Business Finance

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Part1: THE CONCEPT AND DEVELOPMENT OF MONEY

MONEY

o Money was derived from the Latin word moneta, surname of the Roman goddess Juno.
Moneta refers to a mint or a place for coining money.
o According to the etymonline.com, it also comes from the Old French monoie and the
Modern French monnaie, meaning money, coin currency, or change.
o Relative to the attribute of Juno Moneta as the guardian of the finances of Roman Empire, it
could also have been from the Latin monere, meaning advise or warn.
o In Ancient Greece, the word moneta meant advisor, one who warns , or makes people
remember.
o Another term for money is “bucks”, which came from the word “buckins”, meaning deer
hides, a medium of exchange used by settlers during the early times.

o Money is defined by Merriam-Webster as something generally accepted as a medium of

exchange , a measure of value , or means of payments.
o Money is commonly defined as anything authorized by law to be generally accepted as legal
tender, as a medium of exchange , and a standard value in payment of goods and services
without reference to the general standing of the person who offers it.

o According to Business Dictionary.com legal tender consist of denomination of a country’s

currency that, by law must be accepted as a medium for commercial exchange and
payment for a money debt. While all denominations of the circulating paper money are
usually legal tenders, the denomination and amount in coins acceptable is legal tender
vary from country to country.
o Checks and postal orders are not legal tenders and are accepted only at the option of the
creditor , lender, or seller , also called lawful money.
o From the foregoing definitions of money, it can be noted that money is: (1) medium of
exchange; legal tender; measure of value; means of payment; and standard value.

COINAGE

o Coinage is the conversion of metals into coins. The place where metal are made into coins is
known as mint.
o With coinage , metals were made into coins of a fixed weight. Money in the form of coins
became a convenient commodity for exchange transactions and, later, a convenient tool for
comparing and storing values.
o A coin is an ingot of metal, the weight and fineness of which are certified by the integrity of
the design on its surface and the power of the issuing authority. The government is the only
authority granted the power of coinage and, ultimately, the power to print bills as money.
This is an essential step in any monetary system.
o With the government’s sole authority to mint coins and print bills, the following basic
purposes are assumed:
 Prevent confusion
 Ensure uniformity and fineness (ration of weight of pure metal to total weight,
expressed in decimal or carat) of coins
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 Facilitate exchange
 Ensure confidence on the part of the citizenry with respect to the government’s
monetary system.
o It is for these reasons that the fundamental
law or the constitutions of any country
grants the power to mint coins and print
bills to its government alone , usually vested
in its central bank. In the Philippines, this
power is vested in the Bangko Sentral ng
Pilipinas (BSP). BSP ensures stability in the
Philippine monetary system
o With the power to mint coins solely vested
in the government, any private coinage is
considered counterfeit. The government
has made it difficult for coins to be
counterfeited.

PAPER MONEY

o Paper money is lighter than coins, making it more portable. To facilitate exchange, the
government issued paper money to represent certain quantities of gold or silver kept by the
government to cover what has been issued. As such, paper money can be called
representative paper money, following the long use of commodity money.
o Representative money was late replaced by what is termed fiat money.

PLASTIC (POLYMER) MONEY

o Plastic money is made of polymer.

o Plastic money is actual cash made of super resistant polymer film
(instead of paper)
o Polymer money feels like regular paper bill, but lasts longer.
o When holding up a local plastic bill to a light , a small see-through window can be seen.
o This confirms that the bill was printed on clear plastic film.
o The polymer used for manufacturing foreign money is as tick and rigid as American money.
o Polymer is more durable, harder to counterfeit, and environment- friendly.
o PLASTIC MONEY the hard plastic cards used in everyday exchange transactions in place of
actual bank notes are called plastic money. They come in various classifications as credit
card, debit card, cash card, prepaid cash card, and store card.

TYPES OF PLASTIC MONEY

Credit Card

o allows owners to buy products on credit from different stores and establishments, in lieu of
cash or money, except that it has a credit
limit, that is, the maximum amount that can be
charged to the credit card.

Examples of credit cards:

 American Express
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 Visa Card
 Master Card

Banks and other financial institutions issue Visa Cards or Master Cards that bear their name like
BDO, Metro Bank, RCBC, East West Bank, among others.

DEBIT CARD

o The bank where the account is maintained issues the

debit card.
o Unlike credit card, payment using a debit card are
immediately charge to the cardholder’s bank
account, instead of paying the card at a later date.
o The holder can purchase goods or services up to the amount that is in the account to where
it is linked.
o In some instances, if the bank gives an overdraft line, the holder can purchase up to the
extent of the overdraft line given him.
o The overdraft line refers to the credit (up to a certain limit) granted by the bank to the
holder of the card.
o Assuming the holder only has P 5,000.00 in hi account with the bank. If the bank grants him,
say, an overdraft line of P 2,000.00 , the holder can buy up to P 7,000 using his debit card.

CASH CARD

o Cash card only allows withdrawal of money through an Automated

Teller Machine (ATM).
o In short, it is used for ATM transactions only.
o A cash card can be used as a debit card as well. It is convenient in
that the other holder need not stay in line inside the bank to
withdraw money.
o ATM are located in various locations, such as outside or inside the bank, at department
stores, and alongside roads.
o ATM card can also be used for depositing money to the account supporting the card in an
ATM.

PREPAID CASH CARD

 Prepaid cash card, as the name implies, is paid by the

buyers upon purchase.

This card includes: Gift Card/Certificate, Store Card, Multi-currency Prepaid Card

Gift Card /Certificate

 Gift card is a prepaid cash card that can be given as gifts so that the recipients can choose
what they want as gift.
 It can also be used by financial institutions and can be used at any store, just like a credit
card; however the amount that can be spent is fixed. Once fully used, it has no value at all.
Very seldom can it be reusable or topped up.

Store Card
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 Store card is like a credit card , generally issued by a particular store and
can be used for purchase in the same store. This is exactly the same as
the prepaid cash card discussed in the previous section. Very seldom can
it be used in other establishments. This is a simple credit granted by stores to encourage
customers to spend more in their store.

Multi-currency Prepaid Card

 It can load up to six different currencies- US dollar, Euro, British pound, Hong Kong dollar,
Australian dollar , and Japanese Yen.
 It can be used from all Visa-affiliated merchants here in the Philippines and abroad
regardless of the currencies loaded.
 It can be used for purchases of point of sale (POS) terminals. It has locked in exchange rate
for currencies loaded.
 It can also withdraw local currencies from all Visa affiliated ATMS worldwide.
 All purchase would require the client’s signature.

HOW MONEY WAS MADE

FORMS OF MONEY Major Types Of Money:

1. Commodity Money
 When things are used to get what we want , be it goods or services, the things we
used to pay for such may be termed commodity money. Commodity money has its
own value other than using it as money.
2. Currency / Bills and Coins
 The government of any country issues currency that is legal tender in the country.
These bills and coins are in different denominations, minted and printed, by the
central bank of a country. Domestic currency can only be used in its country of
origin. If it used in another country, it needs to be exchanged with the currency of
that country. Or it can be exchange with a currency that is acceptable
internationally, like US dollar.
3. Check / Cheque
 Check is generally used by businesses and persons in conducting businesses, as well
as personal transactions.
 It is a written order to a bank (drawee), by the person, who issues the check (maker
or drawer) to pay someone whose name is written on the face of the check (payee)
a certain amount of money on demand (upon presentation/immediately) or at a
future date (post-dated check).

Different Types of Checks

 Personal Check
 Business Check
 Cashier’s Check/Manager’s Check
 Certified Check

Personal Check

o Personal check is issued by persons to be drawn against their own current/checking account
in a bank.
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o A check is withdrawn from the checking account. The check has the date issue or a later
date, if post –dated, the name of the payee , the amount in words and in figures, and the
signature of the maker or owner of the check.
o Checking account is generally non-interest bearing , while savings account is interest
bearing.

Business check

o Business Check is a check issued by companies/business. It is drawn on the issuer’s bank

checking account or current account. It is
used for business transactions.

Cashier’s Check/Manager’s Check

o Treated as a bank draft , cashier’s checks is

issued by the bank against its own account ,
ensuring availability of funds. It is to be
purchased with a fee from a bank that issues
the check.
o If you are to purchase a cashier’s check for
say P1,000.00 you give the banks P1,000.00 plus any fee the bank will charge. If the total
fees and charges are, say P100, you give the bank P1,100 and the bank will issue you a
cashier’s check for P1,000 that you will use to pay somebody else, even a company. It can be
signed by the bank cashier or any other bank official.

Certified Check

o Certified check is like a cashier’s check. However, it is issued by the bank certifying that the
account of the person issuing it has available funds (just like any ordinary personal check) .
The bank certifies the availability of fund by earmarking the corresponding amount on the
check which only be used to pay the check itself. Certified check clears or negotiates faster
and is easier to encash than personal checks.

Traveler’s Check/ Traveler’s Cheque

o People who travel and who do not want to go into the

hassle of exchanging their currency with the currency
of the country they are visiting bring them what is
known as travel check (also written as traveller’s
check, traveler’s cheque, or travellers cheque). It is a
fixed amount check which is pre-printed, allowing the
signatory of the financial institution who is selling the traveler’s check to make an
unconditional payment to whoever has the traveler’s check in his possession.

Bank Draft

o Bank draft is issued by banks against their own account. At times, they are called cashier’s
check or manager’s check. Like certified and cashier’s checks, bank drafts ensure availability
of funds without any need to check on the character of the person issuing the check.
o To get a bank draft, a customer goes to the bank to request it. The bank will ensure that the
customer has enough money in the bank (if he has an account with the bank where the
funds will come from) or presents enough cash to cover the amount of the draft plus all
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pertinent bank fees. The

bank then issues the draft.

Types of Bank Draft

1. Demand Draft
2. Time Draft
3. Local Draft
4. International Draft
5. Automatic Bank Draft (ABD)

Money Order

o Money order refers to the instrument issued generally by the post office of a country
ordering a sum of money to be paid to the payee indicated on the instrument itself.
o In the Philippines under R.A. 7354, an Act Creating the Philippine Postal Corporation under
Art. II, Sec. 6, (d) states that the Philippine Postal Corporation has the power to issue money
orders or checks for transmittal through the mails and authorized the issuance of a
replacement in cases of lost, stolen, stale , or destroyed money order or check.

Warehouse Receipt

o The Warehouse Receipts Act (Act No. 2137) was enacted to a full and complete treatise on
the subject . It covers all warehouses, whether public or private, bonded or not.
o A warehouse receipt is a document of title to goods used ad proof of possession or control
of the goods covered by the receipt and an authorization to the possessor or the warehouse
receipt to transfer or receive either by endorsement or by delivery of goods represented by
such warehouse receipt.
o The warehouse receipt system has a long history of use in trade and finance.

Business Finance

Chapter 2: The FInancial System

The GOVERNMENT is primarily responsible for defining and regulating the financial system.

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 systems are to:

1) Provide the funds from the savings units (lenders) to the deficit units (borrowers)

2) Provide a medium of exchange

3) Provide a mechanism for risk sharing and

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4) Provide a channel through which the central bank can influence the economy , in general , and the

financial system in particular.

Financial System Participants

• There are 6 participants or sectors in the financial system.

1. Households or consumers;

2. Financial institutions

3. Non-financial firms

4. The government

5. The central bank; and

6. Foreign participants

Households

• Households or consumers are generally described as that group receiving income, majority of
which

typically come from wages and salaries. Such income is spent on goods and services and a part is

saved (if there is enough to save).

• Gross savings are equal to current income less current expenditures.

Financial Institutions

• Financial institutions are the firms that bridge the gap between the surplus units (SU) or

INVESTORS/LENDERS and the deficit units (DU) or borrowers.

• They channel funds from the lender to borrowers . They include depository institutions and non-

depository institutions.

The Government

• By government is meant the national , provincial, city , and barangays or towns compromising the

Philippines as a whole.

The Philippine Treasury is part of the government that we consider as participant in the financial

system.

• When the Phil. Treasury issues their own securities , they act as a borrowers/deficit units, and
when

the Phi. Treasury buys securities, they act as investors or savers/surplus units.

The Central Bank

• Bangko Sentral ng Pilipinas (Central Bank of the Philippines) and all other central banks of the

different countries are mandated to assure that their respective countries have a healthy and stable
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financial system.

• Any central banks is the banker to banks providing various services to banks.

• The central banks are the monetary policymakers of their respective countries.

Foreign Participants

• Foreign participants refer to the participants from the rest of the world-households, governments,

financial and non-financial firms, and central banks.

• International trade and International finance are parts of globalization. As globalization affects the

entire world, the role of foreign participants in the financial system has become more
important.Business Finance

Chapter 2: The FInancial System

Bangko Sentral ng Pilipinas and the Philippine Financial System

• Bangko Sentral ng Pilipinas is at the top of the structure , the one mandated to oversee the
financial

system of the country. It is the agency that is tasked to ensure that the country has a healthy
financial

system and a healthy economy.

• It is the central monetary authority.

The government banking institutions include the:

1. Philippine National Bank

2. Development Bank of the

Philippines

3. Land Bank of the Philippines

4. Amanah Islamic Bank

Non-bank financial institutions are:

1. Private Non-Bank Institutions

2. Government Non-Bank Financial Institutions

▪ Example of Private non-bank financial institutions are:

Investment bank/houses, investment companies, finance companies, securities dealers and brokers,

non-stock savings and loans associations, pawnshops, lending, fund managers, insurance companies.

Examples of Government Non-bank financial institutions

1. gsis

2. social security
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3. pag-ibig fund

• Financial institutions not under BSP are the cooperatives that are handled by the COOPERATIVE

DEVELOPMENT AUTHORITY (CDA)

• Private Insurance companies are under INSURANCE COMMISSION

• Other financial institutions are also overseen by the SECURITIES AND EXCHANG COMMISSIONS

• These organizations are however mandated to submit reports to BSP so that BSP can monitor their

operations and effects on the financial system of the country.

Past Governors of BSP

• Miguel Cuaderno , Sr. ( 1949-1960)

• Andres Castillo (1961-1967)

• Alfonso Calalang (1968-1970)

• Gregorio Licaros (1970-1981)

• Jaime C. Laya ( 1981-1984)

• Jose B. Fernandez, Jr.( 1984-1990)

• Jose L. Cuisa , Jr. (1990-1993)

***

• Gabriel C. Singson (1993-1999)

• Rafael B. Buenaventura (1999-2004)

• Amando M. Tetangco Jr. (2005-2017)

• Nestor Espenilla Jr. (2017-2019)

• Benjamin Diokno (2019-2022)

• Felipe Medalla (2022-2023)

Eli M. Remolona, Jr.

Current BSP GOVERNOR (July 3,2023-PRESENT)Business Finance

Chapter 2: The FInancial System

CENTRAL BANK AND ITS MANDATES

• OBJECTIVES

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable

economic growth.

The BSP also aims to promote and preserve monetary stability and the convertibility of the national

currency.
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• RESPONSIBILITIES

The BSP provides policy directions in the areas of money, banking and credit. It supervises

operations of banks and exercise regulatory powers over non-bank financial institutions with quasi-

banking functions.

MONETARY BOARD AND ITS POWER

• The powers and function of BSP are exercised by its Monetary Board, which has 7 members

appointed by the President of the Philippines.

• 1 member of the monetary board must be a member of the Cabinet appointed by the President of

the Philippines (under new Central Bank Act) with with five full-time members from the private
sector.

• 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 give rise to conflict of interest.

• Exemption: appointed Cabinet member.

• The Governor and other members of the Monetary board serve terms of six years and may only be

removed for a cause.

• The Monetary Board meets at least once (1) a week.

• The Board may be called to a meeting by the Governor of the BSP or by 2 other members of the

Board.

• Usually, the board meets every Thursday but some occasions, it convenes to discuss urgent issues.

Authority of the Monetary Board

1. Issue rules and regulations

2. Direct the management, operations, and administration of the BSP, reorganize its personnel , and

issue such rules and regulations as it may deem necessary or convenient for this purpose.

3. Establish human resource management system.

4. Adopt annual budget for and authorized such expenditures by the BSP in the interest of the

effective administration and operation of the BSP.

5. Indemnify its members and other officials of the BSP.

What is monetary policy?

• Measures or actions taken by the central bank to regulate the supply of money in the economy.
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• Monetary policy actions of the BSP are aimed at influencing the timing, cost and availability of

money credit , as well as other financial factors , for the purpose of stabilizing the price level.

***

• If the BSP believes that money supply is in excess of a desired level , then it can take action to

reduce the money supply. This is referred to as CONTRACTIONARY MONETARY POLICY.

• On the other hand, if based on the BSP assessment – the liquidity situation is tight and there is a

need to increase money supply , it implements an EXPANSIONARY MONETARY POLICY.Business

Finance

Chapter 2: The FInancial System

How does BSP implements monetary policy?

• The BSP implements monetary policy using various instruments to achieve the

inflation target set by the

• Raising /reducing the BSP’s policy interest rates;

• Increasing/decreasing the reserve requirement ;

• Encouraging / discouraging deposits in the special savings account facility by banks and trust

entities of BSP supervised financial institutions;

• Increasing / decreasing the re-discount rate on loans extended by the BSP to banking institutions
on

a short-term basis against eligible collaterals of bank’s borrowers;

• Outright sales/purchased of the BSP’s holdings of government securities.

• The BSP’s primary monetary policy instruments are its overnight reserves repurchase (borrowing)

rate and overnight repurchase (lending) rate.

Financial Stability

To strengthen the mandatory deposit insurance coverage system to generate , preserve, maintain

faith and confidence in the country’s banking system, and protect it from illegal schemes and

machinations.

Maximum Deposit Insurance Coverage (MDIC)

• PDIC pays deposit insurance on all valid deposits up to the Maximum Deposit Insurance Coverage

of P 500,000.00 per depositor of a closed bank.

What are covered by PDIC deposit insurance?

• PDIC insures valid deposits in domestic offices of its member- banks, as follows:

By Deposit Type:
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▪ Savings

▪ Special Savings

▪ Demand/Checking

▪ Negotiable Order of Withdrawal (NOW)

▪ Time Deposits

By Deposit Account

▪ Single Account

▪ Joint Account

▪ Account “By” , “In Trust For” (ITF) or “For the Account Of” (FAO) another person

By Currency

▪ Philippine peso

▪ Foreign currencies considered as part of BSP’s international

Chapter 3: BSP SUPERVISED BANKING INSTITUTIONS

CLASSIFICATION OF BANKS

1. Government Banks
2. Universal Banks
3. Commercial Banks
4. Thrift Banks
5. Rural Banks
6. Cooperative Banks
 The BSP monitors and compiles various indicators on the Philippine banking system. The
PHILIPPINE BANKING SYSTEM is composed of Universal and Commercial banks, Thrift banks,
Rural and Cooperative banks.

Government Banks

1. Land Bank of the Philippines (LBP)

2. Development Bank of the Philippines (DBP)
3. Al-Amanah Islamic Investment Bank of the Philippines

Land Bank of the Philippines

 It is established as a corporate and government instrumentality.

 Its main purpose is to help implement the land reform in the Philippines known as the
COMPREHENSIVE AGRARIAN REFORM PROGRAM (CARP). (5 hectares limit only, more than 5
hectares will go to government)

Development Bank of the Philippines

 It is the government counter-part of the private development banks. It aims to develop, expand,
construct, and rehabilitate our agricultural industry.
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Al-Amanah Islamic Investment Bank of the Philippines

 the Philippines Primarily established to promote and accelerate the socio-economic

development of the autonomous region of Mindanao.

Universal and Commercial banks

 Represent the largest single group, resource-wise, of financial institutions in the country.
 They offer the widest variety of banking services among financial institutions.
 In addition to the function of an ordinary commercial bank,universal banks are also authorized
to engage in underwriting and other functions of investment houses, and to invest in equities of
non-allied undertakings.

Universal Banks

Example of Universal Banks: Union bank, BDO, Metrobank, BPI, Eastwest, China Bank.

Commercial Banks

Example of Commercial Banks: Bank of Commerce, Robinsons Bank, Philippine Bank of

Communication, UCPB, RCBC, Veteran Banks.

Thrift Banks

1. savings and mortgage banks,

2. private development banks,
3. stock savings and loan associations
4. microfinance thrift banks.
 Thrift banks are engaged in accumulating savings of depositors and investing them.
 They also provide short-term working capital and medium- and long-term financing to
businesses engaged in agriculture, services, industry and housing, and diversified financial and
allied services, and to their chosen markets and constituencies, especially small- and medium-
enterprises and individuals.
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Example of Thrift Banks: Sterling Bank of Asia, Planters Bank, Postal Bank, City Saving Bank, Ps Bank,
PR Bank, Valley Bank.

Rural and Cooperative Banks

 Are the more popular type of banks in the rural communities.

 Their role is to promote and expand the rural economy in an orderly and effective manner by
providing the people in the rural communities with basic financial services.
 Rural and cooperative banks help farmers through the stages of production, from buying
seedlings to marketing of their produce.
 Rural banks and cooperative banks are differentiated from each other by ownership. While rural
banks are privately owned and managed, cooperative banks are organized/owned by
cooperatives or federation of cooperatives.
 Rural Banks are organized to promote and expand the rural economy in an orderly and effective
manner by providing farmers and small businessmen with means of facilitating and improving
their productive facilities.
 Rural Banks are usually a family owned business.
 In granting the loans , rural banks shall give preference to the applications of farmers and
merchants whose cash requirements are small.
 Loans may be granted by rural banks on security of land without Torrens Title where the owner
of private properties can show 5 years or more of peaceful , continuous and uninterrupted
possession of the property in the concept of ownership.

Services Performed by Rural Banks

 Accept savings and time deposits

 Can open current and checking accounts provided the rural banks must secure approval from
BSP Monetary Board.
 Can act as collection agent
 In can act as official depository of municipal, city or provincial funds in the municipality; city or
province where it is located to such guidelines as may be established by the MB.
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Examples of Rural Banks and Cooperative Banks: Saviour Bank, Rural Bank of Mexico, GRBank,
Porac Bank, Bank of Florida.

Statistics based on PDIC and BSP

Total Rural Banks : 429 JULY 27, 2021