F INANCIAL S ECTOR 02/10/2010

I NTRODUCTION

R OLES OF THE F INANCIAL S ECTOR Provides financial services to citizens Included in the circulation and flow of capitals Gathers domestic savings and investments of the country Converts savings to investments Prevents disequilibrium and unemployment Key factor in the economy Increase in financial instruments= increase in access to financial market

F INANCIAL I NSTITUTIONS Banking Institutions Accept deposits from household Accumulate the savings of depositors Examples: Mortgage banks Commercial banks Household banks Government banks

B ANKS OF THE W ORLD

Non-banking Institutions Provide long-term financial assistance Have big amounts of resources from saving Help maintain equilibrium through cycle Cycle: determine credits of depositor that will be lent Examples: Insurance firms Investment firms Financial companies

I N THE P HILIPPINE C ONTEXT Shallower / weaker financial sector compared to other Asian countries (3 rd lowest) Poor ratio of GNP to GDP over the decade Showed flexibility during the recession Country greatly affected by China and the US

S TRENGTHS

Limited direct exposure to distressed financial institutions Less financial institutions, banks and insurance companies went bankrupt Managed to avoid a liquidity squeeze A lot of cash, good availability of peso credit Lots of available money to the bank

Institutional Reforms Drives indicators to improve, including rising capital adequacy ratio More stable non-performing loans (NPL) ratios Higher level of resource

Operational and Financial Restructuring Keeping expenses in check Shifting to more cost-efficient methods Business process outsourcing Other operational improvements Risk management has been elevated

W EAKNESSESS

Low loan to deposit ratios Less people loan money from the bank The money becomes stagnant Low savings to GDP ratio Caused by the underdevelopment of the financial sector Low domestic market capitalization Less people take out their money from banks to invest in the country

Bank-dominated Corporate sector is dependent on bank loans to finance growth Over-reliance of the corporate sector on banks Reflects weak governance and the lack of alternative financing sources

R ECOMMENDATIONS

Improvements to ensure equilibrium and less financial losses Reforms have to be made Lessen political problems to gain confidence of investors Become less dependent on banking institutions Non-banking institutions need to be improved for better foundation to firms Preparation for recessions Strengthening investor protection

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