INSTITUTIONAL INTERCONNECTIVITY

Banks fund themselves in the interbank market. They borrow and lend funds from/to
other banks creating direct interconnectivity between banking institutions.  This
interconnectivity can be taken one step further by pointing out that the Central Bank
shows that banks operate within a system.

But insurance companies are stand-alone institutions. They receive a premium from

clients in return for payment upon death in the case of life insurance. In the intervening
time, the insurance company invests the clients’ premiums. While one might be tempted
to compare the interbank market to the insurance-reinsurance relationship, the small
size of this activity renders it unimportant and not truly systemic.

TRANSFORMATION OF MATURITY
Banks make long-term loans and tend to fund them short-term. On the funding side,
insurers, as opposed to banks, are funded long-term (via premiums). Insurers don’t
transform maturity. They run liability-driven investment policies and match their asset
profiles with their liabilities.

LIQUIDITY RISK
Deposits are the largest item on a bank’s balance sheet.  And deposits can be
withdrawn at any time. Banks are by nature liquidity seeking businesses.

Insurers (annuity life, P&C, and health) policies are not called at will. Only non-annuity
life policies are theoretically callable. However, the penalties for early withdrawal and
possible elimination of tax benefits may make early withdrawal too costly.

CREDIT, MONEY & PAYMENT FUNCTION

Banks are an organization of settlement systems. Banks create credit, deal with the
payment function and the liabilities are money.
Insurer liabilities do not constitute money, rather they are an illiquid future financial
claim. Insurers do not provide essential market utilities  – coupled with the fact that
they’re less integrated to the financial markets, in that they are not an organizationally
part of the settlement of payment systems.
What Is The Difference Between Banking &
Insurance?
Arpita WadhawanJune 28, 2019
SHARE
 

Both banks and insurance companies are financial intermediaries. However, their
functions are different. Let’s understand the difference between banking and
Insurance first.

Banking is the financial institutions who do the business activity of accepting and
safeguarding money owned by other individuals and entities and then lending out
this money in order to earn a profit. Banks use the money that their customers
deposit to make a larger base of loans and thereby create money. Whereas
Insurance is a contract between an individual and an insurance provider, in which
an individual receives financial protection or reimbursement against losses from
an insurance provider or insurance company.

The other difference is, when we talk about banking or online banking, the first
thing you do is to subscribe to the alert services offered by your bank. As banks
provide the services to their customers of significant account changes with online
alerts this feature can be taken as the advantage of your banks alerts to protect
yourself from identity theft and misuse. Banking is the act of accepting deposits
either by way of Cash, cheques or transfers from or on behalf of their valued
customers. And when it comes to your insurance, think hard about how much of
your available income you want to spend on insurance versus investments. Of
course, each of us has a finite amount of money to spend on anything, if we do
not think of how much money to invest we aren’t making a wise decision. So, we
have to make smart decisions about it.

The nature of their systemic ties makes Banks and insurance dissimilar. Banks
operate as part of a wider banking system and have access to a centralized
payment and clearing organization that ties them together whereas Insurance
companies are not part of a centralized clearing and payment system. This
means that they are not as susceptible to systemic contagion as banks are.

Though there are risks pertaining to both interest rates and to regulatory control
that impact both insurance companies and banks, although in different ways, its
individual to make the decision to go for banking or insurance based on their
income or budget.

To conclude banking appears at both the asset and liability side of the balance
sheet, while life insurance appears only at the liability side of the balance sheet.
In addition, banking sells via its proprietary distribution network and life insurance
sells primarily through (tied) agents and brokers.

Venture capital and investment banking are different, important types of professional
finance companies. Not many can differentiate between them except academicians and
the experts in the financial circles. Let us explore the differences by defining the two
firstly.
Venture Capital:
Venture capital deals with the investment capital of firms seeking venture capital for
startups, new businesses and fast-growing firms. The returns could be excellent as also
the possibility of losses being high.
Most tiny start-ups are not financially large and cannot access the global markets for
capital, unlike larger firms. Yet, they need funds from proven idea to the stage of scaling
and beyond to evolve successfully. Venture capital fills this gap by picking up equity in
such firms as their investments. Venture capitalists partner the growth of such firms.
Since they own significant equity in the companies it is natural that they sit on the board
not just to protect their investments but also to significantly influence the decisions,
strategies and operations directed at the growth and profitability of the firm.
Venture capitalists, being partners could earn fantastic returns on the success of the
venture and also accept losses if the venture fails. It is understandable then that such
funds are released in small doses over a period of time as agreed upon.
Investment banking:
The investment banks are also lenders of capital at various scales and from different
branches under the same umbrella. They could be direct investors and most often act as
intermediaries helping to raise investment capital.
Some examples of companies raising funds are in the issuances of bonds, IPO’s and
OIUs. Different branches like retail banking, corporate finance, wealth management etc
are involved in offering funds to corporates, syndicated financial institutions and the
governments for infrastructure projects. Investment Banking deals with HNI individuals,
syndicated funds etc to SMEs and retail products like credit/debit cards, bank accounts
for individual investors.
Investment Banking plays the role of an intermediary in the acquisitions and merger
deals. They advise on equity markets, mutual fund investments, and play a consultant to
borrowers in their financial and borrowing journeys. Their profits trickle in as interest
rates charged fees, consultancy retainers and such. Banks may also have in-house
trading facilities.
The key differences:
The main difference is in the investment pattern. The banks offer loans at interest. The
venture capitalist actually invests directly in the firms in the form of equity. Banks can be
the intermediaries of the venture capital deals and the M and A deals. The venture
capitalist has no role in the operations of banks.
While the venture capitalist is gunning for large profits earned as a partner in the buss
the bank charges interest and fees. The VC may earn profits or lose his capital. The bank
operation, on the other hand, does not impact the recoverable fees. They also target
different kinds of customers. The VC is basically looking only at borrowers and high-risk
operations. The banks, on the other hand, are relatively risk-averse and have investors
and borrowers from whom they earn fees or interest for their involvement. Venture
capitalists invest in potentially profitable start-ups with huge implications. IBs work with
financial institutions and firms who also have access to global markets, and capitals
markets abroad.
If you are interested in Investment Banking and becoming a banker the CIBOP
course at Imarticus Learning are highly recommended. The IB jobs are prestigious, pay
well and are constantly facing a demand for well-trained professionals.
IB career-scope and payouts:
In terms of career prospects, salaries, job roles and working conditions there is a lot of
overlap between various divisions in the investment banking sectors. However, asset
management has a slight lead in job prospects. According to Payscale reports, in early
2004, the average Investment Banking salary was USD 315,000. Ten years later the
figures for the IB salary was USD 288,000. Investopedia claims the average 2015
banker’s salary was between USD 75,000 to 85,000.
Conclusions:
Both the VC and IB play important financial roles in the ecosystem of helping firms raise
capital. The banks operate in the acquisitions and mergers deals, financial intermediation
and capital markets while the venture capitalists invest in the equity capital of startups.
Fees and interest are the main sources of earning of Investment Banking whereas the
VCs returns depend on the loss or success of the firm.

Currency brokers vs banks: Which is actually the

best option for currency exchanges?
If you're regularly moving money abroad, it's worth investigating all the options to ensure you're getting the a secure and cost
effective transfer. Here we look at the differences between brokers and banks.
Written by Laura Parsons on 29 October 2015

Whether you need to move £2,000 overseas or £200,000, you must feel confident
that the currency transfer service you’re using is reliable, secure and getting you the
most for your money.
If you’ve got foreign exchange requirements, such as funding an emigration or moving wages
overseas, spending some time looking into your options can be well worth the effort.

While the two most popular kinds of foreign currency exchange provider are banks and
specialist currency brokers, there are services brokers are able to offer which banks can’t so
if you want maximum flexibility and a number of options for safeguarding your transfer from
currency risk, using a broker might be right for you.

Banks aren’t exchange specialists

Most banks offer international currency exchange services, but as the area isn’t their
specialism few employ foreign exchange experts to talk clients through their transfers or
keep them informed of the latest market movements.

Brokers, like TorFX, have a team of dedicated industry experts on call to monitor exchange
rate trends, offer guidance on currency risk and help their clients secure a more competitive
exchange rate.
This level of support means you won’t be passed round a call centre or left confused about
what transfer option best suits your needs – you’ll have a constant point of contact and the
reassurance that your Account Manager has years of experience to their name and is looking
after your best interests.

Breadth of exchange options to reduce risk

While the foreign exchange services offered by a bank might be limited, a broker would be
able to help you streamline recurrent transactions with an automated Regular Overseas
Payments service or allow you to fix a favourable exchange rate up to two years ahead of
making a currency transfer.

As the currency market is extremely volatile, the risk management options some brokers
provide could also prove invaluable.

If you want to safeguard your transfer from the dangers attached to sudden market shifts,
options like setting up a Limit Order (where you target a specific exchange rate and the trade
is executed when the rate becomes available) or a Stop Loss Order (where you can set a
minimum rate at which to transfer your funds, with the transfer being conducted
automatically as soon as the rate is hit) are worth considering.

Securing the best exchange rates

Another difference between banks and brokers is the exchange rates they’re able to offer.

As the two types of institutions work off different margins, brokers tend to be able to secure
more competitive exchange rates. As even a seemingly small variation in the exchange rate
can mean the difference of thousands of Pounds on larger international currency transfers,
securing a better rate could leave you substantially better off.

Before proceeding with a transfer you may want to get quotes from several providers to
ensure you’re getting the best deal available.

Exchange transaction fees and charges

On top of the disparity in the exchange rates they’re able to offer there is a difference in the
fees you might expect to incur. Most banks will charge you for moving your money abroad
while currency brokers like TorFX work on a fee-free basis, meaning you’ll get more for your
money.

In fact, a currency broker could help you save up to 90% of the costs commonly attached to
international money transfers. If you’re moving overseas or already living abroad, savings like
this could make a big difference to your life as an expat.

Opening an account with a currency broker should be free and come with no obligation to
trade, so you can register as a client and benefit from regular market insights and exchange
rate updates a long time before you need to move your funds overseas.

If you’ve got an upcoming foreign exchange requirement, be sure to research your currency
transfer options to make sure you’re getting the best deal. 
Difference between microfinance and commercial bank by
definition

Commercial banks as a financial institution are

established based on the banking regulation act. They
function solely to accept money and lend money out to
costumers. Other functions include brokerage,
insurance, stocks, security, etc. All of these are non-
banking activities. Commercial banks are profit-
oriented. Among the characteristics of commercial
banks are dividends, payment of tax, registration, etc.

Microfinance is not profit-minded. The activity in

microfinance is done more in a group. Each member of
the group has savings, thus the microfinance aims at
giving the loan to any member of the group. The group
ensures the money is being used and the group member
earns profit from any income making enterprises they
engage in. Each and every member of the group is
entitled to loan or perhaps get a loan. This, in turn, self-
sustain the group. Unlike a commercial bank,
microfinance is devoid of registration, dividends, and
taxation.

Difference between microfinance and commercial bank

GENERAL DIFFERENCE
They deal with different costumers in terms of
definition. Microfinance renders financial assistance and
or gives loans to low-income earners of local families.
While commercial banks, on the other hand, give loans
to people and big organizations that open accounts with
them. The worth of note is that their difference per se is
based on the costumers they deal with not even the
magnitude of the loan.

SPECIFIC DIFFERENCE
MFIs basically lend money, funded by private equity
holders and or individuals. So, sources of funds for
microfinance institutions can different from private
equity holders to individuals. Commercial banks offer
financial services range from lending, savings to
insurance and pensions. Commercial banks are funded
through stock markets.
MFIs services are DOOR STEP that is, their staffs take
financial services to customers ’ doorsteps. Whereas
commercial bank services are BANK DOOR services,
that is, the costumers have to go to the bank to carry
out any financial services.
Commercial banks’ loan risk is quite low. Thus, charge
lower interest rates ranging from 10% to 16%. This low
loan risk is predicated on the fact that they deal with
people of high level of income. Contrastingly, the
microfinance loan interest rate is high say 20%-25% due
to the fact that they operate collateral-free loans, also
the loanees are riskier.
Among other differences are dynamics in manpower,
structures of governance, use of or ICT use, physical
presence, etc.

History recorded that in India, commercial banks do not

understand the requirements of the local market. This
birth the idea of micro-financial institutions. They offer
financial help to local families of low income that
couldn’t transact business with commercial banks. With
free collateral loans, they offer financial services to
several poor people.

Whereas commercial banks cannot cope with the high

risk of the given loans to the poor that residents in rural
areas whose small loans are hard to maintain in terms of
cost. The challenges of commercial banks, microfinance
rose to conquer by giving loans to the destitute.
MFIs help the poor in the remote areas to scale up their
business by giving them small loans. No provision of
other facilities like insurance, cash withdrawal from
automated teller machines, credit/debit card provision,
etc. Whereas such services are available in commercial
banks. Commercial banks also help to manage customer
cash, give reports on their accounts, etc.

There is no collateral-free loan in commercial banks.

MFIs give collateral-free loans. There’s extensive
scrutiny in commercial banks before issuing out the
loan. Such scrutiny is not available in Microfinance.
In terms of deposit, some amount has to be deposited to
the MFI before they give out loans to any group
members. Whereas in commercial banks the depositor is
required to pay a fixed rate of interest corresponding to
specific amount to be given out as a loan

MFIs seek to bridge the gap in the segment of the

society not touch by commercial banks which exposed
them to private borrowers.
Commercial banks’ lending operations cover areas like
renewable energy, agriculture, housing, micro, small and
medium enterprises, education, etc.
They also differ in their approaches to risk management.
MFIs manage risk by contacting their customers often.
Also, train their staff (off-field staff) and customers. Self-
deserved, as well as an imposed risk management
system that is advanced, are used in commercial banks.
To meet up with their cost and make service available
are reasons microfinance charge rates are higher than
other banks.
However, the local money lenders whose interest rates
can be up to thousands received far above this from
people.
The microfinance still face challenges sustaining
themselves in the rural areas. A case study that
exposed MFI environment is the Andhra Pradesh
microfinance saga.

MFIs are not profits oriented, experts in giving loans to

people in local communities, be it group or individual.
They are into micro-financing and do not lend huge
money to customers.

On the other hand, commercial banks do a wide range of

financial services corporate bodies and individuals. They
are profit-minded. They offer other financial services like
guarantees, savings, credits letters, etc.

Banks, Pawn Shops, Money Lenders: What’s the Difference?

Posted On: October 27, 2017 | Posted in Licensed Moneylender, Loan, Money Lender

When you encounter a tough financial crisis, and you need extra cash fast, where should
you turn to for your concerns? Should you consider going to a licensed moneylender, a
pawnshop, or a bank? How do these establishments differ from one another?

In times of money problems, there are multiple options in store for you when you need to
borrow money. But then again, making a decision can be crucial because the last thing you
want to happen is to end up picking the wrong option for you. For instance, if you happen to
deal with the wrong moneylender, then you are bound to experience more difficulties with
debt than what you are going through at the moment. This is why you should weigh all your
options first before you come up with a decision.

The proper usage of credit is important to ensure your financial health. If you are provided
with a certain credit, yet you are not disciplined when it comes to handling your money, the
whole situation spells out greater problems for you. You also need to be more disciplined
when repaying your loans, along with setting a realistic budget and sticking to it the best you
can. By doing these, you can attain a more positive credit rating.

OPTIONS FOR BORROWING MONEY

Now, the question is – who can you possibly turn to when you are faced with serious money
issues? Sure, there are are loved ones whom you can try to approach when you need to
borrow some extra funds. But then again, there is no assurance that they will lend you
exactly the amount you need if you require more than a few hundreds of dollars. So, when
borrowing money, there are some lending institutions and organisations that you may go to
for your financial concerns. These include banks, licensed moneylenders, pawnshops, and
those non-bank financial institutions.

Let us take a look at each one of them:

1. BANKS

For years, banks are regarded as a reliable source of credit. There are private banks and
retail banks, which have different features. A retail bank provides loans that are considered
as “mass market” types of loans, which include personal instalment loans, business loans,
credit cards, and car loans. There are various ranges of products and services offered, but
the most important thing about this type of organisation is they can provide what borrowers
need once they qualify.

On the other hand, a private bank caters largely to individuals with a high net worth. There
are special loan options available to those who can present valuable collateral. Thus, if you
have fine wines as one of your significant collections, you may have this as collateral after
the bank has conducted a valuation of the said items.

Benefits of Taking Out a Bank Loan

As banks are very particular about their reputation, there are strict government policies and
industry standards that must be met by applicants who are hoping to take out a loan.
Moreover, banks offer revolving credit facilities as with credit cards. This allows you to have
extra funds whenever needed without having to accomplish new loan applications each
time.

You can apply for a bigger loan from a bank and the interest rate is usually lower unlike with
the rates offered by other lending institutions. This usually applies to specific types of loans
including education and housing loans. When it is time for you to repay your loan, it is very
convenient to do so in the bank. There is the option to do it online, by mail, or using ATMs.
On the other hand, other financial institutions require you to make payments in person.

Drawbacks of a Bank Loan

But then again, it is not too easy to get personal loan from a bank. There is such a thing as
a Debt Servicing Ratio that borrowers have to meet, along with minimum income
requirements. As a result, not all people may be eligible for a loan when they try to get one
from a bank. Another drawback of taking out a bank loan is the impact on your
creditworthiness in case you fail to pay your loan on time. Defaulting on your bank loan
automatically disqualifies you from borrowing money from any bank. It is also difficult to
qualify for a loan from a private bank. Unless you have multi-million dollars to present, you
can never be eligible for any type of loan from this financial institution.

2. PAWNSHOP

With a pawnsop, you can “pledge” or put down something valuable that you own in
exchange for a loan. This is why you will have to bring to a pawnshop a valuable item such
as jewellery before you can borrow money. The range is from 60 to 80 percent of the total
value of what you present to the broker. This is why if you have a ring that costs $10,000,
you may be able to borrow $80,000 from a pawnshop. Then, you leave the item at the
pawnshop as you take out the money borrowed. Beginning the time you are provided a
loan, you are given 6 months to pay the principal amount borrowed including the interest.
But, if you fail to do so, the item you have left as a “pledge” will be auctioned off by the
broker.

As for the interest rate, it can go up to 1 percent for the first month. Then, it reaches 1.5
percent on the subsequent month. This is still lower than the 2 percent interest rate you can
expect from a typical credit card. It is important to note that the repayment option is not
fixed. You may repay as much as $50 on the first month or go up to $700 on other months.
Whenever you repay the loan, the pawnshop will extend the deadline for auctioning the item
by an additional 6 months. Some people choose to sell off their valuables at a pawnshop.
SBut the drawback is you can expect to receive much less than you deserve from the item,
as compared to when you sell it to a watch dealer or a goldsmith.

Benefits of a Pawnshop

It is easy to borrow money from a pawnshop because you only need to present your ID and
the valuable or pledge. They do not even go through your credit history, existing loans, or
income. But if for some reason you are unable to repay your loan, then you lose the item
you leave to them. There is no compounding of the debt when you fail to settle the loaned
amount.
Drawbacks of a Pawnshop

The main concern you may have with a pawnshop is the high interest rate. It is at 1.5
percent per month, which is lower than what banks offer for personal loans. You can also
just qualify for a one-time loan, unlike with a revolving credit facility from a bank. There is a
limit to the total amount the broker can lend you depending on the value of your pledge. So,
you must own something really valuable before you can qualify for a loan.

3. LICENSED MONEYLENDERS

If all you need is a small amount of money such as $10,000 or lower, then you may
consider approaching a licensed moneylender to take up a personal loan. There are some
cases, however, when a moneylender provides a higher amount but to selected clients. The
loans they provide are secured or unsecured.

Before a licensed money lender issue a loan, borrowers must first submit all documents
required. Some credit history checks and income evaluation are also done, and the amount
of money and the interest rates depend on the personal judgment of the lender. Since
moneylenders face a certain risk because of the less stringent standards they follow when
providing a loan, their interest rates can be quite high. Say for example you make under
$30,000 annually, the interest rate for a secured loan may be capped to 13 percent and 20
percent for an unsecured loan. However, if you make more than $30,000 a year, there is no
cap at all on the interest rate. There is also no interest rate higher than 25 percent for a loan
obtained from a licensed moneylender.

With banks, the highest interest rate that a bank can charge on a personal loan is at 8
percent per annum. As for credit card loans, the interest rate only goes up to 24 percent a
year. When it comes to loan repayments, licensed moneylenders generally require a fixed
monthly schedule for you to pay back the loaned amount. There are negotiable terms
applicable, as well.

Benefits of Taking Out a Loan from a Moneylender

When all your efforts have failed in securing a loan, you can always count on a
moneylender to give you extra funds for your immediate needs. Moreover, the whole loan
process is hassle free and the friendly financial advisors are always there to help you and
will get back to you within 24/7. You can get a loan almost in less than 3 days time, so much
faster than the rest if you ever need money for emergency.

Drawbacks of Borrowing from a Licensed Moneylender

The main thing that you need to think about when borrowing cash from a moneylender is
the high interest rate. In fact, banks are still better options, although the standards they set
are very high. So in the end, a more practical choice is a pawnshop because you may
instantly cash out your assets without compounding the debts from failed loan repayments.
The only thing you will lose is your “pledge” unless 
For many Filipinos, pawning jewelry at a neighborhood pawnshop has been the most
common and quickest way to address an urgent need for relatively small amounts of
cash.
Compared with banks, pawnshops do not impose as many documentary requirements
before releasing cash to customers. Moreover, the latter are more accessible, as they
may be found even in remote areas where banks do not operate.
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But despite the essential role these financial-service providers play, pawnshops still
suffer from a bad reputation of preying on middle- and low-income Filipinos. The
perception remains that pawnshops have a tendency to take advantage of people in
need of cash through profiteering, and that many of them are fly-by-night operators
that steal pawned jewelry.
The Bangko Sentral ng Pilipinas, which has a division dedicated to regulating
pawnshops, agrees that the pawnshop industry continues to suffer a stigma. It admits
that it receives complaints involving pawnshops from time to time, usually in terms of
operators that suddenly disappear without notifying customers about how they could
get their pawned assets back.
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The BSP, however, says the proportion of erring pawnshops to the total number of
industry players is miniscule. Ma. Belinda Caraan, officer-in-charge of the central
bank’s integrated supervision department, says the number of pawnshop branches that
have been the subject of complaints is equivalent to less than 5 percent of the
industry’s network.
The pawnshop industry has a network of nearly 17,000, which include head offices
and branches. Of the number, about 10,000 are engaged solely in the pawning
business. The rest also operate auxiliary businesses, such as money changing,
remittance facilitation, and bills payment facilitation.
MOA with LGUs
“Until now, there is still the negative view that pawnshops prey on consumers. We
want to help the industry change its image,” Caraan tells SundayBiz.
To do the task, Caraan says, the BSP is intensifying its coordination with local
government units (LGUs) as far as monitoring pawnshops is concerned.
She says that under a recently updated memorandum of agreement (MOA) between
the central bank and the Department of the Interior on Local Government (DILG), the
two government institutions shall engage in information sharing for the purpose of
better regulation of pawnshops.
Caraan says constant enhancement of regulation, with the aim of bringing down the
number of erring or fraudulent pawnshops to almost zero, will help improve the public
image of the pawnshop industry.
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In one of the central bank’s latest initiatives, its representatives, with assistance from
LGUs, conducts random visits of pawnshops all over the country. The BSP targets to
cover 500 pawnshops until 2015, and an even larger number in the succeeding years.
In the spot visits, Caraan says, BSP representatives check if a pawnshop is duly
registered and if it complies with various regulations.
Caraan says most of the pawnshops that have been the subject of complaints are not
registered businesses. She advises people planning to pawn a property to first check
the website of the BSP to see if the pawnshop to be visited is registered.
Training
The BSP likewise holds training seminars for pawnshop operators and their staff. She
says such training is conducted at least once a month by BSP personnel all over the
country. The training covers a wide range of topics, including ethical business
behaviors, valuation of assets, and detection of money-laundering activities, among
others.
Training helps improve the manner of service delivery by pawnshops, Caraan says.
“We like people to develop a positive view of pawnshops. We want the public to
perceive pawnshops not only as accessible, but as reliable and trustworthy providers
of financial services,” Caraan says.
Service providers
Minda (not her real name), an employee at Palawan Pawnshop in Mandaluyong City,
says in a random interview with SundayBiz that pawnshops must be perceived
positively given the vital role they play in meeting short-term financial needs of many
Filipinos.
“For many Filipinos who are short of cash, pawning is the easiest way to solve their
problem. It is much easier to raise money through pawning than securing a bank
loan,” she says in Filipino. 
She says the pawnshop she works for receives between one and six customers, mostly
from the neighborhood, pawning jewelry in a day.
Janet, a mother in her 50s and who has been a pawnshop customer, says pawning has
been a reliable means to meet her immediate need for cash.
“For instance, if there is an urgent requirement for house repair and I fall short of
cash, all I have to do is visit the nearest pawnshop,” Janet says. “It is not advisable to
go to a bank and try meeting all its requirements if what you need is just a small
amount of money,” she adds.
Expanded role
Because of their wide reach, pawnshops are identified by the BSP as entities for
“financial inclusion.” The term refers to the act of making various financial services
(such as payment facilitation, remittance facilitation, money changing, micro loans,
and micro insurance) accessible even to people in far-flung areas.
A study by the BSP released earlier this year said only two out of 10 Filipinos have
bank accounts. The BSP said the information is an indication that banking services are
still mostly concentrated in urban areas and are not reaching most Filipinos in rural
communities.
Caraan says, however, that pawnshops are capable of filling the gap.
Unlike a bank, a pawnshop is much easier to put up. This is the reason they are much
bigger in number compared with banks. While there are nearly 17,000 pawnshop head
offices and branches in the country, there are only about 9,000 bank head offices and
branches.
The wider reach of pawnshops is largely credited to the ease in putting them up.
Compared with a bank, a pawnshop requires less space, less staff, and needs much
less capital (each pawnshop branch is required by the BSP to have a capitalization of
just P100,000), according to Caraan.
“There is a push for financial inclusion, and pawnshops are seen to help achieve the
goal of having more Filipinos access financial services,” Caraan says. 
Some of the auxiliary services that many pawnshops now offer include remittances
facilitation, money changing, and bills payment facilitation. Moreover, a few also now
serve as “cash in-cash out centers” and offer mobile banking services.
Under the mobile banking concept, an individual may open an electronic account with
a “cash in-cash out center” (which may be a pawnshop) for a measly amount, usually
P100. To open an account, the individual fills out a form with the cash in-cash out
center and registers his cellular phone number.
Once an account has been opened, the individual may place a deposit by buying a
“mobile phone load” from the cash in-cash out center. He will then encode details of
the “load” to his electronic account using his cellular phone.
Moreover, an individual with a mobile banking account may also receive money. If
someone (who must also have a mobile banking account) sends money to the
recipient’s account, the latter shall be notified through text. The recipient may then go
to a cash in-cash out center to get his cash.
The BSP said that as the practice of mobile banking further develops, the number of
Filipinos that do not access financial services and that do not have bank accounts is
expected to
Ma. Belinda Caraan
diminish over the next few years.
Besides providing mobile banking services for low-income Filipinos, Caraan says,
pawnshops in the future may also provide other financial services. With proper
regulatory framework, the BSP believes there is scope for pawnshops to also sell
micro insurance and provide micro credit, she says.
“They serve the important role of making financial services—and even more kinds of
such services in the future—reach the poor and those who reside in remote areas.
Indeed, pawnshops are important to the economy,” Caraan says.

Read more: https://business.inquirer.net/96065/why-do-many-go-to-pawnshops-
more-than-banks#ixzz6LjD9uIU6 
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Banks

These are the best-known sources of credit. Banks can be widely divided into
retail banks and private banks.

Retail banks offer “mass market” loans, in familiar forms such as credit
cards, personal instalment loans, car loans, business loans, etc. The range of loan
products is too large to describe here, but suffice it to say that most  borrowers
can have their needs fulfilled by a retail bank.

A second kind of bank, private banks, cater mainly to high net worth individuals.
These banks offer unique loan options if you possess valuable collateral. For
example, say you have an extensive collection of fine wines – a private bank
could conduct a valuation of it. and make you a loan with the wine collection as
the security.
The Pros of Borrowing from Banks

 Banks value their reputation, and are subject to stringent industry standards and
government policing.
 Banks can provide revolving credit facilities, such as through credit cards. With
revolving credit, you need not make a new loan application every time you want
to borrow money.
 Banks can give out bigger loans compared to the other options listed.
 Banks may charge lower interest rates than the other options listed here,
particularly for specific loans such as home loans and education loans.
 It is usually more convenient to repay the bank. You can do so online, from one
of its many ATMs and branches, or by mail. The other options on this list often
require you to make repayments in person.

The Cons of Borrowing from Banks

 Banks have stringent standards for borrowers, such as Debt Servicing Ratios
DSRs) and minimum income requirements. Not everyone can qualify for a bank
loan.
 If you fail to repay banks on time, it will damage your creditworthiness with every
other bank (and some financial institutions). If you have defaulted on a bank loan
before, you may have no chance of borrowing from a bank at all.
 Private banks are mostly inaccessible to anyone without a few million dollars to
spare.

Pawn Shops
Pawn shops allow you “pledge” your valuable in return for a loan.

When you bring your valuables to a pawn shop (e.g. a gold ring), the pawn shop
will loan you a sum of money. This ranges from 60 – 80% of the value of the item.
So if you were to pledge a ring worth $10,000, the pawn shop might loan you
$80,000.

The valuable left at the pawn shop is called the “pledge”. Starting from the time
you get the loan, you have six months to repay the full loan plus interest. Failing
that, the pawn shop will auction off the item.

A typical interest rate on the loan is 1% for the first month, and 1.5% on
subsequent months (this is lower than the average credit card, which charges
2% each month).

Note that the repayments are not fixed. For example, you can choose to repay
$50 on one month, $700 on the next month, $400 on the month after, etc. Each
time you make a repayment, the pawn shop will postpone the auctioning of your
pledge by another six months.

Important: Avoid using pawn shops as a place to “quick sell” jewellery, watches,

or other valuables. You will usually get less money from the pawn shop than you
would from selling to a goldsmith, watch dealer, etc.

The Pros of Pawn Shops

 All you need to get a loan is identification (your IC) and the pledge. Your income,
credit history, and outstanding loans do not matter.
 If you fail to repay the loan, you simply lose the pledge. This is different from
personal loans or credit card loans, where the debt will continue to compound if
you fail to pay.

The Cons of Pawn Shops

 An interest rate of 1.5% per month, while lower than a credit card, is still
extremely high compared to personal loans from banks.
 Pawn shops give you a one time loan. There are no revolving credit facilities.
 The amount you can borrow is limited by the worth of your pledge.
 You need to own something worth pawning in order to get a loan.
Licensed Money Lenders
Licensed money lenders mostly deal in small loans (up to $10,000), although
some may be willing to loan larger amounts to select clients. The loans can be
either secured (there is a form of collateral, which you will allow them to seize if
you fail to repay), or unsecured.

Licensed money lenders deal with their clients on an individual basis. While they
also check your credit history and income, they may vary interest rates or the
size of the loan based on their personal judgement. As such, it is difficult to
make generalised statements about money lenders.

Due the significant risk involved in their business, money lenders charge high
interest. The rate depends on your income:

If you earn less than $30,000 a year, licensed money lenders can charge a
maximum of 13% for secured loans, and 20% for unsecured loans. If you earn
above $30,000 per annum, then the cap does not apply. It is not unheard of for
interest rates to reach above 25%.

For contrast, some of the most expensive personal loans from banks have an
interest rate of 8% per annum. Credit card loans, which are supposed to be the
most expensive, are around 24% per annum.
Most money lenders require fixed monthly repayments, but such terms may be
negotiable.

The Pros of Borrowing from Money Lenders

 They are lenders of last resort. They may give you a loan even when the banks
have turned you down.

The Cons of Borrowing from Money Lenders

 There have been ugly incidents involving the hiring of debt collection agencies,
and alleged harassment of debtors. A bank is big enough to absorb a bad debt,
and typically cares too much about its reputation to resort to such methods. Not
so for money lenders.
 Some charge interest rates that are almost extortionate

In short, money lenders are for people who – for whatever reason – cannot

qualify for a bank loan. There are few or no advantages compared to banks; they
may simply be the last resort for low-income foreigners (who have a hard time
with loan approval), or frequent defaulters.

Pawn shops are a more viable option, and can sometimes  beat a personal loan.
Pawn shops help you get cash out of illiquid assets, and won’t snowball out of
control – the most the debt can cost you is the pledge.

Cut Down on Debt: How to Utilise a Bal