What is More in Less:

The Downside of 5-6 Lending Scheme

A Position Paper Submitted to

the English for Academic and Professional Purposes Faculty
Senior High School
Ateneo de Davao University

By:

Abadia, Kelia Hazel

Bongalos, Eurilene
Castrence, Janine Ann
Iyog, Renah Mae
Maza, Maria Emmanuelle
Olivo, Zelwyn Pearl
Quiñones, Ma. Rosette
Valdez, Francesca Bianca Ysabelle
Viray, Renzwil Michael

12 - Acquaviva

October 22, 2018

 Borrowing money from lenders and then paying it back in the future, also known as
‘utang’, has already been a part of the Filipino culture ever since the ancestral times. In fact,
one can consider that borrowing money is a temporary aid to get through financial
difficulties. In the Philippines, a person can borrow money either formally, like loaning
money from a bank, or informally, like borrowing money from his or her peers. In connection
to this, one of the lending methods that has been a current controversy in the Philippines is
the 5-6 lending system. It was actually inherited from Indian nationals in the 70s, wherein a
person borrows money from an informal lender and pays back, typically collected on a daily
or weekly basis, with an additional 20% of the original amount (Utang and Instant Pautang,
2018). There had been a number of opinions from government officials and Filipinos about
this kind of loaning and what should be done to it. Thus, the 5-6 lending system in the
Philippines must come to an end because it negatively affects the Filipinos especially the
poor.

The 5-6 lending system takes advantage of the less fortunate and makes them poorer.
If it is put in the context of the Philippines’ current state, it can’t be denied that this can be a
cause of a bigger issue. This will also become a poor substitute for careful thought and hard
work as it gives them an easy way to acquire money (Punongbayan, 2017). This results to a
dependency to this system and will give anyone a long-term debt. According to Avena
(2018), informal lenders offer loans even though it’s impossible for the borrower to pay it
given its current income and social status. For those Filipinos who belong to the lower class
and are only minimum wage earners, this lending system might be an additional liability for
them. In an interview in Pampanga, Philippine President Rodrigo Duterte also stated that
there’s nothing wrong with borrowing money, but the 5-6 lending scheme is really a
disadvantage for the Filipinos because it doubles their burden with its interest and informal
lenders also influence their borrowers to buy expensive appliances from their loans (CNN
Philippines, 2018).

Given the situation, 5-6 is also advantageous as it sustains the needs of the Filipinos
and helps them get cash instantly and conveniently especially in emergency cases. According
to Cash Mart (2017), the 5'6 lending scheme is flexible. Around 5 to 6 borrowers usually
choose to pay daily as it is more convenient. Given an example: paying a hundred pesos
everyday looks smaller than paying thousands at the end of two or three months. That's why
micro-vendors and even simple housewives borrow money from lenders of this lending
scheme. In addition, an article in Kyoto Review of Southeast Asia (2003) said that this
lending scheme is flexible because if the client forgets or fails to pay for one day then he or
she can pay it for the next time around. Also, since the lender's usual schedule of collection is
daily, businesses that generate cash on a daily basis are highly benefited.

On the other hand, the lending system of 5-6 has a very high interest. According to a
personal testimony by Jose Michael Viray, an Accountant in Delmo and Viray Consulting, he
said that the interest rates of the 5-6 Lending System are usually 20% or higher per year but if
people will loan in a bank, it is only 5% per year. The payment for the principal and interest
in a 5-6 lending system will be monthly. Consequently, if a person will not be able to pay the
principal and interest, then an interest will be added to the payment of the borrower.
However, if people will loan in a bank, they could pay the principal and interest monthly,
quarterly or yearly and most important of all, the interest rate in a bank is low. In addition,
according to a personal experience of Mrs. Nancy Conte, who once borrowed from 5-6
lenders said that the terms and conditions of loan sharks look good and availing for it is quite
easy, but they actually charge high interest and other unreasonable charges to their borrowers.
As these loan sharks come daily for collection, your finances become under their mercy. She
said that borrowing from them is literally like losing freedom over a person’s finances.
Paying them becomes the highest priority instead of spending it on needs like food, school
fees, etc. They also engage in shady practices of intimidating or even humiliating their
borrowers just to spit out money from them.

However, loaning in a bank needs a number of legal documents to be filled out while
5-6 lending system does not. It has been beneficial to the public since it does not hassle the
money borrowers to comply with a lot of legal requirements to get approved. Regarding the
other legal lending systems in the Philippines, it is frustrating enough for the people to
borrow money because it involves much paperwork before they can get the money (My
Financial Coach, n.d.). According to BDO Unibank (2012), these paper works include
application form, authorization form, auto-debit arrangement form, and beneficiary
information form. Furthermore, 5-6 money lending system is also advantageous for them
because of fast approval where lenders can decide to let people borrow as fast as less than 24
hours. This type of lending system is helpful since in traditional banks, it takes a long time
before approving the borrower's application due to data verifications, background checks, and
credit investigations (Zoleta, 2018). Moreover, according to 2015 National Baseline Survey
on Financial Inclusion (BSP), one key reason why Filipinos choose to borrow from informal
lenders is borrowing from formal lenders is much costly and inconvenient. 28% of the survey
result cited that they had difficulties on accessing loans or credits from formal lenders since it
requires high collateral, while 20% cited that it is because of numerous documentary
requirements.

The 5-6 lending scheme violates the Republic Act 9474 or Lending Company
Regulation act of 2007 as stated by Commissioner Teresita Herbosa (Lazo, 2016). She also
added that the Security and Exchange Commission (SEC) may invoke the RA 3765 or Truth
in Lending Act because this lenders often forced their borrowers to make loans as if they
bought an appliance through credit. As stated by Kritz (2013), any sort of informal lending is
contrary to Philippine law. The Lending Company Regulation Act of 2007 stipulates that a
lending company not otherwise regulated by law may only be a corporation and must be
granted authority to operate by the SEC. The Truth in Lending Act covers any creditor and
requires that information regarding the total amount to be financed, and the interest to be paid
both in terms of a simple annual percentage and in pesos be furnished to the borrower in a
clear statement in writing. Every informal lender violates both these laws which carry
penalties; a fine of up to P 50,000 and a prison sentence of up to 10 years for a violation of
RA 9474 and a fine of up to P 5,000 and a prison sentence of up to one year for a violation of
RA 3765. Also, according to Gamboa (2017), informal money lenders or the so-called loan
sharks including those engaged in the 5-6 scheme who usually charge interest rates or
victimize borrowers through fraud, falsification, and harassment. They represent lost
revenues for the government being often unregistered and unregulated. These companies ask
for general and personal information, require a fee to process the loan and once the payment
has been made, simply disappear. Some supposedly have fake websites to make them appear
legitimate.

On the side of the lenders, 5-6’s high interest gives them higher lending revenues. As
stated by Punongbayan (2017), the 5-6 lending system involves lenders – most of which are
Indian nationals – who issue small loans at a usual interest rate of 20%. However, informal
interest rates as high as 60% are not really unusual. Imposing higher interest rates on the
borrower’s loans means greater profit for the lender. A paper entitled “The Bombay ‘5-6’:
Last Resource Informal Financiers for Philippine Micro-Enterprises” based on a case study of
the 5-6 lending system in Sta. Rosa, Laguna found that the market share for the loans that
Indian 5-6 lenders release have increased after the 1997 Asian financial crisis. Due to this, it
is possible that the Indian lenders’ market share has gone up. The previously-mentioned
study’s conclusion also states that while it is noticeable that Indian moneylenders are deemed
socially undesirable people in the Philippines, hosting Indian 5-6 lenders could serve as an
asset for the Filipino society due to their different risk diversification strategies, especially in
times of downturns in the country’s economy. Informal lenders like the 5-6s may be of help
in solving such problems as providing funds for owners of micro-enterprises in times when
they are vulnerable to the external shocks of globalization (Entrepreneur Philippines Staff,
2017).

The 5-6 lending scheme has both positive and negative impact for anyone considering
its convenience and interest respectively. Still, this method of lending must stop because it
takes advantage to the lower class citizens of the Philippines, it gives a very high interest to
its borrowers, and it is a clear violation to the country’s regulations. For the Filipinos, it is
better to be financial literate in spending money than depending on an easier yet risky way of
borrowing. People must know and be knowledgeable enough when it comes on holding and
saving money such as doing investments and loans. For the businessmen, earning money
from an unjust method is like holding an invisible income for it comes from a dirty work.
They must know the value of having a business by treating it not just a source of money, but
also a service activity. To add more, the government may implement stricter and specific
laws against this scheme and create a program that will make the Filipinos be aware of
financial literacy and give assistance to them, especially the poor.
References

Avena, K. (2018). Warning: an informal quick cash loan, salary loan, and 5-6 loan can be
dangerous. Retrieved October 17, 2018 from
https://www.loansolutions.ph/blog/warning/quick-cash-loan-salary-loan-personal-loan

BDO Unibank. (2012, March 28). Personal Loan. Retrieved from

https://www.bdo.com.ph/personal/loans/personal-loan

Cash Mart. (2017, March 22). 5 Reasons Why Duterte Ordered to Arrest 5-6 Money Lenders
in the Philippines. Retrieved from
https://cashmart.ph/5-reasons-why-duterte-ordered-to-arrest-5-6-money-lenders-in-
the-philippines/

CNN Philippines. (2018). Duterte says he wants to end 5-6 lending scheme. Retrieved from
https://cnnphilippines.com/news/2018/07/10/duterte-wants-to-end-5-6-lending-
scheme.html

Entrepreneur Philippines Staff. (2017, January 16). 5-6 Loans Actually Helped After Asian
Crisis, Study Says. Retrieved October 11, 2018, from
https://www.esquiremag.ph/culture/lifestyle/despite-high-rates-bombay-5-6-loans-
helped-after-asian-crisis-says-study-a36-a1733-20170116-src-entrep

Gamboa, R. (2017). Money lenders. Retrieved from

https://ww/philstar.com/business/2017/09/25/1742570/money-lenders

Krits, B. (2013). The informal lending trap. Retrieved from

https://www/manilatimesnet/the-informal-lending-trap/26457

Kyotoreview.org.(2003).The “Bombay 5-6”: Last Resource Informal Financiers for

Philippine Micro-Enterprises. Retrieved from
https://kyotoreview.org/issue-4/the-bombay-5-6-last-resource-informal-financiers-for-
philippine-micro-enterprises/
Lazo, K. (2016). SEC to ban ‘5-6’ lending. Retrieved from
https://www.manilatimes.net/sec-ban-5-5-lending/291322/

My Financial Coach. (n.d.). Apply for a home loan in the Philippines. Retrieved from
http://myfinancialcoach.ph/article/housing-loan

Punongbayan, J. (2017, January 14). '5-6' lending? Symptom of a larger problem. Retrieved
from
https://www.rappler.com/thought-leaders/158306-loan-sharks-money-lending-
symptom-larger-problem

Utang and Instant Pautang. (2018). A Simple Guide to the Lending Culture in Philippines.
Retrieved from
https://cashmart.ph/utang-guide-lending-culture-philippines/

What Is "5-6" And Why It Must Be Avoided. (2014, October 8). Retrieved from
https://www.ecomparemo.com/info/what-is-5-6-and-why-should-you-never-resort-to-
borrowing-from-shady-lenders/

Zoleta, V. (2018). Pros and Cons of Borrowing from Private Lenders. Retrieved from
https://www.moneymax.ph/blog/private-lenders-philippines