Aquino, Katrina Gamba, Mark Joseph ECONOMICS

Delos Santos, Rowena Gatchalian, Ericka Ems BSA12KA3

Dionglay, Kyrah Angelica

FINANCIAL SYSTEM THAT IS IN WORK IN THE PHILIPPINES

FINANCIAL SYSTEM IN THE PHILIPPINES

A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges that permit the exchange of funds. Financial systems exist on firm, regional, and
global levels. Borrowers, lenders, and investors exchange current funds to finance projects, either
for consumption or productive investments, and to pursue a return on their financial assets. The
financial system also includes sets of rules and practices that borrowers and lenders use to decide
which projects get financed, who finances projects, and terms of financial deals. The function of
the financial system is to channel the funds from lenders to the borrowers, provide a medium of
exchange, and channel through which the central bank can influence the economy. Moreover, the
financial systems operate both national and global levels. A modern financial system may
include bank, both public and private sectors; financial market, financial instrument and financial
services. It allows funds to be allocated, invested, or moved between economic sectors. The
Bangko Sentral ng Pilipinas (BSP) is the Philippines' central monetary authority that provides
policy directions in the area of money, banking and credit. Under this are the Non-Banking and
Banking Institutions, in which banking institution are categorized as private and government
banking. The private banking institutions are comprised of commercial banking such as universal
and ordinary banks, thrift banks like savings and mortgage banks, private development banks,
and stock savings and loan association; and the rural banks. The government banking institutions
on the other hand, consist of Philippine National Bank, Development Bank of the Philippines,
Land bank of the Philippines, and the Philippine Amanah Bank. While the Non- Banking
Institution are as well categorized as private and government non-banking institutions. The
Private Non-Banking Institutions are comprised of Investment House/Banks, Security
Brokers/Dealers, Building and Loan Association, Credit Unions, Private Insurance, Pawnshop,
Trust Companies, Financing Companies and etc. While the Government Non-banking
Institutions are compromised of The Government Service Insurance System, and the Social
Security System, for additional are the Philippine Export and Loan Guarantee Corporation, and
the National Home Mortgage Finance Corporation.
ROLE OF FINANCIAL SYSTEM IN OUR ECONOMY

The financial system plays a very important role in the economic development of a country. It
helps in creation of wealth by linking the savings with investments. It also facilitates the flow of
funds from the households (savers) to business firms (inventors) to aid in wealth creation and
development of both the parties. Not only that, the financial system of a country is concerned
with the allocation of savings, provision of funds, facilitating the financial transactions,
developing the financial markets, provision of legal financial framework and provision of
financial and advisory services in the country. According to Prof. Robinson, the primary function
of a financial system is “to provide a link between savings and investment for creation of wealth
and to permit portfolio adjustment in the composition of existing wealth”. The role of the
financial system is to gather money from people and businesses that have more than they need
currently and transmit those funds to those who can use them for either consumption or
investment. The financial system consists of financial markets and institutions. Financial
markets are where people buy and sell. Financial institutions, as a part of financial system,
they also play an important role in economic development by facilitating the flow of funds
from surplus unit (savers) to the deficit unit (borrowers). They are firms such as commercial
banks, insurance companies, finance institutions, etc. The development of economy of any
country is dependent on its financial system which includes its markets, banks, stock markets,
etc. According to Streissguth (2018), these sectors influence a nation's currency and interest
rates. In developed countries, they work together to promote growth and avoid runaway price
inflation. When a country is still in a developing stage, the lack of a strong, sound financial
system generally works against the national economy. Banks are the cornerstone of a national
financial system. Their key services are to provide a safe haven for the earnings of individuals
and to make loans to companies in need of capital, either to start operating or to stay in
business. Stock markets provide an opportunity for individuals to invest in companies. By
issuing shares, public companies pay off debt or raise capital for their operations. The bond
market provides another means to raise money. An immature financial system hinders the
growth of the economy and leads to the ruined economy, as the policies of the market are not
clear to both the national and foreign investors thus ruining the development of the economy big
time (Shah, 2013).
MOBILIZATION OF SAVINGS

Mobilization of savings is defined as the transformation of savings into investment. According to

Farlex Financial Dictionary, national savings is the proportion of public and private savings as a
percentage of national income. In simple economic models, the national savings is assumed to be
the same as national investment, which is the total amount spent on securities and similar
investment vehicles. Investment vehicle is a security or derivative. An investment vehicle is used
by the government to mobilized savings, it may be rigidly structured as an asset-backed security
or it may be quite basic like stock or bond. An investment vehicle may involve the purchase of a
debt obligation, which entitles one to repayment with interest or it may involve buying an
ownership stake in a business, with the hope that the business will be profitable. Savings must be
mobilized well whether it is a private savings or public savings. For savings to result in capital
formation, they must be invested. In order that the investment of savings should take place, there
must be a good number of honest and dynamic entrepreneurs in the country who are able to take
risks and bear uncertainty of production. According to PIDS or Philippine Institute of
Development Studies (2011) The Fisherian model can be used by the Philippines in mobilizing
savings especially in rural area. The Fisherian model is usually used to describe the behavior of
savers and borrowers in an exchange economy. In a risk-free world, an individual maximizes his
endowment, production opportunities for external lending and borrowing. If he has low
productive opportunities compared to others in the economy, he will be better-off if he
withdraws his low-yielding investments and h=instead buys relatively high-yielding, risk-free
financial asset offers by deficit units who have better productive opportunities. The main idea of
the model is that individual savers respond to the reward for holding financial assets. The
interaction between savers and borrowers in the economy would lead to an equilibrium interest
rate. In the said model, income is considered as a shift factor.
BIBLIOGRAPHY
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