SOC10-V

Ezequiel, Alexandra

Lomarda, Randall

Valdevieso, Fides

Pautang Naman: A Comparative Study on Authorized and Unauthorized

Money Lending in the Philippines

Introduction

Money lending has been a prominent activity and has flourished through time in the
Philippines because of the country’s economic condition. In turn, more people resort to the said
activity; people who accumulate emergency expenses, paying bills, buying necessities, and
small entrepreneurs. There are a number of explanations for the limited development of the
Philippine capital market, one of which is the lack of government support for secondary trading
that resulted to hindrance of growth of capital market. The result of the stunted development of
security markets in the Philippines has been a predominance of loan financing of business
activities and, as a consequence, very high debt/equity ratios (Sachs and Collins, 1989).

Understanding this concern, numerous banks and other such establishments and
institutions offer loaning services. However, money lending in the Philippines is not restricted to
such “authorized” or formal lending companies, that is, companies and/or businesses registered
to and sanctioned by the government to provide such services. There also exist private lending
businesses that are unregistered to and who’s operations authorization from the government
(Germidis, et al, 1991). Formal lending institutions such as commercial banks fail to cater for
the credit needs of small holders, due to their lending terms and conditions. However, the rules
and regulations set by these formal institutions have created the myth that the poor are not
bankable, and since they cannot afford the required collateral, they are considered “not credit-
worthy” (Atieno, 2001). In this case, although informal financial institutions have proven to be
relatively successful in meeting the financial needs of small scale enterprises, their limited
resources restrict the extent to which they can sustainably satisfy the financial needs of these
entrepreneurs. Unlicensed moneylenders are everywhere. Many of them operate in
communities where poverty is widespread. The poor are not qualified to borrow from banks and
other formal financial institution. So they borrow from friends, relative, neighbors, or from
professional moneylenders. Not a few moneylenders charge very high interest rates. Because
of this, they are often called loan sharks. (Fajardo, 1981)

Significance of the Study

Knowing the process of both formal and informal lending institutions in terms of lending
money can help the prospective borrowers and/or people with plans on starting small-scale
businesses to choose and be able to identify which of them is more appropriate for them; this is,
speaking in terms of their financial capability and stability. Furthermore, the interaction between
the lending institution and the borrower is a continuous social process and through this study,
the people will understand the institutions’ grounds for imposing such rules and guidelines in
lending money and eventually prepare themselves for such cases.

Objectives of the Study

This study aims to determine the preference of most borrowers, specifically small
entrepreneurs, between unauthorized and authorized moneylending business and why they
prefer such institutions by:

1. Identifying the rules and guidelines of both authorized and unauthorized lending
institutions;
2. Identifying the criteria for granting loans to people and companies of both authorized
and unauthorized lending institutions and their reasons in setting such criteria and;
3. Determine the benefits and struggles of an institution’s rules and guidelines to the
present debtors in terms of convenience in getting a loan.
Methodology

The population considered in this study was the business stalls and establishments from
UP Gate to Lopez Ave. (Grove) until F.O. Santos St. then F.O. Santos St. corner Ruby St. until
Raymundo Gate. The sampling method used in obtaining participants was systematic random
sampling purposive sampling for money lenders and money lending institutions.

A systematic random sampling was used in identifying the participants, the starting point
used was McDonald’s and from there, an interval of three was counted to get the next
participant. Each participant (establishment) was given a questionnaire in which their answers
would reflect their preference in terms of source of fund. A purposive sampling was done to
obtain participants (money lenders) and an interview was conducted in order to acquire
information about their guidelines regarding loans.

The population size considered was only 20 participants as most of the supposedly
participants obtained through systematic random sampling refused to disclose information being
asked in the questionnaire with certain factors such as the owner of the said establishment is
not present at the time the survey form was given and the people left in charge were not
equipped with such information or people left in charge chose not to give such information for
personal reasons.

As for the interview conducted for money lenders, purposive sampling was used in
obtaining participants. Information about formal money lending institutions is partly from the
interview conducted and partly from research about the said institution (guidelines and
requirements). Most of the money lenders from the informal sector do not identify themselves to
the public thus they did not allow any interview to take place. To obtain ample amount of
information, secondary data was used and was acquired through some of the borrowers
themselves

Review of Related Literature

Money lending has become prominent in the Philippines. It is mainly a source of capital
for most entrepreneurs, usually small scale business owners. But with the demanding grounds
for lending set by banks and other formal lending institutions, these people usually settle for
informal lending institutions; this now is termed as microfinance. Microfinance is defined as the
provision of small-scale financial services to people who lack access to traditional banking
services. It usually implies very small loans to low-income clients for self-employment, often with
the simultaneous collection of small amounts of savings (Armendariz & Labie, 2011).

There are existing lending institutions and these are formal lending institutions (banks,
etc) and the informal lending institutions (5-6, private money lender, etc.)According to Marthur,
B.L., there actually exist two types of informal money-lenders; the professional and the non-
professional money-lenders. Professional money-lenders are those whose profession is focused
in the lending institutions while the non-professionals who makes money-lending as their
sideline or as their additional income generating activity. Urban money lending in the Philippines
have flourished and are widely varied. From loans from friends, neighbors and relatives to the
so-called “professional” money lenders which pertain to mark vendors, store owners and other
informal institutions that engage in informal loan systems (Germidis, et al, 1991). Usually, these
dealers are considered as a last resort for people who have exceeded their credit with their
relatives and/or friends. One of the most notorious arrangements is the “five-six” scheme
wherein for every five pesos borrowed, six must be returned. This amounts, as the case may
be, to a 20 per cent daily or monthly interest rate. Borrowing, however expensive is one of the
most prevalent coping mechanisms of the poor (Germidis, et al, 1991).Unlicensed
moneylenders are everywhere. Many of them operate in communities where poverty is
widespread. The poor are not qualified to borrow from banks and other formal financial
institution. So they borrow from friends, relative, neighbors, or from professional moneylenders.
Not a few moneylenders charge very high interest rates. Because of this, they are often called
loan sharks. (Fajardo, 1981)

Formal lending institutions such as commercial banks fail to cater for the credit needs of
small holders, due to their lending terms and conditions. However, the rules and regulations set
by these formal institutions have created the myth that the poor are not bankable, and since
they cannot afford the required collateral, they are considered “not credit-worthy” (Atieno, 2001).
In this case, although informal financial institutions have proven to be relatively successful in
meeting the financial needs of small scale enterprises, their limited resources restrict the extent
to which they can sustainably satisfy the financial needs of these entrepreneurs.

Lending money to individuals and corporations, according to the Hong Kong Institute of
Bankers, is the business of banks and usually comes with interest and other fees. Before
lending money to these individuals or corporations, banks considers certain factors; this is what
they call CAMPARI which stands for Character, Ability, Margin, Purpose, Amount, Repayment,
and Insurance. Other banks also consider other “lending acronyms” such as the 5 Cs which
stand for Character, Capital, Capacity, Collateral, and Condition.

Results and Discussion

The result and discussion has two parts since the research methodology and the
research itself covered both the money lending institution and the borrowers’ perspective.

The first part of the discussions will be revolving around the perspective and preference
of the borrowers. Through their answers in the questionnaires provided, their preferences and
idea of convenience in terms of source of funds, is reflected here.

QUESTIONNAIRE

1.) Have you ever borrowed money from other people before?

-Yes- 90%

-No- 10%

2.) How often do you borrow money?

-I have borrowed only once- 33.34%

-At least four times a year- 44.44%

 -At least twice a month- 22.22%

-At least every week- 0%

3.) Where/ from whom do you usually borrow money? (Participants may answer more
than one question so an overlap in the percentage occurred)
-Bank (and card bank microfinance)- 16.67%

-Family and Friends- 44.44%

-5-6- 50%

4.) What were your reasons for borrowing money from these institutions?
-Business/Capital/”puhunan” (all participants answered with these)

5.) How much do you usually borrow?

-Below Php 15,000- 66.67%

-Php 16,000-40,000- 11.11%

-Above Php 40,000- 11.11%

-Did not specify- 11.11%

6.) What would you consider as a convenient source of fund?

-Family and friends- 50%

-5-6- 35%

-Did not answer- 15%

 The data above shows the questions present in the questionnaire given to the
participants, particularly owners of establishments in the area. Below each question shows the
percentage of the participants’ answers. The data shown considers 20 participants who
answered the questionnaires given to them.

Fig.1-1. Considered borrowing from other people

Considered Borrowing from

Other People

Yes
No

The figure above simply shows the first question in the survey form given. 2 out of the 20
participants said that they do not borrow money from any money lending institutions to support
their business. If the participant answers “No” in number one, the participant has to skip to the
last number. Numbers 2 through 8 are for people borrowing money from lending institutions.

Fig. 1-2. Frequency of Borrowing Money

 Frequency of Borrowing
Money
Borrowed once
only
Four times a
year
twice a month

The figure above shows the frequency or how often the participants borrow money from
these institutions. According to the data presented, 6 out the 18 participants have experienced
borrowing only once from these institutions, 8 out 18 states that they make loans every quarter
of the year and the remaining 4 said that they borrow as frequent as twice a month.

Fig. 1-3. Preferred Source of Fund

Where respondents
borrow money

50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Formal Lenders Family and 5,6
friends
 The figure above now shows the comparison between the participants’ preference of
source of capital of their businesses. Formal lenders such as banks and card bank
microfinance, 5-6 or most commonly pertaining to Muslim micro financers which lends money to
small business owners has a relatively high interest rate but collects daily to make the payment
of debt virtually lighter for the borrower and of course relatives and friends.

Fig. 1-4. Source of fund which participants consider as most convenient

Preferred source of fund

Family and Friends

5,6
did not answer

The figure above now shows the final question in the survey form. “Which of the choices
do you prefer most and/or find as convenient source of fund? Or if your answer in number 1 is
no, which of the choices in number 3 would you consider as a convenient source of fund? Why?

This question will now reflect their preference of source of fund and which of these they
found as most convenient. It is shown in the figure above that 10 out of the 20 participants
prefer relatives and friends as their source of fund. One of the common reasons for this is that
when loaning from relatives, there really is no pressure in paying. Payment is only according to
what both parties have decided upon. Unlike in banks and even with 5-6, there are bound to
have collaterals, a number of legal documents, sometimes a guarantor is even a requirement.
And with relatives, interests rarely exists

The second part of this discussion will be revolving around the perspective of the money
lenders. As stated, there are two types of money lenders and these are the informal money
lending institutions and the formal lending institutions. Both institutions share a common nature
in financial help among its clients but differ very much in the process of granting loans, interest
rates, collaterals, requirements, and methods of collection.

Formal money lending institutions are institutions that have a more complex loan
system. Mainly because of the type of loans they are granting to their clients and to what
amount they can extend to. With this, a well-structured process that includes legal documents
and the likes can be observed in their loan process. In this study, two formal money lending
institutions were considered, namely, Bank of the Philippine island (BPI) and Social Security
System (SSS).

The SSS

The Social Security System (SSS) has been around since 1948, and has various types
of loans, each of them purpose-specific: Housing Loans, Business Loans, Member loans. Under
these loans are even more kinds of loans that are more specific, in order to better address the
borrowers’ needs.

Under their business loans, the amount that can be loaned depends on whether the
borrower is a big enterprise or a small and medium enterprise.

The amount that can be loaned depends on whether the borrower is a big enterprise is
whichever is lowest among the following: (1) the amount that the borrower is applying for; (2)
the “actual need of the borrower (total project cost)” (SSS, 1997); (3) whatever the value of the
borrower’s collateral amounts to; (4) a maximum of P500.0 million per borrower.

For small and medium enterprises, however, the loanable amount varies on whether the
loan being applied for is a short-term loan or a long-term loan. For short-term loans, the
maximum is “70% of the value of the Letters of Credit or Purchase Order for export packing, or
70% of the working capital requirement up to P5.0 million,” according to the SSS (1997). For
long-term loans, the maximum is 80% of the incremental cost, until P5.0 million.

After they have been approved, both aforementioned loans have to be secured by
collateral. For big enterprises, the collateral must meet standards set by both the participating
financial institutions (PFIs) and the SSS. For the small and medium enterprises, the acceptable
collaterals depend, as well, on whether the loan is a short-term loan or a long-term loan.

Aside from the fact that the borrower must be an SSS member-employer, who is in good
standing, the other factors that the SSS considers about the borrower before his/her loan is
granted varies on whether the borrower is, again, a big enterprise or a small and medium
enterprise. For big enterprises, the enterprise must have a proven track record that shows that
they are a profitable enterprise. If the record shows that the enterprise suffered a loss in any
year during the past three years, the average income of these years should be positive.
However, enterprises that have only started in the last five years are exempted from this rule.
Another thing that makes a big enterprise eligible for this business loan is that the borrower
should be an SSS member; the borrower should also be in good standing. The SSS also notes
that aside from that, “[t]he borrower is also subject to other criteria and policies, which the Social
Security Commission may impose form time to time.

For small and medium enterprises, the SSS notes that eligible candidates for the loan are as
follows:

 enterprises in all industries except trading of imported

goods, liquor, cigarettes, and extractive industries like
mining or quarrying;
 are at least 60 per cent Filipino owned;
 enterprises with asset size of not more than P100
million, excluding land;
 have positive income for the previous year. If the
previous year's income is negative, the average
income of the past 2 or 3 years should be positive;
 have debt-to-equity ratio of not more than 80:20 after
financing, or 70:30 if borrower is a franchisee;
 are SSS member-employers of good standing.

Interest rates for both big enterprises and small and medium enterprises may vary on the rates
of the PFIs. However, the SSS also assures that “prevailing interest rates shall be reviewed
monthly.”

BPI

The Bank of the Philippine Islands (BPI) has been around for 160 years, and offers various
loans: Auto Loan, Housing Loan, Motorcycle Loan, Ka-Negosyo Loan, and Personal Loan. BPI’s
Ka-Negosyo loan is further categoriezed into three: Business Loan, Franchising Loan, and
Credit Line with ATM. While their rules and terms vary, their interest rates are all dependent on
prevailing market interest rates.

The term loans of the Ka-Negosyo Business Loan are more suitable to those who are looking
for short- to long-term funding. In this Business Loan, the borrowed money is payable up to ten
years, with a suitable real estate mortgage or a deposit or investment as collateral. The
borrower may pay dues, which consists of part of the initial loan plus interest, either monthly or
quarterly. Upon approval of the loan, the borrowed money is deposited into the borrower’s
account.

The Credit Line is suitable for those looking for short-term funding or for capital. This loan
requires borrowers to be able to pay their debt in one year. However, this may be adjusted,
depending on credit assessment. The borrower is required to have collateral, as well, which, in
this case, is the same as the accepted collateral for the Business Loan. Borrowers are also to
pay the interest every month, but are free to pay the initial loan any time within the given time.
The borrower may get the money from the loan through issued checks, ATM withdrawals,
transactions made through EPS, and fund transfers.

Lastly, the franchising loan is suitable for those who are looking to set up franchises. The tenor
of the loan is a minimum of two years. For this type of Ka-Negosyo loan, collateral is not
required. However, the borrower must choose between the Lite Mode or Zero Collateral. For the
Lite Mode, the borrower must pay only the interest rate for the first six months, and then the
initial loan with the interest rate starting the seventh month. The Zero Collateral has the
borrower paying amortization with no collateral, exclusive for Ka-Negosyo Best List Franchise
Brands. In this kind of loan, loan proceeds are through the borrower’s account.

The following are few of the factors BPI considers before approving a request for a loan:
Purpose for business loan, type of borrower (individual/corporate); if it’s for an existing business,
if individual wishes to start a new business, or if the individual wishes to use the loan for another
purpose; if individual is an existing BPI/BPI Family Bank client. If borrower is an individual, the
following is considered, as well: civil status, type of residence, any and all sources of income,
years employed in business, monthly income, estimated monthly expenses, if the individual has
“existing deposits/loans with [BPI] or another bank”. If borrower is a corporation, the bank
considers nature of business and trade references.

Table.1-1. Loans offered by the Bank of the Philippine Island

Next part is centered on informal lenders. They are the lending institutions which are not
legally authorized. These are businesses of individuals which are capable lending a relatively
small amount to people who needs money for miscellaneous, scholastic fees or in the case of
this research, small scale business. These lending institutions do not require much in terms of
documents, usually what they need are guarantors so they are assured that the borrower is able
to pay them in due time.
 Since these informal institutions in the area of this research are not willing to be
interviewed because of privacy and security reasons, information is secondary data and was
obtained through the borrowers themselves.

A set of interview questions was devised to be able to determine their guidelines in

money lending. Attached next to the interview questions are the answers of the three
participants which has a connection with informal lenders.

Interview Questions

1.) How long have you/ this company been in this business?
2.) What are your rules, guidelines, and requirements for individuals borrowing money?
3.) What are your basic criteria for approving loans?
4.) Who are your usual clients?
5.) How much interest do you put on loans?
6.) What are the terms of payment accepted by your institution?

Anonymous, Filipino; clients in LBDH and Lopez School, some clients along grove

1. Four years, since 2009

2. Dapat kakilala, kakilala ng kakilala. Pag malaki yung uutangin, credit investigation
(tatanong saan nagbabangko, kung may utang sa kanila, magtatanong sa mga kakilala
tas itatanong kung umuutang). Kailangan may ATM (yun yung ibibigay muna in
exchange sa money). Bawal umutang sa mas mataas sa kinikita per month; hindi
mababayaran. 2 weeks after ng loan ang umpisa ng bayad. Dapat in 6 months
mabayaran yung loan (minimum 10k), pag mas mababa dun hanggang 3 months; 1k, 1
month. Pag di nakabayad in 6 months papatungan pa ulit ng 10% yung initial loan, tapos
per month na yung compound, yung patong ng 10%
3. CI, kakilala ng kakilala, kilala nya, sweldo ng individual
4. Clients mostly mga co-faculty, mga people sa working place kasi nga dapat kilala nya,
kakilala ng kakilala nya.
5. 10% interest
 6. Kinakaltas sa sweldo every payday, kaya kinukuha yung atm. Tas yung ibabawas ay
yung napag usapan kasi yung 6 months ay maximum. Yung magloloan ang magsasabi
kung kaya nya bayaran before 6 months, edi yung particular na napag usapan na yun.

Anonymous, Indian

1. Matagal na, ayaw sabihin.

2. 10k&up, CI, tinatanong saan gagamitin para makita kung pwedeng mabawi yung money;
pag below that, negotiations lang ng gano katagal pwede bayaran (usually 2months)
tapos hahatiin dun yung pag bayad ng utang. Pag 10k, maghahanap din ng mutual
contacts para may mahabol pag hindi nagbayad. Usually 6 months din or longer,
depende sa laki ng inutang (kung 100k, pwedeng one year), tas ang bayad every day na
bukas yung store. Yung amount na babayaran every day, ay yung utang na dinivide sa
number of working days. Pero pag nag extend sa usapan, 10% ang idadagdag sa initial
loan per month ng extension.
3. CI, paggagamitan ng money (pag malaki yun money, mga 10k), sa ibang lenders
kailangan pa bumili ng binebenta ng lender (appliances, miscellaneous things)
4. Mostly business owners, magsstart ng business.
5. 20% initial na interest, pero pag nag extend sa napag usapan na deadline, plus 10% sa
initial loan for each additional month.
6. Every day, hahatiin yung buong utang sa working days within deadline. Cash. May
tickler na binibigay sa umuutang tapos each time na magbabayad, dun pipirma yung
lender.

Anonymous, from Manila

1. about 25 years in this kind of business

2. Requirements: for bigger amount of loans - she requires collateral like a land title or vehicle
or/cr and a co-borrower.
Rules/policies: the borrower has to pay the monthly interest on a regular schedule, usually every
15th or 30th of the month. For smaller loans like 1000, payment is on a daily basis.
3. Clients are from all walks of life- most are small business owners- stall owners in the market,
employees
4. Basic criteria: the borrower has a source of income, with a capacity to pay - employed or
engaged in business,
5. The going rate is 10%
6. Different payment options for different clients:
a. for smaller loans- 1,2 or 3 months on a daily collection
b. for bigger loans- 6,9 or 12 months. Renewable after the loan contract.

Conclusion

Basically, in order to start a business, even if it is small-scale, one has to have a capital
to pay for the initial expenses. With this, most budding entrepreneurs resort to borrowing money
from capable institutions. According to the findings in this research, in the sector wherein the
population was considered, it appeared that most small scale business owners resort to informal
money lenders at is was proved that they have a less complex loan system which is more
convenient for the borrower. Although in essence formal institutions have more flexible loan
packages, those in need of immediate money resorts to a more accessible institution. In this
research, it was shown that the prevailing informal money lender is the 5-6 or the more
commonly pertained to as Muslim money lender. Although their interest rates are relatively high,
their collection process makes it much more convenient for the situation of business owners.
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