Lesson 1.

Financial Institutions

Business Finance
Accountancy, Business, and Management

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Suppose you have
excess funds. What
would you do with
it?

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Would you keep
them with you or
deposit them in a
bank account?

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Do you know that you
are indirectly lending
your money if you
deposit it on a bank
account?

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Financial institutions facilitate the flow of savings to
lending and investments.
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Quick Look

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.

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Quick Look

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.

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Quick Look

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.

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Quick Look

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.

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Quick Look

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?

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Learning
Competency

Enumerate the varied financial institutions and their

corresponding services (ABM_BF12-IIIa-3).

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Learning Objectives

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.

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Why are financial institutions
crucial in the financial system?

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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.

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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

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 Loans and Interest

Closer
Look

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.

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 Check Your Progress

In what ways can financial institutions help individuals

1 during a crisis such as a pandemic?

Answer area

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 Categories of Financial Institutions

Depository Non-Depository
● does not accept
deposits
● accepts deposits
● offers insurance
● offers loans
policies, mutual funds,
● earns from interest
and stocks
payments
● earns from
commissions
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 Categories of Financial Institutions

Depository
● central banks
● commercial banks
● internet banks
● credit unions
● savings and loan
associations

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Categories of Financial Institutions

Non-Depository

● investment banks and

companies
● brokerage firms
● insurance companies
● mortgage companies

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 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.

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 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

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 Depository Financial Institutions

Savings and Loan

Associations

● accept deposits from

members
● offer loans and
mortgage to members

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 Making a Bank Deposit

Closer
Look

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).

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 Non-Depository Financial Institutions

Investment Banks Brokerage Firms

and Companies
● mutual funds ● buying and selling of
● facilitate transactions short- and medium-term
on long-term securities securities
● buy bonds and offer ● connect individual
these to investors traders and investors

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 Non-Depository Financial Institutions

Insurance Mortgage
Companies Companies

● cover possible financial

● lend money through real
loss and other risks
property mortgage
● collect premium
● focused on home loans
payments

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 Life Insurance Plus Investment

Closer
Look

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.
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 Check Your Progress

How do depository and non-depository financial

2 institutions act as financial intermediaries?

Answer area

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 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

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Difference From Financial Markets

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 The Federal Reserve Response to 9-11

Case S
tudy

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. 32
 The Federal Reserve Response to 9-11

Case S
tudy
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. 33
 The Federal Reserve Response to 9-11

Case S
tudy

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.

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. 34
Keep in Mind

● 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.

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Keep in Mind

● 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.

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Keep in Mind

● 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.

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Keep in Mind

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 Try This
Select TRUE if the statement is correct. Otherwise, select FALSE.

1. Banks lend and invest on behalf of their

depositors.

TRUE FALSE

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 Try This
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

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 Try This
Select TRUE if the statement is correct. Otherwise, select FALSE.

3. Savings and loan associations collect contributions

from their members.

TRUE FALSE

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 Try This
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

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 Try This
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

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 Practice Your Skills
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

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 Practice Your Skills
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

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 Challenge Yourself

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

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 Challenge Yourself

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

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Photo Credits

Slide 1: Person in black suit jacket holding white tablet computer, by Towfiqu barbhuiya is free to use under
the Unsplash license via Unsplash.

Slide 3: Money Money Philippines Rich Philippines Peso, by iiijaoyingiii is free to use under the
Pixabay license via Pixabay.

Slide 4: Free Jar Image, by Towfiqu barbhuiya is free to use under the Unsplash license via Unsplash.

Slide 20: Bank Finance Money Coin Business Currency, by Megan_Rexazin is free to use under the
Pixabay license via Pixabay.

Slide 21: Broker Mortgage Money Real Estate Scale, by mohammed_hassan is free to use under the
Pixabay license via Pixabay.

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Bibliography

CFI Education Inc. 2015 to 2021. "Depository.” Accessed October 22, 2021.
https://corporatefinanceinstitute.com/resources/knowledge/finance/depository/

Horvath, Todd and Curey, Theo. "The Important Role of Financial Institutions in a Time of Uncertainty." Last
modified April 3, 2021.
https://www.fiserv.com/en/about-fiserv/the-point/the-important-role-of-financial-institutions-in-a-time-of
-uncert.html

Melicher, Ronald and Edgar Norton. Introduction to Finance. 16th ed. New Jersey: John Wiley & Sons, 2017.

Rosenthal, Jean, et. al. “The Federal Reserve Response to 9-11, Yale SOM Case 20-029.” Yale School of
Management. Last modified August 10, 2020.
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11

Smart, Scott, Lawrence Gitman, and Michael Joehnk. Fundamentals of Investing. 13th ed. Essex: Pearson
Education Limited, 2017.

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