Chapter 1

The History of Money: From Barter to Banknotes

Value of Money: Money's value comes from its acceptance as a medium of exchange, unit of measurement,
and store of wealth.

A World Without Money:

- Bartering was used for at least 3,000 years.
- Prehistoric currency involved traded goods like animal skins, salt, and weapons.

Asian Cutlery:
- Around 1,100 B.C., the Chinese used miniature tools and weapons as a medium of exchange.
- Eventually, these were abandoned for coins.

Coins and Currency:

- In 600 B.C., Lydia's King Alyattes minted the first official currency from electrum (silver and gold
mixture).

Not Just a Piece of Paper:

- In 600 B.C., China moved from coins to paper money.
- Chinese inscription warned, "All counterfeiters will be decanitated."

Paper Money in Europe:

- Europeans used coins until 1600, supplemented by precious metals from colonies.
- Banks issued banknotes for depositors and borrowers.
- Paper money could be exchanged for silver or gold.

First Paper Currency (European Governments):

- Issued by colonial governments in North America.
- Colonies used IOUs and playing cards as currency due to cash shortages.

Money Travels:
- Paper money increased international trade in Europe.
- Banks and ruling classes bought currencies, creating the first currency market.
- Countries manipulated currency values to affect competitors.

Mobile Payments:
- 21st-century rise in mobile and virtual payments.
- Mobile payments use electronic devices like smartphones.

Virtual Currency:
- Bitcoin, invented in 2009, is an example.
- Offers lower transaction fees and operates with decentralized authority.

The Nature of Money:

- Defined as a medium of exchange.
- Facilitates transactions by acting as a "go-between."
- Money makes transactions easier compared to barter.

Historical Forms of Money:

- Agricultural products like corn, rice, and cattle.
- Decoration/ritual items like shells, fishhooks, and tablets.
- Precious metals like gold and silver.

Functions of Money

1. Money as a Medium of Exchange:

- Facilitates the transfer of goods and services.
- Eliminates challenges of barter.
- Influences the quality of goods and services.
2. Money as a Means of Payment:
- Used for present and future transactions.
- Settlement of exchanges for convenience and satisfaction.
3. Money as a Store of Value:
- Allows people to hold money for future use.
- Maintains its value over time.

Ways of Storing the Value of Money:

1. Saving:
- Keeping money in a piggy bank or vault.
- Depositing money in a bank with a low-interest rate.
2. Investing:
- Putting money in productive activities (business, time deposit, money market placements, lending).
- Higher expected rate of return but also higher risk.
4. Unit of Account:
- Provides a common and acceptable basis for valuation in transactions.
- Serves as a stabilizer in bargaining.

Necessary Attributes of Money

Acceptability:
- Must be widely accepted in exchange.
- Should not fluctuate materially or change in value.

Elasticity:
- Money supply should be adjustable to the needs of the economy.
- Government should reduce money supply during inflation and increase it during deflation.

Convertibility:
- Ability to be swapped for other currencies, like USD, GBP, and EUR.
- Important for international trade.

Divisibility:
- Capability of being divided into smaller denominations.
- Facilitates flexibility of exchange.

Portability:
- Ability to be carried easily.
- Total flexibility cannot be gained without portability.

Recognizability:
- Easy to recognize to prevent forgery.
- Authentic stamps by authority/government.
- Physical features in Philippine peso bills: paper quality, embossed markings, security thread, etc.
- Material coding in coins.
- Coin smuggling is the illegal export of Philippine metallic money for a price above its stamped value.

Malleability:
- Metallic money should be capable of casting with authoritative stamps.
- Paper bills should be processed using distinct and selected material with security features.
Durability:
- Capability to physically last long in circulation.
- Withstand exposure to elements.

Kinds of Money
- Paper money and metallic money.
- Metallic money has characteristics that make it a special type of money.
- Examples: gold, silver, bronze, and other precious metals.

Commodity Money:
- Uses a commodity as a means of exchanging goods.
- Examples: Farm animals, grains, high-value crops, salt.
- Has value in the absence of its textual or numerical face value.

Fiat Money:
- Issued by authority/government.
- Accepted because of custom and practice.
- Value is reinforced by being "legal tender."
- Unquestionable acceptability as a means of payment.

Credit Money:
- In the form of a note.
- Promise to be paid with standard money on demand.
- Examples: government notes, bank notes, loan instruments, and ordinary personal promissory notes.

Credit Environment
- For a healthy credit environment:
- Facilities of credit should be present (banks, lending institutions).
- Debtors should honor their obligations.
- Existing system to help creditors enforce claims.
- Granting credit should be closely regulated.
- The 2008-2009 global financial crisis was due to "too liberalized granting of credit."

Money Creation and Demand for Money

- Basic rules of money creation are simple.
- Money evolved from barter.
- Limitations of barter:
- Two traders must have and want to trade.
- Must be ready to make the trade at the same time.
- Currency developed to deal with these limitations.
- Commodities like salt were used, but scarcity affected value.
- Stable monetary system needed to facilitate exchanges of goods.

Goldsmithing
- Modern money developed from goldsmithing.
- People stored gold/silver with goldsmiths for safekeeping.
- Goldsmiths issued receipts.
- Receipts were used instead of precious metals.

From Plain Receipts to Loan Out

- Goldsmiths loaned out gold held for customers.
- They printed more receipts and made more loans than gold held.
- Origin of modern money and banking practice.
- Goldsmiths/bankers facilitated trade and provided an adequate money supply.

The Modern Banks

- The goldsmith system wasn't perfect.
- Depositors withdrew money, and goldsmiths couldn't redeem receipts.
- Banks are the modern successors to goldsmiths.
- Money can no longer be redeemed for gold; it's a token/medium of exchange.

Fractional Reserve Banking (FRB)

- Banks hold a fraction of deposits as reserves.
- Allows banks to lend out money, creating more money and increasing money supply.
- Overall wealth in the economy remains unchanged.
- Central bank/government plays a role in managing money creation.

Religious Sidetrip of Money

- Jews were not allowed to own land in Europe.
- They went into entrepreneurial businesses, including lending.
- Catholics were not allowed to charge interest at first.
- Early Jewish bankers became influential.
The Significance and Purpose of Coinage
- Coinage is the process of manufacturing metals into coins.
- Maintains uniformity in all coins of the same kind.

Universality of Use:
- Coins are easily labeled.
- Can be transferred easily without weighing/measuring.

Accuracy and Physical Uniformity:

- Coins contain a fixed amount of metal.
- Transactions can be performed rapidly.
- Honesty and accuracy are prime considerations.
- Coins must be accepted by everyone.
- Coins of the same denomination should be equivalent.

To Prevent Value Abuse:

- The right of coinage has been considered the prerogative of the sovereign.

CHAPTER 2

What is Credit?
Credit is obtaining something of value in exchange for a promise to pay later. It involves a creditor and a
debtor.

Advantages of a Credit Economy:

1. Generates Additional Funding: Businesses can use assets as security for loans or sell debt instruments to
raise funds.
2. Presents Opportunity: Helps dynamic individuals capitalize on opportunities.
3. Increases Government Spending: Allows governments to fund projects through bonds or loans (e.g.,
"Build, Build, Build" program in the Philippines).
4. Benefits the Economy: Accelerates production, employment, income, and consumption.
5. Postpones Financial Outlay: Allows consumers to enjoy goods and services sooner.
disadvantages of a credit economy:

Disadvantages of a Credit Economy

1. Credit may lead to inflation: Heavy borrowings by governments can lead to inflation, requiring
competent monetary authorities.
2. It can lead to wastage of resources: Borrowing by the government may result in extravagance and
inefficiency, as noted in developing countries.
3. Unlike cash, credit has a pervasive effect: Business errors in credit use can have unfavorable chain
effects, potentially causing bank problems like in 2008-2009.
4. It can burden the next generation: Excessive loans from other countries may burden future generations
unless wisely invested.
5. It can reduce spending: Credit reduces future consumption of debtors, leading to reduced confidence,
sales, and employment.

Social Viewpoint of Credit:

- The rich often have better access to credit due to their connections.
- Investments should benefit the poorest, and credit resources should be allocated wisely.
- The credit system should improve social and economic conditions, especially for the poor in rural areas.
- Poor individuals are often excluded from the credit system due to lack of acceptable collateral.
- The government is working to address the needs of micro-enterprises by simplifying loan requirements.

Foundations of Credit:
1. Assistance: A credit environment should assist both creditor and debtor through commercial laws.
- Assistance should also be available to borrowers to prevent them from falling victim to exploitative lenders
("loan sharks").

2. Confidence:
- Confidence is a cornerstone of credit, representing the creditor's willingness to be exposed to uncertainties.
- Without confidence, creditors wouldn't provide goods or services in exchange for a promise to pay.
- For collateralized credit, confidence is based on the instrument (e.g., promissory note), the property used as
security, and the debtor's character.
- Example: Pawning is borrowing money with personal property like jewelry as collateral.

3. Facilities for Credit:

- Environment conducive for credit transactions.
- Sources of credit information for evaluation.
- Credit contract respected and protected.
- Legal bases available.

4. Stability of Money:
- Money standard must be stable.
- Value of money should not fluctuate widely.
Basic characteristics of credit

1. Bipartite in character: Involves a meeting of minds between at least two persons or parties who agree on
terms of the transaction.
2. It is fiduciary: Credit is based on trust.
3. It involves futurity: In credit, there is always a future time involved.
4. Financial in nature: Credit involves something with economic substance.
5. There is always an element of risk: Credit is exposed to uncertainties.

The Use of Credit Cards:

- Credit cards allow holders to purchase goods and services up to a credit limit.
- Vendors are reimbursed by the bank, and cardholders repay the bank monthly.
- Unsecured credit cards are issued to those with good credit history.
- Secured credit cards require a cash deposit as collateral.
- Credit cards can lead to debt if not managed properly, with interest accruing on balances.
- Immediate credibility for services like hotel and airline reservations.

Advantages of Credit Cards:

1. Ease of Purchase: Makes it easier to buy things without carrying large amounts of cash.
[Link] of Purchases: Offers protection if something you bought is lost, damaged, or stolen.
3. Building a Credit Line: Helps build a good credit history.
4. Emergencies: Useful in times of emergency.
5. Credit Card Benefits, Points and Bonuses: Offers additional benefits like discounts, bonuses, and
travel insurance.

Disadvantages of Credit Cards:

1. Blowing Your Budget: Encourages people to spend money they don't have.
2. High Interest Rates and Increased Debt: Credit card companies charge high interest rates on balances.
3. Credit Card Fraud:
- Report lost or stolen cards immediately.
- Don't loan your credit card or give out card information.
- Check statements closely.

Guidelines for Credit Card Use:

- Don't loan credit or give out card information.
- Don't spend outside your budget.
- Keep track of purchases.
- Pay off balances each month.
 Classification of Credit:
- Consumer Credit: Short to intermediate-term loans for personal consumption.

Upside and Downside of Consumer Credit:

1. Convenient: No need to carry cash.
2. Emergencies: Can help manage financial crises.
3. Large Purchases: Makes large purchases possible.
4. Builds Credit: Using a small amount of consumer credit helps establish a good credit rating.
5. Temptation: Consumer credit can lead to overspending.
6. More Expensive: Purchasing with credit can become more expensive due to interest.
7. Unrealistic Lifestyle: Consumer credit can lead to living beyond your means.

- Bank Credit: Credit extended by commercial banks for assisting businessmen.

- Collateral: Bank credit focuses on the borrowing capacity of the individual or business entity
.
Credit Worthiness:
- A reasonable expectation of repayment is a basic philosophy.
- Overall financial status is important.

- Ways to Improve Bank Credit Rating:

- Reduce and eliminate credit card debt.
- Cut down on the number of open credit card accounts.
- Keep one or two credit cards and pay them off each cycle.

Classifications of Credit According to Purpose:

- Agricultural Credit: Financing for agricultural transactions.
- Industrial Credit: Financing for high capital outlay projects.
- Commercial Credit: Business credit to obtain goods and services from a supplier.
- Real Estate Credit: Credit for construction, expansion, and acquisition of real estate.
- Export Credit: Credit connected to an export transaction.

According to Maturity:
- Short-term Credit: Payment within one year.
- Medium-term Credit: Maturity is more than a year but less than 5 years.
- Long-term Credit: Maturity of 5 years or more.
According to Manner of Repayment:
- Lump sum: Payment made at one single instance.
- Installment: Payment settled via staggered mode.

According to Release of the Loan:

- Lump sum release: One-time giving of the loan proceeds.
- Installment release: Periodic giving out of loan.

According to Security:
- Secured Credit: Dependent on a specific item as security.
- Unsecured Credit/Character Loan: No property used as security.

According to How the Credit is Granted:

- Direct credit: Loan by a bank to its own client/customer directly.

Discount Loan:
- A loan where interest and finance charges are deducted upfront.
- Borrower receives the "net proceeds" (reduced amount) but repays the full loan amount.

Example Calculation (₱100,000 Loan):

- Interest: 2% per month (24% annually) = ₱24,000

- Service Charge: 1% = ₱1,000
- Total Payable: ₱125,000
- Net Proceeds: ₱93,000 (after deducting ₱7,000 in advance)
- Nominal Rate: 2.00%
- Real Rate: 2.24%

Truth in Lending Act:

- Law: Republic Act No. 3765
- Requirement: Requires disclosure of finance charges for credit extensions.
- Policy: Protects people from lack of awareness regarding the true cost of credit.
- Coverage: Applies to any creditor involved in extending credit.

- Credit: Any loan, mortgage, deed of trust, advance, discount, conditional sales contract, contract to sell,
rental-purchase agreement, or any transaction involving deferred payment for property or services.
- Finance Charge: Includes interests, fees, service charges, discounts, and other charges related to the
extension of credit, as regulated by the Bangko Sentral ng Pilipinas.

Required Information for Debtors/Borrowers:

1. Cash price or delivered price of the property/service.

2. Amounts credited as down payment or trade-in.
3. Difference between amounts in (1) and (2).
4. Itemized charges.
5. Total amount financed.
6. Finance charge in pesos and centavos.
7. Annual percentage rate of the finance charge.

Disclosure Requirements:

- Information must be disclosed prior to the consummation of the transaction.

- Information must be clearly stated in writing.

Effect of Violations: The contract remains valid and enforceable, subject to penalties.

Penalties for Violations:

1. Creditor liable for ₱100 or twice the finance charge (whichever is greater), up to ₱2,000. Action must be
brought within one year.
2. Creditor liable for reasonable attorney's fees and court costs.
3. Willful violation of any provision: fine of ₱1,000-₱5,000, or imprisonment of 6 months to 1 year, or both.
No punishment applies to the Philippine Government or its agencies.

Sources of Credit
Individual Money Lenders:
- Unlicensed lenders who provide funds in exchange for interest payments.
- Often referred to as "loan sharks" and lend money at very high interest rates.

Stores (Department Stores):

- Retail establishments offering a wide range of merchandise.
- Provide consumer choices and sell various products, often part of a retail chain.

Pawnshops:
- Offer secured loans using personal property as collateral.
- Items are called pledges or pawns.
- Pawnbroker can sell the item if the loan is not repaid.
- Do not report defaulted loans on customer's credit report.

Commercial Banks:
- Lending institutions that accept deposits and use them to finance loans.
- Extend loans for various purposes, including personal, home improvements, and business needs.
- May also offer business loans for payroll, operating supplies, and working capital.

Investment Banks:
- Specialize in the sale and management of securities like stocks and bonds.
- Assist companies in offering stocks to the public (Initial Public Offerings - IPOs).

Development Banks:
- In the Philippines, these banks, like the Development Bank of the Philippines (DBP), support small and
medium enterprises (SMEs).
- Dedicated to funding start-ups and economic development projects.

Savings Banks:
- Financial institutions primarily focused on accepting savings deposits.
- Offer accessible savings products to a wide range of the population.

Rural Banks:
- Help rationalize developing regions by financing projects related to agricultural progress.
- Land Bank of the Philippines performs this function.

Employees' Cooperatives or Sinking Fund:

- Financial organizations owned and controlled by members who save as a group.
- Members can borrow at low interest rates.

Credit Unions:
- Cooperative financial institutions owned and operated by their members.
- Promote thrift, provide credit at reasonable rates, and offer financial services.

Insurance Companies:
- Policyholders can access "guaranteed cash values" as loans.
- Trade small certain losses with potentially large uncertain losses and are considered major money-lending
sectors.
Social Security System (SSS):
- Pension and insurance entity for private employees in the Philippines.
- Provides loans for individual members and big-ticket investments.

Government Service Insurance System (GSIS):

- Similar function to SSS but for government employees in the Philippines.

Home Development Mutual Fund (HDMF)/Pag-ibig Fund:

- Mutual fund company for both private and government employees.
- Offers multipurpose, calamity, residential, and property acquisition loans.

Basis of credit
1. Capacity: Managerial ability and competence of the borrower to use the loan wisely.
2. Capital: Resources owned by the borrower (properties and liquid assets).
3. Character: Personal integrity of the borrower, assessed through past business record and personal habits.
4. Collateral: Security for the loan, such as land, buildings, or movable properties.
5. Condition: Economic conditions in the community, industry, or country affecting loan repayment.
6. Currency: Stability of the country's currency to prevent volatility in import/export transactions.
7. Confidence (The Real Foundation of Credit): A creditor's assessment of a debtor's [Link] to
strong credit confidence and increased lending. Results in decreased credit transactions due to a lack of
confidence.

CHAPTER 3

Early Banking: Banking began informally, without strict regulation.

Goldsmiths: Goldsmiths acted as early bankers, safeguarding valuables and charging rent. They realized
deposits exceeded withdrawals.
Lending Emerges: Goldsmiths started lending deposited money and charging interest, leading to modern
banking practices.
Loose Banking Era: This era involved unregulated banks where depositors received interest for parking
gold with bankers.
Regulation Arrives: By the 1600s, banking became a significant business, leading to regulation and the
rise of powerful banking families.
Private Bank Notes: Private banks issued notes (receipts) for deposited gold, which became a form of
"fiat money."
Rise of Central Banks: Unscrupulous banking practices led to the creation of central banks to regulate
banking and prevent fraud.
Central Bank Role: Central banks control the money supply to promote economic stability and perform
banking services for the government.
 Fractional Reserve System: Banks are only required to keep a fraction of deposits on reserve, allowing
them to lend out the rest.
Bangko Sentral ng Pilipinas (BSP): The BSP aims to maintain price stability, promote economic growth,
and preserve the currency's convertibility.
Objectives: The BSP aims to maintain price stability, promote sustainable economic growth, and ensure the
convertibility of the national currency. :

BSP Responsibilities
- Provides policy directions in the areas of money, banking, and credit.
- Exercises regulatory powers over non-bank financial institutions with quasi-banking functions.

- Liquidity Management: Formulates and implements monetary policy to influence the money supply and
maintain price stability.
- Currency Issue: Exclusive power to issue national currency.
- Lender of Last Resort: Extends discounts, loans, and advances to banking institutions for liquidity
purposes.
- Financial Supervision: Supervises banks and non-bank institutions.
- Management of Foreign Currency Reserves: Maintains sufficient international reserves.
- Determination of Exchange Rate Policy: Determines the exchange rate policy of the Philippines.
- Other Activities: Banker, financial advisor, official depository of the Government.

Classification of Banks:
- The Philippine banking system is composed of Universal and Commercial Banks, Thrift Banks, and Rural
and Cooperative Banks.

Universal and Commercial Banks:

- These banks possess powers similar to commercial banks, but also have powers of an investment house.
They can invest in non-allied enterprises and have broad authority in various financial activities.
Here's an overview of the information from the image, focusing on thrift, rural, and cooperative banks:

Thrift Banks:
- Composed of savings and mortgage banks, stock savings and loan associations, and private development
banks.
- Accumulate savings from depositors and invest them.
- Provide short-term working capital and medium- and long-term financing to businesses, especially small-
and medium-sized enterprises.
- Offer various services like granting loans, investing in securities, issuing letters of credit, accepting
deposits, and more.
- With prior approval, they can also offer current/checking accounts, engage in trust and money market
operations, and act as collection agents.
Rural and Cooperative Banks:
- More common in rural communities.
- Promote and expand the rural economy by providing basic financial services.
- Help farmers through all stages of production.
- Rural banks are privately owned, while cooperative banks are owned by cooperatives.

Cooperative Banks:
- Provide financial, banking, and credit services to cooperatives, their members, and the general public.

Rural Banks:
- Extend loans and advances to farmers, fishermen, farm families, cooperatives, merchants, and
private/public employees.
- Accept savings and time deposits.
- Act as correspondents for other financial institutions.
- Offer services like collection agents and other banking services with prior approval.
- May accept current/checking accounts if they have a net asset of at least P5 million.

Bank Accounts in the Philippines: Bank accounts are associated with deposits, credit cards, debit cards,
loans, and investments. They are safer than keeping money in a jar and are insured by the Philippine
Deposit Insurance Corporation (PDIC) for up to P500,000 per depositor.

THE FOLLOWING ARE DIFFERENT TYPES OF BANK ACCOUNT IN THE PHILIPPINES;

1. Savings Account:
- Preferred for Filipinos due to low initial deposit and low maintaining balance.
- Initial deposit of P200.00 can open an account.
- Suitable for children, teenagers, and young professionals.
- Pays low interest (usually 1%).

A. Savings Account vs. Payroll Account:

- Both offer ATM withdrawals and debit card facilities.
- Payroll accounts have no maintaining balance.

B. ATM vs. Passbook Savings Account:

- ATM accounts have lower maintaining balance and initial deposit requirements.
- Passbook savings accounts are safer than ATM accounts.

2. Checking Account:
- Requires higher initial deposit and maintaining balance than savings accounts.
- Earns minimal or no interest.
- Suitable for those with regular cash flow, like businesses.

[Link] Deposit Account:

- Pays higher interest than a regular savings account.
- Funds are kept for a fixed period (one month to seven years).
- Early withdrawal is possible but comes with a penalty.
- Interest rates in the Philippines can go up to 3.50%.

4. Foreign Currency Accounts:

- Allows withdrawals in peso or the currency the account was opened in.
- Depositors can earn money by playing with currency rate differences.
- Available in currencies like Dollar, Yen, Pound, Yuan, etc.

5. Joint Account:
- Suitable for business partners, associations, and couples.
- Can be a savings, checking, or time deposit account.
- Types: "AND" (requires both signatures) and "OR" (allows either signature).

Services Offered by Banks:

1. Accepting Deposits: Banks accept deposits from those who have money but cannot utilize it.
2. Loan Services: Banks lend out deposited money to generate revenue through interest.
3. ATM Services: ATMs offer 24/7 availability, reduce labor costs, and provide convenient locations for
basic banking tasks like deposits and withdrawals.
4. Bank Guarantee: Banks provide guarantees for customers who need to deposit funds in governmental
offices or courts.
5. Check Payment: Banks provide checkbooks to checking account holders, allowing them to make
payments via checks.
6. Collection & Payment Arrangement: Banks handle various credit instruments like bills of exchange
and promissory notes.
7. Consultancy: Modern banks offer consultancy services with financial, legal, and market experts.
[Link] Cards: Allow users to make purchases on credit, paying back the provider over time, often with
interest.
9. Debit Cards: Used at ATMs to withdraw funds directly from the cardholder's account, requiring a PIN
for verification.
10. Discounting of Bills of Exchange: Banks lend money against a bill of exchange, giving the holder less
than the face value upfront.
11. Foreign Currency Exchange: Banks exchange foreign currencies with local currencies, facilitating
international trade.
12. Home Banking: Allows you to manage your finances from home, including inquiries, transfers, and bill
payments.
13. Mobile Banking (M-Banking): Banking transactions via a mobile device.
14. Online Banking: Accessing account data and performing transactions online.
15. Overdraft: Allows customers to withdraw more than their deposit (though not commonly practiced in
the Philippines).
16. Priority Banking: Auto-debit arrangements for bills like electricity and water, plus other services like
free checking and financial consultation.
[Link] Banking: Personalized financial services for high-net-worth individuals (HNWIs) with wealth
management and investment options.
18..Remittance of Funds: Banks facilitate fund transfers through checks and drafts, offering flexibility in
moving money between branches.

Organization & Structure:

- Banks provide financial products and services in exchange for interest and fees.
- Strong organizational structure is essential for banks to thrive.

- Executives: Responsible for specific business areas, including community banking, consumer lending,
commercial lending, and wealth management.

- Directors: Manage the distribution of products and focus on business development, consumer lending,
commercial lending, and wealth management.

- Department Managers: Implement the directions and objectives defined by the directors and oversee
areas like new accounts, branch operations, and teller services.

- Bank Staff: Frontline employees, including tellers, personal bankers, and courier services, who interact
directly with clients.