Chapter 1

THE PROBLEM

Introduction

Borrowing money to informal lenders is an illegal practice but very

common or rampant throughout the country (Alera 2006), even in our own province

(Camarines Norte) wherein we can see Indian nationals which are commonly known as

“Bumbay” or 5-6. We can usually see them riding their motorcycle, making their rounds

daily or weekly and collecting installment payments from their borrowers that are usually

small store owners, stall owners or anyone that is running a small business (Gamboa

2017). According to Dhoan (2011), borrowing money to informal lenders is now usual

and is already accepted in our society as a source of finance. Many had depended their

financial needs like emergency bills and school fees to informal money lenders as it was

a quick cash source and no processes are needed. It was also a source of capital for small

business owners like street vendors and market vendors who are not capable of providing

their starting capital and they really wanted to open a business or even a source of

additional capitals when the current business is slow and there is no other source of cash

(Dula & Grego 2015).

Many people are unfortunate and are unable to finish their studies, and

these people are unemployed and can never be employed due to lack of education. On the

other hand, they mostly prefer establishing their own simple business but they do not

have their own money to invest as their starting capital and they don’t have the

knowledge and the ability to borrow money from banks. That is the reason why they
prefer borrowing money to informal lenders. Another sort of situation is an individual

who has a large number of household members and his income is the only source and is

also not enough to sustain the needs of the household, this leads on depending their

financial needs to informal lenders. As Zapata (2006) stated in his blog, those who are

less educated, unemployed, married couple who as a large household size tend to borrow

to informal lenders. Most people prefer informal lenders than banks because the process

of borrowing money from a bank is very time consuming (Gamboa 2017), banks can’t

reach those people who live in the country side and banks are sometimes too intimidating

for average people (Motecillo 2015) or people simply lack of intangible assets (Dula &

Grego 2015).

Karaivanov & Kessler (2017) said that there are advantages in borrowing

money from informal lenders like friends or relatives in the way that they may not charge

you any interest rate at all and can let you pay whenever that you already have your

money because they can understand your situation. But not all people have their friends

or relatives that will lend them money to borrow, and those people who don’t have any

friends or relatives that will help them obviously relies on informal lenders like

“Bumbay” or 5-6 even though the interest rates are a bit high. Instead of being a good

help for people who badly needed money, these informal lenders charge them at usually

20% interest rate of the principal amount they have borrowed. Where many have troubles

in paying back their debt or cause them to just borrow money again to pay their previous

debt, until they habitually borrow and will lead their life to worst scarcity of money.

As Accountancy Business and Management students, the researchers

decided to conduct a study that is subject to businesses which are inclined with informal

2
money lenders. It is due to the rampant loans on informal money lenders while there are

many banks and lending companies that are existing. The researchers considered those

market vendors specifically the public market vendors of Daet, Camarines Norte who do

have debts to “Bumbay” or 5-6 as their respondents. The study is entitled Dependency of

Daet Public Market Vendors to Informal Money Lenders as their Source of Capital. It is

to sort out some of the possible reasons why they had to borrow money from informal

lenders and to identify whether they have troubles encountered in their business that

cause them to borrow money to informal lenders and to measure how dependent are they

in this sector when it comes to capital source. Most importantly this study is proposed to

help the public market vendors of Daet, Camarines Norte with the problems that they are

facing regarding their business, by finding ways and strategies that they may apply in

managing their business and will lessen or avoid them from borrowing money to informal

money lenders.

Statement of the Problem

This study aims to determine the dependency of public market vendors to

informal money lenders as a source of capital.

Specifically, it will seek answers to the following questions:

1.) What is the profile of the public market vendor based on:

a.) Civil Status

b.) Products sold

c.) Number of dependents

d.) Informal Money Lender engaged in

3
 2.) What problems do they encounter in maintaining their business’ capital?

3.) How dependent are they in borrowing money to informal lenders to provide their

capital for their business?

4.) What are the possible solutions or strategies that maybe applied to their business

and to themselves to avoid being dependent to informal money lenders?

Hypothesis

Public market vendors of Daet, Camarines Norte are not dependent to

informal money lenders in terms of their capital maintenance.

Scope and Limitations

The study only focuses to measure the dependency of the public market

vendors to the informal money lenders as their source of capital. Specifically, the public

market vendors of Daet, Camarines Norte will be this research’s respondents. The

researchers chose the town of Daet because it was the capital of the province and the

public market is located at the Centro of the town and is bigger than other town’s public

market. Aside from that, the researchers’ school is only meters away from the market. It

will be easy for the researchers to reach the public market without spending any cent for

fare expenses when the researchers conduct a survey to gather information and data of the

study. This study will be studied starting June 2018 to March 2019.

Significance of the Study

This research is believed to benefit the following sectors:

Public Market Vendors will have their strategies to apply in their business for them to

maintain their capital and will also avoid borrowing money and being dependent to

informal money lenders to maintain their capital.

4
Family of the Public Market Vendors will not suffer from shortage in budget and can

be satisfied by the necessities provided for them.

Future Public Market Vendors will have an advance knowledge and strategies in

managing the business and maintaining the capital that will avoid them to be engaged at

an informal money lending and will avoid to be dependent on it.

Town’s Local Economy will improved its economic rate and will lessen those illegal

money lenders.

Future Researchers will have further knowledge for their study regarding the

dependency of public market vendors to informal money lenders and this study can be

their reference in their study about informal lenders.

Definition of Terms

For further clarifications and for better understanding, the following are

the terms used in this study and is defined operationally and conceptually.

Dependency – According to google, it is the state of relying on or being controlled by

someone or something else. This happens when you cannot function without the help of

someone or something. In this study, it means being dependent in a way that a business

owners cannot begin, continue or sustain his/her business without relying to informal

money lenders.

Informal Money Lenders – According to google, it is a person or body who offers loans

at extremely high interest rates usually without holding relevant authorization from the

local financial regulator. In this study, they the individual persons who allows people

whom they know or they don’t even know to borrow money from them with a 20%

interest rate.

5
Bumbay or 5-6 – According to google, they are Indian nationals who offers loans at a

very high interest rate and they are the one making their rounds to collect installment

payments whether daily or weekly basis. In this study, they are the common informal

lenders that offers loans to small business owners for their capital.

Capital – According to google, it is a wealth in the form of money or other asset, it is

owned by a person or an organization, or available or contributed for a particular purpose

such as starting a business or investing. In this study, it refers to the money needed to

start or maintain a business, it is intended for establishing stalls and procurement of

goods and products to be sold.

Interest Rates – According to google, it is the proportion of the loan that is charged as

interest to the borrower, typically expressed as an annual percentage. It is the amount

expressed as a percentage of principal by a lender to a borrower for the use of assets. In

this study, it is the payment in return for borrowing an amount of money, in a lenders

point of view, it is their profit for letting someone use their money.

6
 Notes

Alera, D. 2016, Informal Money Lending Business, Retrieved from http://www.mpspc.

edu-ph/index.php/15-abstract/156-informal-money-lending-business

Gamboa, R. 2017, Money Lenders, Retrieved from https://www.philstar.com/business/

2017/09/25/17432570/money-lenders

Dula, R. & Grego, M. 2015, Informal loan trap: Bombay 5’6 and its Effect on Micro
Entrepreneurs in Tacloban City, Retrieved from https://www.imtfi.uci.edu/
research/2015/dula_grego_2015.php

Zapata, N. 2006, Credit Decision and Rationing Rules: A Study of Informal Lenders in
the Philippines, retrieved from https://www.researchgate.net/publication/26521
7643_CREDIT_DECISION_AND_RATIONING_RULES_A_STUDY_OF_
INFORMAL_LENDERS_IN_THE_PHILIPPINES.

Montecillo, P. 2015, Why Borrowers Prefer Informal Fund Sources, Retrieved from
https://www.business.inquirer.net/197421/why-borrowers-prefer-informal-fund-
source/amp

Karaivanov, A. & Kessler, A. 2017, Advantages of Informal Loans – Theory and

evidence, retrieved from https://ideas.repecorg/a/eecrev/V102y2018icp100-128-
html.