MODULE 3

FINANCIAL INTERMEDIARIES (Other Notes)

COMMON CHARACTERISTICS of Financial Intermediaries

 although financial intermediaries are formed on a different basis for different purposes,
their underlying function is the same – to ensure that borrowers are able to meet lenders.
In this regard, financial intermediaries have a given number of characteristics necessary
to carry out this function.
1. Setting of interest rates – in order to sustain profitable operations, financial intermediaries must
be able to create a viable spread between the interest paid to lenders (SSUs) and the interest
received from borrowers (DSUs). Setting of interest rate must consider a lot of things like market
positioning and competitiveness in order to sustain the market. It must be affordable to the
borrowers and at the same time, profitable for the financial intermediary.

2. RISK REDUCTION – to manage the risks transferred to them by lenders (SSUs), financial
intermediaries normally possess expertise in managing a diversified portfolio of assets where
they invest the funds received from lenders. They carefully select and examine the borrowers
(DSUs) to reduce the risk of default. They provide safety in accessing money and spread the
risk by lending to several people.

3. PROVIDE LOANS - financial intermediaries brings together the SSUs and DSUs by bridging their
gaps or differences in terms of amount, maturity, returns, security, liquidity and convenience,
among others.

4. ECONOMIES of SCALE - financial intermediaries create and maintain economies of scale by

taking deposits from a large number of clients and lending money to multiple borrowers.

5. PROVIDE LIQUIDITY - financial intermediaries provide liquidity by converting an asset into cash
easily at low (if none) transaction costs.

6. ASSET STORAGE - financial intermediaries provide their clients with safe storage for both cash
and precious metals such as gold and silver. Clients are given ready access to their funds and
are provided with proof of deposits and record of withdrawals.

7. INVESTMENT ADVICE – aside from investing the funds of their clients and paying them an
agreed rate of interest, financial intermediaries also assist their clients in choosing the
appropriate investments in order to optimize returns, depending on the clients’ investment
profile.

8. REGULATION – due to the complexities of the financial system, monetary authorities should
control dishonest financial intermediaries and ensure there is enough balance in the system to
prevent financial crisis which may put the economy at risk.

9. Bring STABILITY in the Capital Market - by following rules and regulations regarding acquisition
and sale of different financial securities, financial intermediaries bring stability in the capital
market. Thus, they help in preventing scams in the capital market.

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 REGULATIONS OF FINANCIAL SYSTEM
 Financial regulation is a form of regulation or supervision, which subjects financial institutions
to certain requirements, restrictions and guidelines, aiming to maintain the stability and
integrity of the financial system. This may be handled by either a government or non-
government organization. Financial regulation is necessary because financial
institutions cannot be excluded from privately trading in capital markets.
 some of the provisions regulating financial institutions in the Philippines are as follows:
For BANKS
1. General Banking Act of 2000 (Republic Act No. 8791)
Section 8 - 22: Organization, Management and Administration of Banks, Quasi-Banks &Trust Entities
Section 23 - 28: Guidelines on the Operations of Universal Banks
Section 29 - 32: Guidelines on the Operations of Commercial Banks
Section 35 – 42: Requirement and Limit on Loans, Credit Accommodations and Guarantees
Section 36: Restriction on Bank Exposure to Directors, Officers, Stockholders & their Related Interests.
Section 51: Ceiling on Investments in Certain Assets.
Section 54: Prohibition to Act as Insurer.
Section 57: Prohibition on Dividend Declaration
Section 60 – 61: Requirement to Issue and Publish Financial Statements.
Section 66: Penalty for Violation of this Act.

2. Anti-Money Laundering Act (AMLA) of 2001 (Republic Act No. 9160)

 enacted to curb the flow and legitimization of illegally sourced or acquired funds.
 Effective Jan. 1, 2004, any transaction with the banks, non-banks and other covered financial
institutions, concerning purchases or sales of securities in the amount of P500,000 and above
shall be reported to the AMLC for monitoring. The source of such fund must be certified clean in
origin by the source of fund or the originating bank.

Anti-Money Laundering Council (AMLC) – government agency which has the authority to
investigate complaints, referrals, covered and or suspicious transaction reports. It has the authority
to inquire into, and freeze bank accounts thru the Court of Appeals, as well as institute civil forfeiture
proceedings.

For CREDIT UNIONS

3. Philippine Cooperative Code of 2008 (Republic Act No. 9520)
Section 1: Conduct of affairs of cooperative
Section 2: Organization and Registration of Cooperatives.
Section 8: Restrictions related to Capital, Property and Funds
Section 9: Audit, Inquiry and Members’ Right to Examine the records of Cooperative.
Section 10: Allocation and Distribution of Net Surplus
Section 15: Special Provisions relating to CREDIT Cooperatives

For INSURANCE Companies

4. Insurance Code of the Philippines (Republic Act No. 10607)
Section 193 - 197: Requirements to be authorized to engage in Insurance business.
Section 200 - 201: Required maintenance of paid up capital for insurance company.
Section 204 - 2012: Investments allowed to insurance companies to be considered as admitted
assets.
Section 215: Requirement to submit monthly report of investments made by insurance company.
Section 216 - 220: Required reserves to be maintained by insurance company.
Section 229 - 231: Required annual statements for insurance company.

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 For Investment Companies
5. Investment Company Act (Republic Act No. 2629)
Section 11: Restrictions in the functions and activities of investment companies
Section 12: investment policies – cannot be changed without the approval of the majority of
outstanding voting securities
Section 17: conditions and restrictions on the capital structure of investment companies
Section 21: Prohibition on the guarantee of obligations of whatever nature

For Financing Companies

6. Financing Company Act of 1998 (Republic Act No. 8556)
Section 5: Limitation on Purchase Discount, Lease rentals, Fees, Service and Other Charges
Section 6: Form of Organization and capital requirements
Section 14: Penalty on Violations

7. Lending Company Regulation Act of 2007 (Republic Act No. 9474)

Section 4: A lending company shall be established only as a corporation.
Section 5: Minimum paid in capital of any lending company.
Section 6: Citizenship Requirements for voting stocks of a lending company.
Section 7: Restriction on the Amount and Charges on Loans
Section 8: Required maintenance of Books of Accounts and Records.
Section 12: Penalty in violating the provisions of RA 9474.

For Stock Savings and Loan Associations

8. Thrift Banks Act of 1995 (Republic Act No. 7906)
Section 4: A thrift bank shall be established only as a stock corporation
Section 8 - 9: Ownership and Capital Requirements of a thrift bank
Section 10 - 12: Powers and Limitations of a thrift bank

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