Description
Unit I: Introduction to Financial Systems and Financial Market By: Joycelyn P. Ituriaga, MBA
Teaching Learning Objectives
At the end of the unit, student is expected to: • describe the elements of financial systems, particularly the financial market, • describe the importance of financial market in maximizing firms profit and wealth, and • differentiate the different types of financial markets.
Topic Outline Unit I: Introduction to Financial Systems and Financial Market 1. Nature and Importance of Financial System 2. Elements of Financial System 3. Nature and Importance of Financial Market 4. Money Market vs. Capital Market 5. Primary Market vs. Secondary Market
• A 'financial system' is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national and global levels. They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors. Wikipedia
The flow of funds from lender to borrower
Nature and Importance of Financial Systems
Spend more than they earn
Spend less than they earn
Allocate or match the supply of savings in the economy
To the users of those savings in safe and efficient manner
Transfer Funds
Mobilizes Saving
Nature of Financial System
Risk Allocation
Facilities Investment
Enhances Liquidity
Role of Financial System Facilitates Payment Mechanism Reduces Risk Brings Savers and Investors Together Assist in Capital Formation Improves Standard of Living Facilitates Economic Development
Elements of Financial System 1. Financial Institutions – These are organizations that offer financial services for members and clients. – It is also termed as financial intermediaries because they act as middlemen between the savers and borrowers. – Includes Banks and NonBank Institutions.
Elements of Financial System
2. Financial Market – The system that allows people to buy and sell goods and services to each other. – Financial markets are markets in which securities, commodities, and fungible items are traded at prices representing supply and demand. – The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.
Elements of Financial System
3.
Financial Instruments – These are assets belonging to a person or company. – This can include cash, bonds, or other assets; such as property or items of value. – Financial instruments are tradabl e financial assets of any kind. – They include money, evidence of ownership interest in an entity, and contracts.
Elements of Financial System
4.
Financial Services – These are offered by financial institutions. – These include such things as banking, insurance policies, loans and mortgages, as well as pensions. – Financial services are offered by a large number of businesses that encompass the finance industry. – These include credit unions, banks, credit card companies, insurance companies, st ock brokerages, and investment funds.
Elements of Financial System
5. Financial Practice – A sort of guideline around how the financial institutions should operate their services.
Elements of Financial System
6. Financial Transactions – These are the actual exchange of assets for goods or services – paying for a new car, or loan, for instance.
Elements of Financial System
Components of Philippine Financial System • The Philippine Financial System consists of: 1. Banks and, 2. Non-bank Financial Intermediaries.
What are the Roles of Financial Institutions?
“Banks that can produce these services at lower cost can pass some of these savings onto businesses and households while using less of the economy’s valuable resources.”
The Philippine Financial System consists of: 1. Term Transformation 2. Economies of Scale and Diversification in the use of funds 3. Technical Expertise
Types of Financial Institutions
The major types of Financial Institutions in the Philippines are: 1. Commercial Banks 2. Rural Banks 3. Thrift Banks 4. Specialized Government Financial Institutions 5. Offshore Banks 6. Insurance Companies 7. Non-Bank Financial Institutions
Key services provided by Financial System
Key services provided by Financial System 1. Asymmetric information and information cost 2. Adverse Selection. How to reduce adverse selection? a. Screening b. Monitoring 3. Moral Hazard
What are Financial Markets? refer broadly to any marketplace where the trading of securities occurs.
How does the economy benefit from Financial Markets? • Increased Production • Increased Welfare
The Philippine Financial Market 1.
Money Market – A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. – The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
Types of Money Market Instruments Negotiable Certificates of Deposit.
Short-Term and Long-Term Commercial Papers. Banker’s Acceptances.
Treasury Bills, Notes and Bonds Repos and Reverse Repo
Participants in the Philippine Money Market
BSP Foreign Investors Commercial Banks Corporates and Brokers Institutional Investors
The Philippine Financial Market 2. Capital Market – Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term. – In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year.
3. Securities Market
The Philippine Financial Market
– A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with government body or a corporation (bond) – Securities are typically divided into debt securities and equities – Discussed in terms of Primary and Secondary Markets
The Philippine Financial Market
1. Primary Market - firms issue new securities to raise money and are bought and sold for the first time. 2. Secondary Market trading previously issued securities.
Primary Market vs. Secondary Market PRIMARY
SECONDARY
New Issue of Securities
Exchange of Funds for Financial Claim Funds for Borrower; an IOU for Lender
• Trading previously Issued Securities • Now New Funds for Issuer • Provides Liquidity for Seller
The Philippine Financial Market
Process of Raising Money Through Securities Market • Firm sells securities to investors • Firm invest funds it raises in its business • Firm distributes cash earned from its investors • Securities trading in the secondary market
The Philippine Financial Market • Direct Transfer of Funds • SOF – PP – DOF • SOF – FM – DOF
• Indirect Transfer of Funds • SOF – FI - DOF
• Special Transfer of Funds • SOF – FI – FM – DOF
References: • https://www.slideshare.net/sonu689/financial-system-ppt • https://www.slideshare.net/ImranHussain183/1-introduction-to-financial-systemppt • https://www.suomenpankki.fi/en/financial-stability/the-financial-system-inbrief/#:~:text=Funds%20flow%20from%20lenders%20to%20borrowers%20via%20two,claim s%20on%20the%20borrower%E2%80%99s%20future%20income%20or%20assets. • https://commercemates.com/nature-and-role-of-financialsystem/#:~:text=%20Nature%20of%20Financial%20System%20%201%20Transfer,is%20im portant%20feature%20of%20financial%20system.%20More%20 • https://en.wikipedia.org/wiki/Financial_system
End of Unit I Thank you. QUIZ CODE: AE 113 COA 1A
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