Role of the Financial

System to Achieve
Economic Growth

Presented by
Loreno, Jobelyn S.
Manuel, Mary Klaire A.
Mojica, Pears Shandy S.
Moya, Anghelica Eunice P.
Pabito, Denise G.
BSA12KA1
Illustration of the Philippine Financial System
 Role of the Financial System and Economic Growth

Every country aims to reach the economic growth that they want to pursue. This desired
development is not a controlled situation, but it has different ways that could help in order for it to
be achieved – depending on what the nation is capable of or how it plans and decides for it. One
of the considered factors is the financial system of a certain country, which supports the economic
cycle of money, as well as the circulation of goods and services in exchange for the mentioned
medium. Many people all over the world depend on financial institutions on a regular basis through
depositing money and exchange of currencies. There are a lot of questions on how it actually
works; how it is connected to economic development; and how it affects the economy as a whole.
Everything will be discussed as you read further until the end.

Many countries have been experiencing financial problems related to the allocation of
capital of their country. This may result to lack of finances of different sectors and projects of the
government. Therefore, it may affect the whole country. Financial systems, according to World
Bank Small Grants Program, help an organization track and manage finances to successfully
complete one’s work. In addition, it also provides a payment system for exchange of goods and
services, provides financial information that will help the economy have decentralized decision
making in its different sectors. The financial system of a country is an important tool for economic
development. According to Professor Robinson, the primary function of a financial system is "to
provide a link between savings and investment for the accretion of wealth and to permit portfolio
adjustment in the composition of existing wealth". It also facilitates the flow of funds from the
households (savers) to business firms (investors) to aid in wealth creation and development of both
parties. Not only that, the financial systems of a country is concerned with the allocation of savings,
provision of funds, facilitation of the financial transactions, development of the financial markets,
provision of legal financial framework and provision of financial and advisory services in the
country. A financial system comprises of financial institutions, financial services, financial
markets and financial instruments which is illustrated on the previous page. These financial
institutions aid and increase the national output of the country by providing the funds to the
corporate customs to expand their respective business. It also protects the interest of the investors
and ensures the smooth financial transition through regulatory bodies. An example of these are
World Bank and International Monetary Fund – international banks that lend money to those
countries in need, especially to those which is in lack of money in the economic cycle (Claudio &
Abinales, 2018). It really does happen for the reason that households choose to save money instead
of using it for consumption – preventing the medium to circulate in the economy. However, saving
money in banks can somehow be a benefit to the economy for it is lent most to those who are
planning to invest and construct business in the society. According to Brigham, E. F. and Houston,
J. F. (2020), history shows that a strong financial system is a necessary ingredient for a growing
and prospering economy. Firms raising capital to finance capital expenditures as well as investors
saving to accumulate funds for future use require well-functioning financial markets and
institutions. Better economic output and welfare of the economy shows that it is better to have
larger flow of funds and efficient allocation to achieve a healthy economy and society. A healthy
economy can be described as dependent on efficient transfers of resources from people who are
net savers (surplus) to firms and individuals who need capital. Without efficient transfers, the
economy simply could not function.

Discussing more about the previous statements, the financial system also helps the
economic development raise the standard of living of people. It helps to promote the growth of
weaker sections of the society through rural development banks and co-operative societies. The
financial institutions help the customers make better financial decisions by providing effective
financial support, as well as advisory services. It aids in increasing financial assets as a percentage
of GDP and increasing the number of participants in the financial system.

Philippines, given its financial system, has been consistently growing for the last seventy-
three years. Bangko Sentral ng Pilipinas (BSP) reported that the financial system of the Philippines
had its positive performance in 2019 which is evident in the growth of assets, loans, deposits, and
capital. Different banking groups reported growth in major economic sectors as they financed it
while various thrift banks and other cooperative bank industries assist the retail lending segment
of the economy. Its economy became the world's 36th largest economy by nominal GDP according
to the 2019 estimate of the International Monetary Fund's statistics. Also, the 13th largest economy
in Asia, and the 3rd largest economy in the ASEAN after Indonesia and Thailand. In addition to
this, some highlights of Philippine Financial System during 2018 are also mentioned by BSP;
“Capital, mainly comprised of common equity and retained earnings, remained well above
domestic and global benchmarks; credit quality was satisfactory notwithstanding double-digit
loan growth; profits generated primarily from core income were at record high; and the banks’
high quality liquid assets were sufficient to absorb shocks while adequately providing the financing
needs of the growing economy”. Philippine’s Financial System had its positive performance
evident to the activities mention above. BSP stated that the strong fundamentals of the financial
system provided a solid foundation for its sustained positive performance in 2018. These activities
together with BSP’s help with the implementation of financial sector reforms and support from
industry participants will benefit the financial system be stable and be consistent in its growth.

Financial markets as well as financial institutions play major role in an economy’s growth.
They are profit maximizing firms that earn revenues by acquiring funds at interest rates lower than
they earn on their assets. Thus, it contributes to the health and efficiency of an economy. It can be
said that, a financial system serves as a platform to the lenders and borrowers to interact with each
other for their mutual benefits. It helps economic growth by accumulation of capital and production
of goods and services. As of 2019, economic growth slowed to its lowest level in eight years amid
challenging external environment and a significant slowdown in investment growth. However,
even if Philippine Financial System may not be the fastest and biggest of contenders, it still has
built on its endurance throughout the years through long distance races reforms and achieved
steady pace of growth. The recent global financial crisis showed that even the ablest of contenders
can be dropped out in the race if not supported with fundamental reforms. Hence, those who want
to reach the finish line have to train hard to learn from past mistakes and weaknesses, to overcome
the demands of the track and to develop a warrior mind set.
References:

Babu,S. (2018) Role of Financial System in Economic Development of a Country. International

Journal of Interdisciplinary Development, 100-107.

Bangko Sentral ng Pilipinas (2019). BSP Report on the Philippine Financial System Highlights
Sound and Stable Banking System. Retrieved from
http://www.bsp.gov.ph/publications/media.asp?id=

Brigham, E. F., & Gapenski, L. C. (1994). Financial management: theory and practice. Fort
Worth: Dryden Pr.

Brigham, E. F., & Houston, J. F. (2020). Fundamentals of financial management. Boston, MA,
USA: Cengage Learning.

BSP Report on the Philippine Financial System Highlights Sound and Stable Banking System.
(2019). Retrieved from http://www.bsp.gov.ph/publications/media.asp?id=5015&yr=2019.

Dimayacyac, T. (2019). Philippine Financial System. Retrieved from

https://www.academia.edu/36001558/Philippine_Financial_System.

Dr. G Suresh Babu (2018) Role of financial system in economic development of a country.
Retrieved from http://www.allsubjectjournal.com/download/3968/5-8-50-204.pdf

International Monetary Fund. “Issues Brief-Globalization: A Brief Overview.” May 2008. Last
accessed March 9, 2017. http://www.imf.org/external/np/exr/ib/2008/053008.htm

Philippine financial system sustains strong performance in H1 — BSP. (2018). Retrieved from
https://www.philstar.com/business/2018/10/26/1863398/philippine-financial-system-sustains-
strong-performance-h1-bsp

The World Bank (2019). Philippines Economic Update October 2019. Retrieved from
https://www.worldbank.org/en/country/philippines/publication/philippines-economic-update-
october-2019-edition

World Bank. “International Tourism, Receipts (current US$): The Philippines.” Retrieved from
http://data.worldbank.org/indicator/ST.INT.RCPT.CD?locations=PH.