Lesson 8

Financial
Systems
“Cash is KING”
Objectives:
• Explain what financial system is and
its connection to economic growth
and development;
• Elaborate financial institutions,
financial assets, real assets,
portfolio management, and the key
players in these institutions;
• Evaluate the specific contribution of
financial systems to economic
development.
What is financial system?

• Is a group of financial institutions and

financial markets that creates financial
instruments and financial services.
• It efficiently transfers the funds from one
party to another party.
Components of Financial System
Financial Institutions

• These includes banks, credit unions,

insurance companies, and investment
firms. They help people to manage their
money, offer loans, and provide
investment opportunities.
Financial Markets

• These are platforms where financial

assets like stocks, bonds, and currencies
are bought and sold.
Financial Instrument

• These are various type of contracts

or securities, such as stocks,
bonds, and derivatives.
Regulatory Framework

• These are governments and regulatory

bodies, like the Securities and Exchange
Commission (SEC), oversee the financial
system to ensure stability, fairness, and
transparency.
The basic functions of the
Financial Systems:

1. Promote savings functions. With the

different financial institutions and variety
of markets within the system, the savings
of different surplus spending units flow
into investments because these markets
are offering a potential rate of return with
relatively low risk.
The basic functions of the
Financial Systems:

2. Payment Function. The financial system

has the best and most expedient
mechanism for affecting payments to
purchase goods and services through the
checking accounts that commercial banks
offer, as well as other types of banks
authorized to offer such facilities.
The basic functions of the
Financial Systems:

3. Protection Against Risks Functions. The

markets through the available sale of life,
property, and casualty insurance policies
by the institutions in the insurance
business are inevitable to the business,
consumers, and government.
The basic functions of the
Financial Systems:

4. Means to Wealth Function. Through

those different economic units that have
decided to accumulate savings, the
different financial markets are excellent
placement for such savings.
The basic functions of the
Financial Systems:

5. Provide Liquidity Function. The

enormous number of financial instruments
as good storage of wealth possessed by
the different economic units is readily
accessible to the financial market for
conversion into cash, practically with little
or no risk of loss at all.
The basic functions of the
Financial Systems:

6. Credit Facility Function. Other than the

function of facilitating the flow of savings
into investments and providing liquidity,
the markets make credit facilities available
to financial consumers and Investors for
spending or any other purposes.
Nature of Financial
System
1. Transfer Funds
2. Mobilizes Savings
3. Risk Allocation
4. Facilitates Investment
5. Enhances Liquidity
 The role of Financial System to the
Economic Growth and Development

It is generally accepted that the financial system

plays a pivotal role in economic development by
mobilizing funds for investment projects with the
highest probability of success. In fact, a well-
functioning financial system is a key component of a
modern economy, facilitating the exchange of goods
and services, mobilizing savings, allocating scarce
resources, mitigating market imperfections, and
Example:

Imagine a small entrepreneur

in a developing country with
a brilliant idea for a new
solar-powered irrigation
system. This system could
revolutionize agriculture in
the region, boosting food
production and creating jobs.
However, the entrepreneur
lacks the capital to start
production.
Advantages and
Disadvantages of
Financial System
 Advantages
1. Provides Payment System
2. Link Savers and Investors
3. Minimizes Risk
4. Helps in Capital Formation
5. Raises Standard Living
6. Enhance Liquidity
7. Promotes Economic
Development
Disadvantages
1. Lack of Coordination among
financial institutions
2. Monopolistic Market Structure
3. High Rate of Interest
4. Inactive Capital Market
5. Imprudent Financial Practice
8.1 Financial Institutions
What is financial
institution?
• A financial institution exist to provide a
wide variety of deposit, lending, and
investment products to individuals,
businesses, or both. While some financial
institutions focus on providing services and
accounts for general public, others are
more likely to serve only certain customers
with more specialized offerings.
Kinds of Financial
Institutions
1. Central Banks
• are responsible for overseeing and
managing all other banks,
conducting monetary policy, and
supervising and regulating financial
institutions.
2. Retail and Commercial
Banks
• Traditionally, retail banks offered
products to individual consumers, while
commercial banks worked directly with
business. Products offered at retail and
commercial banks include checking and
savings accounts, certificates of deposits
(CDs), personal and mortgages loans,
credit cards, and business banking
3. Credit Unions
• Is a type of nonprofit financial institution
providing traditional banking services
and is created, owned, and operated by
its members. Credit unions used to serve
a specific and shared demographic group,
also known as the field of membership.
4. Savings and Loan (S&L)
• S&L Associations
Associations provide individual
consumers which checking accounts,
personal loans, and home mortgages. A
savings and loan is a type of thrift that is
required by law to produce a certain
number of loans secured by residential
real estate, but the aim of most savings
and loan is to lend for residential
5. Investment
Banks
• Are financial institutions that provide
services and act as a intermediary in
complex transactions. They can also act
as a broker or financial advisor for large
institutional clients such as pension
funds.
6. Brokerage Firms
• Brokerage firm assist individuals and
institutions in buying and selling
securities among available investors.
Customers of brokerage firms can place
trades of stocks, bonds, mutual funds,
exchange-traded funds (ETFs), and some
alternative investments.
7. Insurance
Companies
• Individuals and businesses use insurance
companies to protect against financial
loss due to death, disability, accidents,
property damage, and other misfortunes.
These companies can also include the
self-insurance programs of other financial
institutions such as a savings and loan
holding company.
 8. Mortgage
Companies
• Mortgage companies focus exclusively on
originating loans and seek fund from
financial institutions that provide the
capital for the mortgages.
 Real Assets
• are tangible or physical assets that have
intrinsic value due to their substance and
properties. They typically include
commodities, real estate, and
infrastructure.
Types of Real Assets
1. Real State
• Physical properties such as residential,
commercial, and industrial buildings.
Investors earn income through rent and
benefit from property value appreciation.
2. Commodities
• Physical goods like gold, oil, and
agricultural products. Commodities can
be traded directly or through futures
contracts.
3. Infrastructure
• Long-term physical structures such as
bridges, roads, and utilities. Investments
in infrastructure can provide stable cash
flows through user fees or government
contracts.
4. Natural Resources
• Assets such as timberland, mineral
rights, and water rights. These resources
can generate income through extraction
or leasing.
Financial Assets
• are intangible assets that derive value
from contractual claims, representing
ownership or a right to receive cash
flows. They are crucial for investment and
financing activities.
Types of Financial
Assets
1. Cash and Cash
Equivalents
• These include physical currency, bank
deposits, and short-term investments
that can be quickly converted to cash,
such as Treasury bills.
2. Stocks
• Equity securities representing ownership
in a company. Investors earn returns
through capital appreciation and
dividends.
3. Bonds
• Debt securities issued by corporations or
governments. Investors receive periodic
interest payments and the principal upon
maturity.
4. Derivatives
• Contracts whose value is derived from
underlying assets, such as options and
futures. They are used for hedging or
speculative purposes.
5. Mutual Funds
• Investment vehicles pooling money from
multiple investors to purchase a
diversified portfolio of stocks, bonds, or
other securities.
6. Real Estate Investment Trusts

• Companies(REITs)
that own, operate, or finance
income-producing real estate. Investors
earn returns through dividends and
capital appreciation.
Financial Intermediary
• A financial intermediary is an entity that
acts as the middleman between two
parties, generally banks or funds, in a
financial transactions. A financial
intermediary may lower the cost of doing
business.
PORTFOLIO MANAGEMENT
• is the process of selecting, prioritizing,
and overseeing a collection of
investments to achieve specific financial
objectives while managing risk. It
involves making informed decisions about
asset allocation, investment strategies,
and performance evaluation to optimize
returns based on an investor's goals and
 Components of
Portfolio Management
1. Asset Allocation
• The process of dividing
investments among different
asset categories, such as stocks,
bonds, real estate, and cash.
2. Investment
• A Strategy
plan that outlines how an
investor intends to allocate
resources among different types
of investments.
3. Risk Assessment
• The identification and evaluation
of potential risks associated with
investment decisions.
4. Performance Measurement
• The process of evaluating how
well the portfolio is performing
relative to benchmarks or goals.
5. Rebalancing
• The process of realigning the
proportions of assets in a
portfolio back to the desired
allocation.
6. Tax Consideration
• Understanding how taxes affect
investment returns, including
capital gains tax and income tax
on dividends.
7. Investment Policy Statement
(IPS)
• A formal document that outlines
an investor's goals, strategies,
risk tolerance, and guidelines for
managing the portfolio.
8.2 Financial System in
Economy
 Specific Contributions of
Financial System to Economic
Development in the Philippines
Encouragement of Technological
Innovation
• Financial institutions provide
funding for research and
development, particularly in
technology-driven sectors.
Venture capital and private equity
play a crucial role in supporting
startups and innovative projects.
Facilitation of International Trade
• The financial system supports
international trade through trade
financing, letters of credit, and
foreign exchange services. Banks
help businesses manage currency
risks and secure funding for
import/export activities.
Promotion of Sustainable

• Development
Financial institutions are
increasingly focusing on
sustainable investments,
providing funding for projects
that address environmental
challenges. Green bonds and
sustainable investment funds are
examples of this trend.
Improvement of Payment

• The Systems
financial system enhances
payment systems through
technologies like mobile
payments and digital wallets,
making transactions faster and
more secure.
Development of Human
Capital institutions
• Financial often
support educational initiatives
through funding scholarships or
vocational training programs,
enhancing workforce skills.
Promotion of Consumer
Protection
• Regulatory frameworks
established by the financial
system protect consumers from
unfair practices, ensuring
transparency in financial
products.
Strengthening of Local

• By Economies
providing microloans and
support to small businesses, the
financial system strengthens local
economies and promotes
community development.
THANK YOU
“If cash is KING, then I’d be its SLAVE.”

Group 1
Fortaliza, Angela Jane
Brua, Mary Grace
Tomimbo, Cejay
Vasquez, Armin
Pabuaya, Ryan Marck