NATIONAL COLLEGE OF BUSINESS AND ARTS

Cor. Regalado St. Commonwealth Ave., Fairview, Quezon City

Business Administration Department
BASIC FINANCE

-1-

03
LECTURE
N O T E
Prepared by: Rey G. Parcon, MBA
FINANCIAL MARKETS PART THREE
Financial Institutions
These are the firms that provide access to the financial markets, both to savers who wish to
purchase financial instruments directly and to borrowers who want to issue them. Because financial
institutions sit between savers and borrowers, they are also known as financial intermediaries, and
what they do is known as intermediation.
The Role of Financial Institutions
1. Financial institutions reduce costs.
Transactions costs are reduced by specializing in the issuance of standardized
securities. Financial institutions reduce the information costs of screening and
monitoring borrowers to make sure they are creditworthy and they use the proceeds
of a loan or security issue properly.
2. Financial institutions give savers ready access to their funds.
They issue short-term liabilities to lenders while making long-term loans to borrowers.
By making loans to many different borrowers at once, financial institutions can
provide savers with financial instruments that are both liquid and less risky than
securities they would purchase directly in financial markets.
The Structure of the Financial Industry
Financial intermediaries can be divided into two (2) broad categories:
1. Depository institutions take deposits and make loans.
a. Universal and commercial banks. They offer the widest variety of banking services
among financial institutions. In addition to the function of an ordinary
commercial bank, universal banks are also authorized to engage in underwriting
and other functions of investment houses, and to invest in equities of non-allied
undertakings. Commercial banks are the traditional department stores of
finance, serve a wide variety of savers and borrowers. Historically, commercial
banks were the major institutions that handled checking accounts.
b. Thrift Banking System is composed of savings and mortgage banks, private
development banks, stock savings and loan associations and microfinance thrift
banks. Thrift banks are engaged in accumulating savings of depositors and
investing them. They also provide short-term working capital and medium- and
long-term financing to businesses engaged in agriculture, services, industry and
housing, and diversified financial and allied services, and to their chosen markets
and constituencies, especially small- and medium- enterprises and individuals.
c. Rural and cooperative banks are the more popular type of banks in the rural
communities. Their role is to promote and expand the rural economy in an

NATIONAL COLLEGE OF BUSINESS AND ARTS
Cor. Regalado St. Commonwealth Ave., Fairview, Quezon City

Business Administration Department
BASIC FINANCE

-2-

03
LECTURE
N O T E
Prepared by: Rey G. Parcon, MBA
orderly and effective manner by providing the people in the rural communities
with basic financial services. Rural and cooperative banks help farmers through
the stages of production, from buying seedlings to marketing of their produce.
Rural banks and cooperative banks are differentiated from each other by
ownership. While rural banks are privately owned and managed, cooperative
banks are organized/owned by cooperatives or federation of cooperatives.
d. Credit Unions. These are cooperative associations whose members are supposed
to have a common bond, such as being employees of the same firm. Members
savings are loaned only to other members, generally for auto purchases, home
improvement loans, and home mortgages. Credit unions are often the cheapest
source of funds available to individual borrowers.
2. Nondepository institutions screen and monitor borrowers, transfer and reduce risk, and
act as brokers.
a. Insurance companies. Accepts premiums, which they invest in securities and real
estate (their assets) in return for promising compensation to policyholders should
certain events occur (their liabilities).
b. Securities firms include brokers, investment banks, underwriters, and mutual-fund
companies. Brokers and investment banks issue stocks and bonds to corporate
customers, trade them, and advise customers. Mutual fund companies pool the
resources of individuals and companies and invest them in portfolios, so they face
the risk that the assets will change in value.
c. Finance companies raise funds directly in the financial markets in order to make
loans to individuals and firms. Finance companies tend to specialize in particular
types of loans such as mortgage, automobile, or certain types of business
equipments.
d. Pension funds invest individual and company contributions in stocks, bonds, and
real estate in order to provide payments to retired workers.
REFERENCES

Bibliography

Brigham, E and Houston, J. Fundamentals of Financial Management 10E
Cecchetti, S. (2010). Money, Banking, and Financial Markets 2E, Philippines:McGraw-Hill
Medina, G. (2007). Business Finance, Manila City: Rex Book Store
Mejorada, N. (1999). Business Finance, Makati City: Goodwill Bookstore
Saldaa, C. (1985). Financial Management in the Philippine Setting: Text and Cases, Quezon City:
AFA Publications