investment management, insurance; as well as

extension of credit and deposit gathering.

FINANCIAL SYSTEM 1986 – Mrs. Corazon C. Aquino assumed presidency

after a successful people power that ended two
●​ is a term used in finance to describe the system
decades of the Marcos rule.
that allows money to go between savers and
1991–the asset sold resulted to proceeds of P14.3
borrowers.
billion, and another 6 billion worth of assets were
●​ is a network of various institutions. It is an important
added to the net total.
component of the economy because it provides
funds to consumers, producers and traders.
BANGKO SENTRAL NG PILIPINAS (BSP)
The Philippine Financial System can be viewed
from the major political milestones of the country:
➢​ Bangko Sentral ng Pilipinas was established on
July 3, 1993 pursuant to the provisions of the 1987
constitution and the New Central Bank Act of 1993.
➢​ BSP is autonomous in its fiscal and administrative
1594 – Obras Pias was established and represented functions from the national government as it
the first organized financial institution in the pursues its mandated responsibilities. As its
Philippines. primary objective, BSP’s monetary policy is to
August 2, 1882– the first savings bank in the country “promote a low and stable inflation conducive to a
was founded by Father Felix Huertas and named balance and sustainable economic growth”.
“Monte de Piedad y Caja de Ahorros de Manila.”
Within a short span of four years a branch of Banco FUNCTIONS OF BSP
Peninsula Ultramarino of Madrid was also opened.
1898– the end of Spanish regime, four banks, three ❖​ Liquidity management
commercial & one savings bank were doing ❖​ Currency issue
business in the Philippines. ❖​ Lender of last resort
❖​ Financial supervision
❖​ Management of foreign currency reserves
❖​ Determination of exchange rate policy
❖​ Other activities.
​ 1901– other foreign & domestic banks were opened
during the American era, including American Banks As prescribed by the New Central Bank Act,
which operated for four years. the main functions of the BSP are:
​ 1902– the Wai Hung Bank and the Abrue, Newberry
and Reyes Bank were both founded.
​ 1904-1906 – the First Provincial Banks, Bank of Liquidity management - the BSP formulates monetary
Pangasinan. policy aimed at influencing money supply consistent
​ 1904-1908– Bank of Zamboanga. with its primary objective to maintain price stability.
​ 1906 – the S. Misaka Bank was opened to serve Currency issue- exclusive power to issue the national
the Japanese community. currency. All notes and coins issued by the BSP
The Postal Saving Bank was created as a division of are fully guaranteed by the government and
the Bureau of Post to promote the habit of thrift considered legal tender for all private and public
among the people and to bring banking to the rural debts.
areas. Determination of exchange rate policy- currently, the
ACT NO. 2612 – funds were transferred to the BSP adheres to a market-oriented foreign
Philippine National Bank exchange policy.
1916 – called for the establishment of PNB Other activities- the BSP functions as a banker,
1900 – the first Philippine Commission passed Act no. financial advisor and official depository of the
52 providing for the regular examination and government.
inspection of banks of the Bureau of Treasury.
1929 – the bureau of banking was created assuming
THE BSP ORGANIZATION
the power of supervision over this institution from
the Bureau of Treasury ●​ Monetary Board – exercises the powers and
functions of the BSP such as the conduct of
monetary policy and supervision of the financial
system.
January 02, 1942 – the entry of the Japanese imperial ●​ Has seven (7) members appointed by the President
forces in Manila, place the operation of the 17 existing of the Philippines.
banks at a standstill. ●​ Its chairman is the BSP Governor with five (5) full
time members from private sector and one from the
cabinet.
●​ Meets at least once a week. The Board may be
called to a meeting by the Governor of the BSP or
1980 – effected a revision in the Philippine Banking by two members of the board.
structure including administrative regulations. ●​ The Governor is the chief executive officer of the
Universal Banking – is the conduct of variety of BSP and is required to direct & supervise
financial services such as trading of financial operations and internal administration of the BSP.
instruments; foreign exchange activities
underwriting new debt and equity issues;
 Kinds of Business

1.​ Commerce- Business firms which are engaged in

the buying and selling of goods and services are
classified as those falling under commerce. Also
A deputy governor heads each of the BSP’s included are trading, merchandising, and marketing.
operating sector as follows: Examples are supermarkets, dry goods store,
peddlers, sari-sari stores, importers and many
others.
1.​ Banking Services sector-serves the banking needs 2.​ Industry- those who are mainly concerned with
of all banks such as accepting deposits, servicing production.
withdrawals, and extending credit through the
Industry are classified into the following:
rediscounting facility.
2.​ Supervision and Examination sector- enforces and ★​ Genetic industries- those involved in agriculture,
monitors compliance to banking laws to promote a forestry and fish culture.
★​ Extractive industries- those involved in the
sound and healthy banking system. extraction of goods from natural resources which
3.​ Resource management sector-serves the human, include mining, lumbering, hunting and fishing.
financial, and physical resource needs of the BSP.
3.​ Manufacturing industries- those which covert raw
materials into finished products.
4.​ Construction industries- consists of firms
Monetary Policy- measures or actions taken by the
engaged in building infrastructures like airports,
central bank to regulate the supply of money in the seaports, dams and highways.
economy. It aims in influencing the timing, cost and 5.​ Services- one which sells service to the buyer.
availability of money and credit, as well as other
financial factors, for the purpose of stabilizing the Service may be classified as:
price level.
a.​ Recreation- movie house, television and radio
Inflation Targeting- focuses mainly on achieving price stations, theaters, and the like
stability as the ultimate objective of monetary policy. b.​ Personal- restaurant, barber shops, transportation,
This approach entails the announcement of an hotels, tailoring shops, and the like.
explicit inflation target that the Central Bank c.​ Finance- banks, insurance companies, investment
promises to achieve over a given period of time. houses, financing institutions, credit unions, savings
and loan associations and the like.
Social Security System
★​ The social security system (SSS) administers social
security protection to workers in the private sector;
★​ On the other hand the Government Service
Insurance System (GSIS) takes care of workers in
the public sector.

Two programs administered by SSS:

Single proprietorship is a business unit owned and
[Link] social security program managed by only one person. The owner, as the sole
[Link] employees’ compensation program proprietor, possesses all the assets. He takes all the profits
and assumes all the liabilities. Disposal of the business and
Components of the Financial System its assets is fairly simple. In the event of death, the business
and all its assets may be passed by virtue of a will.
The financial system comprises various interconnected
components that facilitate the flow of funds between savers
ADVANTAGES
and borrowers.
❖ Simple to create
Financial Institutions: These are intermediaries that ❖ Least costly form of ownership to begin
channel funds from savers to borrowers, including banks, ❖ Total decision-making authority
insurance companies, and investment firms. ❖ Easy to discontinue
Financial Markets: These are platforms where financial
instruments are traded, such as the stock market, bond DISADVANTAGES
market, and foreign exchange market. ❖ Unlimited personal liability
Financial Instruments: These are contracts that represent ❖ Limited skills and capabilities
a claim on assets, such as stocks, bonds, and derivatives. ❖ Limited access to capital
Regulatory Bodies: These are government agencies that
❖ Lack of continuity for the business
oversee and regulate the financial system, such as the
Securities and Exchange Commission (SEC) and the
Bangko Sentral ng Pilipinas (BSP). Limitations of Sole Proprietorship
Payment Systems: These are systems that facilitate the The sole proprietorship has a number of limitations. Many
transfer of funds between parties, such as electronic funds result from the lack of separate business entity. The
transfer systems and check clearing systems. resulting limitations include:

●​ Everything the proprietor and the family own is at

BUSINESS
risk in both personal and business activities unless
For our purpose, it will suffice to define business as any
nonbusiness assets are protected in a trust or other
lawful economic activity concerned with production or
isolating mechanism;
distribution of goods or services for profit. This definition ●​ The resource base of the business unit may be so
conforms with Oxenfeldt’s description of business. He limited that credit availability and capacity to
declared that business “involves providing and selling a respond to business opportunities is moderately to
product or service with the aim of obtaining rewards for the severely restricted;
private owners.
 ●​ The business end with the death of the proprietor ADVANTAGES
and, if business activity is to continue, a new
business must be established by the survivors. ❖​ Easy to establish
●​ Unless succession is carefully planned, each ❖​ Complimentary skills of partners
generation must purchase or inherit the business ❖​ Division of profits
assets paying any applicable taxes and costs; ❖​ Larger pool of capital
●​ Mixing business and household finances can make ❖​ Ability to attract limited partners
it difficult to measure business financial ❖​ Limited government regulation
performance and profitability, and may lead to loss ❖​ Flexibility
of equity that is not recognized until the business is ❖​ Taxation
in serious financial difficulty.
●​ Conflicts or disagreements within the family can
immobilize the business unit and prevent needed DISADVANTAGES
decision making.
❖​ Unlimited liability of at least one partner
❖​ Capital accumulation
❖​ Difficulty in the disposal of interest without
dissolving the partnership
❖​ Lack of continuity
❖​ Partners are bound by the Law of agency
When two or more people own the business, it is called
partnership. Partnerships are formed for several reason.
Limitations of a Partnership
The most common is to pool funds and to share
Partnership have a number of limitations with important
responsibilities where the business planned is more than
one person can handle. Equal partners share the initial implications for the partners and members of their families.
investment equally and each has the same amount of These include but not restricted to:
control over the business as the other.
●​ In a general partnership, all assets of each partner
The standard partnership agreement will include the
are at risk while in a limited partnership, all assets
following:
of the general partner are at risk and capital
invested by the limited partners are at risk.
➔​ Name of partnership ●​ Any partner in the general partnership and the
➔​ Purpose of the business general partner of a limited partnership can enter
➔​ Domicile of the business into contracts and incur obligations that are binding
➔​ Duration of the partnership on all partners.
➔​ Names of the partnership and their legal address. ●​ Unless the partnership agreement contains specific
➔​ Contribution of each partner to the business provisions authorizing continuation, a general
➔​ Agreement on how the profits and losses will be partnership ends upon the death of any
distributed partner-usually resulting in disruption of ongoing
➔​ Procedure for expansion through the addition of a business arrangements.
●​ Any general partner can require dissolution of the
new partner
partnership at any time.
➔​ If the partners voluntarily dissolve the partnership, ●​ Partners holding a minority interest can be alienated if
how will the assets of the partnership be general partners holding a majority of the ownership
distributed? interest consistently vote as a block and the interest of
➔​ Sale of partnership interest minority partners are ignored
➔​ Absence or disability ●​ Unless succession is carefully planned, each generation
➔​ Alterations or modification of the partnership must purchase or inherit the interest of each
agreement partner-subject to associated estate and inheritance tax
costs.
●​ Division of management responsibility among the
TYPES OF PARTNERSHIP partners can result in no one having an overall
understanding of the financial standing of the partnership
1.​ GENERAL PARTNERS- All partnership must have ●​ For a number of social and economic reasons, it may be
at least one general partner. Each general partner difficult to enter an existing partnership
has unlimited personal liability and is expected to ●​ It may be very difficult to get out of partnership
take an active role in the management of business. without undue financial loss and/or interpersonal
2.​ LIMITED PARTNERS- have limited financial conflict with the other partners.
liability. They cannot take an active role in the ●​ Conflicts or disagreements among the partners can
management of the firm, if they do, they will be immobilize business decision making causing loss
treated as general partners and will lose their of productivity and profitability
limited liability protection.
3.​ SECRET PARTNER- not known to the public, but
does take an active role in the management of the
business, and is considered a general partner in the
eye of the law.
The following is generally required to be in the Articles of
4.​ HONORARY OR NOMINAL PARTNER- lends his Incorporation to be filed with the Securities and Exchange
name in the business, even though he is not an Commission:
owner and does not take an active part in the firm’s
management. The honorary partner is generally
paid for the publicity or public relations value of his ➔​ The name of the corporation
name. ➔​ Time horizon of the corporation
5.​ SILENT PARTNERS- are not active in the ➔​ Names and addresses of the incorporation
operation of the business but are generally known ➔​ Place of business
to be members of the partnership ➔​ Capital stock authorization
6.​ DORMANT PARTNERS- are neither active in the ➔​ Restriction of transferring shares
partnership nor generally known to be associated ➔​ Rules under which the corporation will operate
with the business
ADVANTAGES

❖​ Limited liability of the stockholders

❖​ Ability to attract capital
❖​ Transferrable ownership
❖​ Larger pool of skills, expertise and knowledge 1.​ Bangko Sentral ng Pilipinas (BSP)
2.​ Securities and Exchange Commissions (SEC)
DISADVANTAGES 3.​ Department of Trade and Industry (DTI)
4.​ Department of Labor and Employment (DOLE)
❖​ Cost and time involved in the incorporation process 5.​ Department of Finance (DF)​
❖​ Taxation
❖​ Potential for diminished managerial incentives
❖​ Legal restriction regulatory red tape
❖​ Potential loss of control by the founders

The Corporation Code of the Philippines classifies

private corporations into stock and nonstock
This is an association of persons who voluntarily joined corporation, according to whether the membership is
together to achieve a common end through the formation of presented by shares of stock or not.
a democratically controlled organization, making equitable
contribution to the capital required and accepting a fair STOCK CORPORATION - is the ordinary business
share of the risks and benefits of the undertaking in which corporation created an operated for the purpose of making
the members actively participate. Cooperatives are a perfect which may be distributed in the form of dividends
registered with Cooperative Development Authority (CDA) to stockholders of the basic of the investment capital.
promulgates rules and regulations to govern the promotion,
organization, registration, and the supervision of all types of
NONSTOCK CORPORATION - nonstock corporations
cooperatives.
do not issue stock and distribute dividends to their
members; they are created not for the profit but for the
Types of Cooperatives public good and welfare.

1.​ Credit Cooperative

2.​ Producers’ cooperative
3.​ Consumer Cooperatives
4.​ Service Cooperatives
5.​ Marketing Cooperatives CORPORATION SOLE - special form of corporation
usually associated with the clergy. Under the code, it is a
ADVANTAGES religious corporation which consists of one member only
❖​ A “captive” market in the form of patronage by its and his successors, such as bishop.
members of the cooperative’s product or services.
❖​ Tax advantages. Exemption for the first ten years of DOMESTIC CORPORATION- is one incorporated under
operation. the laws of the Philippines.
❖​ Democratic control. “one man, one vote” principle.
The maximum interest that any member of the FOREIGN CORPORATION - is formed, organized and
Cooperative can own is limited to 20% of the total existing under any lawst other than those of the Philippines.
capital of the cooperative.
PUBLIC CORPORATION- are those formed or organized
for the government or for the state.
DISADVANTAGES
GOVERNMENT OWNED OR CONTROLLED
CORPORATION - are those which the government is the
❖​ As with cooperation, government regulations
majority stockholder.
reporting requirements necessitate the observance
of a minimal level of formality in the conduct of the
internal affairs of cooperative. CIVIL CORPORATION- is one established for the
❖​ As compared to single proprietorship, cooperatives business or profit.
can , in theory raise more capital as they can afford
to put up, that is more capital than can be raised by ELEEMOSYNARY CORPORATION - is one established
single person. and devoted to charitable purposes or those supported by
❖​ Other privileges-preferential access to government charity.
facilities and other resources.
❖​ The rule of “one man, one vote” and the restriction ECCLESIASTICAL CORPORATION - is one organized
of returns on share capital may limit the amounts
for religious purposes.
which individual members are willing to invest.
❖​ The limited share capital of a cooperative may limit
its ability to finance expansion of the scale of its LAY CORPORATION - is one organized for a purpose
business operations. other than for religion.
❖​ The orientation towards maximizing direct member
benefits and participation can complicate business DE JURE CORPORATION - is a corporation existing in
decision making and render it more difficult to fact and in law.
achieve economical business operations.
DE FACTO CORPORATION - a corporation existing in
fact but not in law.
OPEN CORPORATION - is one which is open to any 5. Interest Rate Risk
person who may wish to become a stockholder or member . – this refers to the volatility of bond prices that result from
changes in interest rates. If bonds are purchased and
interest rates subsequently rise, then the prices of the
CLOSE CORPORATION - is one which is limited to
purchased bonds will decline. If the fund is not willing to
selected persons or members of a family.
sell at these low levels, then it is “stuck” with the low
interest on the purchased bonds and cannot participate
PARENT OR HOLDING CORPORATION - is one who in the higher rates now being earned. Lower interest
is so related to another corporation that it has the power rates adversely affect the yield on money market
either directly or indirectly to elect the majority of the instruments and funds.
directors of such other corporations.
6. Credit Risk
SUBSIDIARY CORPORATION - is one which is related – this refers to the “creditworthiness” of the bond issuer
to another corporation that the majority of its directors can and its expected ability to pay interest and to repay the
be elected either directly or indirectly by such other principal upon maturity. A decline in an issuer’s credit
rating can cause a bond’s price to decline.
corporation.

7. Purchasing Power Risk

AFFILIATED CORPORATION - is one related to another – this is the risk of inflation or the risk that the value of
by owning or being owned by common management or by a one’s money in real terms will be less than the
long-term lease of its property or other control device. purchasing power of your original investment. This is
particularly true when investing in fixed-income
CORPORATION BY PRESCRIPTION- is one which has securities whose interest rates are consistently below
exercised corporate powers for an indefinite period without the rate of inflation.
interference on the part of the sovereign power and which
by function of law is given the status of a corporation. 6. Call Risk
– also called pre-payment risk and is the possibility that a
bond will be called away from the investors by the issuer
before its maturity date. This usually happens when
interest rates drop and the issuer has an opportunity to
borrow money at a lower rate than the one current being
paid. As a consequence, the bond holder will not receive
anymore interest payments from the investment and
1. Risk /Reward Trade-Off may be forced to reinvest his money at lower rates.
– a basic concept in investment that generally says, “the
lesser the risk in a given investment, the lesser, the
opportunity for gain” and conversely, “the more risk
assumed, the greater the potential return.” – Thus, “no
risk, no reward.” Risk should be understood so they can
be managed effectively.
• The PCPI is an indicator of the general level of
2. Market Risk prices by measuringchangesin the prices of a fixed
-the risk of a single stock as measured by its volatility (the basket of selected consumer goods andservices,
fluctuation in its price relative to the market) actually of usingsome specified year as the base year. The
two components: unsystematic risk and systematic risk. basket of goods usedtocalculatethe index covers
Unsystematic risk or company specific risk is the components such as food and beverage,
variability in the stock’s price due to factors associated transportation,housing, and entertainment.
with the company. Systematic risk or market-related risk
is the variability in price related to the ups and downs of
• Inflation is an economic condition cha racterized by
the stock market as a whole.
a continuingriseinthegeneral level of prices of goods
and services. Deflation is theoppositeofinflation and is
3. Sector Risk therefore a period of declining prices of goods andser
– Investing heavily in securities issued by companies in a [Link] another viewpoint, inflation reduces the
particular industry is subject to what is known as sector purchasing power of moneywhile deflation increases
risk. Other factor that negatively affect industries and the the relative value of money.
securities issued by companies within these industries
include cyclical downturns, regulatory restrictions, and
industry scandals. KEY TERMS

4. Liquidity Risk Consolidation - The union of two or more corporations into

– this is the risk that an investment may not find a ready a single new corporation.
buyer or that it may have to be disposed at a substantial
loss. The prices of longer-term bonds are more affected Merger - The absorption of one or more corporations by
by changes in interest rates than shorter-term bonds. another existing corporation which retains its identity and
Stocks, however, are generally more volatile in price takes over the rights and privileges of the absorbed
than bonds and are therefore more susceptible to this
corporations.
type of risk. To reduce this risk, investors should try to
stay away from securities which: 1) do not have a ready
Exchange Ratio - Based on the relative book values of the
market; 2) are not listed; 3) are listed but not actively
traded; and 4) are very volatile. shares of stock of the merging companies.

Additional Paid-in Capital - The net asset value received

is more than the par value of the shares issued.
Economies of Scale - The fixed cost per produced unit Sales, payments or deposits subscription and
scale. contracts to sell prohibited. No offer to buy the
securities can be accepted and no part of the
Horizontal Mergers - Two firms that operate and compete purchase price can be received until the
in a similar kind of business. registration statement has become effective.
Such offer may be withdrawn or revoked,
Vertical Mergers - Firms in different stages of without obligation or commitment of any kind, at
production/operation. any time prior to notice of its acceptance after
the effective date.
MOTIVES OF MERGERS A Preliminary Prospectus (red herring) which meets
the requirements of SRC Rule 8.1-1: the
1. Economies of scale - a decrease in the total cost of Prospectus Delivery Rule and which has been
the company (the fixed cost per produced unit fall) and filed with the registration statement and during
increase in the value of the firm; include tax savings; the formal offering period. The Commission,
2. Overcome financial difficulty - a joining together of however, may prescribe a different percentage
weak and shaky companies to give life to a financially if warranted under prevailing market situation.
bigger and stronger company;
2. Local Small investors (10%)
3. Less competition or achieve bigger market share;
The allocation to the “local small investors” shall be at least
4. Diversification
ten percent (10%) of the entire IPO, which shall be offered
only after the effectivity of the registration statement and
NONDEPOSITS INSTITUTIONS during the formal offering period. The Commission, however
may prescribe a different percentage if warranted under
a.​ Life Insurance- protects policy holders against the
prevailing market situation.
risk of premature death and disability.
b.​ Insurer- offers policies to reduce risk of loss
Local small investors is defined as a “share subscriber who
associated with crime weather damages, and
is willing to subtribe to a minimum board lot or whose
personal negligence.
subscription does not exceed P20,000.00 or ssuch other
c.​ Pension Funds- protects customers against the
risk of outliving their sources of income in the amount as the Commission may prescribe as warranted
retirement years. under prevailing market situation.

The distribution outlets for the 10% offer to “local small

Initial Public Offering (IPO)- the first time that the
investors” may be branches of participating Universal
corporation is issuing it securities to the public. The
Banks, Investment Houses as well as securities brokers.
IPO can be primary offering or secondary offering a Application forms shall be published in the newspaper of
combination of both. general circulation, which can be cut out by an applicant
and submitted to any distribution outlets together with the
check payment.
1.​ Book Building Process (30%)
A “ book-binding” program for the domestic market shall be
undertaken simultaneously with the international tranche, if 3. General Public (60%)
any. The international tranche of any IPO shall not be sold The balance of sixty percent (60%) may be distributed by
or distributed in the domestic market except thru Investment the underwriter directly to their clients/general public to
Houses duly licensed under P.D 129 or thru Universal include institutional investors and high net worth individuals.
Banks licensed by the Bangko Sentral ng Pilipinas (BSP)
and the SEC. The distribution of the IPOs is the primary responsibility of
the underwriters in accordance with the above distribution
Qualified Institutional Buyers (QIBs) be limited to the system.
following:
●​ Mutual funds KEY TERMS
●​ Pension or retirement funds;
●​ Commercial or universal banks;
➢​ CAPITAL MARKET- designed to finance long-term
●​ Trust companies;
●​ Investment houses; investments by businesses, governments, and
●​ Insurance houses; households.
●​ Investment companies; ➢​ MONEY MARKET- designed for the making of
●​ Finance companies short-term loans
●​ Venture capital firms ➢​ TREASURY BILLS- short-term government IOUs
●​ Government financial institutions and; that are a safeguard and a popular investment
●​ Such other persons as the commission may by rule medium for financial institutions and corporations of
determine as qualified buyers, on the basis of such
all sizes.
factors as financial sophistication, net worth,
➢​ CONSUMER LOANS- availed by households to
knowledge, and business matters, or amount of
make purchases ranging from automobiles to home
assets under management
appliances.
Thirty percent (30%) of the amount of the IPO shall be ➢​ CREDIT UNIONS- attract small savings deposits
available to QIBs under the book-building exercise. This from individuals and families and grants loans to
percentage however, may be adjusted depending upon the credit union members.
reception of the market to the IPO. ➢​ INVESTMENT- refers to the acquisition of capital
The book-building will be done after the registration goods, such as buildings, and equipment and the
purchase of inventories of raw materials and goods to
statements is filed but before it becomes effective, the
sell.
following shall be strictly observed:
Philippine Financial System Assessment
1.​ In what year was the first organized financial
institution (Obras Pias) established in the
Philippines?
-​ 1594
2.​