The financial system, at its most fundamental level, performs a simple but indispensable function: it moves funds from those who have an excess of them to those who need them. Households place their savings in banks. Banks transform deposits into loans. Investors provide capital to businesses. Pension funds convert workers' savings into long-term investments. Governments borrow to finance infrastructure and public services. Through this process, idle resources become productive capital.

What keeps this enormous machinery running? Trust, according to Benel Dela Paz Lagua, a former executive of the Development Bank of the Philippines, writing in a commentary for BusinessWorld.

A depositor leaves money with a bank because he trusts it will be there when needed. A bank lends to an entrepreneur because it trusts the borrower will repay. An investor commits capital because she trusts the information presented and believes contracts and property rights will be respected.

Nearly every financial transaction, however, involves information asymmetry. Borrowers know more about their businesses and intentions than lenders. Corporate managers know more about their companies than shareholders. Governments know more about how public funds are actually spent than taxpayers.

To bridge information gap, financial systems have developed a set of familiar mechanisms: audited financial statements, collateral, credit ratings, disclosure requirements, bank supervision, corporate governance, contracts and laws. These tools reduce uncertainty and make transactions between strangers possible. In effect, they make trust possible.

When lenders trust borrowers, credit flows more readily. When investors trust corporations, regulators and the government, capital becomes available at reasonable cost. When businesses trust public institutions and the stability of policies, they are more willing to undertake investments whose returns may arrive only many years later.

When trust deteriorates, the opposite happens. Banks become cautious. Investors demand higher returns to compensate for greater perceived risk. Businesses postpone expansion, capital looks elsewhere, and transactions require more safeguards and monitoring. A lack of trust, Lagua writes, becomes another form of transaction cost.

He argues that this provides a useful lens through which to view the Philippines' current economic difficulties. The sharp slowdown in economic growth and the weakness in investment cannot, of course, be attributed entirely to governance: inflation, global uncertainty, interest rates, weather disturbances and structural constraints all matter. But governance matters enormously because governance affects confidence.

Recent controversies involving public infrastructure, particularly flood control projects, illustrate the problem. When questions arise over unused billions of pesos intended for public works, the damage extends far beyond the money allegedly lost. The loss is not merely the amount diverted. The country forfeits the productive infrastructure that should have been created. Businesses suffer from inefficient logistics. Communities remain vulnerable to flooding. The government may eventually have to spend again to repair or replace defective projects.

There is another casualty that is harder to quantify: trust. Citizens begin questioning where their taxes go. Legitimate contractors become wary of a procurement system perceived to favor connections. Investors wonder whether rules will be applied fairly. Businesses incorporate political and regulatory uncertainty into investment decisions. Corruption, in this sense, operates like an invisible tax on the economy.

The commentary also draws a connection to inflation, which is influenced by food supply, energy prices, exchange rates and global conditions. Governance affects the economy's supply side. Efficient infrastructure lowers logistics costs. Good roads move agricultural products faster from farms to markets. Effective irrigation improves productivity. Competitive procurement gives taxpayers more infrastructure for every peso spent.

A peso lost to corruption is therefore not merely a peso missing from the Treasury. It can mean a road not completed, irrigation that does not work, flood control that fails, or a logistics bottleneck that keeps food prices unnecessarily high. Governance, in other words, has an economic price. It is a price paid by everyone who uses the roads, buys the food and relies on the services that public spending is meant to deliver.

The importance of trust becomes even clearer from the perspective of development finance. For decades, the Philippines has struggled to provide adequate financing to micro, small and medium enterprises. Many entrepreneurs have viable businesses but lack the collateral, financial records or track record required by conventional lenders. At first glance, this appears to be a shortage-of-money problem. Often, Lagua notes, it is actually a shortage-of-trust problem.

The challenge of development finance, then, is to create mechanisms that enable lenders to understand entrepreneurs well enough to take calculated risks. Better credit information, financial education, guarantees, responsible lending and stronger financial records can reduce information asymmetry and gradually make previously excluded enterprises bankable. Development, in this sense, involves expanding the radius of trust.

But institutions and regulations can only go so far. Audits can be strengthened, procurement improved, disclosure required and elaborate checks and balances established — yet ultimately, someone must still make the right decision. That brings the argument from economics to character. Character, as Lagua puts it, is doing the right thing even when nobody is looking. No regulatory system can anticipate every possible act of bad faith. Good governance therefore depends not only on strong institutions but also on people worthy of the responsibilities entrusted to them.

For the Philippines, restoring trust should consequently be considered part of the economic agenda. Fighting corruption is not separate from attracting investment. Accountability is not separate from creating jobs. Good governance is not separate from achieving sustainable growth. The test in the period ahead is whether the familiar mechanisms — strengthened audits, improved procurement, required disclosure and closer supervision — are enforced visibly enough to be felt where it counts: in credit that reaches viable small enterprises, in projects completed as designed, and in investors' readiness to commit capital for the long term.

A trusted banking system mobilizes savings. Trusted businesses gain access to capital. Trusted institutions attract investment. And a trusted government can ask citizens to make sacrifices because people believe those sacrifices serve the public interest.

Numbers matter. Returns matter. Risk management matters. But none of them can endure without trust. Finance may be measured in numbers, but ultimately it runs on trust.

The views expressed are the author's own and do not necessarily reflect the opinion of his office or FINEX. Benel Dela Paz Lagua was previously executive vice president and chief development officer at the Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs, and currently serves as an independent director in progressive banks and in several non-governmental organizations.

This commentary originally appeared in BusinessWorld.