PHILIPPINE FINANCIAL SYSTEM
Financial System
- set of institutions, such as banks, insurance companies, and stock exchanges.
- allows the exchange of funds between savers, borrowers, and investors to support both
consumption and productive investment.
- exists at firms, national and global levels.
- includes the rules, practices and regulations that guide financial activities.
Importance and Objectives of the Financial System
Promotes Economic Growth and Development
- financial system channels funds from people who save to people or businesses who
invest.
- helps build new businesses, expand industries, and create jobs.
- A strong financial system is a key ingredient for a growing and prosperous economy.
Example: Company raising capital through the financial system to finance capital
expenditures and investors savings accumulate funds for future use.
Encourages Savings and Investments
- provides safe and reliable ways to save and invest money.
-converts idle funds into productive investments that help the economy grow.
Example: Individuals deposit money in banks or buy mutual funds that invest in global
securities like Chinese or US assets
Ensures Smooth Flow of Funds
- Connects lender-savers and borrower-spenders through direct and indirect financing.
Example: A person in Metro Manila can deposit in a U.S. bank or buy mutual funds that
invest abroad
Supports Businesses, Households, and Government
-provides capital for businesses to expand operations
- Allows governments to borrow money for public projects
-Helps households buy goods like houses, cars, or furniture through loans.
Maintains Financial Stability and Confidence
- well-functioning financial system ensures trust and stability among banks, investors,
and the public.
-prevents financial collapse by regulating fund flows and controlling risks.
Example: The 2008 Global Financial Crisis in the U.S. showed what happens when new
financial products are misused, emphasizing the need for regulation and balance.
Supports Government and Regulation
-helps the BSP control inflation, interest rates, and money supply.
-Ensures that financial institutions follow government rules for stability.
Flow of Funds through the Financial System
Figure 5-1: Flow of funds through the Financial System
Key components of the Financial System
1. Financial Intruments
-Represent claims or obligations between lenders and borrowers.
Examples: Bonds, stocks, and promissory notes.
2. Financial Markets and Financial Institutions
-Markets: Platforms for trading financial instruments (e.g., stock and money markets).
-Institutions: Organizations that facilitate financial activities (e.g., banks, insurance
companies).
3. The Central Banks and other Financial Regulator
-Regulate, supervise, and stabilize the financial system.
Example: Bangko Sentral ng Pilipinas (BSP) in the Philippines.
Functions of the Financial System
- Channel funds from sectors that have a surplus to sectors that have a shortage funds.
Economist believe there are 3 key services that financial systems provides to savers and
borrowers:
1. Risk Sharing – It helps spread and manage financial risks among savers and
borrowers (e.g., investing in stocks or bonds).
2. Liquidity – It allows assets to be easily converted into cash (e.g., withdrawing from a
savings account).
3. Information – It provides useful data for making sound financial decisions (e.g., credit
reports and market trends).
Structure of the Philippine Financial System
Main
Subcategory Institutions / Examples Functions / Description
Component
Central monetary
I. Bangko authority; regulates
Sentral ng — Bangko Sentral ng Pilipinas money supply, supervises
Pilipinas (BSP) banks, and ensures
financial stability.
II. Banking A. Private 1. Expanded Accept deposits and
Institutions Banks Commercial/Universal Banks provide loans; act as main
(e.g., BDO, BPI, Metrobank) intermediaries between
Main
Subcategory Institutions / Examples Functions / Description
Component
2. Commercial Banks
3. Thrift Banks
A. Savings & Mortgage
Banks
savers and borrowers;
B. Private Development
support business and
Banks
consumer financing.
C. Stock Savings & Loan
Associations
4. Rural Banks
5. Cooperative Banks
1. Development Bank of the Provide financing for
Philippines (DBP) government projects,
B.
[Link] Bank of the agriculture, and
Government
Philippines (LBP) development programs;
Banks
3. Philippine Al-Amanah promote inclusive
Islamic Investment Bank banking.
1. Investment Houses
2. Investment Banks
3. Financing Companies
4. Securities Dealers/Brokers Do not accept traditional
III. Non-Bank 5. Savings & Loan deposits but provide
Financial A. Private Associations financial services like
Institutions NBFIs 6. Mutual Funds investments, insurance,
(NBFIs) 7. Pawnshops loans, and capital market
[Link] Investors activities.
9. Pension Funds
10. Insurance Companies 11.
Credit Unions
1. Government Service Offer social security,
B.
Insurance System (GSIS) pension, and insurance
Government
2. Social Security System services to government
NBFIs
(SSS) and private employees.
REFERENCES:
Cabrera, Ma. E. B., & Cbrera, G.A. (2020). Financial markets and
institutions.
Team, I. (2025, May 16). Financial System: definition, types, and market
components. Investopedia. Retrieved from
[Link]
Armas, J. & De Guzman, N. (2022). Introducing a multi-dimensional
financial development index for the Philippines. Retrieved from
[Link]
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