The PhilippineFinancial System

The Bangko Sentral ng Pilipinas• The Bangko Sentral ng Pilipinas (BSP) was created by the Republic

Act No. 7653, otherwise known as the New Central Bank Act of 1993.

• The BSP is now the Philippines’ central monetary authority that provides policy directions in the areas of money, banking and credit.

• The BSP’s powers and functions are exercised by its Monetary Board, consisting of seven members appointed by the president of the Philippines.

• One of the government sector members of the Monetary Board must be a member of the Cabinet designated by the President of the Republic, which position is currently held by the Secretary of Finance.

• The New Central Bank Act authorizes the Governor of BSP to appoint up to three Deputy Governors, subject to the approval of the Monetary Board.

The Bangko Sentral ng Pilipinas

• The Governor is the chief executive officer of the BSP and is required to direct and supervise the operations and interval administration of BSP.

• The BSP is aided in its bank monitoring and examination processes by credit rating agencies and financial conglomerates.

• The BSP is also into the upgrading of its domestic prudential standards in areas of capitalization, connected or pooled lending, loan provisioning, data disclosure, and qualifications of owners and managers.

• The BSP likewise imposes the requirements on the operations on e-bankers.

• The BSP is backstopped in this regard by the passage of e-commerce law in June 2000 which facilated the exchange of information and promoted the security of electronic transactions.

BSP Organizational Structure

The Banking Institution• The Banking Institution in the Philippines can be categorized as

private banking and government banking.• The private banking institutions are comprised of commercial

banking such as universal banks and ordinary commercial banks; thrift banks like savings and mortrage banks, private development banks, and stock savings and loan association; and the rural banks.

• The govenment banking institutions, on the other hand, consist of Philippine National Bank, Development Bank of the Philippines, Land Bank of the Philippines, and the Philippine Amanah Bank

Private Banking Institution1. Commercial Banking Institutions.

The Banks that fall under commercial banking institutions are the ordinary commercial banks or non-expanded commercial banks. These banks continue to account for the bulk of the total resources of banking industry.

2. The Thrift Banks.Thrift banks are primarily engaged in mobilizing the small savings of the people. They provide funds for agriculture and industry at reasonable

interest rates. The small producers like farmers, fishermen, craftsmen, and poor consumers can rely on such banks for financing their production and consumptions inputs. The following banks fall under the category of Trift Banks• The Savings and Mortrages Banks.

The primary function of a savings and mortrage bank is to recieve time deposit of different types and to invest its funds in long term investment.• The Savings and Loan Association.

Very simular to the savings and mortrage banks are the savings and loans associations nowadays. However, these institutions may either be stock or non-stock corporations.

• The Private Development Banks.This is quite different from the government institution of the same name.

It is a government entity, formely the Rehabilitation Finance Corporations.• The Rural Banks.

Rural Banks fulfill the investment function by allowing small farmers to finance their needs through the granting of loans for capital or other uses.

Government Banking Institutions1. The Philippine National Bank.

The Philippine National Bank (PNB) operates under the provision of Executive Order No. 80, the 1996 revised charter of PNB.

2. The Development Bank of the Philippines.The Development Bank of the Philippines (DBP) started operating in 1935 as the National Loan and Investment Board. Its first mission was to coordinate and manage trust funds.

3. The Land Bank of the Philipines.The Agrarian Reforms Code created the Land Bank of the Philippines (LBP) to finance the acquisition and distribution of agricultural estates for division and resell these small landholders.

4. The Al-Amanah Islamic Investment Bank of the Philippines.The Al-Amanah Islamic Investment Bank of the Philippines (Islamic Bank) was created under Republic Act No. 6848 for the purpose of promoting and

accelerating the socio-economic growth of Mindanao, particularly the provinces of Cotabato, Lanao del Sur, Lanano del Norte, Zamboanga del Sur, Zamboanga del Norte, and Sulu.

Non-Bank Financial InstitutionThese are other financial institutions which engage in specific functions. They provide services related to claims, financial information, and advice, manage porfolios of financial assets on behalf of other economic units, buy and sell claims on institution from clients, and assist in finding sources for those economic units seeking loans. These either private or government non-bank financial institution.Private Non-Bank Institutions1. Investment House/Banks.

The term “investment house” is defined to mean as “any enterprise” which engages in the underwriting of securities of other corporations “. Underwriting is the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation. Securites are written evidences of

ownership, interest, or participation in any enterprise, or written evidences of indebtesness of a person or enterprise.

2. Securities Brokers/dealers.Pursuant to hte provision of the Revised Securities Act, no broker,

dealer, or salesman must engage in business in the Philippines as such broker, dealer, or salesman or sell any securities, including securities exempted under the said law.3. Building and Loan Associations.

A building and loan association is a special type of savings institution. Because of its very nature, however, it falls under this category in

view of the fact that it also receives savings from members and lends fund to them.4. Credit Unions.

A credit unions is another type of savings institutions. It also has for its purpose the inculcation of the habit of thrift, frugality, and the idea of

helping one another.5. Private Insurance.

Private insurance companies contribute to the contry’s socio-economic development as well as to the insured.

6. The Pawnshop.Pawnshop provides credit to small borrowers who are not qualified to

obtain small loans from financial institution. In pawnshop, the cost of borrowing and terms of payment are generally fair. 7. Trust Companies.

A trust company is any corporation formed or organized for the purpose of acting as trustee or administering any trust or holding property or on deposit for the use. Benefit, or behoof of others.8. Non-Stock Savings and Loans Association.

A non-stock savings and loans associations is a corporation engaged in the business of accumulating the savings of its member.9. Financing Companies.

Financing companies or partneships, except those regulated by the Bangko Sentral, the Insurance Commisioner, and the Cooperative Administration Office which are primarily organized for the purpose of extending credit facilities to consumer and to industrial, commercial, or agricultural enterprises.10. Other Non-Bank Financial Institutions.

These are financial institution that are unknown to many people. Fund managers, lending investor, and venture capital corporations are among these institution.

Government Non-Financial Institution1. The Government Service Insurance System.

On May 13 May 1937, thew Government Service Insurance System (GSIS) started its operation. Presently, the GSIS administers the following: Life Insurance Fund, Retirement Fund, Health Insurance Fund/Medicine, State Insurance Fund/Employees’ Compensation, General Insurance Fund/Property Insurance, and Barangay Officials’ Life Insurance.

2. The Social Security System.On 1 September 1957, the Social Security System (SSS) started its operation. At first SSS granted only death, disability, sickness, and

old-age benefits under its social security program for the workers/employees in the private sectors. As its capacity the funding and administrative experience grew, other benefits have added to the program such as hospitalization benefits under the Medicare program, employees’ compensation benefits, and maternity benefits.

3. Philippine Export and Foreign Loan Guarantee Corporation.The Presidential Decree No. 1080 entrusts the Philippine

Export and Foreign Loan Guarantee Corporation (PEFLGC) to undertake the following:• To guarantee approved foreign loans, in whole or in part, granted

to any domestic entity, enterprise, or corporation, majority of the capital of which is owned by citizen of the Philippines.

• To guarantee Philippine banking and financial institutions against loss that may be incurred in connection with:

1. The grant of loans/credit accomodations to exporters, producers of export products, or contractors with approved service contactors abroad, provided that such exporters, producers or service contractors are Filipinos or entities majority of the capital of which are owned by citizens of the philippines; and

2. the inssuance of standby letters of credit or of letters of guarantee, as the case may be, to secure the performance of approved service contracts abroad entered into by any domestic entity, enterprise, or corporation, majority of the capital of which are owned by citizen of the Philippines.

4. The National Home Mortrage Finance Corportation.The National Home Mortrage Finance Corporation’s (NHMFC) primary

purpose is to develop and provide a secondary market for home mortrages granted by public and/ or private home financing institutions.

Under Section 5 of Presidential Decree No. 1267, the NHMCF is authorized to exercise the following powers and functions:• To purchase, acquire, sell, discount, refinance, or otherwise deal in home

mortrages or participations therein under such terms and conditions as may be prescribed by the Board of Directors of the corporations.

• To borrow funds from domestic or foreign private or public financial institutions as may from time to time be required for its operations, and to issue bonds, promissory notes debentures, and other debt instuments in local or foreign currency.

• To own, lease, purchase or otherwise acquire, sell or otherwise dispose of property, real or personal as may be necessary and appropriate for the conduct of its business.

• To invest funds or monies of the corporations not invested in mortrage loans in securities issued by the national government, Bangko Sentral and other

government entities, including government-owned and controlled corporations, the servicing and repayment of which are fully guaranteed by the Republic of the Philippines.• To enter into and perform such contracts with any person or entity,

public or private, as may be necessary, proper, or conductive to the attainment or furtherance of the objectives and purposes of the corporations.

• To adopt, alter, and use a corporate seal; to sue and be sued; and generally, to exercise all the powers of a corporation under the Corporation Code of the Philippines which are not inconsistent with P.D 1267.

• To promulgate such rules and regulations and to perform any and all things as may be necessary and proper to carry out its responsibilities, powers, and function under P.D No. 1267.

Financial System: Definition

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

Financial System ParticipantsHouseholds

Households or consumers are generally described as that group receiving income, majority of which typically come from wages and salaries. Gross savings are equal to current income less current expenditures. Such income is spent on goods and services and a part is saved. Goods that are consumed within a current period are termed non-durable consumer goods. Goods that will last for more than a year are termed durable consumer goods. Consumers or households purchase non-durables from current income and borrow for the durables like cars, washing machines, air-conditioners and houses.Financial Institutions/ Intermediaries

Financial institutions channel the funds from lenders to borrowers. They can also be the lenders and borrowers themselves. If they buy securities they are lenders but if they are the ones issuing the securities, they are borrowers.

Non-Financial Institution Non-Financial Institution are businesses such as trading,

manufacturing, extractive industries, construction and genetic industries. Non-financial institution can also be the lender and borrowers just like financial institution.The Government

The government is the national, provincial, city and towns comprising the Philippines as a whole.The Central Bank

Is an institution that manages a state’s currency, money supply and interest rate. Central banks also usually oversee the commercial banking system of their respective countries.Foreign ParticipantsForeign participants refers to the participants from the rest of the world such as households, government, financial and non-financial firms, and central bank. They exchange goods and services across national boundaries. International trade and international finance are parts of globalization.

The different Institutions governed by BSP basically divided into Banking System and Non-banking System.

*Monetary Board*Monetary Stability Sector*Supervision and Examination Sector*Resource Management Sector*The Structure of Different Sector

The Monetary Board The power and functions of the Bangko Sentral ng Pilipinas are

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

Objectives of BSP 1. Maintain monetary policies conducive to a balanced and sustainable

growth of the economy. - It is about maintaining the rule of conduct or policies in order to have a good supervising and regulating the financial system of the Philippines. It is mobilizing and directing the resources to attain sustainable growth of the economy. They provide policy directions in the areas of money, banking, and credit.

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

3. Promote and maintain monetary stability and the convertibility of the peso. - It should maintain the monetary stability to regulate the supply of money in the economy. It is about influencing the timing, cost, and availability of money. And maintaining the convertibility of peso, the conversion of money. A central bank needs to be able to meet its domestic and international payments to create confidence in the people it serves and the countries it deals with abroad.

4. Maintain stability of the financial system - They ensure that financial institution encourage people and companies to save for the future, make deposits, etc., to oversee that will maintain its permanence in the financial system.

5. Provide payment and other financial services to the government, the public, financial institutions, and foreign official institutions. - They continue to give the needs in the financial environment offering financial services like in the: Government – issuing treasury bills Public – make deposits, borrow and invest, withdrawals Financial Institutions – acquiring capital for investment Foreign official institution – letter of credit

6. Supervise and regulate depository institutions. - It is about directing and controlling the fund that was accepted as deposits from surplus units.

Function of the Monetary Board 1. Issue rules and regulations it considers necessary for the effective

discharge of the responsibilities.- They issue rules and regulation in order to direct and to guide for conduct that need to do their responsibilities well enough for the good run of the BSP.

2. Direct the management, operations, and administration of Bangko Sentral. - They are the once to plan for management, operation, and administration, in how to manage it, to provide with an orderly structure of Bangko Sentral, and in order to have a clean arrangement of all the parts as a whole.

3. Establish a human resource management system. - They are in charge to set up the employees which is the need in financial and physical resources that includes selecting, hiring, appointment, transfer, promotion and even dismissal of all personnel.

4. Adopt an annual budget for and authorize such expenditures in Bangko sentral. - They have the power to give the annual budget, the expenses, which are the financial resources for the effective operation of Bangko Sentral.

5. Indemnify its members and other officials of Bangko Sentral. - They ensure the members and officers in any damage or loss of Bangko Sentral, that every personnel was monitored compliance to banking laws to promote a sound and healthy banking system.

FUNCTIONS OF BANGKO SENTRAL NG PILIPINAS (BSP)

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

Bank of IssueBSP is the only one of the financial institutions who has the rights to produce, print out paper bills and mint coins. This is enact to ensure the uniformity in design and content of money, for the people to prevent the circulation of a fake money and for us to know if the money is either be fake or real. It can also effect the government supervision over money supply, to give prestige or honor to the central bank and become a good source of income for government. BSP do not easily print out money, they need to know first the state of our economy because if BSP print out money the prices of goods and services will increase and the price stability will not be balanced. Government’s banker, agent, and adviserAll the money of all agencies of our country will handle by BSP, if ever there is a transaction about money to other party, BSP is the one who will transact or talk to them. BSP is also responsible in importation or foreign exchange, because we all know that BSP is the one who has the skills and knowledge about that.

Custodian of the cash reserves of banksBanks are required to have fund reserved to BSP because if the bank needs money they have money that is reserved to BSP. If there are some problems like money crisis or a client withdraws all his/her money, bank has reserved money where they can use it for that problem. Fund Reserved has an interest.Custodian of the nation’s reserves of international currency

BSP is the one who handle all the international currencies, gold and more that owned by our country. And that international currency and gold is a requirement in printing out money.Bank of rediscount and lender of last resortBank can borrow money to BSP and in that way they can be a lender of last resort. And about rediscounting, it is a process of a discounted amount will be discounted again, example of that is when one party borrows money that money will have an interest and also has a deadline or due date and when other party did not pay on or before the deadline, the borrowed money will be given another interest that the borrower needs to pay.Bank of central clearance and settlement

We all know that BSP is the mother of all banks; it means that in every disagreement of two banks BSP is responsible to clear things between the two banks. BSP is the one who will settle all the issues between the banks. And provide rules and regulations for the banks to prevent the misunderstandings and problems.

Controller of Credit BSP needs to control credit because controlling credit can control

money supply and if we control money supply there is a possibility that the prices of goods and services will just be balanced. BSP needs to limit the credit; they need to prevent the high percentage of credit because if the credit is high then the money supply is high. There are 9 ways how BSP can control credit. First ids increasing or decreasing interest rate, when the interest rate is high then the people that is possibly borrows money will decrease. Second increasing or decreasing the legal reserve requirement of the bank, if the reserved requirement of the bank is high then the possibility of the bank to borrow money can limit also. Then, by regulating requirements of stock exchange securities, open market operations can also limit the credit because open market operations influence the money supply. When BSP sells securities the money supply will decrease and when they buy securities, money supply will increase. Credits can also limit by imposing ceilings on total amounts bank can lend, rationing central bank credit, restricting imports, selecting projects for funding and moral suasion by encouraging people to support and cooperate with the rules and regulations of central bank.

Monetary Policy and the Financial System Monetary Policy refers to the manipulations of

the money supply to affect the economy of the country as a whole. It largely impact interest rates. Increase in the money supply lower short term interest rates, encouraging investments and consumptions. Expansionary monetary policy may lower interest rates and stimulates investment and consumption in the long run. Monetary Policy Refers to Regulations that will affect money supply to benefit the economy. Among the tools of monetary policy are money supply, open market operations, reserve requirement on bank, discount rate, interest rate, credit control, among others.