Lesson 3 - Lending Industry
Lesson 3 - Lending Industry
Lesson 3 - Lending Industry
I. Description
This module introduces the non-banking financial institutions called the lending companies, and
its characteristics. Learners will be introduced to the RA 9474 or otherwise known as Lending
Company Regulation Act which was signed in May 22, 2007.
The Bangko Sentral ng Pilipinas (BSP) is the monitory and regulatory body of all the financial
institutions inside the Philippines.
1. Universal and commercial banks: Resource wise, these represent the largest group of
financial institutions. These banks offer a range of financial services. The universal banks differ
from commercial banks in ways that they have the authority to engage in underwriting and other
functions of investment houses and to invest in equities of non-allied undertakings in addition to
the functions of an ordinary bank.
2. Rural and cooperative banks: These banks are well known and popular among rural
communities in the Philippines. These banks play an active role in developing the rural economy
by providing basic financial services to the rural communities. These services can range from
helping farmers through the different stages of production to buying vehicles. The difference
between the rural banks and Cooperatives is the way they are owned. Rural banks are owned
and managed privately while cooperative banks are organized/owned by cooperatives or
federation of cooperatives.
3. Thrift banking system: The system is composed of savings and mortgage banks, private
development banks, stock savings and loan associations and microfinance thrift banks. These
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.
4. The market also consists of some non-banks with quasi-banking functions. This group
consists of institutions engaged in the borrowing of funds from 20 or more lenders for the
borrower's own account through issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of re-lending or purchasing receivables and other
obligations.
Lending Companies - A corporation engaged in granting loans from its own capital funds or from funds
sourced from not more than nineteen (19) persons.
(Section 3, Republic Act No. 9474 or the Lending Company Regulation Act)
It shall only be established as a stock corporation with the words “Lending Company”, “Lending
Investor” or any other word descriptive of its primary activity of granting loans to the public,
except words commonly used to identify financing companies, included in its corporate and trade
name.
No lending company shall conduct business unless granted an authority to operate by the
Securities and Exchange Commission (“SEC”).
(Sec. 4, R.A. No. 9474 and Rule 3 of its Implementing Rules and Regulations [“IRR”])
A lending company may grant loans in such amounts and reasonable interest rates and charges
as may be agreed upon between the lending company and the debtor:
Provided, That the agreement shall be in compliance with the provisions of R.A.
No. 3765 (Truth in Lending Act) and R.A. No. 7394 (Consumer Act of the
Philippines);
Provided, further, That the Monetary Board, in consultation with the SEC and the industry, may
prescribe such interest rate as may be warranted by prevailing economic and social conditions.
Financing Companies - Corporations primarily organized for the purpose of extending credit
facilities to consumers and to industrial, commercial, or agricultural enterprises,
1. by direct lending or by discounting or by factoring commercial papers or accounts
receivable, or
2. by buying and selling contracts, leases, chattel mortgages, or other evidences of
indebtedness, or
3. by financial leasing of movables as well as immovable property.
It does not include banks, investment houses, savings and loan associations, insurance
companies, cooperatives, and other financial institutions organized or operating under other
special laws.
(Sec. 3(a), R.A. No. 8556 or the Financing Company Act, as amended)
It shall be organized in the form of a stock corporations, subject to the following requirements:
a) At least forty percent (40%) of the voting stock of the corporation shall be owned by
citizens of the Philippines;
c) The corporate name of financing companies shall contain the term “financing company”,
“finance company”, “finance and investment company” or any other title or word(s)
descriptive of its operations and activities as a financing company.
• Engage in quasi-banking and money market operations with the prior approval of the
Bangko Sentral ng Pilipinas (“BSP”);
• Engage in trust operations subject to the provisions of the General Banking Act upon prior
approval by the BSP;
• Issue bonds and other capital instruments subject to pertinent laws, rules and regulations;
• Rediscount their paper with government financial institutions subject to relevant laws,
rules and regulations;
Such rights and powers may be included in the financing company’s Articles of Incorporation after
submission of the appropriate license/authority issued by the government agency involved.
I. Title - Implementing Rules and Regulations of Republic Act No. 9474, otherwise known
as the “Lending Company Regulation Act of 2007”
The words “Lending Company” or “Lending Investor” or any other word descriptive
of its primary activity of 5 granting loans to the public except words commonly
used to identify financing companies shall always be included in the corporate and
trade name.
b. Requirements for Securing an Authority – A lending company shall file with SEC four (4)
copies of a duly accomplished application form to operate as a lending company, signed
under oath by the President, together with the following documents in the prescribed
form:
i. Information Sheet;
iv. President’s Sworn Statement and Undertaking that the corporation will not
accept or solicit investments, other 6 than loans, from more than 19
persons without SEC approval, and upon presentation of valid claims, it
shall immediately indemnify or return the investments of persons from said
unauthorized public solicitation of funds; Moreover, the sworn statement
shall likewise contain an undertaking that the country or state of the
foreign applicant allows Filipino citizens and corporations to do lending
business therein.
vi. Business plan including method of marketing its product and sources of
the funds and maturities of credit; and
vii. Statement of its compliance with Rule 17.1(2)(A)(i) and (ii) of the
Amended Implementing Rules and Regulations of the Securities Regulation
Code.
c. Branches, Extension or Satellites Offices or Units.
d. Licensing Fees
Initial Fees: shall be paid to SEC at the time of filing of application
Head Office A fee of 1/10 of 1% of the paid-up capital of the lending
company shall be paid for the issuance of a Certificate of
Authority to Operate as a Lending Company.
e. Commencement of Operations
A corporation/company that has been duly registered and granted a Certificate of
Authority to Operate as a Lending Company shall commence operations within one
hundred twenty (120) days from date of grant of such authority. Failure to
commence operations within said period shall be a ground for the suspension of
its CA.
f. Lending Companies shall use at least 51% of their funds for direct lending
purposes.
g. The total investment of a lending company in real estate and in shares of stock in
a real estate development corporation and other real estate based projects shall
not at any time exceed twenty-five (25%) percent of its networth.
IV. Capital
A Lending Company shall have a minimum paid-up capital of One Million Pesos
(PhP1,000,000.00), unless the SEC prescribes a higher minimum capitalization, if
warranted by the circumstances.
V. Citizenship Requirements
A majority of the voting stock of the lending company shall be owned by citizens of the
Philippines.
If the percentage of foreign owned voting stock in any Lending Company existing prior to
the effectivity of the Act is in excess 12 of forty-nine (49%), it shall not be increased but
may be reduced and once reduced, shall not be increased thereafter beyond 49% of the
voting stock.
No foreign national may be allowed to own stock unless the country of which he is a
national accords reciprocal rights to Filipinos.
A lending company may grant loans in such amounts and interest rates and charges as
may be agreed upon between the lending company and the debtor:
In accordance with the Truth in Lending Act and prior to the consummation of the
transaction, a lending company shall furnish each debtor a disclosure statement, setting
forth, to the extent applicable, the following information:
Every lending company shall maintain books of accounts and records as may be required by the
SEC and prescribed by the Bureau of Internal Revenue and other government agencies. In case
a lending company engages in other businesses, it shall maintain separate books of accounts for
these businesses.
The Manual of Accounts prescribed by the BSP for lending investors shall continue to be adopted
by lending companies for uniform recording and reporting of their operations, until a new Manual
of Accounts shall have been prescribed by the SEC.
Lending Companies shall be under the supervision and regulation of the SEC.
• Balance Sheet
• Income and Expense statement;
• Cash flow
• Statement of Changes in Equity
• Schedule of Liabilities
• List of Directors and Officers
• Aging of Receivables
The SEC may examine the Books of Accounts and other records of the lending company.
Administrative Sanctions - The SEC shall, at its discretion, impose upon any lending company a
basic fine of P10,000.00 16 and P100.00 for each day of continuing violation but such daily fine
shall not exceed P50,000.00 for the following:
The penalty of suspension shall be imposed in case of three (3) violations and revocation in case
of four (4) violations.
Lending companies shall be under the supervision and regulation of the SEC, Provided, those
lending companies which are subsidiaries and affiliates of banks and quasi-banks shall be subject
to BSP supervision and examination in accordance with Republic Act No.7653.
A fine of not less than Ten Thousand Pesos (PhP10,000.00) and not more than Fifty
Thousand Pesos (PhP50,000.00) or imprisonment of not less than six months but not more
than ten (10) years or both, at the discretion of the court, shall be imposed upon:
(a) Any person who shall engage in the business of a lending company without a validly
subsisting authority to operate from the SEC;
(b) The president, treasurer and other officers of a corporation, including the managing
officer thereof, who shall knowingly and willingly
(e) Any officer, employee or examiner of the SEC directly charged with the implementation
of the Act or of other government agencies who shall commit, connive, aid, or assist
in the commission of acts enumerated under Subsection 1 and 2 of this Rule.
The provisions of Republic Act No. 3765, otherwise known as the “Truth in Lending Act of
the Philippines,” Republic Act No. 7394 or the “Consumer Act of the Philippines” and other
existing laws, insofar as they are not in conflict with any provisions of this Act, shall have
a suppletory applicability to Lending Companies.
These Implementing Rules and Regulations shall take effect fifteen (15) days from
publication in two (2) newspapers of general circulation. Adopted by the Commission En
Banc on August 23, 2007. Mandaluyong City, Philippines.
D. Audit Objectives
E. Audit Planning
In addition to knowledge of the industry, the independent accountant should have knowledge of
matters that are unique to the entity whose financial statements are being audited. With regard
to financial institutions, such matters include
• risk management strategies,
• organizational structure,
• product lines and services,
• capital structure, locations, and other operating characteristics.
Related Parties
Obtaining knowledge of a client's business should also include performing the procedures to
determine the existence of related party relationships and transactions with such parties.
IAS24 - Related Party Disclosures ensures that an entity’s financial statement contain
sufficient disclosures, that the entity’s financial position or profit/loss may have been affected
by; Existence of related parties; Transactions and outstanding balance with related parties.
Disclosure of related party transactions and approvals for such transactions is one such area
which is intended to prevent directors, Key managerial persons from taking undue advantage of
their position for their personal benefit and ensure transparency in dealings of the company.
What’s the risk? Related-party transactions sometimes involve contracts for goods or services that
are priced at less (or more) favorable terms than those in similar arm’s length transactions
between unrelated third parties.
Independent accountants with clients in the industry should be aware of the general business and
economic risk factors that affect the industry. There is no list of risk factors that can cover all the
complex characteristics that affect transactions in the industry.
Competition for business, innovations in financial instruments, and the role of regulatory policy
were already introduced, as well as emerging regulatory and accounting guidance. Other primary
risk factors involve the sensitivity of institutions' earnings to changes in interest rates, liquidity,
and asset quality. Independent accountants should consider all such risk factors when planning
the audit of an institution's financial statements.
a. Interest-Rate Risk
b. Liquidity Risk
c. Asset-Quality Risk
d. Fiduciary Risk
e. Processing Risk
PSA 320 – Materiality
F. Internal Control
The assets of financial institutions generally are more negotiable and more liquid than those of
most other enterprises. As a result, they may be subject to greater risk of loss than are the assets
of most other enterprises. In addition, the operations of financial institutions are characterized by
a high volume of transactions; as a result, the effectiveness of internal control is a significant
audit consideration.
After obtaining this understanding, the independent accountant assesses control risk for the
assertions embodied in the account balance, transaction class, and disclosure components of the
financial statements. The independent accountant may assess control risk at the maximum level
(the greatest probability that a material misstatement that could occur in an assertion will not be
prevented or detected on a timely basis by the institution's internal control) because the
independent accountant believes controls are unlikely to pertain to an assertion, are unlikely to
be effective, or because evaluating their effectiveness would be inefficient. Alternatively, the
independent accountant may obtain evidential matter about the effectiveness of both the design
and operation of a control that supports a lower assessed level of control risk. In such cases, the
independent accountant considers whether evidential matter sufficient to support a further
reduction is likely to be available and whether performing additional tests of controls to obtain
such evidential matter would be efficient. Such evidential matter may be obtained from tests of
controls
The independent accountant uses the knowledge provided by the understanding
of internal control and the assessed level of control risk in determining the nature,
timing, and extent of substantive tests for financial statement assertions.
1. Control environment sets the tone of an institution, influencing the control consciousness
of its people. It is the foundation for all other components of internal control, providing
discipline and structure.
5. Monitoring is a process that assesses the quality of internal control performance over time.
G. Audit Procedures
Financial institutions operations are characterized by large volumes of transactions and, therefore,
generally rely heavily on computers.
In evaluating an institution's internal control and assessing control risk, control issues involving
information technology are significant and should receive considerable attention. The
independent accountant should consider matters such as:
• The extent to which information technology is used for significant accounting applications.
• The organizational structure for information technology, including the extent to which on-
line terminals and networks are used.
• Controls over information technology (for example, program changes and access to data
files), operations, and systems.
• The use of information technology assisted audit techniques to increase the efficiency of
performing procedures. (Using information technology assisted audit techniques may also
provide the independent accountant with an opportunity to apply certain procedures to an
entire population of accounts or transactions. In addition, in some accounting systems, it
may be difficult or impossible for the independent accountant to analyze certain data or
test specific control procedures without information technology assistance.)
The AICPA Auditing Procedure Study Auditing in Common Computer Environments, provides
guidance to independent accountants when institutions use microcomputers, local area networks,
end-user computing, data base management systems, or telecommunications in conjunction with
their accounting systems. The Auditing Procedure Study identifies a number of electronic data
processing technologies and software applications that may affect the financial statement audit,
describes how these technologies and applications work, and discusses possible ramifications for
the financial statement audit.
V. References