Saturday, June 17, 2017
Culture Nurture: The Philippine Financial System: Its Role in the Growth of the Nation By: James U. Sy Jr.
The financial system is a network of various institutions which generate, circulate, and control money and credit. It provides intermediation between the suppliers and users of credit. Its elements include financial claims, financial institutions, financial markets, government agencies (the Bangko Sentral ng Pilipinas in particular), and laws and policies. Let’s zoom in on the financial institutions, which are private or government organizations whose assets consist primarily of claims or income primarily derived from dealings in and/or performing services in connection with claims. They act as intermediaries/middlemen between borrowers and lenders. A financial institution can either be a Banking Institution, like BDO and Metro Bank, or a Non-Bank Financial Institution (NBFI), like a financing firm. The general function of financial institutions is to facilitate the transfer of funds from the savers to the users while the specific functions are investigation and credit analysis, matching the supply and demand for funds, provisions for liquidity, and provides payment system. In layman’s terms, there are people who have lots of money, more than they can use for business or prudently spend while there are those in dire need of funds, such as new start up entrepreneurs or the working class who wants to buy real estate to call home. If the latter goes to the former to borrow money, it’s more likely that individuals with money will not extend credit, especially when they are not related to and/or don’t know the borrower, and/or when no collateral is offered to secure the loan. It has to be noted that wealth is unevenly distributed around the world, especially in third world countries. Almost half of the wealth of the world is owned by just 1% of the population, according to “Working for the Few,” a report by Oxfam International involving 1,166 adult respondents in the UK on October 1-14, 2013. The report also revealed that the wealth of the 1% richest people in the world amounts to $110 trillion (£60.88 trillion), or 65 times the total wealth of the bottom half of the world’s population, and the wealth of the poorest 3.5 billion (bottom half) of the world’s population is the same as the richest 85 people in the world, a combined wealth of £1 trillion. This is where banks and financing firms come in. They act as a “bridge” to those who have money (the suppliers of money) and those who need the funds (the users of money). Since these financial institutions are duly registered by the government and have legal personalities, the suppliers of money feel safer to invest their money as deposits, investments or equities. In return, they get interest or income/dividends for their money. On the other hand, the financial institutions lend the funds to the users of money at an interest. The interest gives the banks and financing firms a margin for operating expenses/overhead and profit. The loan/credit/mortgage is normally secured by a chattel (vehicle) or real estate, though there are also unsecured loans such as salary loans for employees. Thus, financial institutions facilitate the flow of money into the economy, priming it for growth, and stimulate entrepreneurship as well as the general improvement of the quality of life of the citizentry. The more entrepreneurs who enter the market, the more dynamic the economy is. The more entrepreneurs grow and increase in numbers, the more people are employed and the more taxes the government collects. The more people are employed the more the demand for products, encouraging entrepreneurship, innovation, and the manufacture of goods and the rendering of services. 2011 Department of Trade and Industry (DTI) data showed that 99.6% (816,759 out of 820,255) business enterprises in the Philippines consist of Micro, Small, and Medium Enterprises (MSMEs), those with P3 million, P3- 15 million, and P15-100 million capitalizations respectively. MSMEs generated 3,872,406 jobs in 2011, or 61% of that year. This is but an introductory look at the Philippine Financial System. There will be follow up articles for this topic.