CHAPTER 5

The Payments System and Financial

Intermediation

The Payments System and

Financial Intermediation

Payments System
Defined

According to O' Bannon, et al., (1972)

payments system is:
"Set of institutional arrangements through
which purchasing power is transferred from
one participant in an exchange to another,
that is, from the buyer to the seller."
"Set of institutional arrangements for the
transfer of money from person to person,
frequently among people who are widely
separated geographically, often in different
countries using different money."

Composition of the Money

Supply

The Money Supply

The money supply measures the amount of monetary assets available

in an economy. This is an important metric in macroeconomics, because it
can dictate inflation and interest rates.
The composition of our money supply is classified in two categories:
1. CURRENCY - is a generally accepted form of money, including coins and
paper notes, which is issued by a government and circulated within an
economy.
2. DEMAND DEPOSITS is consists of funds held in an account from
which deposited funds can be withdrawn at any time from the depository
institution, such as a checking or savings account, accessible by a teller,
ATM or online banking.
(Deposit money, withdrawal checks)

Payments under Philippine Laws

Article 1249 of the Civil Code of the Philippines
"The payment of debts in money shall be made in the currency
stipulated, and if it not possible to deliver such currency, then
in the currency which is legal tender in the Philippines
"The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when
through the faults of the creditor they have been impaired
"In the meantime , the action derived from the original
obligation shall be held in abeyance"

Section 63 of The Central Bank Act

"Checks representing deposit money do not have
legal tender power and their acceptance in the
payment of debts, both public and private, is at
the option of the creditor. Provided, however, that
a check which has been cleared and credited to
the account of the creditor shall be equivalent to
a delivery to the creditor of cash in an amount
equal to the amount credited to his account
Payment through check is only payment when
the same is actually cashed or the check has
been cleared and credited to the account of the
creditor.

Clearing of Checks
The clearing of checks is a Central Bank responsibility.
According to the provision of:
Section 107 of the Central Bank
"The Central Bank shall establish nationwide facilities to provide
interbank clearing at no cost to the bank."
"The deposits reserves maintained by the banks in the Central
Bank, in accordance with the provisions of Section 100, shall
serve as basis for the clearing of checks and the settlement of
interbank balances, subject to such rules and regulations as the
Monetary Board may issue with respect to such operations."

Objectives of Clearing House

The purpose of Philippine Clearing House Corporation (PCHC) is made
reference of the provision of:
Section 107 of the Central Bank Act
"To provide, maintain and render an effective, convenient, efficient,
economical and relevant exchange and facilitate service limited to the
check processing and sorting by way of assisting member banks/entities
in clearing checks and other clearing items as defined in existing and in
future Central Bank of the Philippines circulars, memoranda, circular
letters, rules and regulations and policies in pursuance to the provisions
of Section 107 of R.A. no. 265, otherwise known as the Central Bank Act,
as amended; to carry in every branch of or related business usually
transacted in connection therewith; to do each and everything
necessary, suitable, useful or advisable for the accomplishment of said
purpose, or which shall, at any time, appear to be conducive to or
expedient for the benefit of said corporation in connection therewith;
and to do any lawful act which is necessary or proper to accomplish the
purpose of the corporation"

Clearing Procedures
The clearing of checks within banks in Metro
Manila is done by the Philippine Clearing
House Corporation.
Payments of checks are done through
the offsetting process. These are recorded
in the clearing office statement of each
bank which indicates the debit/credit
balance due. Clearing of checks is held
every day at 4:00 P.M.