CHAPTER I - Introduction

What is Finance? Finance the study of how individuals, institution, governments and businesses acquire, spend and manage money and other financial assets. Financial Environment includes financial system, institutions, markets and individuals that make the economy operate efficiently. Financial Institution organizations or intermediaries like banks, insurance companies, investment companies. They engage in financial activities to aid the flow of funds from savers, to borrowers or investors. Financial Markets Physical or electronic forums that facilitate the flow of funds among investors, businesses, and governments. Investments involve the sale or marketing of securities, the analysis of securities and the management of investment risk. Investors include savers and lenders as well as equity investors. Investors can be corporate or personal. Financial Management involves financial planning, asset management and fund raising decisions to enhance the value of businesses. This involves decision-making relating to the efficient use of financial resources in the production and sale of goods and services. The goal of the financial manager in a profit seeking organization is to maximize the owners wealth. Three Areas in Finance 1.) Institution and markets 2.) Investments 3.) Financial Management Reasons for Studying Finance 1.) To make informed economic and financial decisions. 2.) To acquire basic knowledge of investments for business and personal reasons. 3.) To acquire basic understanding of financial management. Financial System Components and their Financial Function 1.) Monetary System a.) Creating Money b.) Transferring Money 2.) Financial Institutions a.) Accumulating Savings b.) Lending/Investing Savings 3.) Financial Market a.) Marketing Financial Assets b.) Transferring Financial Assets Foreign Policy -Plan of action adopted by one nation with regards to its diplomatic dealings with other countries -Foreign policies are established as a systematic way to deal with issues that may arise with other countries Cash Flow -Incoming and outgoing of cash, representing the operating activities of an organization.

-In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance) Consumer Price Index (CPI) -A measure of changes in the purchasing-power of a currency and the rate of inflation. The consumer price index expresses the current prices of a basket of goods and services in terms of the prices during the same period in a precious year, to show effect of inflation on purchasing power. It is one of the known lagging indicators, See also producer price index. Portfolio -Pool of investments, collection of samples of an artist or either creative person or a group of complementary or supplementary products marketed together. Asset -Something valuable that an entity has acquired or purchased; and that has money value(Its cost, book value, market value or residual value) an asset can be. Why is there a need for a highly developed financial system? -The process of assembling and redistributing capital funds is wisely carried out. -Large-scale production and a high degree of specialization of labor can function only if an effective system exists for paying goods and services -Business can obtain the money it needs to buy such capital goods only if necessary institutions, instruments and procedures have been established for making savings available for such investment. -The national government and other government units can carry out their wide range of activities on the domestic and international scene only if efficient means exist for raising money, for making payments and for borrowing. What are the requirements of an effective financial system? 1.) The financial system must provide an efficient medium for exchanging goods and services. A unit measure prices a unit of account as the Peso. It must be universally accepted in the economy. 2.) The financial system must make it possible for the creation of capital on a scale large enough to meet the demands of the nations economy. Capital creation takes place whenever production facilities are used to produce buildings, machinery or other equipment to use in production of goods for consumers or producers use.

3.)

This process takes place when some individuals, business or government units do not spend all of their current income (used to buy buildings, machinery or equipment) Savings The financial system should provide markets and procedures for the transfer of claims to wealth, such as promissory notes and shares of ownership (stocks) in a business, and for the conversion of claims into cash. Savings available for investment by a large group of investors only when the saver can quickly and easily convert his claim into cash when he needs it.

EVOLOTION OF THE PHILIPPINES FINANCIAL SYSTEM

SPANISH PERIOD
Obras Pias (1854) represented the first organized institution in the Philippines Religious functions which drew their capitalization from the legacies of wealthy individuals who made wills before going out on dangerous expeditions Funds used to finance the galleon trade in Acapulco, Mexico Commercial Banks 1.) Banco Espaol-Filipino de Isabel II(1851) First Bank in Far East Engaged in banking functions and finance in a limited way, the countrys foreign trade. Granted the privilege note issue by royal decree on October 17, 1854 2.) Chartered Bank of India, Australia and China(1973) with headquarters in London 3.) Hong Kong and Shanghai Banking Corporation(1875) Note: A and B banks engaged in general banking business but they were more of exchange banks than commercial banks since they confined most of their activities to buying and selling of drafts and bills of exchange. Savings Bank 4.) Monte de Piedad y Caja de Ahorros de Manila -branch of Banco Peninsula Ultramarino of Mandrid was also opened only within a short span of 4 years

AMERICAN PERIOD
1.) International Banking Corporation -later absorbed by and as a branch of the National City Bank 2.) Guaranty Trust Company 3.) American Bank (1901) -operated for 4 years 4.) Wai Hung Bank(1902) 5.) Abrue, Newberry and Reyes Bank(1902) 6.) S. Misaka Bank(1906) -serve Japanese community 6.) Postal Savings Bank -serve as a division of Bureau of Posts to promote the habit of thrift among the people and to bring banking to the rural areas. 7.) Government-owned Agricultural bank(2 years later) -failed to render effective service due to its meager capital of P1 million. 8.) Philippine Nationa Bank (1916) -privilege note to issue -organize grant and extend long term credit to agriculture and industry

After World War I 9.) Yokohama Specie Bank (1918) 10.) Asia Banking Corporation (1919) 11.) Chinese-American Bank of Commerce of Peking and China Corporation (1920) 12.) Peoples Bank and Trust Company and the Mercantile Bank of China (1926) 13.) National City Bank of New York (1930) After establishment of Commonwealth (1935) 14.) Bank of Taiwan (1937) 15.) Netherlands Indische Handles Bank (1937) Note: Before the outbreak of WWII 17 Banks 11 domestic and 6 foreign 17 offices in Manila 22 branches in the provinces 54 provincial agencies Bureau of Treasury (1900) -responsible for regular examination and inspection of banks to provide a measure of safety to depositors and creditors as well as the banks themselves Bureau of Banking -assuming the power of supervision over these institution from the Bureau of Treasury

JAPANESE PERIOD(1942)
Note: Japanese Imperial forces placed the operation of the 17 existing banks at a standstill. Japanese Military Government -called for resumption of the banking business but was limited only to Filipino-owned and Japanese banks. 1.) Southern Development Bank (Nampo Kaihatsu Kindo, 1942) -acted as fiscal agent of Japanese Government in the Philippines -issuing military notes -taking custody of clearing branches of the banks -receiving deposits from the bank

POSTWAR AND INDEPENDECE PERIOD (1945)

1.) Rehabilitation Finance Corporation - provide financial aid in the rehabilitation in the country 2.) Development Bank of the Philippines Establishment of the Central Bank of the Philippines (1949) Central Bank of the Philippines -manage the countrys currency system -controlling the economys supply of money and credit -acting as the countrys sole bank of issue -depository fiscal agent of the Philippine government and its instrumentalities Monetary Policy Tools a.) Charges in rediscount rates b.) Variations on legal reserves requirements c.) Sales and purchases of the Government securities d.) Selective credit and other regulations it may deem necessary to attain its objective.

ENACTMENT OF BANKING LAWS(50s & 60s)

General Banking Act (RA No. 337) -contained the first major rules and regulations governing the operation, particularly of commercial and savings banks. -Rural Bank Act and Savings and Loan Association Act was approved. Note: End of 1969 38 commercial banks with 542 branches/extension offices 29 private development banks 87 savings bank with 38 branches 29 private development complemented by 469 rural banks 87 savings and loan associations stock and non-stock

The 70s: The New Society Period -constructive reforms and the reorientation of the
Philippine political, economic and social set-up Central Bank Presidential Decree No. 71 -a redefinition of basic banking terms, reclassification of financial intermediaries into banks and non-banks and their expanded functions as well as guidelines on their operations was made

The 80s: The Universal Banking

Universal Banking (Expanded Commercial Banking) -known as one-stop banking or department store banking -involves combination (full domestic and international banking) with the powers of an investment house (underwriting, securities dealership and equity investments)

The 90s: The New Central Bank

-established for an independent central Monetary Authority Major changes incorporated: 1.) Change in composition of the Monetary Board 2.) Adoption to price stability and maintenance of monetary stability and the convertibility of the peso 3.) Indemnification of Monetary Board Members and other officials of Banko Sentral 4.) Abolition of two expenses accounts; Monetary Adjustment Accounts and Exchange Stabilization Account 5.) The phase out of fiscal agency function 6.) The phase out of regulatory function 7.) Additional mandatory reports 8.) Financial Restructuring of the Central Bank (CB) 9.) The imposition of requirements on trust accounts by the Monetary Board 10.) The imposition of interest loans advances made by the CB to any bank

CLASSIFICATION OF FINANCIAL SYSTEM

1.) Banking Sector a.) Expanded Commercial Bank or Universal Bank -Perform com-banking functions and non-related banking activities b.) Commercial Banks -Offer the greatest variety of banking services c.) Rural Banks -extension of small loans for agricultural purposes as well as retail traders d.) Thrift Banks -Conduct deposit and lending operations with the general public 1. Savings bank -accumulate savings deposit and invest them for specified purposes 2. Private development banks -cater capital needs and demand for investment credit on medium to long-term loans 3. Cooperative Banks -undertake ventures in accordance with universally cooperative principles 4. Islamic banks -promote and accelerate socio-economic development of our Muslim brothers based on Islamic concept of banking 5. Microfinance banks -provide broad range of financial services to micro enterprices. e.) Specialized Banks 1. DBP long-term industrial and agricultural credit 2. LBP an instrument for carrying out part of the countrys land reform program 3. Philippines Amanah Bank provide banking facilities at unique and reasonable terms to the Muslim provinces of Mindanao. f.) Offshore Banking Units (OBUs) - branches, subsidiaries or affiliates of foreign banks which are authorized to transport offshore banking business in the country. 2.) Non-Bank Financial Institutions (with quasi Banking Functions) a.) Investment Houses -Underwriting function b.) Investment Companies -investing, reinvesting or trading in securities open-end companies no fixed amount of paid-in capital close-end companies have relatively fixed amount of outstanding capital c.) d.) e.) Finance Companies -discounting and factoring commercial papers The Securities dealers -buy and sell securities Securities Brokers -business of effecting transactions in securities and earn their income from commission received Private Insurance Companies -conduct life-or non-life insurance business Pawnshops and pawnbrokers -engaged in lending money on personal property delivered as security, pledged or collateral. Non-stock savings and loan associations -organized for mutual self-help

f.) g.)

h.)

i.) j.)

k.)

l.)

Mutual and Building Loan Associations -extending long-term mortgage loans to members Credit Unions -extend short-term credit for personal and productive purposes Trust and pension fund managers -institutional and personal administrators of funds created or constituted for the benefit of others Lending Investors -extending secured or unsecured direct loans to individuals and enterprise

CHAPTER 2 The Role and Uses of Money

Money Anything that people regularly use to buy goods and services from other people. Basic function of Money Money has one fundamental purpose in an economic system: to facilitate the exchange of goods and services, to lessen the time and effort required to carry on trade. Barter System Difficulties 1.) Barter tends to slow down trade, it being cumbersome or burdensome. 2.) Barter is difficult because of the lack of double coincidence of wants. 3.) Barter is also difficult due to the lack of proper way to equate the values of the things exchanged. 4.) Barter is likewise difficult because of indivisibility of goods. How did people live without money? Communities were so small that everything was shared out between them. Barter The exchange of goods without the use of money. Money functions in three levels 1.) Money is held directly by the public, by companies and other organizations, and by the government itself. 2.) There are the banks which borrow money from the public and in turn make loans to the public. 3.) There are the states or central banks which act for the government and are responsible for creating new money or cutting down the amount of money which is circulating round the system. Traditional Characteristics of Money 1.) Utility used in its own original form 2.) General Acceptability one hand to another stability of value 3.) Portability-easy to carry 4.) Uniformity-standard metal 5.) Malleability- shaped into different forms 6.) Durability-can withstand normal wear and tear 7.) Cognizability easily recognized 8.) Divisibility9.) Convertability Functions of Money 1.) As a medium of exchange - intermediary 2.) As a standard of value single unit of account 3.) AS a store of value holding and saving money to obtain gains in the future 4.) As a standard of deferred payment payment for all debts 5.) Conveyance guarantee for solvency of flow of production and consumption Electronic Banking -An open banking system, E-banking has proven to be a boost in generating more deposits and efficiently serving clientele. Virtual Banking - Allow clients to transact with bank and link with distributors and suppliers thru office-based computers. Classification of Money

I. Full-bodied Money Money whose value as a commodity for non-monetary purposes is as great as its value as money. II. Representative full-bodied money Represents in circulating an amount of metal with a commodity value equal to the value of the money. Usually made of paper, is in effect a circulating warehouse receipt for fullbodied coins or either equivalent in bullion. A. Issued by government 1.) Token Coins 2.) Representative token money 3.) Circulating promissory notes B. Issued by Banks 1.) Circulating promissory notes issued by central banks 2.) Circulating promissory notes issued by other banks 3.) Demand deposits subject to check Credit Money or Fiat Money By credit money, or debit money, we mean any money, except representative full-bodied money, that circulates at a value greater than the commodity that circulates at a value greater than the commodity value of the material from which it is made. Seigniorage Profit made by a government by issuing currency, esp. the difference between the face value of coins and their production costs. Monetary System 1.) Metallic-based system (Variations of the gold system) a.) Gold Coin Standard As the name implies, gold circulates as currency in form of coins having a given weight, fineness, and shape. Thus, the value of a coin is easily recognizable and the problem of non-standardized shape is eliminated. b.) Gold Bullion Standard The monetary unit is again defined in terms of a fixed quantity of gold; however, instead of the gold being circulated as coins, paper money convertible into gold is used as the hand-to-hand currency. c.) Gold Exchange Standard Bases the monetary reserves of one nation on the holdings of claims against another nation on the gold bullion standard. 2.) Paper-currency system Arises out of limitations on the supply of gold and the failure of the supply of gold to increase in proportion to the growth of the demand for money make a paper money supply necessary. Fiat money Inconvertible paper currency exists only on the basis if the government decree that it is money. Managed inconvertible monetary system Government agency controls the supply of money in order to ensure that the money

maintains its value and continue to an acceptable medium of exchange. Mickey Mouse Money Circulated huge amounts peso-notes introduced by the Japanese.

CHAPTER 3 MONETARY THEORIES

Money -play distinct role in the determination of the volume of output, its production, its distribution to the factors of production and the level of consumption. Monetary Theory -A study which seeks to discover and explain how the use of money in its different functions affects the production, distribution and consumption of goods.

A. Printing Press Cure -Flooding the economy with freshly printed money may prevent a self-reinforcing downward spiral but it may cause inflation later. -In a worst-case scenario, inflation or the fear of inflation, could dissuade foreign investors to finance the countrys debt, from buying and holding the currency, In turn, could provoke a disorderly decline in the currency, sending prices and interest rates sharply higher. B. Fisher Determinants reciprocal 1.) 2.) 3.) 4.) 5.) of the purchasing power of money or its The volume of currency in circulation Velocity of circulation The volume of bank deposits subject to check Its velocity The volume of trade

Monetary Economics -branch that handles the five regulators of purchasing power -an exact science capable of precise formulation, demonstration, and statistical verification. Equation of Exchange MV+MV=PT M Volume of deposits V Velocity of circulation M Quantity of Currency in Circulation V Velocity of circulation of the quantity of demand deposits P Average level of prices T Quantity of goods and services Quantity Theory of Money most important relation constituents; a.) Quantity of money (M and M) b.) Velocity of circulation (V and V) c.) Volume of trade (T) Note: To stabilize the purchasing power of the dollar, the currency commission would be required to buy securities when the index was below the official par and to sell when it was above. FRIEDMAN (Milton Friedman) - Inflation is always everywhere a monetary phenomenon, produced in the first instance by an unduly rapid growth in the quantity of money.

To stop inflation is to restrain the rate of growth of the quantity of money; a.) Should be allowed increase by 3% to 5% each year, with expansion kept at a uniform rate when considered monthly or even weekly. b.) 100% Reserve Banking System; for every dollar of deposit, banks would be required to hold dollar of currency or its equivalent. The essence of this is to make all money, whether currency or deposit, a direct liability of the government. c.) Government should stay out of economic affairs as much as possible. His economic analysis thus runs parallel with his political preference, that of laizzesfaire government. D. Demand for Money 1. Transaction Demand for Money Demand for Money total amount of money balances that everyone wishes to hold for all purchases. Transaction motive for holding money reason for wanting to hold money original stressed in the quantity theory Transaction Balances transactions force both firms and households to hold money balances 2. The Precautionary Motive Precautionary Balance Money balances for precautionary motives; insurance against being unable to pay bills because some temporary fluctuation in either receipts or disbursements. 3. The Speculative Motive - Emphasizes its roles as a store of wealth Speculative balances - Balances held in anticipation of a fall in the price of assets. 4. The Influence of Interest Rates on the Demand for Money - Theres an inverse relationship between the interest rates and the demand for money is predicted for speculative as well as for transaction and precautionary motives. Liquidity preference refers to demand to hold assets in the form of money rather than as interest-earning wealth. Liquidity preference schedule The schedule relating the demand for money to the interest rate THE ROOTS OF BERNANKEISM Fisher To stop economic downturn was for the Federal Reserve to forget about just being a lender for last resort and print money, lots of money. (Printing money Buying Treasury bill and thus driving down interest rates.) Keynes The government needed to counteract the ever moremiserly tendencies of businesses and consumers in a downturn by spending with abandon. It needed to become the spender of last resort.

Chapter 5 Money and Inflation Meaning of Inflation -Inflation is not a monopoly of the Philippines. It is a universal experience of all countries, both developed and developing. The differences lies only on the magnitude of price increases countries suffer from. Undesirability of Inflation 1.) People who have fixed income with increased prices, people who belong to this group would lose out because the income they receive now would be able to buy less than before. Thus, their economic welfare is diminished. 2.) Pensioners, insured or policyholder unless the benefits received by the pensioners are adjusted to the inflation rate, the pensioners would not suffer a net loss. 3.) Creditors Because the fixed amount of principal and interest they lent out would now be valued less. If the percent rate charged by the creditor is 12% but the inflation rate is 20% the net loss of the creditor is 8%. Gainers during the Inflation 1.) People who have flexible income For example, business would gain more if the prices of the commodities they produce and sell increase. So long as there is a demand for their product, these would be sold. At higher prices, their income would obviously register bigger gain. 2.) Speculators Perceptive and lucky individuals who are able to buy goods at cheaper prices and then sell later at higher prices because of inflation. Ex. Groceries, appliances, jewelry. 3.) Debtors The value of money they borrow before would now have more value. Other gainers would be people who built their houses in the 80s through housing loans with SS or GSIS. There houses and lots are worth much now than before. Demand Pull Inflation If those who buy goods and services desire to purchase greater than what the economy can produce. In other words, excess demands for commodities tend to push prices up.