Financial Institutions
1
Suppose you have
excess funds. What
would you do with
it?
2
Would you keep them
with you or deposit
them in a bank
account?
3
Do you know that you
are indirectly lending
your money if you
deposit it on a bank
account?
4
Financial institutions facilitate the flow of savings to
lending and investments.
5
Money is a part of daily life. People earn, spend, and save money to
survive in this society. Thus, people need to manage their finances and
set specific financial goals. Most people do this by setting aside a portion
of their income, depositing it in bank accounts, and earning from
interest.
6
Banks play an essential role in this kind of financial activity. These
institutions accept deposits from different individuals, households, and
companies to pool their funds and offer loans to those in need.
Meanwhile, lenders grow their money from the borrowers' interest
payments.
7
People in the accumulation phase often consider their family's future
needs. They are more likely to invest in securing their future income and
attaining financial freedom. Financial institutions offer many types of
investments that people can choose from. These are time deposits,
stocks, and life insurances.
8
Financial institutions could help you achieve your financial goals and
fulfill your financial needs. To know which of their services you need, you
have to determine the type of financial transaction you want and identify
the appropriate financial institution that could help you.
9
QUESTIONS TO PONDER
1. What are the common reasons for keeping personal savings in banks?
2. Do you think that people should invest their money? Explain your
answer.
3. Based on the given narrative, why are financial institutions important?
10
Enumerate the varied financial institutions and their
corresponding services (ABM_BF12-IIIa-3).
11
In this lesson, you should be able to do the following:
● Explain the definitions and purpose of financial institutions.
● Determine the importance of various types of financial
institutions in specific situations.
● Recommend financial decisions concerning financial
institutions.
12
Why are financial institutions crucial in the
financial system?
13
FINANCIAL INSTITUTIONS
● exist to assist individual entities by investing and lending on
their behalf
● products and services:
○ accepting donations
○ offering loans
○ proposing investment plans, etc.
14
FINANCIAL INSTITUTIONS
● intermediaries to facilitate the flow of funds and financial
capital
● play an essential role in economic activities
○ pooling excess funds
○ financing business activities
15
Loans and Interest
Banks finance different types of loans such as personal loans,
home loans, car loans, and business loans. When a client
applies for a car loan that is payable for five years with an
interest rate of 8.14%, the said interest becomes the bank’s
income. The interest rates are guided and approved by the
Central Bank. In the Philippines, the Bangko Sentral ng Pilipinas
is the authorized body to regulate the interest rates.
16
1
IN WHAT WAYS CAN FINANCIAL INSTITUTIONS HELP
INDIVIDUALS DURING A CRISIS SUCH AS A PANDEMIC?
Answer area
17
CATEGORIES OF FINANCIAL INSTITUTIONS
DEPOSITORY NON-DEPOSITORY
● does not accept deposits
● accepts deposits
● offers insurance policies,
● offers loans
mutual funds, and
● earns from interest
stocks
payments
● earns from commissions
18
CATEGORIES OF FINANCIAL INSTITUTIONS
DEPOSITORY
● central banks
● commercial banks
● internet banks
● credit unions
● savings and loan associations
19
CATEGORIES OF FINANCIAL INSTITUTIONS
NON-DEPOSITORY
● investment banks and
companies
● brokerage firms
● insurance companies
● mortgage companies
20
DEPOSITORY FINANCIAL INSTITUTIONS
CENTRAL BANKS RETAIL AND COMMERCIAL
BANKS
● accept deposit
● provide loans
● govern all bank
● savings and checking
● set monetary policies
accounts, time deposits,
● keep prices stable
personal loans, credit
cards, etc.
21
DEPOSITORY FINANCIAL INSTITUTIONS
INTERNET BANKS CREDIT UNIONS
● pool contributions from
● new kind of financial
members
institution
● provide loans with
● accept deposits
interest to members
● purely online
● formed by particular
transactions
groups
22
DEPOSITORY FINANCIAL INSTITUTIONS
SAVINGS AND LOAN
ASSOCIATIONS
● accept deposits from
members
● offer loans and
mortgage to members
23
Making a Bank Deposit
Saving money helps in the efficiency of the financial system.
When you deposit your savings in a bank, you are indirectly
lending your money to the bank’s other clients. The income
you will receive would come from the interest payments that
these borrowers pay. Make sure to inquire about the interest
rate to know how much your money will grow. Deposits made
on Philippine commercial banks are insured by the Philippine
Deposit Insurance Corporation (PDIC).
24
NON-DEPOSITORY FINANCIAL INSTITUTIONS
INVESTMENT BANKS BROKERAGE FIRMS
AND COMPANIES
● mutual funds ● buying and selling of
● facilitate transactions on short- and medium-term
long-term securities securities
● buy bonds and offer ● connect individual
these to investors traders and investors
25
NON-DEPOSITORY FINANCIAL INSTITUTIONS
INSURANCE COMPANIES MORTGAGE COMPANIES
● cover possible financial
● lend money through real
loss and other risks
property mortgage
● collect premium
● focused on home loans
payments
26
Life Insurance Plus Investment
Many financial advisors endorse a variable universal life (VUL)
insurance to their clients. This kind of insurance is typically
offered to full-time employees because they have the capacity
to pay the premiums periodically. VUL insurances provide
lifetime insurance coverage that also serves as an investment
that accumulates value. In case an unfortunate incident
happens to the insurance holder, their beneficiaries will
receive the insured amount indicated in the insurance policy.
Companies that offer VUL insurances are examples of non-
depository financial institutions.
27
2
HOW DO DEPOSITORY AND NON-DEPOSITORY FINANCIAL
INSTITUTIONS ACT AS FINANCIAL INTERMEDIARIES?
Answer area
28
DIFFERENCE FROM FINANCIAL MARKETS
FINANCIAL FINANCIAL MARKETS
INSTITUTIONS
● intermediary or medium
of exchange
● operate in the financial ● a place for exchange
market
● offer products and
services
29
DIFFERENCE FROM FINANCIAL MARKETS
30
The Federal Reserve Response to 9-11
The World Trade Center attack on September 11, 2001 made
headlines globally. Terrorists gained control of a passenger
plane and crashed it into the two of the tallest buildings in
Manhattan, which resulted in 3,000 deaths and massive
destruction of the city's infrastructure. From a financial
perspective, this event also paralyzed the world’s financial
system as most bank transactions were interrupted. Trading
was stopped in various financial markets.
Rosenthal, Jean, et. al. The Federal Reserve Response to 9-11, Yale SOM Case 20-029 August 10, 2020,
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11, last accessed on 25 October 2021. 31
The Federal Reserve Response to 9-11
The interruption created tremendous challenges for the
Federal Reserve, the U.S.’ central bank. When the attacks
commenced, Roger Ferguson, Vice-Chairperson of the Fed’s
Board of Governors, took the reins as he was the only member
available and capable of making immediate decisions.
Throughout that morning and the rest of the week, he was the
person in charge through one of its most difficult periods. Even
the fundamental questions of leadership were vague as there
are no provisions in the legislation establishing the Federal
Reserve for a single governor to act.
Rosenthal, Jean, et. al. The Federal Reserve Response to 9-11, Yale SOM Case 20-029 August 10, 2020,
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11, last accessed on 25 October 2021. 32
The Federal Reserve Response to 9-11
Nevertheless, under Ferguson’s leadership, the Federal Reserve
made a series of decisions designed to provide confidence and
increase liquidity in a severely damaged financial system.
These become the ultimate solutions to the financial crisis.
33
● Financial institutions are entities that provide products and services
related to financial transactions. These intermediaries serve as
essential channels in the financial system to ensure the efficient flow
of funds from savings to investment. Financial institutions primarily
cater to individual participants in the financial market.
34
● Depository financial institutions pool deposits and savings to offer
as loans to borrowers. The different depository financial institutions
are central banks, retail and commercial banks, internet banks, credit
unions, and savings and loan associations.
35
● Non-depository financial institutions do not accept deposits but
offer other financial services like investments and insurances. The
different types of non-depository financial institutions are
investment banks and companies, brokerage firms, insurance
companies, and mortgage companies.
36
37
Select TRUE if the statement is correct. Otherwise, select FALSE.
1. Banks lend and invest on behalf of their depositors.
TRUE FALSE
38
Select TRUE if the statement is correct. Otherwise, select FALSE.
2. An individual can apply for a car loan in a mortgage
company.
TRUE FALSE
39
Select TRUE if the statement is correct. Otherwise, select FALSE.
3. Savings and loan associations collect contributions
from their members.
TRUE FALSE
40
Select TRUE if the statement is correct. Otherwise, select FALSE.
4. Brokerage firms buy bonds from companies and
governments and offer these to investors.
TRUE FALSE
41
Select TRUE if the statement is correct. Otherwise, select FALSE.
5. The Bangko Sentral ng Pilipinas sets the monetary
policies for all local banks to follow.
TRUE FALSE
42
Examine the given situations and answer the following questions.
1. Your aunt is a public school teacher. Every 15th and 30th of
the month, a percentage of her salary is automatically
deducted and transferred to the cooperative association.
Every June of the year, your aunt applies for loans from this
association to pay for her children’s tuition and other
school fees. What financial institution is your aunt
transacting with? Explain your answer.
Answer area
43
Examine the given situations and answer the following questions.
2. Marie established a grocery business. She is aware that her
business could suffer losses from calamities, natural or
otherwise. She wants to protect her assets from these
unfortunate events. Which financial institution can help
Marie and how?
Answer area
44
Short Essay. Answer the following questions briefly and concisely.
1. Your best friend’s father was recently laid off from his work
because of the pandemic. Although they have Php 550,000
in their savings account, it is obvious that it is not enough
to cover all the expenses of their family for a year. Which
financial institutions can help their family and how?
Answer area
45
Short Essay. Answer the following questions briefly and concisely.
2. Your sister is earning Php30,000 a month but holds a
contractual position in a company. She does not have any
savings or investments, nor any dependents. However, she
is interested in diversifying her monthly income. In what
financial institution would you recommend her to invest
her money? Explain your answer.
Answer area
46
