Banking and Financial

Institutions

RL
by Richard Lajara
What are Financial Institutions?
Financial institutions are the backbone of modern economies, playing a pivotal
role in the facilitation of economic activities

Intermediaries Financial Services

Financial institutions act as They offer a wide range of financial
intermediaries, facilitating the flow of services, including lending, investment,
funds between savers and borrowers. insurance, and payment processing.
Banks
A bank is a financial institution that plays a vital role in the economy by offering
a wide range of financial services, including accepting deposits, providing loans,
and facilitating various financial transactions. Banks act as intermediaries
between savers and borrowers, helping to allocate capital, manage risk, and
promote economic growth.
Financial Markets, Institutions, and
the Circle of Money
Flow of Funds through the Financial System
The Vital Role of Financial
Institutions in the
Economy
Financial institutions are essential for
economic growth and stability. They act
as intermediaries between savers and
borrowers, facilitating the flow of capital
and fostering investment.

RL
Economic Stability
Resource Allocation
Financial institutions
provide liquidity and They play a crucial
stability to the role in allocating
economy by capital to
managing risk and businesses and
ensuring the projects, ensuring
availability of capital that resources are
for businesses and directed towards
individuals. productive and
profitable
endeavors.
Financial Inclusions
Financial institutions facilitate access to
financial services for individuals and
businesses, promoting economic inclusion
and empowerment.
Facilitating Flow of Funds
Banks and other financial institutions collect deposits from
individuals and businesses and then lend these funds to
others in the form of loans.
This process ensures that money flows smoothly through the
economy, supporting consumption and investment.

Supporting Economic Growth

By providing credit to businesses, financial institutions
enable companies to expand, innovate, and create jobs.
Similarly, access to consumer credit helps households
purchase goods and services, further stimulating economic
demand.
Promoting Savings and
Investments
Financial institutions provide products that encourage
savings (e.g., savings accounts, fixed deposits) and
investment (e.g., mutual funds, stocks). Through these
mechanisms, capital is accumulated and invested into
productive uses, which helps drive growth.

Risk Management and

Diversifications
Institutions like insurance companies and pension funds offer
products that help individuals and businesses mitigate
financial risks. Whether it's protecting a business from
natural disasters or securing one’s health, these products
provide a safety net for unpredictable events.
Market Efficiency and Price Discovery
In financial markets, institutions such as investment banks and asset
management companies help facilitate the efficient allocation of resources.
By trading and investing, they ensure that assets are priced fairly based on
supply and demand.
Types of Financial Institutions
Commercial Banks Investment Banks Insurance Companies
Offer a wide range of financial Focus on capital markets, Provide financial protection
services, including deposits, facilitating mergers and against various risks, such as
loans, and payment processing. acquisitions, underwriting accidents, illness, and property
securities, and providing damage.
financial advice.

Mutual Funds Pension Funds

Pool money from multiple investors to invest in a Manage retirement savings for individuals, providing
diversified portfolio of securities. long-term investment opportunities.
Commercial Banks: The
Backbone of the Financial
System
1 Deposit Taking 2 Loan Provision
Commercial banks accept They provide loans to
deposits from individuals individuals, businesses,
and businesses, providing and governments, fueling
a safe and secure place to economic activity and
store funds. growth.

3 Payment Services
Banks offer a variety of payment services, including
checking accounts, debit cards, and wire transfers,
facilitating transactions.
Investment Banks: Facilitating Capital Markets

Mergers & Acquisitions Underwriting Financial Advice

Investment banks advise companies They underwrite securities, such as Investment banks provide financial
on mergers, acquisitions, and other bonds and stocks, ensuring their advice to corporations and
strategic transactions. successful issuance in the market. governments on a wide range of
issues, including investment
strategies, risk management, and
capital raising.
Insurance Companies:
Providing Financial Protection
1 Risk Assessment
Insurance companies analyze potential risks and assess the
likelihood of claims.

2 Premium Collection
They collect premiums from policyholders to create a pool of
funds to cover potential claims.

3 Claim Settlement
When a policyholder experiences an insured event, the
insurance company investigates and settles claims based on
the policy terms.
Mutual Funds
Pooling of Capital
Mutual funds pool money from multiple investors to
invest in a variety of securities.

Professional Management
Managed by experienced fund managers who make
investment decisions.

Diversification
Mutual funds offer diversification, reducing risk by spreading
investments across different assets.
Pension Funds: Ensuring Retirement Security
Retirement Savings
Pension funds manage retirement savings for individuals, ensuring
1
financial security during retirement.

Investment Management
2 They invest contributions in a diversified portfolio of assets,
aiming for long-term growth.

Payout Distribution
3 Pension funds distribute payouts to retirees, providing
income during their retirement years.
Financial Market
Three Players in the Financial Markets

1 Borrowers – individual, businesses and government

2 Savers – individual, businesses and government

3 Financial Institutions – Commercial Banks

Debt and Equity Market
The most common method is to issue a
debt instrument, such as a bond or a
mortgage.
Bond or mortgage - is a contractual
agreement by the borrower to pay
the holder of the instrument fixed
amount at a regular interval until
maturity period).
Debt and Equity Market
Other method of raising funds is by issuing
equities, such as common stock.
Common Stock - are claims to
share in the net income (income
after expenses and taxes) and the
assets of a business.
Dividends – periodic payment to
stockholder of the company.
Primary market – a market in
which securities are bought and
sold for the first time. The firm Secondary market – a
selling securities receives the market for subsequent trading
money raised. of previously issued securities.
The issuing firm does not
receive any new money.
 Exchange and Over the
Counter (OTC)
Exchange - where buyers and sellers of
securities (or their agents or brokers)
meet
in one central location to conduct trades.

Philippine Stock Exchange and Makati

Stock exchange are examples of
organized exchanges.
 Exchange and Over the
Counter (OTC)

Over The Counter (OTC) is the market

that is operated through a dealer and is
largely disorganized whereas exchange
refers to an organized and established
trade system where stocks are traded
with defined rules and
regulations
Money Market
is a financial market in which
only short-term debt instruments
(generally those with original
maturity of less than one year)
are traded.

Less fluctuation and more widely

traded than long-term
instrument.
Corporations and banks actively
uses money market to earn
interest
Capital Market
is the market in which longer-
term debt (generally with
original maturity of one year or
greater) and equity instruments
are traded.

Stocks and long-term bonds

usually held by the financial
intermediaries
International Bond Market
Foreign bonds are sold in a foreign
country and are denominated in that
country’s currency.

For example, if the German automaker

Porsche sells a bond in the United
States denominated in U.S. dollars, it
is classified as a foreign bond.

Eurobond – is the recent innovation in

international bond market.
Providing Feedback
Satisfaction Check
Teller asks customer for feedback on their experience.

Survey
Customer may be invited to complete a short survey
or feedback form.

Appreciation
Teller thanks customer for their business and wishes
them a good day.
Commercial Banking
and Other Depository
Institutions
Commercial Banks
– Everyone’s Financial Marketplace

Commercial banks are financial

institutions that provide a wide
range of services to both
individuals and businesses,
including accepting deposits,
offering loans, and providing
various other financial services.

They are the most common type

of depository institution.
Key Features
Deposit Services: Commercial banks
accept deposits from customers, offering
different types of accounts such as
checking accounts, savings accounts, and
certificates of deposit (CDs). These
deposits are a key source of funding for
the bank.

Lending Services: Banks provide loans

to businesses, individuals, and
governments. They offer various types of
loans, including personal loans, business
loans, mortgage loans, and auto loans.
The interest rates charged on loans
represent a significant source of revenue
Key Features
Payment Services: Commercial banks
offer payment services such as wire
transfers, electronic funds transfers (EFT),
mobile banking, and payment processing
(e.g., debit and credit card services).

Wealth Management: Many commercial

banks offer investment products, financial
advisory services, and wealth
management to individuals and
businesses.
Investments
Bank
Investment banks specialize in
services related to the capital
markets, primarily assisting
businesses and governments with
raising capital, providing advisory
services, and facilitating mergers
and acquisitions (M&A).

Unlike commercial banks,

investment banks do not accept
deposits or provide loans to the
general public.
Key Functions
Capital Raising: Assist companies and governments
in raising funds through the issuance of stocks, bonds,
and other securities.
Mergers and Acquisitions: Advise and facilitate
mergers, acquisitions, corporate restructuring, and
other strategic financial transactions.
Trading and Market Making: Engage in buying and
selling securities, commodities, and derivatives for
themselves or on behalf of clients.
Asset Management: Provide investment
management services, including managing mutual
funds, hedge funds, and other portfolios.
Central Bank
Central banks are government
institutions that oversee and
regulate the banking system
within a country.

They play a crucial role in

managing monetary policy,
ensuring financial stability, and
serving as the lender of last
resort to commercial banks.
Key Functions
Monetary Policy: Control the money supply and
interest rates to manage inflation, unemployment,
and economic growth.
Currency Issuance: Issue the nation’s currency
and manage the country’s money supply.
Banker to the Government: Act as the
government’s bank, managing national debt and
foreign currency reserves.
Lender of Last Resort: Provide emergency loans
to commercial banks facing liquidity crises to
prevent financial instability.
Supervision and Regulation: Regulate and
supervise commercial banks and other financial
institutions to ensure systemic stability.
Key Functions
Monetary Policy: Control the money supply and
interest rates to manage inflation, unemployment,
and economic growth.
Currency Issuance: Issue the nation’s currency
and manage the country’s money supply.
Banker to the Government: Act as the
government’s bank, managing national debt and
foreign currency reserves.
Lender of Last Resort: Provide emergency loans
to commercial banks facing liquidity crises to
prevent financial instability.
Supervision and Regulation: Regulate and
supervise commercial banks and other financial
institutions to ensure systemic stability.
Savings Savings and loan associations (S&Ls), also known as
thrifts, are financial institutions that specialize in
and Loans accepting savings deposits and making mortgage loans.

Association S&Ls are designed to promote home ownership by

s offering more favorable terms on home loans.
 Savings Focus: Primarily offer savings accounts and
other deposit products.

Key Mortgage Lending: Focus on providing home loans,

including mortgages for first-time homebuyers and home
Functions equity loans.

Community-Based: Often serve local or regional areas,

focusing on providing affordable housing financing.
 Cooperative
Bank
Cooperative banks are financial
institutions that are owned and
operated by their members, who are
usually individuals with common
interests (e.g., farmers, local
communities, or workers in a
particular industry).
These banks aim to
provide financial services
to their members at
favorable terms and
operate on a non-profit
basis.
Key Features
Member-Owned: Cooperative banks
are owned by the depositors, who have
voting rights in the bank’s decision-
making process.

Community-Oriented: Cooperative
banks tend to serve specific
communities or professional groups,
focusing on providing affordable financial
services to members.

Lower Fees and Interest Rates:

Cooperative banks often offer better
interest rates and lower fees on savings
accounts, loans, and other financial
services.
Development
Bank
Development banks are
financial institutions that
provide funding for long-
term projects, particularly in
sectors critical for national
development, such as
infrastructure, agriculture,
and industrial development.
Their goal is to promote
economic growth and
development in emerging
and developing economies.
Key
Features
Long-Term Financing: Provide
long-term loans for large-scale
development projects like
infrastructure, housing, and
industrialization.

Targeted Lending: Often focus on

sectors such as agriculture, small
and medium-sized enterprises
(SMEs), and social development
projects.

Government-Backed:
Development banks are often
supported by the government to
promote national economic goals.
Retail Bank
•Retail banks are financial
institutions that provide services to
individuals and small businesses.

•They typically offer a wide range of

products, including checking and
savings accounts, personal loans,
and credit cards, and serve the
general population.
Key Features
Consumer-Oriented: Focus on
providing everyday banking services
to consumers, such as savings
accounts, checking accounts, and
personal loans.

Personal Loans and Mortgages:

Provide personal loans, mortgages,
and auto loans to individual
consumers.

Branch Network: Retail banks often

have physical branches, although
many have adopted digital banking
services.
Private Bank
Private banks provide specialized
banking services to high-net-worth
individuals (HNWIs) and wealthy
families.

These services typically include

wealth management, tax planning,
estate planning, and investment
advisory services.
Key Features
Wealth Management: Private banks offer
personalized services such as investment
management, financial planning, and
estate planning.

Exclusive Services: Typically provide

access to exclusive investment products,
concierge services, and bespoke financial
advice.

High-Entry Barriers: Private banking

services are generally available only to
individuals with substantial financial
assets.
Online Bank
– Internet
Only
Online banks, also known
as internet-only banks,
operate exclusively online
and do not have physical
branches.

They offer traditional

banking services but rely
on digital platforms for
customer service, account
management, and
transactions.
Key Features
No Physical Branches: Conduct all
banking operations online, including
customer service, account access, and
transactions.

Lower Fees and Higher Interest:

Because online banks have lower
overhead costs, they often offer better
interest rates on savings accounts and
lower fees for services like ATM
withdrawals.

Convenience: Offer the convenience of

managing accounts from anywhere,
with mobile apps and online banking
platforms.
Islamic Bank
Islamic banks operate in compliance
with Islamic law (Sharia), which
prohibits interest (usury) and
promotes profit-sharing
arrangements.

They offer banking services based on

ethical and interest-free principles.
Key Features
Sharia Compliance: Islamic banks
adhere to Sharia principles, which
prohibit the charging of interest and
require profit-sharing mechanisms.

Profit and Loss Sharing: Instead of

earning interest, Islamic banks use
profit-sharing contracts, such as
Mudarabah and Musharakah, to earn
returns on investments.

Ethical Investment: Islamic banks

avoid investing in industries that are
considered harmful to society, such as
alcohol, gambling, and tobacco.