INTRODUCTION TO MONETARY POLICY
THREE KEY AREA OF FINANCE
1.
2.
3.
FINANCE
•
study of how individuals, institutions
governments and businesses acquire
spend and manage money and other
financial assets.
Why Study Finance?
•
FINANCIAL ENVIRONMENT
•
•
Includes the financial system institutions,
markets and individuals that make the
economy operate efficiently.
•
FINANCIAL INSTITUTIONS
•
organizations or intermediaries like banks,
insurance companies and investment
companies. They engage in financial
activities to aid the flow of funds from
savers to borrowers or investors.
Physical or electronic forums that facilitate
the flow of funds among investors,
businesses and governments.
INVESTMENTS
•
the sale or marketing of securities, the
analysis of securities and the management
of investment risk. Investors include savers
and lenders as well as equity investors.
Investors can be corporate or personal.
FINANCIAL MANAGEMENT
•
Involves financial planning, asset
management and fundraising decisions to
enhance the value of businesses. This
involves decision making relating to the
efficient use of financial resources in the
production and sale of goods and services.
To make informed economic and financial
decisions.
To acquire a basic knowledge of
investments for business and personal
reasons.
To acquire basic understanding of financial
management.
THE FINANCIAL SYSTEMS AND THEIR FINANCIAL
FUNCTIONS
MONETARY SYSTEM
•
•
FINANCIAL MARKETS
•
Institutions and Markets
Financial Management
Investments
Creating Money
Transferring Money
FINANCIAL INSTITUTIONS
•
•
Accumulating Savings
Lending/Investing Savings
FINANCIAL MARKETS
•
•
Marketing Financial Assets
Transferring Financial Assets
The evolution of the financial system in the
Philippines can be viewed along the major political
milestones of the country
1.
The Spanish Period
OBRAS PIAS
•
•
(1854)
first organized
Philippines
institutions
in
the
•
•
•
•
Charitable foundation during Spanish
Period.
Works of Piety in Spanish.
Church directed a share of personal
fortunes to its charities.
funds are to be used for charitable,
religious and educational purposes.
However, some of the funds were managed
by confraternities that invested capital in
secular activities like underwriting cargoes
for the galleon trade.
2.
The American Period
•
Branches of International Banking
Corporation and Guaranty Trust Company.

1901- American Bank (operated 4
years)

1902 – Wai hung bank and the
Abrue, Newberry and Reyes Bank.
(shortlived)
1906 – The S. Misaka Bank served local
Japanese Community.
1906 – Postal Savings Bank, created as a
division of the Bureau of Posts to promote
the habit of thrift among the people and to
bring banking to the rural areas.
1908 – Government-owned Agricultural
Bank w/a capital of 1M pesos. It failed to
render effective service to the famers due
to its meager capital.
Act. No. 2612 in (1916) – Philippine
National Bank (PNB)

Privilege note issue

Organized to grant and extend long
term credit to agriculture and
industry.
After World War 1, several foreign and
domestic banks were attracted to operate
in Manila.

1918 – Yokohama Specie Bank

1919 – Asia Banking Corporation

1920 – Chinese-American Bank of
Commerce of Peking and China
Corporation

1926 – People’s Bank and Trust
Company and Mercantile Bank of
China

1930 – National City Bank of New
York
1935
Establishment
of
the
Commonwealth.
1937 – Bank of Taiwan. Nederlandsche
Indische Handelsbanks branch.
Before the outbreak of World War 2, 17
banks (11 domestic and 6 foreign) were
operating in the country with 17 offices in
Manila, 22 branches in the provinces and
54 provincial agencies.
•
•
BANCO ESPANOL-FILIPINO DE ISABELL II
•
•
•
•
•
First bank in the Southeast Asia.
Engaged in general banking functions and
financed in a limited way, the country’s
foreign trade.
Oldest existing business house in the
Philippines/
(August 1, 1851) - Originally called ‘El
banco Espanol de Filipinas de Isabel II’ in
Manila
1869 - Opening of Suez Canal greatly
expanded Philippines-European trade.

1873 – Chartered Bank of India,
Australia
and
China
w/headquarters in London, Agency
in the Philippines.

1875 – Hongkong and Shanghai
Banking Corporations (HSBC)
Britished owned bank.
Both banks engaged in general banking business
but they were more exchange banks than
commercial banks since they confined most of
their activities to buying and selling of drafts and
bills of exchange.
•
•
•
August 2, 1882 – The First Savings bank.
‘Monte de Piedad y Caja de Ahorros de
Manila’ founded by Father Felix Huertas.
Banco Peninsula Ultramarino of Madrid
was also opened only within a short span (4
years).
1898 – End of Spanish Regime. Four banks
still in business in Ph.
•
•
•
•
•
•
•
•
1900 – first Philippine Commission passed
ACT. NO. 52 providing for the regular
examination and inspection of banks by the
Bureau of Treasury.
February 1929 – Bureau of Banking,
created assuming the power of supervision
over these institutions from the Bureau of
Treasury.
3.
The Japanese Period
•
Domestic banks owned by foreign
nationals and branches of foreign banks
were treated as enemy property and
placed under liquidation by the ruling
military government.
1942 – Southern Development Bank
(Nampo Kaihatsu kindo) opened in Manila
and acted as fiscal agent of Japanese
Government. It performed some of the
functions od central bank, issue military
notes, taking custody of the clearing
branches of the banks and he receiving
deposits from the bank.
ESTABLISHMENT OF THE CENTRAL BANK OF THE
PHILIPPINES

FUNCTIONS OF CENTRAL BANK

•
4.
•
•
•
Postwar and Independence
Executive Order No. 49 (June 16 1945) –
Rehabilitation of the banking system.
Discharged banks from any liability for
deposits made during the Japanese and
made them liable only for Pre-Occupation
deposit
balance
less
voluntary
withdrawals.
Rehabilitation Finance Corporation (RFC)
– organized primarily to provide financial
aid in the rehabilitation of the country and
to help in the broadening and
diversification of the Philippine economic
structure.
RFC’s charter was amended and gave away
to a much larger and expanded
development banking institution, the
Development Bank of the Philippines.
R.A. No. 265- Central bank of the
Philippines (1949). Administer both the
monetary and banking systems of the
country.


Established principally to manage the
country’s currency system.
Consists in controlling the economy’s
supply of money and credit, acting as he
country’s sole bank of issue, and as the
depository and fiscal agent of the
Philippine
government
and
its
instrumentalities.
The central bank relies on a number of
monetary policy tools such as charges in
rediscount rates, variations on legal
reserve requirements, sales and purchases
of the government securities, selective
credit and other regulations it may deem
necessary to attain its objective.
ENACTMENT OF BANKING LAWS
1948 – General Banking Act (R.A. No. 337) –
contained the fit major rules and regulations
governing the operation, particularly of
commercial and savings and mortgage banks, was
passed.
1952 -Rural Bank Act was approved.
1963 – Savings and Loans Association Act, setting
the stage for the development of another type of
banking institution.
The New Society Period
a.
THE 70’s: THE NEW SOCIETY PERIOD
b.
c.
5.



The later part of 1972 highlighted the
growing demands upon the banking system
when the constitution of the New Society
called for constructive reforms and a
reorientation of the Philippine political,
economic and social set-up.
Statutory reforms in the financial system
were strengthened with a series of
Presidential Decrees and implementing of
the Central Bank Presidential Decree No.
71.
Under this decree, a redefinition of basic
banking terms, reclassification of financial
intermediaries into banks and non- banks
and their expanded functions as well as
guidelines on their operations was made.
d.

Specialized unique government banks,
such as Development Bank of the
Philippines and the Land Bank, are not
covered by this classification but shall be
subject to the supervision and regulation
by the Central Bank pursuant to the
provisions of Section 25 of Republic Act.
No. 265.
A.
Expanded Commercial Bank or Universal
Bank
•
It is considered as a one stop combank performing com-banking
functions and non-related banking
activities.
B.
Commercial Banks
•
it represents the largest single
group of the country's banking and
Financial intermediaries operating
branch-banking
organizational
structure with all head offices
located in Metropolitan Manila and
the largest network branches and
extension offices distributed
throughout the country.
•
It offers the greatest variety of
banking services among financial
institutions such as: accepting
demand, savings, time and foreign
currency deposits, handling local
foreign currency deposits, handling
local,
and
foreign
fund
remittances,
money
market
transactions like administering
trust funds; and a host of other
services that truly make them the
department stores in finance.
THE 80’s: THE UNIVERSAL BANKING


Expanded commercial banking or universal
banking is introduced.
“one-stop banking” or “department store
banking” – enables the clientele to avail of
all banking services they need from only
one bank.
THE 90’s: THE NEW CENTRAL BANK

June 14, 1993 – Pres Fidel V. Ramos
signed into law R.A. 7653 (The New
Central Bank Act), pursuant to the
requirements of he 1987 Constitution for
the establishment of an independent
central Monetary authority.
CLASSIFICATION OF THE FINANCIAL SYSTEM
THE BANKING SECTOR

For purpose of uniformity, simplicity, and
equality of treatment, R.A. 7653 entitled
"The New Central Bank Act", classified
banks institutions into the following
categories:
An expanded commercial bank or a
universal bank
b, Commercial banks
Regional unit banks, composed of
rural banks.
Thrifts banks, composed of savings
and mortgage banks, stocks
savings and loan associations;
C.
D.
Rural Banks
•
The passage of the Rural Banks Act
in 1952 saw the emergence of
regional unit or rural banks which
specialize in the extension of small
loans for agricultural purposes as
well as for retail traders.
•
All rural banks are privately owned,
although they receive equity
counterparts, loans and technical
assistance from the Central Bank.
Thrift Banks
•
Thrift banks (TBs), as defined in
Republic Act (R.A.) No. 7906,
which shall be composed of: (a)
savings and mortgage banks, (b)
stock
savings
and
loan
associations, and (c) private
development banks
•
Saving Banks serve primarily as
thrift institutions drawing funds
from household and individual
savers and investing such funds,
together with its capital, in bonds,
or in loans secured by bonds, real
estate mortgages and other forms
of securities.
Thrift banks include:
1. Savings banks - banks organized primarily to
accumulate savings deposits and invest them for
specific purposes.
2. Private development banks - organized
primarily to cater to the capital needs and demand
for investment credit on medium to long-term
loans.
3. Cooperative banks - duly registered
associations of persons who undertake ventures in
accordance with universally accepted cooperative
principles.
4. Islamic banks - banks established to promote
and accelerate socio-economic development of
our Muslim brothers (esp. in ARMM) based on the
Islamic concept of banking.
5. Microfinance banks - bank established to
provide a broad range of financial services for
micro enterprises.
SPECIALIZED BANKS

The three specialized government banks,
composed of the Development Bank of the
Philippines (DBP), the Land Bank of the
Philippines (LBP), and the Philippine
Amanah Bank, play special roles in the
economic development of the country.
1.
The DBP was established mainly to
provide long term industrial and
agricultural credit.
2.
The Land Bank was established to
serve as an instrument for carrying
out part of the country's land
reform program.
3.
The Amanah Bank is designed to
provide banking facilities at unique
and reasonable terms to the
Muslim provinces of Mindanao.
PRIVATE NON-BACK FINANCIAL
INTERMEDIARIES
1. Investment houses - constitute the largest
group, in terms of resources, among the private
non-bank financial intermediaries.
2. Investment companies, which are primarily
engaged in investing, reinvesting or trading in
securities.
•
•
open - end companies - no fixed
amount of paid-in capital;
redeemable at any time; on day-today basis.
close - end companies - relatively
fixed amount of outstanding
capital; no provisions for the
issuance or redemption of shares
on a day-to-day basis.
3. Finance companies are organization
(partnership or corporation) that are organized to
extend credit lines to consumers and to industrial,
commercial, agricultural enterprises.
4. The securities dealers are companies which
buy and sell securities of others or which acquire
securities to resell or offer them for sale to the
public.
5. Securities brokers are those engaged in the
business of affecting transactions in securities and
earn their income from commissions received.
6. Private insurance companies are under the
direct supervision and regulation of the Office of
the Insurance Commission and are authorized to
conduct life of non-life insurance business.
7. Pawnshops or pawnbrokers are business
establishments engaged in lending money on
personal property delivered as security, pledge or
collateral.
8. Non-stock savings and loans associations are
associations, which primarily provide short-term
loans to members and whose main sources of
income are savings and time deposits.
9. Mutual and Building Loan Associations are
mutually owned stock companies that specialize in
extending long-term mortgage loans to members.
10. Credit unions are cooperative composed of
small producers and consumers who voluntarily
join together to form their business enterprises
which themselves own, control and patronize.
11. Trust and pensions fund managers are
institutional and personal administrators of funds
created or constituted for the benefit of others.
•
employee welfare funds are
constituted to employers wherein
benefits are payable to employees
upon retirement, death, cessation
from work and other.
•
trust funds are created by trustors,
or estates of absent persons,
minors or by courts, thereby
creating a trust relationship
between the owner (trustors) of the
fund or property and the manager
(trustee) for the benefit of a third
person called the beneficiary.
12. Lending Investors pertain to individuals or
entities engaged exclusively in the business
extending secured or unsecured direct loans to
individual and enterprises.
THE ROLE AND USES OF MONEY
2.
MONEY





A medium that can be exchanged for goods
and services and is used as a measure of
their values on the market.
Money is a good that acts as a medium of
exchange in transactions.
It is a way for a person to trade what he/she
has for what he/she wants.
Money is an officially-issued legal tender
typically consisting of notes and coins.
Money is the circulating medium of
exchange as defined by a government
HISTORY OF MONEY
•
•
•
•
•
•
•
BARTER SYSTEM
Before the invention of money, people
traded goods and services using the barter
system.
The history of bartering dates back to 6000
B.C.
when
Mesopotamian
tribes
introduced the concept to the Phoenicians.
Barter is an act of trading goods or
services between two or more parties
without the use of money —or a monetary
medium
Barter system refers to the system of
exchange where goods and services are
exchanged directly for other goods and
services.
It is the oldest form of commerce.
The known history of bartering dates back
to 6000 B.C.
Reportedly introduced by Mesopotamian
tribes, bartering was adopted by the
Phoenicians. The Phoenicians bartered
goods to those located in various other
cities across oceans.
3.
4.
•
•
•
•
•
•
•
•
Some of the difficulties:
1.
Barter tends to slow down trade.
•
Goods were either perishable or
too heavy to be transported from
place to place
Lack of double coincidence of wants.
•
To exchange goods for goods, a rare
coincidence of wants and desires
must coincide at all times.
Lack of proper way to equate values of the
things exchanged.
Indivisibility of some goods.
FIRST METAL MONEY - COINS
The first metal coins date back to the 7th
century BCE in Lydia (modern Turkey) and
China.
In China, metal coins were made of bronze
and shaped like farming tools.
In Lydia, coins were made of an alloy of gold
and silver called electrum. Lydian staters
were the first coins to be officially issued by
a government body. Early iterations of coins
were also used by ancient Greeks, starting
in the late 7th century BC.
FIRST PAPER MONEY
The first paper money was created in China
during the Song Dynasty in the 11th century
CE. Trade played a huge part in its creation.
Around 900 CE, merchants trying to get
around the weight issue of carrying coins
began trading transaction receipts.
Early Song authorities gave a few shops a
monopoly on issuing these deposit
receipts. Eventually, in the 1020s, the
government took over and began issuing
the receipts as the first official paper
money.
THE GOLD STANDARD
In 1816, gold became the standard of value
in England. Each bank note represented a
certain amount of gold, so only a limited
number of bank notes could be printed.
By 1900, the United States had followed
suit with the Gold Standard Act. While the
gold standard would slowly fade out of
usage by the 1970s, the gold standard
played an important role in the history of
U.S. money.
•
•
•
•
•
FIRST BANK CREDIT CARD
In 1946, John Biggins, a Brooklyn banker,
came up with the idea of the Charg-It card
to bring new customers into the bank.
People with an account at the bank could
use their card at a few select merchants.
The merchant would then send the receipts
to the bank, and the bank would pay for the
items purchased and later bill the
customer for repayment.
3.
FIRST MODERN CREDIT CARD
Invented in 1950, the Diners Club card is
known as the first modern-day credit
card. The idea came from Frank
McNamara, businessman who'd forgotten
his wallet while out to dinner in New York.
He and his business partner, Ralph
Schneider, would soon invent the Diners
Club card as a way to pay without carrying
cash.
The Diners Club card was first used only in
local restaurants before expanding to
include additional retailers. The new
charge card required customers to pay the
balance in full at the end of every month.
By 1951, the Diners Club boasted 42,000
members and had expanded to major U.S.
cities. By 1953, it was accepted in Canada,
Cuba, Mexico and the United Kingdom.
FUNCTIONS OF MONEY
MOBILE BANKING
Before the introduction and enablement of
mobile web services in 1999, mobile
banking was completed primarily through
text or SMS; it was known as SMS banking.
European banks were on the frontier of
mobile banking service offering, using the
mobile web via WAP support.
TRADITIONAL CHARACTERISTICS OF MONEY
1.
2.
Utility - useful, the object must possess
intrinsic value
General acceptability - common usage of
it would allow the object to transfer from
one hand to another without question of its
origin.
4.
5.
6.
Portability - should be easily carried or
transported from place to place.
Uniformity - achieved through the use of
standard and uniform metal or paper.
Malleability - commodity used as money
could be melted down and shaped into
different form as well as imprinted with any
desired sign.
Durability - would have to withstand
normal wear and tear.
As a medium of exchange:


Money allows goods and services to be
traded without the need for a barter
system. Barter systems rely on there being
a double coincidence of wants between
the two people involved in an exchange.
Money is wanted not for its own sake but for
what it brings in return for it.
As a standard of value:



Money is now used as the yardstick for
values.
It measures the values or utilities of the
objects exchanged through the pricing
system.
It is the common denominator of values.
As a store of value:



In performing this function, money keeps
value.
It must be presumed that the value of
money is stable to be effective as such.
Money retains its value for some period of
time.
As a standard of deferred payment:


Money functions as a basis or
measurement for future debt contracts.
Article 1250 of the Civil Code provides: In
case an extraordinary inflation or deflation
of the currency stipulated should

intervene, the value of the currency at the
time of the establishment of the obligation
shall be the basis of payment, unless there
is an agreement to the contrary.
This refers to the expressing of the value of
a debt i.e. if people borrow today, then they
can pay back their loan in the future in a
way that is acceptable to the person who
made the loan
As a unit of account

This refers to anything that allows the value
of something to be expressed in an
understandable way, and in a way that
allows the value of items to be compared.
CLASSIFICATION OF MONEY
1. Commodity Money
•
•
This is money that is an actual
commodity that has value outside
of being a medium exchange.
Commodity money can be precious
metals, gemstones, spices, and
even coffee.
2. Fiat Money
•
Fiat money is entirely backed by
government orders rather than a
physical good. It gets its status as a
medium of exchange because the
government declared it an official
means of payment.
3. Fiduciary Money
•
This is money that is based on trust
rather than the intrinsic value of the
money itself with no government
backing. This form of payment
relies on the trust or promise that it
will be accepted as a form of
payment.
4. Commercial Bank Money
•
Commercial bank money can be
described as claims against
financial institutions that can be
used to purchase goods or
services. It represents the portion
of a currency that is made of debt
generated by commercial banks.