University of the East

2219 C. M. Recto Avenue

Manila, Philippines

Understanding the Philippine

Financial Environment: Markets, and
Institutions

Submitted by:
ATIENZA, Von Lester L.
REBAO, Montesa Joy R.
RESULTA, Ronalyn C.
SAN ANDRES, Trishia D.
BSA-BAE

Submitted to:
Dean Veronica N. Elizalde
 PHILIPPINE FINANCIAL SYSTEM

DEFINITIONS
- On a regional scale, the financial system is the system that enables lenders and
borrowers to exchange funds. The global financial system is basically a broader
regional system that encompasses all financial institutions, borrowers and lenders
within the global economy.
- A financial system (within the scope of finance) is a system that allows the exchange
of funds between lenders, investors, and borrowers. Financial systems operate at
national, global, and firm-specific levels. ... Money, credit, and finance are used as
media of exchange in financial systems.
- It is the set of implemented procedures that track the financial activities of the
company. On a regional scale, the financial system is the system that enables lenders
and borrowers to exchange funds. The global financial system is basically a broader
regional system that encompasses all financial institutions, borrowers and lenders within
the global economy.

FINANCIAL SYSTEM PARTICIPANTS

There are six participants or sectors in the financial system. They are:
1. Household or consumers
2. Financial institutions or intermediaries;
3. Non-financial firms;
4. The government;
5. The central bank; and
6. Foreign participants

Household
Household or consumers are generally described as that group receiving income,
majority of which typically come from wages and salaries. Such income is spent on
goods and services and a part is saved (if there is enough to save). Gross saving are
equal to current income less current expenditures. What is spent is termed consumption
(from where the word consumer came from). Goods that are consumed within a current
period are termed non-durable consumer goods or non-durables. Goods that will last for
more than a year are termed durable consumer goods or durables. According to the
hadjimichalakises (1995), "the standard definition of consumer durables, however, is
that they are consumption goods with a life of three or more year. The assumption is
that all consumer goods with shorter lives are used up in the year in which they are
purchased." Typically, consumers or households purchase non-durables from current
income and borrow for the durables like cars, washing machines, air-conditioners,
among others, including houses.
Financial Institutions/Intermediaries
Financial institutions/intermediaries are the firms that bridge the gap between the
surplus units (SUs) or investors/lenders and the deficit units (DUs) or borrowers. They
channel the funds from the lenders to the borrowers. They include the depository
institutions and the non-depository institutions that we will study in chapter -IX. Other
that being channels, they are, at times, also lenders and borrowers themselves. When
they underwrite securities or acts as brokers or dealers, they are intermediaries. If they
buy securities, they are investors or lenders and when they are the ones issuing the
securities, they are borrowers.
Non-financial Institutions
The non-financial institutions are the businesses other than the financial
institutions or intermediaries. They include the trading, manufacturing, extractive
industries, construction, genetic industries, and all firms other than the financial ones.
Just like households and the financial institutions, these non-financial institutions are
also borrowers or lenders or both at one time or the other. When these non-financial
institutions buy securities, they are lenders. When they issue the securities, they are
borrowers.
The Government
By government is meant the national, provincial, city, and barangays or towns
compromising the Philippines as a whole. Each division has its head and agencies that
help in running the division it is made responsible for. The President is responsible for
the entire country; the governor is responsible for his own province; the mayor is
responsible for his own city; and the barangay captain is responsible for his own
barangay. Each of them has its own agency. The Philippine Treasury is part of the
government that we consider as participant in the financial system. When the Philippine
treasury or any other division of government issues their own securities, they act as
borrowers/deficit units, and when the Philippine treasury or any other subdivision of
government buys securities, they act as investors or savers/surplus units.
The Central Bank
Bangko Sentral ng Pilipinas (Central bank of the Philippines) and all the other
central banks of the different countries are mandated to assure that their respective
countries have a stable and healthy financial system. They oversee the operations of
the entire financial system of their respective countries and mandate the rules,
regulations, and monetary policies that will help their respective countries maintain a
healthy and stable economy. Any central bank is the "banker" to banks providing
various services to banks, helping them collect and clear checks and loaning them
funds as needed. As a lender and regulator, the central bank oversees the health of the
banking system. The central banks are the monetary policymakers of their respective
countries.

Foreign Participants
Foreign participants refer to the participants from the rest of the world-
households, governments, financial and non-financial firms, and central banks. Goods
and services and financial instruments/securities are exchanged across national
boundaries, as well as within these boundaries. International trade and international
finance are parts of globalization. As globalization affects the entire world, the role of
foreign participants in the financial system has become more important.

The Bangko Sentral ng Pilipinas

The Bangko Sentral ng Pilipinas (BSP) was created by the Republic Act No.
7653, otherwise known as the New Central Bank Act of 1993.
The BSP is now the Philippines central monetary authority that provides policy
directions in the areas of money, banking and credit.
The BSPs powers and functions are exercised by its Monetary Board, consisting
of seven members appointed by the president of the Philippines.
One of the government sector members of the Monetary Board must be a
member of the Cabinet designated by the President of the Republic, which
position is currently held by the Secretary of Finance.
The New Central Bank Act authorizes the Governor of BSP to appoint up to three
Deputy Governors, subject to the approval of the Monetary Board.
The Governor is the chief executive officer of the BSP and is required to direct
and supervise the operations and interval administration of BSP.
The BSP is aided in its bank monitoring and examination processe3s by credit
rating agencies and financial conglomerates.
The BSP is also into the upgrading of its domestic prudential standards in areas
of capitalization, connected or pooled lending, loan provisioning, data disclosure,
and qualifications of owners and managers.
The BSP likewise imposes the requirements on the operations on e-bankers.
The BSP is backstopped in this regard by the passage of e-commerce of
information and promoted the security of electronic transactions.

The BSP likewise releases selected statistics on non banks with quasi-banking
functions. This group consists of institutions engaged in the borrowing of funds from
20 or more lenders for the borrower's own account through issuances, endorsement
or assignment with recourse or acceptance of deposit substitutes for purposes of
relending or purchasing receivables and other obligations.

Figure 1. The BSPs Organizational Structure as of 23 January 2017

Executive Management Services a collective term for all departments/offices

directly reporting to the Monetary Board or to the Governor
Functional Sectors
o Monetary Stability Sector- mainly responsible for the operations/activities
related to monetary policy formulation and implementation
o Supervision and Examination Sector mainly responsible for the
regulation of banks and other BSP-supervised financial institutions
o Resource Management Sector mainly responsible for the management
of human, financial, and physical resources of the Bank
o Security Plant Complex responsible for the production of Philippine
currency, security documents, and commemorative medals and
medallions

Under the Bangko Sentral are the different banking institutions, both private and
government-owned, and the non-bank financial institutions, also both private and
government-owned. The private banking institutions are composed of the
commercial banking institutions, the thrift banks, and the rural banks. This is
 depicted in the chart representation as derived from the descriptive narration in
Fajardo and Manansalas Money, Credit and Banking (1993).

BANGKO SENTRAL NG PILIPINAS

NON-BANK FINANCIAL
BANKING INSTITUTIONS
INSTITUTIONS

PRIVATE BANKING GOVERNMENT

INSTITUTIONS BANKING
INSTITUTIONS

Thrift Development Land Bank Philippine

Commercial Banking Rural Banks Bank of the
Institutions Banks of the Amanah
Philippines Philippines Bank

Ordinary Savings &

Commercial Universal Mortgage
Banks Banks Banks

Private
Development
Banks

Savings &
Loan
Association

Figure 2. Bangko Sentral ng Pilipinas and the Banking Institutions and

Non-Bank Financial Institutions

*Continuation of Non-financial Institutions is presented on the next page

 BANGKO SENTRAL NG
PILIPINAS

NON-BANK FINANCIAL
INSTITUTIONS

Private Non-Bank Financial Institution Government Non-Bank

Financial Institution

Investment Banks
Government Service
Finance Companies Insurance System

Securities Dealers/Brokers Social Security System

Pawnshops

Lending Investors

Fund Managers

Trust Companies/Departments

Insurance Companies

Etc.

Figure 3. Bangko Sentral ng Pilipinas and Non-Bank Financial

Institutions
BANKING INSTITUTIONS
Private Banking Institutions
Commercial Bank
It is a financial institution that provides various financial service, such as
accepting deposits and issuing loans. Commercial bank customers can take
advantage of a range of investment products that commercial banks offer
like savings accounts and certificates of deposit. The loans a commercial bank
issues can vary from business loans and auto loans to mortgages.
The types of loan a commercial bank can issue vary and a commercial bank
may specialize in just one or a few types of loans. Commercial banks can offer
mortgages, which help borrowers buy homes with the homes as the collateral
backing the loans. They can also issue car loans with automobiles as collateral.
Commercial banks also can engage in issuing personal loans, lines of credit or
credit cards. In addition to the interest it earns on its loan book, a commercial
bank can generate revenue by charging its customers fees for mortgages and
other banking services.

Ordinary Commercial Banks

These are banks which perform all kinds of banking functions such
as accepting deposits, advancing loans, credit creation, and agency
functions. They are also called joint stock banks because they are
organised in the same manner as joint stock companies.

Universal Banks

Universal banks may offer credit, loans, deposits, asset

management, investment advisory, payment processing, securities
transactions, underwriting and financial analysis. While a universal
banking system allows banks to offer a multitude of services, it does not
require them to do so. Banks in a universal system may still choose to
specialize in a subset of banking services.

Universal banking combines the services of a commercial bank and

an investment bank, providing all services from within one entity. The
services can include deposit accounts, a variety of investment services
and may even provide insurance services. Deposit accounts within a
universal bank may include savings and checking.

Under this system, a bank can choose to participate in any or all of

the permitted activities. They are expected to comply with all guidelines
 that govern or direct proper management of assets and transactions.
Since not all institutions participate in the same activities, the regulations
in play may vary from one institution to another.

Universal banking is a banking system in which banks provide a

wide variety of financial services, including commercial and investment
services. Universal banking is common in some European countries,
including Switzerland. In the United States, however, banks are required
to separate their commercial and investment banking services.
Proponents of universal banking argue that it helps banks better diversify
risk. Detractors think dividing up banks' operations is a less risky strategy.

It is important not to confuse the term "universal bank" with

any financial institutions with similar names.

Thrift Banks
The thrift banking system is composed of savings and mortgage banks,
private development banks, stock savings and loan associations and
microfinance thrift banks. Thrift banks are engaged in accumulating savings of
depositors and investing them. They also provide short-term working capital and
medium- and long-term financing to businesses engaged in agriculture, services,
industry and housing, and diversified financial and allied services, and to their
chosen markets and constituencies, especially small- and medium- enterprises
and individuals.

Savings & Mortgage Bank

A bank that primarily or exclusively offers loans to clients to
purchase real estate, especially of private residences. The bank loans its
own capital to clients and either collects payments (with interest) or sells
its loans on the secondary market. Other revenue comes from origination
fees and similar fees attached to making loans.

Private Development Bank

Financial institutions dedicated to fund new and upcoming
businesses and economic development projects by providing equity
capital and/or loan capital.

Savings & Loan Association

A savings and loan association (S&L) is a financial institution that
specializes in savings deposits and mortgage loans, and has become one
of the primary sources of mortgage loans for homebuyers today. It offers
 mortgage services to people from the savings and deposits received from
private investors. Depositors and borrowers are members with voting
rights and have the ability to direct the financial and managerial goals of
the organization.

Rural Banks
Rural and cooperative banks are the more popular type of banks in the
rural communities. Their role is to promote and expand the rural economy in an
orderly and effective manner by providing the people in the rural communities
with basic financial services. Rural and cooperative banks help farmers through
the stages of production, from buying seedlings to marketing of their produce.
Rural banks and cooperative banks are differentiated from each other by
ownership. While rural banks are privately owned and managed, cooperative
banks are organized/owned by cooperatives or federation of cooperatives.
Government Banking Institutions
Development Bank of the Philippines

Development Bank of the Philippines provides various banking products

and services to the agricultural and industrial enterprises in the Philippines. The
companys deposit products include current and savings accounts, and time
deposits. It also offers investment banking services, such as financial
packaging/investment design for debt/equity, financial advisory and investment
consultancy, securities/debt underwriting/issue management, structured
finance/loan syndication, and program/project development and management. In
addition, the company provides development financing for infrastructure and
logistics sectors; environmental initiatives; social services and community
development; and micro, small, and medium enterprises. Further, it offers various
trade and treasury products and services; and remittance, trust, electronic
banking, leasing, and ATM services. As of December 31, 2015, the company
operated a total of 110 branches. Development Bank of the Philippines was
founded in 1947 and is headquartered in Makati City, the Philippines.

Land Bank of the Philippines

The Land Bank of the Philippines is a government financial institution that

strikes a balance in fulfilling its social mandate of promoting countryside
development while remaining financially viable.

Philippine Amanah Bank

Amanah Islamic Bank was first established as "Philippine Amanah Bank"

by virtue of Presidential Decree No. 264 by then President Ferdinand E. Marcos.
 The decree required the Bank to invest 75%of its total loanable funds for the
purpose of providing, among others, reasonable medium and long-term credit
facilities to the people of the Muslim-dominated provinces of Cotabato, South
Cotabato, Lanao del Sur, Lanao del Norte, Sulu, Basilan, Zamboanga del Norte,
Zamboanga del Sur and Palawan. Thus, the Bank has been transformed into a
development bank with an initial capitalization of P50 million.

In 1974, Presidential Decree No. 542 was issued directing the Bank to
implement the Islamic concept of banking, following the "no interest principle"
and the partnership principles. This directive was not fully carried out because
conventional banking still dominated the Bank's operations.
NON-BANK FINANCIAL INSTITUTIONS
It is a financial institution that does not have a full banking license and cannot
accept deposits from the public. However, NBFIs do facilitate alternative financial
services, such as investment (both collective and individual), risk pooling, financial
consulting, brokering, money transmission, and check cashing. NBFIs are a source of
consumer credit (along with licensed banks). Examples of nonbank financial institutions
include insurance firms, venture capitalists, currency exchanges, some microloan
organizations, and pawn shops. These non-bank financial institutions provide services
that are not necessarily suited to banks, serve as competition to banks, and specialize
in sectors or groups.
Private Non-bank Financial Institution
Investment Banks

While investment banks may be called "banks," their operations are far different
than deposit-gathering commercial banks. An investment bank is a financial
intermediary that performs a variety of services for businesses and some governments.
These services include underwriting debt and equity offerings, acting as an intermediary
between an issuer of securities and the investing public, making markets, facilitating
mergers and other corporate reorganizations, and acting as a broker for institutional
clients. They may also provide research and financial advisory services to companies.
As a general rule, investment banks focus on initial public offerings (IPOs) and large
public and private share offerings. Traditionally, investment banks do not deal with the
general public. However, some of the big names in investment banking, such as JP
Morgan Chase, Bank of America and Citigroup, also operate commercial banks. Other
past and present investment banks you may have heard of include Morgan Stanley,
Goldman Sachs, Lehman Brothers and First Boston.
Generally speaking, investment banks are subject to less regulation than
commercial banks. While investment banks operate under the supervision of regulatory
bodies, like the Securities and Exchange Commission, FINRA, and the U.S. Treasury,
there are typically fewer restrictions when it comes to maintaining capital ratios or
introducing new products.
Finance Company

It is a specialized financial institution that supplies credit for the purchase of

consumer goods and services by purchasing the time-sales contracts of merchants or
by granting small loans directly to consumers.
Securities Dealers/Brokers

A broker-dealer is a person or firm in the business of buying and selling

securities, operating as both a broker and a dealer, depending on the transaction. The
term broker-dealer is used in U.S. securities regulation parlance to describe stock
brokerages, because most of them act as both agents and principals. A brokerage acts
as a broker (or agent) when it executes orders on behalf of clients, whereas it acts as a
dealer, or principal, when it trades for its own account.
Pawnshops

A pawnbroker is an individual or business (pawnshop or pawn shop) that offers

secured loans to people, with items of personal property used as collateral. The
items having been pawned to the broker are themselves called pledges or pawns, or
simply the collateral. While many items can be pawned, pawnshops typically accept
jewelry, musical instruments, home audio equipment, computers, video game
systems, televisions, cameras, power tools and other relatively valuable items as
collateral.
Lending Investors

A corporate lending investor does not take money deposits like banks do, so it
actively looks for individuals with excess capital to invest. The investor usually
requires that individual investors put in a certain minimum amount of money.
Depending on the company, investors might be able to obtain details about what the
clients will use the money for and use the information to decide whether to go
through with the investment.
As a safety measure for the individual investors, the lending investor sometimes
promises a certain rate of return and secures the loan against the borrower's asset.
A secured loan means the investor can take over the borrower's asset if he or she
fails to make loan repayments. For example, if the borrower wants to use the money
to buy a property, the investor can secure the loan against that property. If the
borrower can't repay the loan, the investor obtains the property so it can sell it and
recover the money.
A lending investor gets profits from the fees and commissions it charges,
including application fees, collection fees, insurance, and notarial fees. He often has
 small expenditures because of his limited area of coverage. Due to the small number
of borrowers and investors, a lending investor can often afford to have a small office
with basic office equipment operated by a handful of staff members.
Fund Managers

A fund manager is responsible for implementing a fund's investing strategy and

managing its portfolio trading activities. A fund can be managed by one person, by
two people as co-managers, or by a team of three or more people. Fund managers
are paid a fee for their work, which is a percentage of the fund's average assets
under management (AUM).
Trust Companies/Departments

A trust company is a legal entity that acts as a fiduciary, agent or trustee on

behalf of a person or business entity for the purpose of administration, management
and the eventual transfer of assets to a beneficial party. The entity acts as a
custodian for trusts, estates, custodial arrangements, asset management, stock
transfer, beneficial ownership registration and other related arrangements.
Insurance Companies

An investment company is a corporation or a trust through which individuals

invest in diversified, professionally managed portfolios of securities by pooling their
funds with those of other investors. Rather than purchasing combinations of
individual stocks and bonds for a portfolio, an investor can purchase securities
indirectly through a package product like a mutual fund.

There are three fundamental types of investment companies: unit investment

trusts (UITs), face amount certificate companies and managed investment
companies. All three types have the following things in common:

An undivided interest in the fund proportional to the number of shares held

Diversification in a large number of securities
Professional management
Specific investment objectives

Government Non-bank Financial Institution

Government Social Insurance System

The Government Service Insurance System (Filipino: Paseguruhan ng mga

Naglilingkod sa Pamahalaan, abbreviated as GSIS) is a government-owned and
controlled corporation (GOCC) of the Philippines. Created by Commonwealth Act
No. 186 passed on November 14, 1936, the GSIS is mandated to provide and
 administer the following social security benefits for government employees:
compulsory life insurance, optional life insurance, retirement benefits, disability
benefits for work-related contingencies and death benefits. In addition, the GSIS is
entrusted with the administration of the General Insurance Fund by virtue of RA656
of the Property Insurance Law. It provides insurance coverage to assets and
properties which have government insurable interests.
It is not possible for non-government employees, self-employed or non-working
persons to become members of the GSIS. Instead, they are covered by the Social
Security System (SSS).
Social Security System

The Philippine Social Security System (SSS; Filipino: Paseguruhan ng

Kapanatagang Panlipunan) is a state-run, social insurance program in
the Philippines to workers in the private, professional, and informal sectors. SSS is
established by virtue of Republic Act No.1161, better known as Social Security Act
of 1954. This law was later amended by Republic Act No. 8282 in 1997.
Government employees, meanwhile, are covered under a separate state-pension
fund managed by the Government Service Insurance System (GSIS).

THE FINANCIAL MARKETS

1. What are the money and capital markets?

Financial markets are classified into the money market and the capital market.
The money market is where short-term funds are raised through the buying and selling
of short term debt securities such as commercial papers. The capital market is where
long-term funds are raised through the bond market, which deals with long-term debt
securities such as bonds, the stock market which deals with equity securities or stocks.

2. What are the primary and secondary markets?

Basically, it is in the capital market, called the stock market, where an investor
can buy and sell stocks. This market consists of the primary market or secondary
market, depending on whether the securities were sold by the company itself or by an
existing shareholder(s).
Primary market

In the primary market, new shares are issued and sold to the investing public for
the first time. It is where capital is actually raised by the company selling stock directly
to investors typically through an initial public offering. For instance, if San Miguel
Corporation decides to sell a new stock to raise equity funds, it will be a primary market
transaction. Since it is the first time the company has sold stock to the public, it is called
an initial public offering (IPO). The proceeds of the sale go to San Miguel Corporation,
the issuing company. Investors who have subscribed to the IPO have provided the
company with the necessary funds to continue its operation and expansion, and
become part owners of the company.

An underwriter or investment banker assists the issuer of a new security in

setting the offering price and in marketing the securities to the public. The investment
bankers, serves as a middleman in the transfer of funds between the company in need
of capital and the public, and facilitates the issuance of shares.

There is occasionally a secondary offering in the primary market. This means

that the shares of stock being offered were previously issued but is being offered to the
public for the first time by a large or controlling shareholder. As such, the selling
stockholder gets the proceeds of the sale.

Secondary market

The secondary market is where securities can be bought and sold after they
have been issued to the public in the primary market. Thus, if you decide to buy existing
shares of San Miguel Corporation, you cannot buy them directly from the issuing
company anymore since they have all been sold to the investing public during the initial
public offering.

So, how can you avail of San Miguel shares when the IPO has been completed?
Investors can only buy these shares from existing shareholders who are willing to sell
their shares. When they do so, it is a secondary market transaction. The proceeds from
this transaction don not go to the issuing corporation; instead they go to the investor
who sold his shares.

The secondary market is where the original shareholders sell their shares to
other investors. An investor can only make a profit when he can sell his shares at a
price higher that the purchase price. This market gives a continuous reflection of the
value of securities (prices) at some point in time according to the best available
information.
 Secondary markets include the stock exchange and the over-the-counter (OTC)
market.

THE FINANCIAL INSTITUTIONS

A financial institution is an establishment that conducts financial transactions

such as investments, loans and deposits. Almost everyone deals with financial
institutions on a regular basis. Everything from depositing money to taking out loans and
exchanging currencies must be done through financial institutions. Here is an overview
of some of the major categories of financial institutions and their roles in the financial
system.

Commercial Banks
Commercial banks accept deposits and provide security and convenience to their
customers. Part of the original purpose of banks was to offer customers safe keeping for
their money. By keeping physical cash at home or in a wallet, there are risks of loss due
to theft and accidents, not to mention the loss of possible income from interest. With
banks, consumers no longer need to keep large amounts of currency on hand;
transactions can be handled with checks, debit cards or credit cards, instead.
Commercial banks also make loans that individuals and businesses use to buy
goods or expand business operations, which in turn lead to more deposited funds that
make their way to banks. If banks can lend money at a higher interest rate than they
have to pay for funds and operating costs, they make money.

Investment Banks

While investment banks may be called "banks," their operations are far different
than deposit-gathering commercial banks. An investment bank is a financial
intermediary that performs a variety of services for businesses and some governments.
These services include underwriting debt and equity offerings, acting as an intermediary
between an issuer of securities and the investing public, making markets, facilitating
mergers and other corporate reorganizations, and acting as a broker for institutional
clients. They may also provide research and financial advisory services to companies.
As a general rule, investment banks focus on initial public offerings (IPOs) and large
public and private share offerings. Traditionally, investment banks do not deal with the
general public. However, some of the big names in investment banking, such as JP
Morgan Chase, Bank of America and Citigroup, also operate commercial banks. Other
past and present investment banks you may have heard of include Morgan Stanley,
Goldman Sachs, Lehman Brothers and First Boston.
 Generally speaking, investment banks are subject to less regulation than
commercial banks. While investment banks operate under the supervision of regulatory
bodies, like the Securities and Exchange Commission, FINRA, and the U.S. Treasury,
there are typically fewer restrictions when it comes to maintaining capital ratios or
introducing new products.

Insurance Companies

Insurance companies pool risk by collecting premiums from a large group of

people who want to protect themselves and/or their loved ones against a particular loss,
such as a fire, car accident, illness, lawsuit, disability or death. Insurance helps
individuals and companies manage risk and preserve wealth. By insuring a large
number of people, insurance companies can operate profitably and at the same time
pay for claims that may arise. Insurance companies use statistical analysis to project
what their actual losses will be within a given class. They know that not all insured
individuals will suffer losses at the same time or at all.

Brokerages

A brokerage acts as an intermediary between buyers and sellers to facilitate

securities transactions. Brokerage companies are compensated via commission after
the transaction has been successfully completed. For example, when a trade order for a
stock is carried out, an individual often pays a transaction fee for the brokerage
company's efforts to execute the trade.

A brokerage can be either full service or discount. A full service brokerage

provides investment advice, portfolio management and trade execution. In exchange for
this high level of service, customers pay significant commissions on each trade.
Discount brokers allow investors to perform their own investment research and make
their own decisions. The brokerage still executes the investor's trades, but since it
doesn't provide the other services of a full-service brokerage, its trade commissions are
much smaller.

Investment Companies

An investment company is a corporation or a trust through which individuals

invest in diversified, professionally managed portfolios of securities by pooling their
funds with those of other investors. Rather than purchasing combinations of individual
stocks and bonds for a portfolio, an investor can purchase securities indirectly through a
package product like a mutual fund.

There are three fundamental types of investment companies: unit investment

trusts (UITs), face amount certificate companies and managed investment companies.
All three types have the following things in common:

An undivided interest in the fund proportional to the number of shares held

Diversification in a large number of securities
Professional management
Specific investment objectives

Unit Investment Trusts (UITs

A unit investment trust, or UIT, is a company established under an indenture or

similar agreement. It has the following characteristics:

The management of the trust is supervised by a trustee.

Unit investment trusts sell a fixed number of shares to unit holders, who receive a
proportionate share of net income from the underlying trust.
The UIT security is redeemable and represents an undivided interest in a specific
portfolio of securities.
The portfolio is merely supervised, not managed, as it remains fixed for the life of
the trust. In other words, there is no day-to-day management of the portfolio.

Face Amount Certificates

A face amount certificate company issues debt certificates at a predetermined

rate of interest. Additional characteristics include:

Certificate holders may redeem their certificates for a fixed amount on a specified
date, or for a specific surrender value, before maturity.
Certificates can be purchased either in periodic installments or all at once with a
lump-sum payment.
Face amount certificate companies are almost nonexistent today.

Management Investment Companies

The most common type of investment company is the management investment

company, which actively manages a portfolio of securities to achieve its investment
objective. There are two types of management investment company: closed-
end and open-end. The primary differences between the two come down to where
investors buy and sell their shares - in the primary or secondary markets - and the type
of securities the investment company sells.

Closed-End Investment Companies: A closed-end investment company issues

shares in a one-time public offering. It does not continually offer new shares, nor
does it redeem its shares like an open-end investment company. Once shares
are issued, an investor may purchase them on the open market and sell them in
the same way. The market value of the closed-end fund's shares will be based
on supply and demand, much like other securities. Instead of selling at net asset
value, the shares can sell at a premium or at a discount to the net asset value.

Open-End Investment Companies: Open-end investment companies, also

known as mutual funds, continuously issue new shares. These shares may only
be purchased from the investment company and sold back to the investment
company. Mutual funds are discussed in more detail in the Variable Contracts
section.

BOND

A bond is a debt investment in which an investor loans money to an entity (typically

corporate or governmental) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money and finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.

Characteristics of Bonds

Most bonds share some common basic characteristics including:

Face value is the money amount the bond will be worth at its maturity, and is also
the reference amount the bond issuer uses when calculating interest payments.
Coupon rate is the rate of interest the bond issuer will pay on the face value of
the bond, expressed as a percentage.
Coupon dates are the dates on which the bond issuer will make interest
payments. Typical intervals are annual or semi-annual coupon payments.
Maturity date is the date on which the bond will mature and the bond issuer will
pay the bond holder the face value of the bond.
Issue price is the price at which the bond issuer originally sells the bonds.
EQUITIES

Stocks grant investors an equity stake in a corporation. In exchange for buying

stocks, investors become eligible for perks such as quarterly dividend distributions,
which are payments made from a company's excess profits. Equity investors also obtain
the right to vote on major corporate happenings, such as a merger with another
company or a change in corporate governance. The market value of a stock often rises
and falls in conjunction with earnings, which reflect profits and loss at a corporation,
according to Russell Investments.

FIXED INCOME

Fixed income investments represent loans that investors extend to corporations

or government bodies. Bond issuers make interest payments to investors based on the
face value of the security. Unless a bond issuer defaults, investors also receive the face
value of a bond security when the contract ends. The life of a bond can range anywhere
from three months to 30 years and may be issued by a corporation, government or
municipality. Investment grade bonds are among the safest fixed income securities,
while bonds rated below investment grade pay higher interest but have a greater
chance for default.

BANKRUPTCY

When a company falls into bankruptcy, it may mean that both equity and fixed
income investments are lost. In the event that a corporation is able to generate some
liquidity, or money, bond investors have priority over equity investors for repayment.
While it is unusual for government or municipal bond issuers to default, it can happen.
In 2012 after the city of Stockton, California, filed for bankruptcy protection, the city was
threatening to abandon its bond investors and leave them with losses, according to an
article in Barron's.

CONSIDERATION

Historically, equities and fixed income investments respond differently to financial

conditions. As a result, these two investment categories are considered non-correlated
to one another. After the financial crisis the led to the Great Recession began to unfold
in late 2007, however, stocks and bonds were both losing value amid gloomy economic
conditions. It wasn't until 2010 that equities started to trade based on corporate profits
and bond prices became sensitive to monetary policy once again, according to an
article in Bloomberg.

THE ORGANIZATION AND STRUCTURE OF FINANCIAL MARKETS AND

INSTITUTIONS

The literature has identified three broad approaches to regulating financial

markets: the institutional approach, the functional approach, and the objectives-based
approach. In practice, regulation can also be organized as a combination of these three
approaches.

Traditional approaches

The two main organizing principles that have been traditionally used in the
structure of regulation are the institutional approach (by type of firm) and the functional
approach (by type of activity).

In the institutional approach, regulation covers each individual category of

financial intermediary, which has made this approach particularly appropriate when
considering prudential issues. Traditionally, each category of institution is assigned to a
distinct agency for regulation of its entire range of activities. Since each intermediary
has only one regulatory authority as a counterpart, duplication can be avoided, and the
costs of regulation can potentially be reduced.

However, with growing integration and the blurring of distinctions between

different types of intermediaries, the obvious risk is that institutions performing similar
functions can be regulated differently, which raises the issue of competitive neutrality.

The functional approach, on the other hand, focuses on the business undertaken
by firms. Proponents of the functional approach include Macey and OHara (1999),
Merton and Bodie (1995), and Steil (2001). Macey and OHara argue that the functional
approach provides three main benefits: it applies the same rules to all intermediaries
who perform the same activity; it allows firms to select the precise services they wish to
offer; and it best supports the process of financial innovation, because it provides
competitors with the maximum amount of flexibility consistent with regulatory objectives.
Others argue, however, that the functional approach may lead to excessive
specialization of competencies across regulatory agencies, and that the position of an
institution as a whole may be obscured.

Goodhart et al. (1998) argue that a strict dichotomy between these two
approaches is misleading because the two serve different purposes. In practice, it is the
institution that can fail, so the institution itself needs to be regulated for safety and
soundness; that is, for prudential reasons. Functional regulation, on the other hand, is
concerned with how intermediaries conduct various aspects of their business and how
they behave towards customers. For competitive neutrality to be maintained, this type of
regulation, known as conduct-of-business regulation, must apply to particular aspects
of business regardless of which type of institution conducts the business. So, while
prudential regulation may be conducted by different agencies, conduct-of-business
regulation needs to be equitable to all firms.

Objective-Based Approach

An approach that has been examined more recently is the objectives-based

approach, which is advocated by Taylor (1995, 1996), Goodhart et al. (1998), and Di
Giorgio and Di Noia (2001), among others, and has been the organizational approach
used for Australias regulatory system. This approach postulates that all intermediaries
and markets be subject to control by more than one authority, each of which is
responsible for one objective of regulation regardless of both the legal form of the
intermediaries or of the activities they perform. The aim is to create a structure that
reflects the objectives of regulation and, at the same time, promotes those objectives
most effectively and efficiently. This approach is particularly effective in a highly
integrated market context and in the presence of poli-functional operators,
conglomerates and groups operating in a variety of different business sectors. (Di
Giorgio and Di Noia 2001).

Taylor (1995) provides an example of the objectives-based approach in his

proposed twin peaks model for the financial system (including financial markets) of the
United Kingdom. This model consisted of only two regulatory agencies: one responsible
for ensuring the soundness of the financial system and one focusing strictly on
consumer protection. He argues that this model should have several benefits including
eliminating regulatory duplication and overlap, providing for greater clarity in the
objective of regulators, establishing mechanisms for resolving conflicting objectives, and
encouraging a regulatory process that is open, transparent, and publicly accountable.

In response to Taylors twin-peaks model, McDonald (1996) notes that the

argument regarding the number of regulators seems to depend on the view that each
must have only one objective, but it appears that the concepts of investor protection and
systemic risk cannot be so easily separated. Goodhart et al. (1998) claim that Taylors
model is too all-encompassing. In their view, major differences still exist between
different types of firms, and although firms have diversified, a dominant core business
usually remains. They argue that the risks across business lines are sufficiently different
to warrant a differentiated approach to prudential regulation. Instead, Goodhart et al.
argue for a larger number of regulatory bodies. They suggest no fewer than six separate
agencies: a competition authority, together with five others to cover systemic risk; non-
systemic prudential regulation; retail conduct of business; wholesale conduct of
business; and financial exchanges.

Briault (1999) notes that the rationale for objectives-based models of regulation is
superficially attractive, but it does not resolve inefficiencies, nor the communication and
co-operation problems that exist whenever there is more than one regulatory body. He
criticizes Taylors approach in particular, arguing that the distinction between prudential
and conduct-of-business regulation is not as neat and simple in practice as the Taylor
model might imply. With respect to the structure proposed by Goodhart et al., he notes
that it looks very similar to a functional approach, partly because many firms would be
subject to regulation by more than one regulator.

Sectors in the Financial Market Institution

The Philippine financial system is composed of a formal and informal financial

sector that is either regulated or non-regulated. The formal financial sector includes
banking institutions that are authorized to provide credit and accept deposits from the
general public. Non-bank institutions are also part of the formal financial sub-system.
These non-bank institutions are authorized to provide credit but are not allowed to
accept deposits from the public. The informal financial sector is composed of a variety
of organized and singular sources of credit.
The financial sector is a category of stocks containing firms that provide financial
services to commercial and retail customers. This sector includes banks, investment
funds, insurance companies and real estate. Financial services perform best in low
interest rate environments. A large portion of this sector generates revenue from
mortgages and loans, which gain value as interest rates drop.
The banking sector is the section of the economy devoted to the holding of
financial assets for others, investing those financial assets as leverage to create more
wealth, and the regulation of those activities by government agencies.

The nonbanking sector is the section of the economy that facilitate alternative
financial services, such as investment (both collective and individual), risk pooling,
financial consulting, brokering, money transmission, and check cashing that are not
necessarily suited to banks. They also provide various other financial services, ranging
from portfolio management to stockbroking.
Stakeholders in a Financial Market Institution
The term stakeholders refer to all the people who are formally or informally
involved with and affected by the corporate governance of a business. Stakeholders are
interested in financial aspects of an organizations performance and management. In
particular, they will be interested in how an organizations performance is likely to
impact upon them. Other people have a stake in and use for the financial information
that results from what you and others do in your organization. The way in which
financial information is used and compiled into financial reports and statements is
heavily influenced by perceptions of what these users need and expect. The following
are the stakeholders in a financial market institution:

Shareholders/Investors
Shareholders/investors provide capital needed to run a business, and they
expect a return for their investments. The shareholders of a financial institution
appoint the board of directors for corporate governance. The shareholders also
choose the managers who will be hands on the financial operations of the
institution.

Board of directors
These folks are the topmost responsible people in a corporate body.
Selected by the shareholders, the board members are responsible for developing
corporate policies, strategies, procedures, and more to guide the institution
toward success. They are also responsible and accountable to stakeholders for
financial performance. To do so, the board of directors of a financial firm must
have demonstrated competency in the finance industry.

Managers
Managers are accountable for the internal controls in the institution. They
are concerned on planning, controlling, decision-making and stewardship
(safeguarding assets) in the institution. Their jobs focus on implementing the
policies, strategies, and procedures.

Employees
Employees are the one employed in an institution that performs specific
tasks in accomplishing the organizational goals. They determine if the institution
is capable to give them more benefits than other does.

Communities and Government

Communities and governments are closely tied external stakeholders.
Companies operate within communities, and their activities affect more than just
customers. Businesses pay taxes, but they are also informally expected by
residents to operate ethically and with environmental responsibility. Communities
also like to see businesses get involved in events and local charitable giving.
Government entities make decisions that can significantly impact a company's
operations. It is important, therefore, for company managers to maintain good
 relationships with local officials to anticipate legal or regulatory changes or
community developments that may affect them.

Lender
Businesses commonly use lenders to finance business ventures, building
and asset purchases and supply purchases. Banks often provide loans for major
purchases, such as a new building. Suppliers may provide product inventory on
account, which a business than pays down the road. Current creditors basically
expect that a business meets its payment deadlines responsibly and consistently.
Doing so helps your business maintain good relationships with creditors and also
makes you more likely to get quality financing in the future.

Suppliers and business partners

Suppliers and business partners have become more critical stakeholders
in the early 21st century. More often, companies build a number of small, loyal
relationships with suppliers and associates. This enables each business to
develop shared goals, visions and strategies. Trade buyers and sellers can
effectively collaborate to deliver the best value to end customers, which is
beneficial to each partner. Additionally, your trade partners expect that you
operate ethically to avoid tarnishing the reputation of companies with whom your
business associates.

Customers
Customers are one of the most immediate external stakeholders that a
company must consider. For retailers, consumers are customers. Attracting,
retaining and generating loyalty from core consumer markets its critical to long-
term financial success. For business-to-business companies, the customers are
the businesses that buy goods for business use. Trade resellers sell directly to
wholesalers or retailers, but they must also consider end customers as part of
their stakeholders. If consumers don't buy manufactured goods, for instance,
nobody in the distribution channel succeeds.

Competitors
An often-overlooked stakeholder for any company is its competitor,
because often the actions of one player can influence the image of an entire
industry (or business in general).
 Public
Public stakeholders rely on credible disclosures from financial institutions.
However, these people are responsible for their own actions related to the
financial firm; they dont influence the firm directly.

SWOT Analysis of the Philippine Financial System

Strengths Weaknesses

Banking system remained stable Frail corporate governance

- Improved asset quality Vulnerability to internal and external
- Ample liquidity environment shocks and market volatility
- Sufficient capitalization and Supervision and regulation
increased profitability
- Expansion in assets, loan portfolio
and deposits
Strong capitalization and liquidity profiles
Prudent monitoring by the Bangko Sentral
ng Philipinas (BSP)

Opportunities Threats

Consolidation in the banking industry Periods of heightened uncertainty

Broadening access to financial services
and promoting competitiveness in the
financial system
Strengthening corporate governance
Improving risk management
Enhancing supervisory oversight on
nonbank financial institutions
Promoting accelerated development of
the capital market.
Brexit, the US presidential elections,
and President Rodrigo Dutertes
increasingly unorthodox policies
weighing on investor confidence,
according to Business Monitor
International (BMI).
Market volatility
Increasing competition from foreign
banks
Unexpected losses in the event of
economic shocks
 Philippine Financial System Case Analysis: Policies, Problems, Concerns and
How to Address Them

Introduction

A financial system allows the exchange of funds between lenders, investors, and
borrowers. It encompasses all financial institutions, borrowers and lenders and uses
money, credit, and finance as media of exchange.

In the Philippines, financial system is dominated by a banking system, Bangko

Sentral, the official central bank in the Philippines. The job of the Central Bank
should not only achieve monetary stability but also use its resources more towards
the improvement of the standard of living. Economic growth with social justice must
be the fundamental program of any central bank in a poor society.

Financial markets are said to be effective when they are efficient and deep.
Efficient financial markets are those that can mobilize funds from savings with the
lowest opportunity cost and distribute these funds to investments that offer the
highest potential returns, or what we call allocational efficiency. Financial markets
are also efficient if they mobilize and allocate funds at minimal cost, or what we call
operational efficiency. In terms of savings mobilization or efficiency, the Philippines
gross domestic savings ratio of 21% as of 2003 is one of the lowest, (Economic
Policy Reform & Advocacy).

The country needs an effective financial market system for sustainable and
broad-based economic growth to happen. An effective financial system should be
able to mobilize resources in the economy for productive investment, and channel
resources to activities that will promote growth, allow businesses to produce more
goods and hence, generate more jobs.
1. Financial Markets

Financial Markets are physical locations or electronic forums that facilitate the
flow of funds among investors, businesses and governments. It provides the
mechanism for allocating financial resources of funds from savers to borrowers.

1.1 Roles of the Financial Market:

Money market operations or the borrowing and relending of highly

liquid, short-term assets and securities
Expedites the transaction of financial claims
Serves as a mean of bringing the forces of demand and supply of
financial claims
Facilitates the flow of funds among investors, business, and
governments
Provides the mechanisms for allocating financial resources or
funds from savers to borrowers
Raises money by selling shares to investors and its existing share
can be bought or sold
Where lenders and their agents can meet borrowers
Convenes many interested sellers in one place
Provides the place where many commodities are traded
Used to match those who want capital to who have it
Facilitates the raising capital in capital markets, the transfer of risk
in the derivatives market and international trade in the currency
market
2. Bangko Sentral Ng Pilipinas and tis Role in the Deposit Expansion and
Money Supply Central Bank
Bangko Sentral is thefinancial institution vested by the State with the
function of regulating the supply, cost and use of money with a view to
promoting national and international economic stability and welfare.

2.1 The Function of the Bangko Sentral ng Pilipnas:

Liquidity Management
Currency Issue
Lender of Last Resort
Financial Supervision
Management of Foreign Currency Reserves
Determination of Exchange Rate Policy
Other Activities (Functions as the banker, financial advisor and
official depository of the Government)

2.3 Objectives of BSP

1. To maintain price stability conducive to a balanced and sustainable

growth of the economy

2. To promote and maintain monetary stability and convertibility of the

Philippine peso

2.4 Monetary Policy and its Objectives

Monetary policy is the management of the expansion and

contraction of the volume of money in circulation for the explicit
purpose for attaining a specific objective. Central Bank of the
Philippines is responsible for executing the monetary policy; gives
primary and immediate importance to the maintenance of monetary
stability.
3. Problems encountered by the Philippine Financial System
The key factors that affect the financial system are the financial resources, the
banking system and the non-bank financial institutions. Aside from these issues
on financial stability, integrated regulators, financial transparency, deregulation of
financial market rapid financial innovation and space age technology are issues
that needs to be addressed.

1. Despite their prominence, banks have not provided substantial

intermediation to the market. Banking institutions account for a high
percentage of financial system assets, most of which are family-owned.
Commercial and universal banks dominate the banking sector, accounting
for 88% of total banking assets, with the top five universal banks (excluding
state-owned banks) accounting for 50% of total commercial banking assets.
Philippine banks tend to invest in a small number of top-tier creditworthy
firms, including peers and affiliated organizations, due to an inability to
accurately judge credit risk. In addition, bank density is heavily skewed
towards three large regions, leaving about one-third of all municipalities in
the Philippines without a banking office.

2. A perception of heightened instability, low investor confidence, and

inefficiencies arising out of structural impediments has constrained financial
sector development. Inadequate intermediation between savers and
investors, and limited access to finance, continue to slow Philippine
economic growth and development, and have limited the governments
progress in reducing poverty.

3. The nonbank financial subsector remains underdeveloped. The Philippines

bond market recently exhibited some very promising trends, reporting the
second best performance in Asia (excluding Japan) through the third
 quarter of 2010. Nevertheless, the nonbank financial subsector is still too
small to compensate for the limited level of bank intermediation.
4. Short-term government debt securities, mostly treasury bills, account for
almost 30% of the market, while corporate issues constitute less than 5% of
the market. The number of primary dealers is too high, which transforms
the process into a private placement format, and the dealers do not have
the inventory management tools necessary to make two-way markets.
Corporate issuance has also been constrained by tax and regulatory
disincentives that constrain potential investors as well as a weak insolvency
regime. The limited supply of investment products and vehicles, such as
open-end mutual funds, has discouraged small investors, and an active
fund management industry has yet to emerge.

5. The equity market remains shallow, with little growth. About 60% of market
capitalization is composed of around 25 family-controlled corporations. The
small market size and limited turnover increase the risk of insider dealing
and market manipulation. In addition, cross shareholdings and limited
disclosure make it difficult to track intercompany transactions and
exposures. Efforts to follow through on the demutualization of the stock
market have stalled, and effective self-regulatory systems have not yet
been established. Since 2003, the Philippine Stock Exchange has
suspended minimum float requirements, which has not been conducive to
ensuring sufficient liquidity.

6. The small insurance subsector is plagued by restrictive legislation and

regulation. Life insurance premiums represent less than 1% of gross
domestic product and have shown nominal growth over the past 10 years.
There are restrictions on expanding the range of insurance providers, as
well as on microinsurers introducing nonlife products. Tax distortions also
hamper development efforts, but, more significantly, the state-owned
 Government Services Insurance System competes directly with the private
market.

7. Lack of sufficient direction and sustained stakeholder support. A Capital

Market Development Plan (CMDP) was published in 2006 along with a
sequenced implementation action plan. However, the plan was regulatory-
centric and overly prescriptive. Implementation was incomplete, and a
sizable number of deviations were noted. In an effort to refocus its reform
efforts, financial sector development has been positioned as a key part of
the Philippine Development Plan (PDP), 20112016 and the associated
CMDP. A review of the PDP has confirmed the emergence of a strong
reform agenda under the incoming administration and the appointment of
reform champions in key positions in the Securities and Exchange
Commission (SEC) and Investment Committee (IC). However, a number of
constraints remain unaddressed. First, the CMDP has not been
backstopped with a detailed implementation plan that establishes key policy
actions and associated deadlines or, most importantly, who is responsible
for implementing the reforms. Further, an overall champion has yet to
emerge to take a leadership role in building a consensus across a diverse
group of stakeholders.

8. Weak financial supervision continues to lower investor confidence. The

quality and coordination of supervision have improved considerably, but
weaknesses remain and continue to dampen investor confidence. Gaps in
capacity and coverage between, and poor enforcement coordination
among, the key financial sector regulators have encouraged regulatory
arbitrage by financial entities. A key underlying cause of these governance
and operational weaknesses is the lack of fiscal and administrative
autonomy. Combined with a suppressed budget, the high demands of the
noncore functions have limited the capacity of staff to address higher value
 core functions under SECs mandate. Compounding this problem, the lack
of budget support has compromised SECs ability to develop and retain
staff with the skill sets necessary to provide an overall enabling
environment for capital market development while at the same time
assuring financial stability. In the absence of timely reforms, the financial
sector will remain vulnerable to systemic risks, and investors will be
vulnerable to fraud and misconduct.

9. Microfinance subsector faces uneven regulation. With Asian Development

Bank (ADB) assistance, the government has been formalizing the
cooperative sector, placing financial service-engaged cooperatives under
the prudential supervision/regulation of the Cooperative Development
Authority (CDA) in accordance with Republic Act No. 9520 or the
Cooperative Code.4 However, CDA has yet to transform itself to a financial
regulatory body as mandated by the Cooperative Code. The
Microinsurance Regulatory Framework supported by ADB, along with the
National Strategy for Microinsurance, was officially launched on 29 January
2010.

10. Lack of appropriate insurance products to deal with natural disasters and
catastrophes. The Philippine Disaster Risk Reduction and Management Act
of 2010 devolves the authority for implementing disaster risk reduction
measures to local governments.5 At the same time, the National Calamity
Fund and the Local Calamity Funds are made available for disaster-related
activities such as relief, rehabilitation and reconstruction. Due to funding
constraints in the National Calamity Fund (annual Congressional
appropriations amount to Php 700 million or approximately $16 million) and
Local Calamity Funds (currently 5% of local government unit budget), the
Government is seeking complementary and sustainable financing solutions
for natural disaster risk management. These include the development of
Disaster Risk Financing Strategy for national assets (major infrastructure
 networks, schools, hospitals) currently being undertaken with the World
Bank, and a public-private earthquake insurance pool (EQ pool) covering
middle class residential and small and medium enterprise (SME) property
that is being initiated with ADB. The purpose of the integrated Disaster Risk
Financing Strategy is to identify complementary financing solutions based
on modeling the assets at risk national government property as well as
residential and business, and pricing the risk cover. Specific risk modeling
and pricing will then allow for the development of appropriate market risk
transfer mechanisms (ex-ante risk financing), which will include insurance
and reinsurance, as well as possibly reserve fund financing. At present, the
underinsurance of national assets and the absence of affordable, market-
based insurance products for residential and SME property owners,
represent a significant and potential liability for Government in the event of
a major earthquake in a highly urbanized city. The EQ pool, being
developed by ADB is drawing upon lessons learned from similar public-
private EQ pool models internationally (e.g. Turkish Catastrophe Insurance
Pool, Indonesia Earthquake Reinsurance Pool, Taiwan Residential
Earthquake Insurance Fund as well as EQ risk financing solutions
developed in Latin America).

4. Recommendations

Reforms in the domestic financial system will be guided by the associated

CMDP and will promote further deepening of the financial system through the
balanced development of the banking system and capital market. These reforms
are anchored in an enabling environment, progressive adoption of international
standards and best practices, and good governance and transparency. Key
reforms will focus on (i) promoting savings generation at the regional level but
institutionalizing deployment of resources at the national level, (ii) developing an
enabling environment for long-term savings, (iii) strengthening the governance
framework of the financial system in line with international standards and best
practices, and (iv) establishing a strong legal framework for financial sector
development.

1. An overall framework will be developed by the government to provide an

enabling environment that balances financial inclusion objectives with
financial stability goals. To broaden financial inclusion, the government will
promote the use of alternative products and delivery channels to reach
underserved and unserved areas of the country, including microinsurance,
a credit surety fund program, and microhousing. To encourage long-term
savings and investment, auxiliary markets will be developed through the
forward and cash markets.

2. To strengthen the governance framework of the financial system, the

regulatory agencies will pursue sustained capacity development in
conjunction with the passage of amendments to strengthen the legislative
mandates of the Bangko Sentral ng Pilipinas, SEC, and Insurance
Commission. Regulatory and supervisory oversight will be harmonized
through cooperative arrangements among domestic and international
financial regulators to address the growth of financial conglomerates. In
addition, the government will establish a strong legal framework to support
financial sector development and to enhance financial stability. The
existing microprudential approach to supervision will be supplemented
with macroprudential policies to ensure the resilience of the financial
system. Momentum to further deepen the domestic financial markets will
be supported through faster integration of the financial system into the
Association of Southeast Asian Nations region.

3. The government will continue, but refine, existing efforts to support its
social agenda of reducing poverty through mandated credit to certain
 sectors of the economy such as small and medium-sized enterprises and
the agriculture sector. The market-based policy environment includes
adoption of market-based interest rates in microfinance, phase-out of
subsidized directed credit programs in agriculture, and nonparticipation of
nonfinancial government agencies in lending. The government also plans
to develop cooperative financial services and microinsurance based on
the same market-based principles. The government now focuses to create
enabling environment for microinsurance sector development based on
public-private partnership approach to ensure its sustainability, rather than
becoming directly involved as service provider. Through the process of
adoptions of National Strategy and Regulatory Framework, the
consultative process with various stakeholders under the Department of
Finance (DOF) (National Credit Council) has been established. This
mechanism is essential and should be maintained to keep current
momentum.

4. The government, through DOF and Insurance Commission, in

coordination with 15 agencies and the Philippine Insurance and
Reinsurance Association is currently initiating a national catastrophe risk
assessment as well as a complementary residential and SME property
earthquake risk assessment to facilitate the design of a national disaster
risk financing strategy. The objective of the national disaster risk financing
is to develop insurance cover for strategic national assets that are
presently uninsured (e.g. schools, roads, bridges, airports, and railways)
with complementary insurance provided via a public-private EQ pool for
middle class residential and business owners. The government is aware of
the following constraints: (i) the heavy reliance on government resources
to finance costs arising from disasters, (ii) the large gaps in the collection
and management of exposure data, (iii) the scope of underinsurance
among national agencies, as well as (iv) the absence of catastrophe
 insurance provision to a wide segment of residential and business owners.
The World Bank is providing technical assistance to address the gaps
specific to issues (i) (iii) while ADB is addressing the development of a
public-private EQ pool for residential and SME business owners.

5. ADB has supported reforms in the financial sector for more than 10 years,
with four program loans between 1995 and 2010.7 The 2008 Philippines
country assistance program evaluation identified intermediation and
savings as a key driver of poverty reduction and as an area where both
institutional knowledge and potential impact are high. Recommendations
included (i) strengthening capital market development planning; (ii)
improving market functions; and (iii) strengthening supervision and
regulation overall, and in the nonbank subsector specifically.

6. While the outlook for financial sector development has improved, ADB has
not included support to the financial sector in the Country Partnership
Strategy, 20112016 in view of the need to align with PDP priorities and
focus on the most critical development constraints, Country Assistance
Program Evaluation recommendations, and strategic cooperation among
development partners. Nevertheless, recent developments are
encouraging and could lead to a reassessment of ADBs support to the
financial sector. Specifically, the government has met the funding triggers
necessary to disburse Financial Market Regulation and Intermediation
Subprogram 2. A substantial budget increase has been provided to the
SEC to provide retro-active salary increases in compliance with the
Revised Securities Regulation Code, additional staff and salary scale
adjustments, and to support capital projects including the automation of
corporate registrations. Further, the SEC will, with the support of ADB
technical assistance, begin an active engagement with the private sector
 to develop a comprehensive and realistic action plan to further develop the
Philippine capital market.

7. While ADB is willing to support additional policy development lending

programs to the financial sector, this support will be conditioned on the
governments success in implementing these newly emerging reform
priorities, the degree and pace with which reforms contemplated under the
Financial Market Regulation and Intermediation Program are
implemented, and the emergence of a clear and sustained champion to
lead these difficult reform efforts. In the interim, technical assistance
support will be provided to the financial sector to maintain ADBs long-
standing policy dialogue and to provide assistance in implementing key
reform priorities under the Post Partner Partnership Framework and the
CMDP.

8. Microinsurance. Following the capacity-building efforts for policy and

regulatory side (supply side), an on-going ADB project initiated a series of
regional financial literacy campaigns on a pilot basis to strengthen the
demand side. For further development of the microinsurance sector the
following measures have been identified as priorities for future ADB
support: (i) risk-based supervisory approach to develop a level playing
field for various microinsurance providers, (ii) capacity development of
supervisors for emerging microinsurance products and services including
parametric or index type products for climate change, (iii) formulation of
policies to accommodate expanded distribution channels including
nonconventional and cost- effective ones, (iv) consumer protection
measures to fit for small-amount transactions like microfinance/insurance,
and (v) local government unit level impact assessment of financial literacy
campaign have been identified to be followed up.
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