.

e. Al-Amanah Islamic Investment 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-Banking Financial Institutions (NBFCS)

- are companies that provide financial services such as lending, insurance, and investment banking but
that are not regulated as banks. This means that they have a different set of rules and regulations to
follow.

Examples Of Non-Banking Financial Institutions In The Philippines Include:

a. Finance Companies
 They provide loans and leasing services to individuals and businesses. Examples are Lender's
Insurance Corporation and PNB Finance Corporation.
b. Microfinance Institutions
They cater to the financial needs of low-income individuals and communities, often providing
microcredit and other financial services. Examples are CARD MRI and NWTF.
c. Investment Houses
They offer investment advisory services, underwriting, and other investment-related services.
Examples are Philstocks Financial Inc. and COL Financial Group Inc.
d. Pawnshops
They provide short-term secured loans against collateral, such as jewelry or electronic items.
Examples are Cebuana Lhuillier Pawnshop and Villar Foundation Pawnshop.
e. Insurance Companies
They offer various insurance products to protect individuals and businesses against financial risks.
Examples are Insular Life and Sun Life Financial.

Republic Act 7653, also known as the New Central Bank Act of 1993
- is a Philippine law that established the Bangko Sentral ng Pilipinas (BSP) as the central monetary
authority of the country. This act replaced the Central Bank Act of 1949 and aimed to modernize the
Philippine monetary and banking system. By enacting Republic Act 7653, the Philippine government
aimed to strengthen the country's financial sector and promote economic growth and stability.

Financial Stability
- refers to the resilience of the financial system and its ability to continue functioning effectively
during times of economic stress or financial shocks. It ensures that financial institutions can meet
their obligations to depositors, investors, and other stakeholders.

FINANCIAL INSTRUMENTS
A financial instrument is a contract between parties that represents a financial asset, which can be traded,
used to raise capital, or to make investments. These instruments are used to manage risk, generate income, or
facilitate transactions. Common examples include stocks, bonds, options, futures, and derivatives. They play
a crucial role in the functioning of financial markets and the global economy.

Financial Instruments is a contract that gives rise to a financial asset of one entity and a financial liability
or equity instrument of another entity.

Type of Investment Class

1. Equity Securities
2. Debt Securities
3. Currencies
4. Real Estate
5. Commodities
Equity Securities
- Share of stock that represents ownership in a company and provide shareholders with a claim on the
company’s assets and earnings.
Debt Securities
- Is a financial instrument that represent a loan made by the investor to an issuer, such as a
government, corporation, or financial institutions.

FINANCIAL MARKETS
Markets is where financial instruments are traded.
Financial Markets is a marketplace in which financial assets (securities) such as stocks and bonds can be
purchased or sold".

Importance of Financial Markets

1. Price Determination
Financial markets help in determining the price of various goods and services.
2. Funds Mobilization
They play a crucial role in mobilizing savings from individuals and institutions and channel them
into productive investments.
3. Risk Sharing
They provide a platform for investors to share and transfer risks.
4. Liquidity: They provide liquidity to tradable assets, enabling businesses to raise capital and people
to invest their savings.
5. Information Dissemination: Financial markets help in the creation of a range of financial products
and services using the latest technology and methodologies.
6. Economic Stability: By facilitating a controlled flow of funds, they help maintain economic stability
in the country.
7. Wealth Generation: They provide a range of investment avenues, helping individuals and
businesses generate wealth.

FUNCTIONS OF FINANCIAL MARKETS

a. Raising capital
Companies issue securities to raise funds for business operations or expansion.
b. Facilitating savings and investments
Individuals can save and invest in various financial instruments, such as stocks, bonds, and mutual
funds.
 c. Providing liquidity
Financial markets enable investors to buy and sell financial assets easily, providing liquidity to the
economy.
d. Pricing financial assets
Markets determine the fair value of financial instruments based on supply and demand.
e. Risk management
Financial markets offer various financial derivatives that help businesses and investors manage their
risks.

How do financial market works?

Financial markets work by connecting buyers and sellers of financial instruments through a network of
intermediaries, such as stock exchanges, brokerage firms, and investment banks. These markets provide
liquidity, transparency, and efficiency in the pricing of financial assets.

TYPES OF FINANCIAL MARKET

1. Money Markets
These markets deal with short-term borrowing and lending of funds, typically with maturities of less
than one year
2. Capital Markets
Capital markets cater to the long-term financing needs of businesses, governments, and other entities.
They involve raising capital through the issuance of securities with maturities longer than one year,
such as stocks (equities) and bonds (debt securities).
3. Derivative markets
Financial markets where contracts derive their value from the performance of an underlying asset,
index, or interest rate. These contracts include options, futures, forwards, and swaps. They are used
for hedging, speculation, and arbitrage by investors, institutions, and businesses.
4. Exchange markets, also known as securities exchanges or financial markets,
are organized platforms where various financial instruments such as stocks, bonds, commodities, and
derivatives are traded. These markets provide a centralized location and infrastructure for buyers and
sellers to meet and execute transactions. Examples include stock exchanges like the New York Stock
Exchange (NYSE) and commodity exchanges like the Chicago Mercantile Exchange (CME).
5. OTC (Over-the-Counter) market
is a decentralized marketplace where trading occurs directly between parties without the supervision
of an exchange. In the OTC market, financial instruments such as stocks, bonds, derivatives, and
currencies are traded directly between buyers and sellers, often facilitated by brokers or dealers. OTC
trading typically involves customized or less liquid assets that are not listed on formal exchanges.

TYPES OF CAPITAL MARKETS

a. Primary market
This is where new financial instruments, such as initial public offerings (IPOs) and bonds, are issued
by companies and governments for the first time.
b. Secondary market
This is where existing financial instruments, such as stocks and bonds, are traded between investors.
To Illustrate Capital Market:
1. Issuer Preparation
A company decides to raise capital by issuing stocks or bonds. They work with investment bankers
to prepare the offering documents and determine the terms of the securities.
2. Underwriting Process
Investment bankers underwrite the securities, meaning they agree to purchase the entire issue from
the issuer at a predetermined price. They then sell the securities to investors at a slightly higher price
to make a profit.
3. Primary Market Offering
The issuer conducts an Initial Public Offering (IPO) or a bond issuance in the primary market.
Investors purchase the newly issued securities directly from the issuer or through the underwriters.
4. Secondary Market Trading
Once the securities are issued, they are traded among investors in the secondary market, such as
stock exchanges or bond markets. Prices in the secondary market are determined by supply and
demand.
5. Investor Participation
Investors, including individuals, institutions, and funds, buy and sell the securities based on their
investment objectives, market analysis, and economic outlook.
6. Capital Deployment
The funds raised from the capital market transaction are used by the issuer for various purposes, such
as financing business expansion, funding projects, or paying off existing debt.

Philippine Stock Market, also known as the Philippine Stock Exchange (PSE)
- is the primary stock exchange in the Philippines where stocks, bonds, and other securities are traded.

Here's how it works:

1. Listed Companies
The PSE provides a platform for publicly listed companies to raise capital by offering shares of
ownership to investors through an Initial Public Offering (IPO).
2. Trading Mechanism
The PSE operates using a central order book system where buy and sell orders are matched
electronically. Investors place orders through licensed brokerage firms, which are members of the
exchange.
3. Market Participants
Various participants engage in the stock market, including individual investors, institutional investors
(such as mutual funds, pension funds, and insurance companies), traders, and market makers.
4. Market Indices
The PSE tracks the performance of the market through indices such as the PSEi (Philippine Stock
Exchange Index), which is composed of a basket of listed companies representing various sectors of
the economy.
5. Regulation
The stock market is regulated by the Philippine Securities and Exchange Commission (SEC) to
ensure fair and orderly trading, transparency, and investor protection.
6. Market Hours
The trading hours for the PSE are typically from 9:30 AM to 3:30 PM, Monday to Friday, except on
holidays declared by the exchange or the government.
Philippine Stock Market
- refers to the overall marketplace where stocks, bonds, and other securities are bought and sold in the
Philippines. It encompasses the entire marketplace for securities trading in the Philippines
Philippine Stock Exchange (PSE)
- specifically refers to the organization or institution that operates the primary stock exchange where
most of this trading takes place.

TYPES OF SECONDARY MARKET

a. Stock Markets
These markets focus on the trading of equity securities, such as stocks or shares in publicly traded
companies.
b. Bond Markets
These markets facilitate the trading of debt securities, like bonds, issued by corporations or
governments.
c. Derivatives Markets
Derivatives markets involve the trading of financial instruments, such as futures, options, and swaps,
which derive their value from an underlying asset or index.
d. Commodities Markets
These markets deal with the trading of physical goods, like agricultural products, metals, and energy,
or related financial instruments.
e. Currency Markets
Also known as the foreign exchange (Forex) market, currency markets facilitate the exchange of one
country's currency for another, enabling international trade and investments.