Lesson 1.

Financial Institutions

Business Finance
Accountancy, Business, and Management

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

3
Would you keep them
with you or deposit
them in a bank
account?

4
Do you know that you
are indirectly lending
your money if you
deposit it on a bank
account?

5
Financial institutions facilitate the flow of savings to
lending and investments.
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Quick Look

Money is a part of daily life. People earn, spend, and save money to
survive in this society. Thus, people need to manage their finances and
set specific financial goals. Most people do this by setting aside a portion
of their income, depositing it in bank accounts, and earning from
interest.

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Quick Look

Banks play an essential role in this kind of financial activity. These

institutions accept deposits from different individuals, households, and
companies to pool their funds and offer loans to those in need.
Meanwhile, lenders grow their money from the borrowers' interest
payments.

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Quick Look

People in the accumulation phase often consider their family's future

needs. They are more likely to invest in securing their future income and
attaining financial freedom. Financial institutions offer many types of
investments that people can choose from. These are time deposits,
stocks, and life insurances.

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Quick Look

Financial institutions could help you achieve your financial goals and
fulfill your financial needs. To know which of their services you need, you
have to determine the type of financial transaction you want and identify
the appropriate financial institution that could help you.

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Quick Look

Questions to Ponder
1. What are the common reasons for keeping personal savings in banks?
2. Do you think that people should invest their money? Explain your
answer.
3. Based on the given narrative, why are financial institutions important?

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Learning Competency

Enumerate the varied financial institutions and their

corresponding services (ABM_BF12-IIIa-3).

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Learning Objectives

In this lesson, you should be able to do the following:

● Explain the definitions and purpose of financial institutions.
● Determine the importance of various types of financial
institutions in specific situations.
● Recommend financial decisions concerning financial
institutions.

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Why are financial institutions crucial in the
financial system?

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Financial Institutions

● exist to assist individual entities by investing and lending on

their behalf
● products and services:
○ accepting donations
○ offering loans
○ proposing investment plans, etc.

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Financial Institutions

● intermediaries to facilitate the flow of funds and financial

capital
● play an essential role in economic activities
○ pooling excess funds
○ financing business activities

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 Loans and Interest

Closer L
o ok

Banks finance different types of loans such as personal loans,

home loans, car loans, and business loans. When a client
applies for a car loan that is payable for five years with an
interest rate of 8.14%, the said interest becomes the bank’s
income. The interest rates are guided and approved by the
Central Bank. In the Philippines, the Bangko Sentral ng Pilipinas
is the authorized body to regulate the interest rates.

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 Check Your Progress

In what ways can financial institutions help individuals

1 during a crisis such as a pandemic?

Answer area

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 Categories of Financial Institutions

Depository Non-Depository

● does not accept deposits

● accepts deposits
● offers insurance policies,
● offers loans
mutual funds, and
● earns from interest
stocks
payments
● earns from commissions

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 Categories of Financial Institutions

Depository

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

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Categories of Financial Institutions

Non-Depository

● investment banks and

companies
● brokerage firms
● insurance companies
● mortgage companies

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 Depository Financial Institutions

Central Banks Retail and

Commercial Banks
● accept deposit
● provide loans
● govern all bank
● savings and checking
● set monetary policies
accounts, time deposits,
● keep prices stable
personal loans, credit
cards, etc.

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 Depository Financial Institutions

Internet Banks Credit Unions

● pool contributions from

● new kind of financial
members
institution
● provide loans with
● accept deposits
interest to members
● purely online
● formed by particular
transactions
groups

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 Depository Financial Institutions

Savings and Loan

Associations

● accept deposits from

members
● offer loans and
mortgage to members

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 Making a Bank Deposit

Closer L
o ok

Saving money helps in the efficiency of the financial system.

When you deposit your savings in a bank, you are indirectly
lending your money to the bank’s other clients. The income
you will receive would come from the interest payments that
these borrowers pay. Make sure to inquire about the interest
rate to know how much your money will grow. Deposits made
on Philippine commercial banks are insured by the Philippine
Deposit Insurance Corporation (PDIC).

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 Non-Depository Financial Institutions

Investment Banks Brokerage Firms

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

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 Non-Depository Financial Institutions

Insurance Mortgage Companies

Companies

● cover possible financial

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

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 Life Insurance Plus Investment

Closer L
o ok

Many financial advisors endorse a variable universal life (VUL)

insurance to their clients. This kind of insurance is typically
offered to full-time employees because they have the capacity
to pay the premiums periodically. VUL insurances provide
lifetime insurance coverage that also serves as an investment
that accumulates value. In case an unfortunate incident
happens to the insurance holder, their beneficiaries will
receive the insured amount indicated in the insurance policy.
Companies that offer VUL insurances are examples of non-
depository financial institutions.
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 Check Your Progress

How do depository and non-depository financial institutions

2 act as financial intermediaries?

Answer area

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 Difference From Financial Markets

Financial Institutions Financial Markets

● intermediary or medium
of exchange
● operate in the financial ● a place for exchange
market
● offer products and
services

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Difference From Financial Markets

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 The Federal Reserve Response to 9-11

Case Stu
dy

The World Trade Center attack on September 11, 2001 made

headlines globally. Terrorists gained control of a passenger
plane and crashed it into the two of the tallest buildings in
Manhattan, which resulted in 3,000 deaths and massive
destruction of the city's infrastructure. From a financial
perspective, this event also paralyzed the world’s financial
system as most bank transactions were interrupted. Trading
was stopped in various financial markets.

Rosenthal, Jean, et. al. The Federal Reserve Response to 9-11, Yale SOM Case 20-029 August 10, 2020,
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11, last accessed on 25 October 2021. 32
 The Federal Reserve Response to 9-11

Case Stu
dy

The interruption created tremendous challenges for the

Federal Reserve, the U.S.’ central bank. When the attacks
commenced, Roger Ferguson, Vice-Chairperson of the Fed’s
Board of Governors, took the reins as he was the only member
available and capable of making immediate decisions.
Throughout that morning and the rest of the week, he was the
person in charge through one of its most difficult periods. Even
the fundamental questions of leadership were vague as there
are no provisions in the legislation establishing the Federal
Reserve for a single governor to act.
Rosenthal, Jean, et. al. The Federal Reserve Response to 9-11, Yale SOM Case 20-029 August 10, 2020,
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11, last accessed on 25 October 2021. 33
 The Federal Reserve Response to 9-11

Case Stu
dy

Nevertheless, under Ferguson’s leadership, the Federal

Reserve made a series of decisions designed to provide
confidence and increase liquidity in a severely damaged
financial system. These become the ultimate solutions to the
financial crisis.

Rosenthal, Jean, et. al. The Federal Reserve Response to 9-11, Yale SOM Case 20-029 August 10, 2020,
https://som.yale.edu/case/2020/the-federal-reserve-response-to-9-11, last accessed on 25 October 2021. 34
Keep in Mind

● Financial institutions are entities that provide products and services

related to financial transactions. These intermediaries serve as
essential channels in the financial system to ensure the efficient flow
of funds from savings to investment. Financial institutions primarily
cater to individual participants in the financial market.

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Keep in Mind

● Depository financial institutions pool deposits and savings to offer

as loans to borrowers. The different depository financial institutions
are central banks, retail and commercial banks, internet banks,
credit unions, and savings and loan associations.

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Keep in Mind

● Non-depository financial institutions do not accept deposits but

offer other financial services like investments and insurances. The
different types of non-depository financial institutions are
investment banks and companies, brokerage firms, insurance
companies, and mortgage companies.

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Keep in Mind

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

1. Banks lend and invest on behalf of their depositors.

TRUE FALSE

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

2. An individual can apply for a car loan in a mortgage

company.

TRUE FALSE

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

3. Savings and loan associations collect contributions

from their members.

TRUE FALSE

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

4. Brokerage firms buy bonds from companies and

governments and offer these to investors.

TRUE FALSE

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

5. The Bangko Sentral ng Pilipinas sets the monetary

policies for all local banks to follow.

TRUE FALSE

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 Practice Your Skills
Examine the given situations and answer the following questions.

1. Your aunt is a public school teacher. Every 15th and 30th of

the month, a percentage of her salary is automatically
deducted and transferred to the cooperative association.
Every June of the year, your aunt applies for loans from this
association to pay for her children’s tuition and other
school fees. What financial institution is your aunt
transacting with? Explain your answer.

Answer area

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 Practice Your Skills
Examine the given situations and answer the following questions.

2. Marie established a grocery business. She is aware that her

business could suffer losses from calamities, natural or
otherwise. She wants to protect her assets from these
unfortunate events. Which financial institution can help
Marie and how?

Answer area

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 Challenge Yourself

Short Essay. Answer the following questions briefly and concisely.

1. Your best friend’s father was recently laid off from his work
because of the pandemic. Although they have Php 550,000
in their savings account, it is obvious that it is not enough
to cover all the expenses of their family for a year. Which
financial institutions can help their family and how?

Answer area

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 Challenge Yourself

Short Essay. Answer the following questions briefly and concisely.

2. Your sister is earning Php30,000 a month but holds a

contractual position in a company. She does not have any
savings or investments, nor any dependents. However, she
is interested in diversifying her monthly income. In what
financial institution would you recommend her to invest
her money? Explain your answer.
Answer area

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Photo Credits

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

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

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

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

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

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Bibliography

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

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

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

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

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

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