CREDIT AND COLLECTION

Lesson 1: The Emergence of Credit

The history of credit actually dates back to ancient times when various forms of lending
and borrowing were prevalent in different civilizations.

1. Ancient Civilizations:

Sumerians (circa 3000 BCE) (BCE means before the common era or before the
Christian era) The concept of credit began with agricultural societies in Mesopotamia.
Sumerians engaged in crop-sharing arrangements and early credit transactions.

Ancient China (circa 1100 BCE): Chinese merchants and farmers used bills of credit to
facilitate trade. These bills could be exchanged for goods, making them an early form of paper
money.

Merchants in ancient China used bills of credit as a form of early paper money. These
bills were essentially promissory notes that represented a promise to pay a certain amount
of precious metal, usually copper or silver, to the bearer.

The use of bills of credit allowed for more efficient trade, reducing the need to carry
heavy metal coins over long distances.

Before the widespread use of paper money, metal coins and cowrie shells were
commonly used as currency in ancient China. Cowrie shells were often used in smaller
transactions, and metal coins were used for larger transactions.

2. Roman Empire: (circa 200 BCE – 476 CE) where CE is common era

The Romans established a system of credit where loans were provided by private
individuals, usually with high-interest rates.

The Roman government also engaged in borrowing to finance public projects.

3. Middle Ages

During the Middle Ages, the Church condemned usury (charging interest on loans),
making lending a complicated affair.

The Middle Ages, also known as the medieval period, spanned roughly from the 5th to
the late 15th century. This era was characterized by significant social, political, and economic
changes, and credit practices during this time were influenced by a combination of economic
needs, religious beliefs, and societal structures.
 One of the defining features of credit during the Middle Ages was the strong influence of
the Catholic Church, which strongly condemned usury. Usury refers to the practice of charging
excessive interest on loans. The Church considered usury sinful and against moral principles,
as outlined in biblical texts.

4. Renaissance and Early Modern Period (14th – 17th centuries)

Bills of exchange and promissory notes became common instruments for credit.

5. 18th Century- Start of the Industrial Revolution

At this period, there was an increase in economic activities which meant needing more
extensive credit systems

Now that we are in the digital era, access to credit is more convenient and access to
financial resources for various purposes are also convenient as there are plenty nowadays.

Lesson 2: The Classes and Kinds of Credit

Bookkeeping: There is an exchange of value

Banking: Deposits become obligations of the banks towards the depositors, deposits,
being liabilities of the bank.

Kinds of Consumer Credit

1. Charge Account. A charge account is a form of credit where the consumer can make
purchases on credit, but the balance is expected to be paid in full by the end of the billing
cycle. It allows the consumer to defer payment until the end of the month but typically does
not involve an extended repayment period.

2. Installment Credit. The most common type of consumer credit today is installment sales or
purchase credit. Through this method, the buyer is often asked to make a partial payment
at the time of purchase, termed down payment. The balance is expected to be paid with a
series of regular payments. As a policy and practice, a buyer of goods on installment credit
is required by the selling company to sign a formal agreement known as the installment
contract.

Advantages of Installment Buying

a. Under the installment plan, the buyer is able to obtain, and , therefore, use the goods
he needs even before he the amount covering the full purchase price of the goods;
b. Installment buying may be considered as one form of savings. A number of individuals,
especially in cities and suburbs, are able to acquire a number of expensive articles
 which they use and which most probably they could not obtain if the installment plan is
non-existent.
c. To a number of individuals, installment buying is not only convenient but is also a
necessity. Possessed with limited purchasing power, these individuals are forced to
buy on the installment plan which provides them with the only way of participating in
the enjoyment of an abundance of goods which they need.
d. Many goods bought on installment plan “pay for themselves”. This may be illustrated
through the purchase of a house and lot wherein the individuals, instead of having to
pay the rent for the premises they occupy, would thereby be able to use it to pay for the
house and lot which they can call as their own.

While charge account and installment credit may be interpreted to be the same or
synonymous, there are actually differences between the two:

As to the Nature of Credit

A charge account is like a short-term borrowing arrangement where you can make
purchases and delay paying for them until the end of a billing cycle. It's a type of credit that
expects you to settle the entire bill each month.
Example: Let's say you have a store credit card. You go shopping and buy a few
items. Instead of paying immediately, the store gives you a bill at the end of the month. If
you pay the full amount shown on the bill by the due date, you won't owe any extra money.
However, if you choose to pay only a part of it, you might have to pay interest on the
remaining balance. The key is that the expectation is to clear the entire bill on a monthly
basis, making it a short-term credit arrangement.

Installment credit, on the other hand, involves borrowing a specific amount of

money for a particular purchase or expense. The borrower agrees to repay the loan amount
in fixed, regular installments over a predetermined period, which could be months or years.

As to Interest Charges

For charge account, interest charges may apply if the balance on the charge
account is not paid in full by the due date. However, interest rates on charge accounts
might be lower compared to other forms of credit.

For Installment Credit, interest charges are a standard component of installment

credit. The interest rate is usually determined at the time the loan is originated and remains
fixed for the duration of the repayment period.

3. Revolving Charge Accounts

Revolving credit plans manifest themselves under a variety of names. However, all
operate in much the same way, similar to regular charge account, new purchases may be
added to a revolving account without making new credit arrangements. However, unlike a
regular charge account payments may be made in installment.
 In other words, one of the defining features is of a charge account is that, as the
borrower makes payments, the available credit is replenished, allowing for continuous use
of the account as long as it remains within the credit limit.

Example: When you make a loan of P 72,000.00 that is payable in three years at P
2,000.00 per month and you were able to pay at least 24 months,available credit is
replenished, allowing you to make a reloan. Others would deduct the remaining balance to
the new loan. Example, since you were able to make payments for 24 months, you may be
allowed to make a loan again for a maximum of P 42,000.00. The remaining balance of P
24,000.00 will be deducted from the loan which you are going to make, giving you a net
proceeds of P 24,000.00

One common example for this is also your credit card. When you use a credit card,
you are essentially borrowing money up to your credit limit. As you make payments, you
free up space within your credit limit for future purchases.

4. Personal Loans

A person may borrow for a number of purposes such as to pay cash for an
appliance, for repair of the house, to pay for medical expenses, or to cover the expenses of
one’s travel abroad. The lender usually requires the borrower of a personal loan to pay
back a certain portion of the principal and interest each month over a period of time.
Moreover, most lenders ask a borrower to sign a promissory note, commonly called a note.
This is simply a written promise that the amount borrowed will be repaid on a certain date.
The borrower who signs the note is the maker.

A person with a good credit standing may be able to borrow on his signature alone.
This is called a signature or character loan because the borrower’s character is an
important factor in the lender’s decision to grant a loan. The name "signature loan" comes
from the fact that the borrower essentially secures the loan with their signature,
representing their commitment to repay the borrowed amount.

On the other hand, a borrower may be asked to furnish security that will guarantee
payment of his loan. Security may consist property such as automobile, sewing machine,
furniture, jewelry, etc. If the loan is not paid, the lender has the right to sell the property in
order to collect his money. This type of loan is called a secured loan. Anything used as
security for loan is called collateral.

Another method of securing a loan is to have a friend or relative of the borrower

endorse the note. As endorser, this person becomes responsible for the payment of the
loan if the borrower fails to pay.

5. Mercantile Credit

Mercantile credit is equally known as commercial credit or trade credit. It is granted

by manufacturers, wholesalers, jobbers as incident of sale.
 This is a type of credit arrangement between businesses where a supplier allows a
customer to purchase goods or services on credit with the expectation that payment will be
made at a later date. In other words, it refers to the credit extended by suppliers to buyers
for the purchase of goods or services for business purposes.

Therefore, we can say that mercantile credit is common practice in business-to-

business (B2B) transactions. Mercantile credit usually make use of bill of exchange as a
negotiable instrument that facilitates the exchange of goods or services for payment. A bill
of exchange is a written order issued by the seller (drawer) to the buyer (drawee), directing
the buyer to pay a specified amount to the seller or a third party (payee) at a future date. It
essentially serves as a type of credit instrument and a payment promise.

6. Small Market Vendor’s Loans

This new lending program for the vendors is made available as additional source of
capital of the market vendors. The loan may be availed of only by legitimate vendors and
stallholders

Other Types of Credit

1. Bank Credit

As quite well known, banks furnish funds to borrowers of every description. Such
type of loans vary from one bank to another which are generally based according to the
purposes for which these banks are established.

Bank credit" typically refers to the amount of money that a bank extends to its
customers in the form of loans or other credit products. This includes various types of loans
such as personal loans, mortgages, business loans, credit cards, and lines of credit

Banks extend credit to individuals and businesses based on various factors

including creditworthiness, income, collateral, and the purpose of the loan. The terms and
conditions of the credit, including the interest rate, repayment schedule, and any associated
fees, are usually outlined in a loan agreement or credit card agreement.

Bank credit plays a crucial role in the economy by facilitating consumption,

investment, and business activities. It allows individuals and businesses to access funds
they may not have readily available, enabling them to make purchases, invest in assets, or
expand their operations.

Banks manage their credit exposure by assessing the credit risk of borrowers and
setting limits on the amount of credit they are willing to extend. This helps mitigate the risk
of default and ensures the stability of the banking system. Additionally, banks may use
various tools such as credit scoring models, collateral requirements, and loan covenants to
manage and monitor their credit portfolios.
Types of Transactions Commercial Banks Finance

a) Commercial Loans

Commercial loans are financial instruments that banks and other financial
institutions provide to businesses for various purposes. These loans are designed to
meet the specific needs of businesses, ranging from short-term working capital to long-
term investment in assets.

b) Agricultural Loans

These are loans to farmers. Agricultural loans are typically used to finance
various aspects of agricultural production, including crop cultivation, livestock farming,
fisheries, agribusiness, and the acquisition of necessary equipment and inputs. Types
of agricultural loans are the following:

 Production Loans: Aimed at financing the costs associated with planting,

cultivating, and harvesting crops or raising livestock.
 Livestock Loans: Specifically tailored for those engaged in animal husbandry or
poultry farming.
 Fisheries Loans: Targeting individuals or businesses involved in the fishing
industry.
 Agribusiness Loans: Supporting enterprises involved in processing, marketing,
and distribution of agricultural products.

c) Industrial Loans

These are granted to finance the acquisition of new or additional plants and
machinery in connection with the production of goods or the expansion of services.
Examples of industrial loans are:

 Equipment Financing: Loans specifically used to purchase machinery and

equipment necessary for industrial processes.
 Working Capital Loans: To cover day-to-day operational expenses, such as raw
material procurement and payroll.
 Expansion Loans: Financing for the construction of new facilities or the expansion
of existing ones.
 Technology and Innovation Loans: Funding for research and development,
technology upgrades, and other initiatives aimed at improving industrial processes.

d) Real Estate Loans

These are loans granted to finance the acquisition or improvement of real estate,
either urban or rural. These loans play a crucial role in the real estate market by
providing the necessary funds for various real estate-related purposes. Here are some
key aspects of real estate loans in the context of the Philippines:
 As to purpose:

Home Loans: Individuals can take out real estate loans to purchase residential
properties, such as houses or condominiums.

Commercial Real Estate Loans: Businesses may seek financing for the acquisition,
construction, or improvement of commercial properties, including office spaces, retail
centers, and industrial facilities.

Types of Real Estate Loans:

Home Purchase Loans: Financing for buying a home or residential property.

Home Construction Loans: Loans to fund the construction of a new home.

Home Improvement Loans: Financing for renovations or improvements to an existing

property.

Commercial Real Estate Loans: Funding for businesses to acquire, develop, or

improve commercial properties.

e) Packing Credit Advances

These are loans to exporters to finance the processing of export goods prior to
their being shipped to foreign buyers

"Packing credit" typically refers to a short-term finance facility provided to

businesses engaged in export activities. It is a pre-shipment finance arrangement
designed to help exporters meet working capital requirements during the production
and packing stages of goods destined for export.

The eligibility criteria for packing credit may vary depending on the financial
institution providing the credit and the specific regulations in the country where the
exporter operates. However, in general, the following are common eligibility criteria for
businesses seeking packing credit:

 Exporter Status: Typically, only businesses engaged in export activities are

eligible for packing credit. The business should be involved in the production or
manufacturing of goods for export.
 Creditworthiness: The exporting business should have a good credit history and
financial stability. Lenders may assess the company's financial statements, credit
reports, and payment history.
 Export Order/Contract: Lenders may require proof of a firm export order or
contract with a buyer. This helps establish the need for packing credit and the
terms of the export transaction.
  Credit Limit: Financial institutions may set a credit limit based on the exporter's
past performance, financial strength, and the nature of the export transaction. The
credit limit represents the maximum amount the exporter can borrow.

2. Investment Credit

Investment credit consists of advances that have been made to a business

enterprise to enable it to purchase or construct the necessary plant and equipment.

(What is the difference between a commercial real estate loan and investment credit?)
While some people may interpret these two in the same way, these are two different types
of loans.Commercial real estate loan is specifically designed to finance the acquisition,
development, or improvement of commercial properties while investment credit is a broader
term that can refer to various forms of financing used for long-term capital expenditures.
While it can include real estate investment, it is not limited to property transactions.
Investment credit might cover a range of strategic investments, including business
expansion, technology upgrades, or acquisitions.

3. Agricultural Credit

Qualified to borrow agricultural loans are corporations, entities and private individuals
engaged in agricultural production, processing, storage, marketing, exportation, importation,
manufacture and distribution of farm machinery and equipment, fertilizers and other inputs.

(What is the difference between an agricultural loan and agricultural credit?)

While some may say that the two terms are synonymous, the difference may lie in the
scope of agricultural loans and agricultural credit. "Agricultural credit" is a broader term
encompassing a range of financial services and products tailored for the agricultural sector
such as lines of credit, crop insurance and other financial instruments, while an "agricultural
loan" specifically refers to the provision of funds through a loan arrangement. The key
difference lies in the scope and inclusiveness of the term "agricultural credit," which may go
beyond loans to include various financial tools and services that support the financial well-
being of those involved in agriculture.

“Lines of Credit” in the context of agricultural credit

Flexible Access to Funds: Farmers and agricultural businesses can access funds from
the line of credit as needed. This flexibility is especially beneficial in agriculture, where cash
flow needs may vary throughout the year based on planting seasons, harvesting, and other
factors.

Revolving Nature: A line of credit is typically a revolving form of credit. As the borrower
repays the drawn amount, the available credit is replenished, and the farmer can continue
to access funds within the established limit.
4. Supervised Credit

Supervised credit is a combination of production credit with technical help to the

farmer using it. The program was designed to assist family farmers who lost their crops
because of lack of rain, or were forced to sell what little they produced at low prices, by
extending credit to the farmer accompanied with extensive guidance in farm, home and
financial management.

5. Export Credit

By definition, export credit refers to financing provided to businesses engaged in

exporting goods and services. It aims to support and promote international trade by offering
financial assistance to exporters.

Export credit helps exporters manage various financial challenges associated with
international trade, such as production costs, working capital requirements, and risks
related to non-payment by foreign buyers.

Export credit can take various forms, including pre-shipment and post-shipment
financing, working capital loans, and credit insurance. It may be provided by government
agencies, financial institutions, or a combination of both.

What is the difference between a packing credit and export credit?

Packing credit is a specific type of short-term financing that addresses the working
capital needs of exporters during the pre-shipment stage. It is designed to assist exporters
in the period between the receipt of an export order and the actual shipment of the goods.

6. Public Credit

Public credit is just another term for government borrowing and is considered as a
means of pledging the good faith and resources of the whole people for the repayment of a
debt incurred on their behalf.

Public credit refers to the financial credibility and reputation of a government in the
eyes of lenders, investors, and the public. It is a measure of the government's ability to
borrow money and meet its financial obligations. Public credit is essential for a government
to access funds from domestic and international financial markets to finance public
expenditures, infrastructure projects, and other fiscal activities. The components of public
credit are:

a. Credit Rating: Credit rating agencies assess a government's creditworthiness and

assign a credit rating based on various economic and financial indicators. These
ratings range from high to low, with higher ratings indicating lower risk for
investors.
 Several credit rating agencies assess the creditworthiness of governments and
assign credit ratings based on their analysis of economic, financial, and political
factors. These ratings provide investors and creditors with insights into the risk
associated with lending to a particular government. Some prominent credit rating
agencies globally include:

 Moody’s Investors Service: Moody's is a globally recognized credit rating

agency that provides credit ratings for various entities, including sovereign
governments. Its ratings range from Aaa (highest) to C (lowest).

 Standard and Poor’s (S & P): S&P is another prominent credit rating agency
that assesses the creditworthiness of governments worldwide. Its sovereign
credit ratings range from AAA (highest) to D (default).

 Fitch Ratings: Fitch is a global credit rating agency that evaluates the credit
risk of sovereigns, corporations, and other entities. Its sovereign credit ratings
range from AAA (highest) to D (default).

SOURCES OF CREDIT

Credit ,which is made available through the savings of the various sectors of the
economy, in essence, helps its allocation to its best uses. However, for a credit economy to
thrive and attain healthy growth and development, it is necessary that not only should adequate
safeguards be instituted for the wise and proper use of credit, but equally important is that it
should be made available at the time a need for it arises, in amounts needed, and at a cost
considered reasonable for the user.

This statement emphasizes the crucial role of credit in an economy, highlighting its
significance in promoting growth and development. The following are its key points:

1. Source of Credit

Credit is made available through the savings of various sectors of the economy. This
implies that the funds used for lending come from the accumulated savings of individuals,
businesses, and other entities. These savings are then channeled into the credit market to
be lent out.

2. Allocation of Credit

This suggests that credit plays a vital role in efficiently allocating resources in the
economy. By providing access to funds, credit allows individuals and businesses to invest,
spend, and undertake various economic activities. This allocation is expected to contribute
to the overall economic well-being.

3. Safeguards for Wise Use

 This implies the importance of establishing regulations, oversight mechanisms, and
responsible lending practices to prevent misuse of credit. Safeguards are necessary to
promote wise and proper utilization of credit, preventing excessive risk-taking or
irresponsible behavior.

4. Timely Availability

For a credit economy to thrive, it is crucial that credit is made available when
needed. Timely access to credit allows individuals and businesses to seize opportunities,
address financial challenges, and navigate economic uncertainties. Delays in obtaining
credit could hinder economic activities and growth.

5. Appropriate Amounts

In addition to timely availability, credit should be provided in amounts that meet the
needs of borrowers. Whether it's for personal loans, business investments, or other
purposes, having access to the right amount of credit is essential for individuals and
businesses to achieve their goals.

6. Reasonable Cost

The cost of credit, including interest rates and fees, should be reasonable.
Excessive costs could deter borrowers and make credit less accessible. Balancing the cost
of credit ensures that it remains affordable for users, contributing to the sustainability of
economic activities.

Financial Intermediaries

While lenders and borrowers may be brought together through credit instruments and
credit markets, in many instances, credit transactions are consummated through credit
institutions which serve as intermediaries between lenders and borrowers in these markets.

Credit institutions, in general, perform the following functions:

1. To pool the savings of the lending customers;

Credit institutions, such as banks, serve as intermediaries that gather funds from a
large number of individual depositors. These depositors are essentially lending their money
to the institution. By pooling these savings, credit institutions accumulate a significant
amount of funds, creating a sizable pool of capital that can be used for lending and
investment purposes.

2. To invest these funds financially on the basis of careful investigation and analysis of credit;

Once the savings are pooled, credit institutions invest these funds in various
financial instruments. This involves careful investigation and analysis of creditworthiness.
Institutions conduct due diligence to assess the risk associated with potential borrowers or
 investment opportunities. This function helps ensure that the funds are allocated to
projects, businesses, or individuals with a reasonable expectation of repayment.
3. To diversify risk to a degree unattainable for individual investors;

Credit institutions enable risk diversification by distributing funds across a variety of

borrowers and investments. This diversification helps mitigate the impact of losses from any
single borrower or investment. It spreads the risk across a broad portfolio, making the
overall financial position of the institution more stable and resilient to individual defaults.

4. To transform short-term to long-term funds through an expedient and careful staggering of

maturity dates;

Credit institutions engage in maturity transformation by converting short-term

deposits into long-term loans or investments. This involves managing the maturity dates of
assets and liabilities in a way that balances the need for liquidity with the desire to earn a
return on long-term investments. Skilful staggering of maturity dates allows institutions to
meet the short-term demands of depositors while also making long-term investments.

5. To perform insurance and trust functions.

Credit institutions often perform insurance and trust functions. In the case of insurance,
they may offer various financial products such as life insurance, property insurance, or
other types of coverage. As for trust functions, institutions may act as trustees, managing
assets on behalf of clients and ensuring that they are used according to the terms of the
trust.

The following are among the most important sources of credit in the country:
FINANCIAL INTERMEDIARIES
While lenders and borrowers may be brought together through credit instruments and
credit markets, in many instances, credit transactions are consummated through credit
institutions which serve as intermediaries between lenders and borrowers in these markets.

Credit institutions, such as banks and credit unions, act as intermediaries in credit
transactions. They play a crucial role in connecting lenders and borrowers and facilitating the
flow of funds between them.

Credit institutions assess the creditworthiness of potential borrowers, evaluating factors

like income, credit history, and collateral to determine the risk associated with lending.

They match the funds from savers (lenders) with the needs of borrowers. This
intermediation process helps allocate resources efficiently in the economy. Also, they manage
the documentation process, and service the loans by collecting repayments and handling
customer inquiries.
Credit institutions, in general, perform the following functions:
1. To pool the savings of the lending customers
Combining the funds deposited by various customers who are also borrowers.
Financial institutions, such as banks, often attract deposits from their customers. These
deposits represent the savings of individuals and businesses who entrust their money to the
bank for safekeeping and potential returns.
Financial institutions make a profit by charging a higher interest rate on loans than the
interest they pay on deposits. The difference between the interest earned on loans and the
interest paid on deposits is known as the interest rate spread.
2. To invest these funds financially on the basis of careful investigation and analysis of
credit;
This suggests that the financial institution, such as a bank, is not just holding the
pooled funds passively but actively using them for investments.
Instead of keeping the deposited funds idle, the financial institution aims to invest or
deploy them strategically. This typically involves putting the funds into various financial
instruments or vehicles that can generate returns, such as loans, securities, or other
investment opportunities.
3. To diversify risk to a degree unattainable for individual investors;
To reduce risk and enhance the stability of the investment portfolio, financial
institutions often diversify their investments. This means spreading the funds across different
types of assets or loans to avoid concentration risk.
4. To transform short-term to long-term funds through an expedient and careful
staggering of maturity dates
This describes a financial strategy where funds with short-term maturities are
intentionally shifted to longer-term maturities, and this process is carried out with efficiency
and careful consideration of the timing of maturity dates.
What is maturity date? The maturity date refers to the date on which a financial
instrument, such as a loan or a bond, becomes due for repayment. It is the point in time when
the principal amount, along with any accrued interest or additional payments, must be repaid
to the lender or bondholder.
In the context of loans, the maturity date is the date by which the borrower is obligated to
repay the entire loan amount. This date is specified in the loan agreement and is agreed upon
by the borrower and the lender during the loan origination process.
For bonds, the maturity date is the date when the bond issuer is required to repay the
principal amount to the bondholders. Until the maturity date, bondholders typically receive
periodic interest payments. Once the bond reaches maturity, the issuer repays the face value
of the bond to the bondholders.
 Short-term funds: Also known as money market funds, these are funds with a relatively
short time horizon, typically less than a year. They may include sources like short-term loans,
current liabilities, or other obligations that mature in the near term. Examples are:
 Treasury bills- short term debt issues by the government
 Certificates of deposit: Time deposits with fixed terms at banks
Long-term funds: These are funds with a more extended time horizon, usually beyond one
year. Long-term funds may include sources such as long-term loans, bonds, or equity.
Examples are:
 Real estate investment trusts: investment in real estate assets, providing income and
potential appreciation
 Retirement funds: Designed for long-term retirement savings, often with diversified
portfolios
The term "staggering of maturity dates" implies that the process involves strategically
arranging or spreading out the maturity dates of the transformed funds. Instead of having all the
funds mature at once, they are distributed over a range of maturity dates.
5. To perform insurance and trust functions
Suggests that a financial institution or entity involved in credit transactions may take on
additional roles related to insurance and trust management.
In credit and collection, insurance functions could involve providing insurance products
or services to mitigate various risks associated with lending. This might include credit
insurance, which protects the lender against the risk of borrower default or other specified
risks.
FINANCING COMPANIES

As defined in the Financing Company Act (RA No. 5980), financing companies are
corporations or partnerships (except those regulated by the Central Bank of the Philippines, the
Insurance Commissioner and the Cooperatives Administration Office, now the Bureau of
Cooperatives and Community Development), which are primarily organized for the purpose of
extending credit facilities to consumers and to industrial, commercial or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivables, or buying and
selling contracts, leases, chattel mortgages, or other evidences of indebtedness,or by leasing
motor vehicles and office machines and equipment, appliances and other movable property.

Types of Financing Companies

Consumer Finance Companies: These companies specialize in providing personal loans,

installment loans, and other forms of credit to individuals for personal and household needs.
Unlike banks, consumer finance companies typically do not accept deposits. They rely on other
funding sources, such as borrowing from financial markets or using their capital to provide
loans.
Commercial Finance Companies: These companies cater to businesses, offering financing
solutions such as working capital loans, equipment financing, factoring, and other business
credit services.

As to their range of services, banks and commercial finance companies differ in the sense that
Banks provide a broad spectrum of financial services, including savings and checking accounts,
credit cards, mortgages, wealth management, and more. Commercial finance companies are
more specialized and focused on meeting the financing needs of businesses. This may include
loans for equipment, real estate, or short-term working capital, thus the word commercial.

Auto Finance Companies: Specialize in providing financing options for vehicle purchases,
including auto loans and leases.

Specialty Finance Companies: Some financing companies focus on specific niches, such as
healthcare financing, equipment leasing, or invoice financing.

Investment Houses

Investment houses assist corporations, governments, and other entities in raising capital
by underwriting new securities, such as stocks and bonds, and facilitating initial public offerings.
Underwriting is a financial process carried out by financial institutions, such as investment banks
or insurance companies, where they assess and evaluate the risk associated with providing
financial services or issuing securities.

Investment houses are like financial helpers for big companies, governments, and
others. They help companies and governments with things like selling stocks and bonds to raise
money.

Think of them as financial experts that companies and governments turn to when they
need help with important financial decisions.

Imagine a big tech company wants to sell its stocks to the public. The investment house
steps in, helps set the right price, and makes sure everything goes smoothly. It's like having a
knowledgeable friend when dealing with big money matters!

Underwriting: Is the process through which an individual or institution takes on financial

risk for a fee. An underwriter is any party that evaluates and assumes another party’s risk
for a fee. The pay paid to an underwriter often takes the form of a commission, premium,
spread or interest.

Investment houses commonly perform underwriting as one of their key functions.

Underwriting is a financial process where institutions assess and assume the risk
associated with issuing securities or providing financial services.
Example:

Company Needs Money:

Explanation: Imagine a company (let's call it ABC Corp) wants to raise money by selling
something like bonds.
Example: ABC Corp needs funds for expanding its business, so it decides to issue
bonds, which are like IOUs that investors can buy.

Gets Expert Help:

Explanation: ABC Corp asks an investment house (let's call it XYZ Bank) for help. XYZ
Bank is like a financial expert.
Example: ABC Corp hires XYZ Bank to guide them through the process of selling these
bonds to investors.

Checking the Company:

Explanation: XYZ Bank looks at ABC Corp's financial health, checks if they are a good
investment, and figures out how much risk is involved.
Example: XYZ Bank reviews ABC Corp's financial statements and business plans to
make sure investors would be interested in buying ABC Corp's bonds.

Deciding on Terms:

Explanation: XYZ Bank and ABC Corp work together to decide on the details, like how
many bonds to sell, at what price, and for how long (the maturity).
Example: They agree to issue $10 million worth of bonds at $1,000 each, with an interest
rate of 3%, and the bonds will mature in five years.

Bank Commits to Buying:

Explanation: XYZ Bank promises to buy all the bonds from ABC Corp, taking on the risk.
Example: XYZ Bank commits to purchasing all $10 million worth of bonds from ABC
Corp, even if they can't sell them all to investors.

Selling to Investors:

Explanation: XYZ Bank now goes out and sells these bonds to investors. This is like ABC
Corp getting the money upfront.
Example: XYZ Bank markets and sells the $10 million worth of bonds to individuals and
institutions looking to invest.

Support After the Sale:

Explanation: XYZ Bank might continue to support ABC Corp after the sale, helping
ensure the bonds are doing well in the market.
Example: XYZ Bank keeps an eye on how well the bonds are trading and offers
additional support to ABC Corp if needed.

Underwriting can take place in various financial and insurance contexts, and it occurs in
different locations depending on the type of underwriting involved. Here are some
common settings where underwriting takes place:

Insurance companies: In the insurance industry, underwriting is a critical process for

assessing risk and determining the terms of insurance policies. Insurance underwriters
evaluate applications for coverage, analyze risk factors, and decide on the terms of
coverage. This process typically takes place within the offices of the insurance company.

In the real estate and lending sector, mortgage underwriting is the process of
evaluating a borrower's creditworthiness and the risk associated with a mortgage loan.
Mortgage underwriters work for mortgage lenders or financial institutions, and the
underwriting process takes place within these organizations.

Example:

Applicant: Sarah wants car insurance for her new car.

Application: Sarah fills out a form with details about herself and her car, including its
make, model, and usage.

Underwriting: XYZ Insurance reviews the application to assess the risk. They consider
factors like Sarah's driving history, the car's value, and the likelihood of accidents.

Policy Terms: XYZ Insurance decides on the coverage amount, deductible, and
premium based on the risk assessment.

Offer: XYZ Insurance offers Sarah a car insurance policy with specific terms, such as
coverage limits and the premium amount.

Acceptance: If Sarah agrees, she accepts the policy and pays the premium.

Policy Issuance: XYZ Insurance issues the car insurance policy, and Sarah is now
covered against potential damages.

Risk Management: XYZ Insurance assumes the risk of Sarah's potential claims during
the policy period.

In this example, underwriting is the process of XYZ Insurance evaluating the risk
associated with insuring Sarah's car and determining the terms of the insurance policy.
 The policy provides coverage, and XYZ Insurance manages the risk of potential future
claims.

 Money Market: Basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market has
become a component of the financial market for buying and selling of securities of short-
term maturities, of one year or less, such as treasury bills and commercial papers.

Examples of highly liquid instruments with short-term maturities:

Treasury Bills (T-bills):

Characteristics : Short-term debt securities issued by governments
Maturity : Typically range from a few days to one year.
Liquidity : Highly liquid and actively traded in the secondary market.

Commercial Paper:
Characteristics : Unsecured, short-term debt issued by corporations.
Maturity : Typically ranges from a few days to 270 days.
Liquidity : Generally considered highly liquid, especially for well-established
corporations.

Certificates of Deposit (CDs):

Characteristics : Time deposits offered by banks.
Maturity : Can range from a few days to several months or a year.
Liquidity : The secondary market for CDs is not as active as other money market
instruments, but they are still considered relatively liquid.

Repurchase Agreements (Repos):

Characteristics : Short-term agreements where one party sells securities with an
agreement to repurchase them later.
Maturity : Usually very short term, often overnight.
Liquidity : Highly liquid and commonly used in the money market for short-term
funding.

Money Market Funds:

Characteristics : Investment funds that invest in a diversified portfolio of short-term, low-
risk instruments.
Maturity : The fund's holdings consist of short-term instruments with varying
maturities.
Liquidity : Shares of money market funds are redeemable on demand, providing
high liquidity to investors.

Short-Term Government Bonds:

Characteristics : Government-issued bonds with short maturities.
Maturity : Typically range from a few months to a few years.
Liquidity : Government bonds are generally liquid, especially those issued by
stable governments.
Treasury Notes (T-notes):
Characteristics : Medium-term debt securities issued by governments.
Maturity : Generally, maturities range from two to ten years, but the shorter-term
ones are considered in the money market.
Liquidity : T-notes are actively traded, and their shorter-term versions are relatively
liquid.

The term "money market" can refer to both the financial market itself and the
participants or entities involved in that market. Let's clarify both aspects:

1. Financial Market:

Money Market: The money market is a segment of the financial market where short-term
borrowing and lending take place. It involves the trading of short-term, highly liquid, and
low-risk financial instruments. Participants in the money market aim to meet short-term
financing needs or invest excess funds for a brief period.

2. Participants in the Money Market:

a. Banks: Commercial banks play a central role in the money market. They engage in
short-term borrowing and lending with other banks and financial institutions to
manage their liquidity and meet regulatory requirements.

b. Financial Institutions: Various financial institutions, including credit unions,

investment banks, and other non-banking financial institutions, participate in the
money market to address short-term funding needs.

c. Governments: Governments, both at the national and local levels, participate in the
money market by issuing short-term debt instruments, such as Treasury Bills, to
manage their cash flow and meet immediate financial requirements.

d. Corporations: Large corporations access the money market for short-term

financing through instruments like commercial paper. They may also invest their
excess funds in money market instruments for short-term returns.

e. Central Banks: Central banks play a crucial role in the money market by
conducting monetary policy operations, such as open market operations and
discount window lending, to influence interest rates and manage overall liquidity in
the financial system.

f. Money Market Funds: These are investment funds that pool money from individual
and institutional investors to invest in a diversified portfolio of money market
instruments. Money market funds provide a convenient way for investors to access
the money market.
 g. Brokerage Firms: Brokerage firms facilitate trading in the money market by
connecting buyers and sellers of money market instruments. They play a role in
the buying and selling of short-term securities.

h. Individuals: While not direct participants in the wholesale money market, individual
investors can indirectly participate through money market funds or by investing in
short-term instruments like Treasury Bills.

Commercial Banking

In line with the provision of the General Banking Act, a commercial banking corporation
shall be any corporation which accepts or creates demand deposits subject to withdrawal by
check. A commercial banking corporation, in addition to the general powers incident to a
corporation, shall have all such powers as shall be necessary to carry on the business of
commercial banking, by accepting drafts and issuing letter of credit, by discounting and
negotiating promissory notes, drafts, bills of exchange and other evidences of debts; by
receiving deposits; by buying and selling foreign exchange and gold or silver bullion, and by
lending money against personal security or against securities consisting of personal property or
first mortgages on improved real estate and the insured improvement thereon.

Commercial banks are like big piggy banks where regular people and small businesses
keep their money. They offer services like savings accounts, checking accounts, and certificates
of deposit (CDs).

Commercial banks make money by lending money. They offer loans for things like
buying a house (mortgages), getting a car (auto loans), starting a business, or personal needs.
Example: If you take a loan from the bank to buy a car, the bank earns money by charging you
interest on that loan.

The money you and others deposit into the bank (your savings or checking account)
provides the bank with the funds to lend to people who need loans. Example: Your savings in
the bank contribute to the pool of money that the bank can use to lend to others.

Commercial banking is not just for individuals; it's also for big companies, institutions,
and sometimes governments. They offer specialized services like business loans, global trade
services, and more. Example: A big company might use commercial banking services to
manage their finances, get loans for expansion, or facilitate international trade.

Savings and Mortgage Banking

Savings Bank

Savings banking refers to the financial services provided by banks that focus on helping
individuals and businesses save and manage their money. These services are designed to
encourage saving and offer various types of deposit accounts.
 Savings accounts, certificates of deposit (CDs), and other similar accounts are common
in savings banking. These accounts usually provide interest on deposited funds.The focus is on
safety, liquidity, and modest returns on savings. Customers can easily withdraw their money
when needed.

Example: When you open a savings account at a bank, you are engaging in savings
banking. You deposit money, earn a small amount of interest, and can access your funds
whenever you need them.

Mortgage Banks

Mortgage banking involves providing financial services related to real estate, specifically
the origination, servicing, and sometimes selling of mortgage loans. These services facilitate
individuals and businesses in buying or refinancing real estate.

Key Features:

Mortgage banks help people secure loans to buy homes or refinance existing
mortgages. They often package and sell these mortgages in the secondary market.
Services include loan origination (processing and approval), servicing (collecting payments and
managing the loan), and, in some cases, the sale of mortgage-backed securities.

Example:

When you apply for a home loan to buy a house, the bank that helps you with the loan
process is involved in mortgage banking. The bank may later sell the mortgage to another
financial institution.

Difference between savings and mortgage banks to commercial banks

Primary Focus:

Savings and Mortgage Banks:

Focus on savings products, including savings accounts and certificates of deposit, encouraging
individuals and businesses to save. May specialize in mortgage-related services, offering home
loans and related products.

Commercial Banks:

Offer a broader range of financial services, including savings accounts, checking accounts,
loans, business accounts, and various corporate services. Serve both individual customers and
businesses with a diverse set of banking products.
Services Offered:

Savings and Mortgage Banks:

Primarily offer savings products, mortgage loans, and related services; May not provide the
extensive range of services offered by commercial banks.

Commercial Banks:

Provide a comprehensive suite of financial services, including savings and checking accounts,
loans, credit cards, wealth management, business banking, and more; Cater to a wide range of
financial needs for individuals, small businesses, and large corporations.

Loan Focus:

Savings and Mortgage Banks:

Have a specific emphasis on mortgage-related loans, such as home loans and refinancing; May
not offer as diverse a range of business loans as commercial banks.

Commercial Banks:

Provide a variety of loans, including mortgages, personal loans, business loans, and lines of
credit; Serve the borrowing needs of individuals and businesses across different sectors.

Target Customer Base:

Savings and Mortgage Banks:

Often target individuals and businesses looking for savings options and mortgage financing;
May have a more specialized focus on real estate-related services.

Commercial Banks:

Serve a broad customer base, including individuals, small businesses, large corporations, and
government entities; Aim to provide a comprehensive range of financial solutions for diverse
clients.

OTHER SOURCES OF CREDIT

In primitive societies, where members produced what they consumed and vice versa,
the need for a medium of exchange like money was minimal. Barter, the direct exchange of
goods and services, was a practical method of obtaining what one needed.
However, as societies evolved and became more complex, several challenges arose with the
barter system, leading to the emergence of money as a more efficient medium of exchange.
The key points in this evolution are:
 Limitations of Barter

Double Coincidence of Wants: Barter relies on a double coincidence of wants, meaning

both parties must have something the other wants. This requirement often led to difficulties
in finding suitable trading partners.

Lack of Standardization: The absence of a standardized unit of value made negotiations

in barter transactions cumbersome, as there was no common measure of worth.

 Emergence of a Medium of Exchange

Common Medium of Exchange: To overcome the challenges of barter, societies began

using certain items as a common medium of exchange. These items, often chosen for their
durability, divisibility, and widespread acceptance, evolved into early forms of money.

Commodity Money: Initially, goods with intrinsic value, such as cattle, shells, or precious
metals, served as commodity money. These items were generally accepted in trade due to
their usefulness and desirability.

 Development of Currency

Transition to Coinage and Paper Money: As societies became even more sophisticated,
they transitioned from barter and commodity money to minted coins and later, paper
money. These forms of currency further streamlined trade and economic transactions.

In the early history of money, its primary use was often for consumption rather than
investment. People used money to facilitate transactions related to their immediate needs, such
as acquiring goods and services for daily living. During this period, loans that were available
were typically used for sumptuary purposes, meaning they were taken out for personal or
household expenses rather than for business or investment ventures.

The prevailing sentiment during this time was generally negative toward the concept of
charging interest on loans. Aristotle, a prominent philosopher of ancient Greece, expressed this
sentiment by stating that money is "barren." This idea implies that money, by itself, does not
have the ability to generate more value over time. Therefore, charging interest on money was
viewed as inappropriate and against the natural order.

Aristotle's viewpoint was reflective of the prevailing ethical and moral attitudes of the
time, where making a profit from money itself was considered morally questionable. The belief
was rooted in the idea that true value should come from productive activities like agriculture,
craftsmanship, or trade rather than from the mere possession of money.

Despite this general aversion to charging interest, the demands of trade and economic
activities gradually led to the practice of lending money at interest. As societies became more
complex, and economic activities expanded, there arose a recognition of the time value of
money. Lending money became a means for individuals to obtain capital for various purposes,
including business ventures, and the charging of interest was seen as a way to compensate
lenders for the opportunity cost of lending their funds instead of using them for immediate
consumption.

Over time, as economies evolved and financial practices developed, the prohibition
against charging interest on loans diminished, and interest-bearing loans became more
commonplace. The shift in attitudes toward interest rates was influenced by changing economic
needs, the recognition of the role of capital in economic growth, and the acknowledgment that
lending involves risks and should be compensated accordingly.

Individual Money Lenders

Individual money lenders in this country fall under two types: Those who grant loans as
personal accommodation to friends and relatives termed in Filipino as pakikisama or to
reciprocate a debt of gratitude or what is known as “utang na loob.” As such, these individuals
do not charge interest for such personal accommodations. The other type covers those who
make the lending of money profitable business. For this reason, being unlicensed by the
government, they generally charge and collect exorbitant or usurious rates of interest a practice.

1. Pakikisama or Utang na Loob Lenders:

These lenders provide loans as personal accommodations to friends and relatives.The

term "pakikisama" translates to a sense of camaraderie or solidarity, implying that these loans
are granted based on social relationships and a desire to maintain harmony within the
community.

"Utang na loob" refers to a debt of gratitude, and loans under this category are often
extended in reciprocation of favors or as a way of fulfilling social obligations.Importantly, these
individuals typically do not charge interest for such personal accommodations. The lending is
based on personal relationships and a sense of communal reciprocity.

2. Profit-Oriented, Unlicensed Lenders:

The second type of individual money lenders engages in lending as a profitable

business.
Unlike the first group, these lenders are not motivated by personal relationships or social ties;
instead, they operate with a profit motive.

Due to being unlicensed by the government, they may not be subject to regulatory
oversight and may operate outside formal financial regulations. Because of their unregulated
status, these lenders might charge what is described as "exorbitant or usurious rates of
interest." Usury refers to the practice of charging excessively high-interest rates, often
considered exploitative or unjust.
Commercial Establishments

1. Retail Stores

The role of commercial establishments, particularly retail stores, is indeed significant in

the functioning of a credit economy.

The disappearance of barter as a prevalent method of exchange paved the way for the
rise of retail stores. Barter faced challenges, such as the double coincidence of wants and lack
of standardization, making it impractical as societies became more complex.

Retail stores emerged as a solution to these challenges, providing a centralized place for
individuals to buy and sell goods using a common medium of exchange, i.e., money.

Historical Context:

Retail stores have a long history and are known to have existed before the time of
Christ. In ancient Rome, they flourished to such an extent that the city was described as a "city
of shops."
Early retail shops were often small, and many were located inside or in front of the
owner's home. These shops were typically operated by the owner with little or no assistance.

Etymology of "Shop":

The word "shop" itself has an interesting etymology. It is derived from the Middle English
word "shoppe," which means "to buy or to inspect." The Middle English term, in turn, comes
from the Old French "eschoppe" and the Late Latin "scūpa," both meaning "a small retail store"
or "room."

Evolution and Localization:

Retail stores evolved over time, adapting to the changing needs of consumers and the
growing complexity of economies.

In many cases, these stores were initially small and localized, often established by
entrepreneurial individuals who procured goods from other merchants and assembled them at a
specific location for resale to consumers in the neighborhood.

Birth of Retail Stores in the Country:

The exact origins of retail stores in a specific country may not be precisely known, but
their emergence can be presumed to coincide with the development of trade and commerce
within the community.
 Pioneering individuals likely played a role in introducing the concept of retailing by
sourcing goods from various merchants and making them available for resale within the local
community.
Economic Impact:

Retail stores play a crucial role in facilitating economic transactions by providing a

platform for consumers to access a variety of goods and services conveniently.

Their existence contributes to the development of a credit economy, as

consumers can make purchases on credit, and businesses can manage their cash flows
through credit transactions.

2. Grocery and Department Stores

More sophisticated, grocery and department stores are two examples of retailing
establishments. However, grocery stores are essentially food stores. As in department stores,
goods in grocery stores are displayed for the customers to inspect and pick out whatever they
want to buy and have them checked out through the cashier. Grocery stores, as well as
department stores, generally carry well-known brands of products they sell to the consumers in
efforts to enlist their patronage. Moreover, as an added inducement, the customers are given
the privilege of buying goods on credit which is generally facilitated by the use of credit cards.

Customer Inducement: Offering the privilege of buying goods on credit serves as an

inducement for customers to make purchases, especially for more significant or unplanned
expenses.

Convenience: Credit transactions, facilitated by credit cards or store-specific credit

accounts, provide customers with the convenience of deferred payments. This can be
particularly appealing for items with higher price tags or during periods of financial strain.

Credit Cards and Retail:

Facilitation of Credit Transactions: Credit cards play a crucial role in facilitating credit
transactions in retail establishments. They provide a convenient and widely accepted means for
customers to make purchases on credit.

Partnerships with Financial Institutions: Retailers often form partnerships with

financial institutions to issue co-branded credit cards, offering additional benefits such as loyalty
points, discounts, or exclusive promotions to cardholders.

Issuing Credit Cards:

Banks issue credit cards to eligible individuals or businesses. Each credit card comes
with a unique card number, expiration date, and security code, allowing cardholders to make
transactions.
Card Networks and Payment Processors:

Credit cards are associated with major card networks such as Visa, MasterCard,
American Express, or Discover. These networks facilitate the authorization, clearing, and
settlement of transactions.

Banks partner with payment processors that connect with these card networks to ensure
seamless processing of credit card transactions.

Establishing Merchant Accounts:

Banks work with merchants to establish merchant accounts. A merchant account is a

type of bank account that allows businesses to accept credit card payments.

Merchants undergo a vetting process, and once approved, they receive the necessary
equipment or software to accept credit card payments.

Point-of-Sale (POS) Terminals:

Merchants, ranging from retail stores to restaurants, install POS terminals to accept
credit card payments. These terminals can read the information on a credit card's magnetic
stripe or chip, process the transaction, and print or email receipts.

E-commerce Integration:

For online businesses, banks provide e-commerce solutions that enable them to accept
credit card payments over the internet.

This involves integrating payment gateways, which securely handle the online
transaction process, including encryption and authentication.

3. Supermarket

Supermarkets The one major benefit that supermarkets offer to hoppers is that they can
buy almost everything under a single roof. The reason is that they are like a big catalog where
the shopper can inspect and study any of the thousands of items on display and budget her
buying as she goes through the store. She can examine a brand without anybody watching her,
place it on her shopping basket or push cart, return it o the shelf, or she can examine another
brand, choose it or reject it to her heart’s content. While a supermarket is largely a brand new
form of retailing, its chief features consist of assembling all kinds of goods including non-food
items, clothing, shoes, hardware and countess others, May goods are placed in neat packages
which make them convenient and appeal to the aesthetic sense of the shoppers.
Fundamentally, a supermarket sells good to their customers on credit who qualify for the use of
such privilege.
4. Pawnshop

The present-day pawnshops evidently owe their origin from the Montes Pietatis which
were established by Franciscans in Italy. The terms mons referred to any form of capital
accumulation and pietatis fro the Latin “pietas” meaning pious. As such, montes pietatis is
consisted of charitable funds from which loans come from, which were exempted from interest,
but secured by pledges. Such loans were granted to the poor. In the Philippines, pawnbroking is
one of the oldest credit institutions and believed to have been introduced in this country by the

Spanish friars when we were under the crown of Spain. It may be interesting to point out,
in this connection, that the oldest savings bank, the Monte de Piedad was granted the privilege
of lending money against pledges of jewelry. Nowadays, the amount of loans which pawnshops
may grant is subject to the agreement of the parties. However, in o instance, shall the amount of
the loan be less than thirty ercent (30%) of the appraised value of the security offered for the
loan, unless the pawner manifests in writing the desire to borrow a lesser

Pawnbroking likely began in the Philippines during the Spanish colonial era when the
practice was introduced by the Spanish friars.
The Monte de Piedad, established in 1882, played a significant role as an early savings
bank that provided loans against pledges, particularly jewelry.

Legal Framework: Presently, the operations of pawnshops in the Philippines are

regulated by laws and government authorities. The amount of loans that pawnshops can grant
is subject to the agreement between the pawnshop and the customer.

Loan Amounts and Appraisal: The amount of the loan granted by pawnshops is
typically based on the appraised value of the pledged item. According to the provided
information, the loan amount shall not be less than 30% of the appraised value of the security
offered for the loan.

Customer's Option: The customer (pawner) has the option to borrow an amount lower
than 30% of the appraised value, but this desire must be explicitly manifested in writing.

Secured Loans: Loans provided by pawnshops are secured by collateral, usually in the
form of personal items like jewelry, watches, or electronic gadgets. If the customer fails to repay
the loan within the agreed-upon period, the pawnshop may sell the pledged item to recover the
loan amount.

Financial Inclusion: Pawnshops often play a role in financial inclusion by providing

credit to individuals who may not have access to traditional banking services. The ability to
secure a loan with tangible assets allows a broader segment of the population to access credit.
 Modern Operations: While the historical roots are in charitable lending, modern
pawnshops operate as commercial entities, providing financial services in exchange for
collateral.

Government Financing Institutions

Government financing institutions are entities established or supported by the

government to provide financial services and support for various economic and developmental
purposes. These institutions play a crucial role in promoting economic growth, supporting
specific sectors, and addressing the financial needs of individuals, businesses, and government
projects. The nature and functions of government financing institutions may vary from country to
country, but they often share common objectives.

1. Social Security System

The SSS is a state-run, social insurance program in the Philippines to workers in the
private, professional and informal sectors. SSS is established by virtue of Republic Act No.
1161, better known as the Social Security Act of 1954. This law was later amended by Republic
Act No. 8282 in 1997. SSS provides death, funeral, maternity leave, permanent disability,
retirement, sickness and involuntary separation/unemployment benefits. The Employees'
Compensation (EC) Program which started in 1975 provided double compensation to workers
who had illness, accident during work-related activities, or died. EC benefits are granted only to
members with employers other than themselves. SSS members can make 'salary' or 'calamity'
loans. Salary loans are calculated based on a member's particular monthly salary credit.
Calamity loans are for instances when the government has declared a state of calamity in the
area where an SSS member lives, following disasters such as flooding and earthquakes

Individuals become members of the Social Security System by making regular

contributions. Contributions are usually a percentage of their salary or income, and both
employees and employers contribute to the system. Self-employed individuals can also
voluntarily enroll and make contributions.

One of the primary functions of the SSS is to provide retirement benefits to members
when they reach the retirement age. Members become eligible for a regular pension, which is
calculated based on their contributions and the number of years they have been part of the
system.

The SSS offers disability benefits to members who become permanently or temporarily
disabled and are unable to work. The benefits are designed to provide financial assistance
during the period of disability.

Members are entitled to sickness benefits if they are unable to work due to illness or
injury. Additionally, female members can receive maternity benefits to support them during
pregnancy and childbirth.

Some Social Security Systems offer loan programs to their members. Members can
avail themselves of loans for specific purposes, such as housing, salary, or calamity assistance.
The loans are typically repaid through deductions from future benefits. These and other more
loan programs are available at the SSS.

2. Government Service Insurance System

The GSIS is a government-owned and controlled corporation (GOCC) of the Philippines.

Created by Commonwealth Act No. 186 and Republic Act No. 8291 (GSIS Act of 1997), GSIS is
a social insurance institution that provides a defined benefit scheme under the law. It insures its
members against the occurrence of certain contingencies in exchange for their monthly
premium contributions. GSIS members are entitled to an array of social security benefits, such
as life insurance benefits, separation or retirement benefits, and disability benefits. GSIS is also
the administrator of the General Insurance Fund by virtue of RA 656 (Property Insurance Law).
It provides insurance coverage to government assets and properties that have government
insurable interest.

Both the government employer and the employees make monthly contributions to the
GSIS. Contributions are based on a percentage of the employees' salary and are used to fund
the various benefits provided by the system.

GSIS offers retirement benefits to its members upon reaching the compulsory retirement
age, which is 65 years old. Members with at least 15 years of service are eligible for retirement
benefits.

GSIS provides life insurance coverage to its members. In the event of a member's death,
beneficiaries receive a lump sum amount or a monthly pension.

Members who become disabled due to work-related injuries or illnesses may qualify for
disability benefits. These benefits aim to provide financial assistance to members who can no
longer perform their regular duties.

GSIS members are entitled to maternity benefits for female employees and sickness
benefits for both male and female employees. These benefits provide financial support during
periods of illness or childbirth. These and other loan programs are available at the GSIS.