Finance is a branch of economics’ concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matters related to money and the market (www. Dictionary.com). Finance is the crucial aspect of any economic development in the world. It affects every individual in the society. The financial system operates in an environments were economic and social conditions were affected its performance (Tomy Thalachirakuxchy).
As a developing country, the Philippines have a large informal sector as comprised of micro-enterprises. Many of these are severely resource-constrained small scale retailers or neighborhood store owners, market vendors and many other/ including night time workers in karaoke bars, whose survival in the business relies heavily on access to financing. This usually comes from the informal sector as well in the form of informal financiers, called “5-6” lending business. There are two types of “5-6” financiers are commonly found in such Barangays, each with a distinctive lending mechanism, Filipinos and Indian lenders. This study will give central attention to Indian financier for some several reasons. First they are considered “last resource Lenders”, because they are mostly crucial to the marginalized micro-entrepreneurs sources (Mari Kondo). Second, Indian financier exist because there is a strong demand for them (Magsaysay-2006).
The financial institution can be classified into formal and informal institutions. Formal institutions are those objectives and functions are defined and based on government laws, policies, even the rules and regulations. Example of this is banks, lending association (www.yahoo.com). The informal institution, is engaged in the business whose that come under the direct preview of the government. Examples are the Filipino and the Indian Lenders (www.google.com). The Central Bank of the Philippines is the major agency that is responsible for monitoring, regulating and oversees the operations of the country’s financial system. It is the power machinery for economic and social development (Tomy Thalachirakuxchy).
Informal money lenders, both Filipinos and Indians provide loans mostly to the consumers and small time entrepreneurs. These informal institutions group normally no formal officers, office and other similar facilities like formal institutions. This is known as “5-6” among their clients and communities dependent on them. This informal money lender plays an important role in channeling credit to small borrowers in the urban as well as rural areas of the Philippines.
The Five-Six Money Lenders so-called because of the manner in which they lend, “5-6” money lenders charge a nominal interest rate of 20% over an agreed period of time. A person who borrows 5 pesos from a “5-6”over a period of one week repays 6 pesos, including 1 peso interest. Neither Filipino nor Indians “5-6” money lenders require collateral or documents from their borrowers. The success of the borrower’s business and loan repayment history provide a gauge of the borrower’s credibility. Five-Six money lenders undertake daily collections of payment in the morning, afternoon or both. A client’s daily payment is determined by the sum of the principal borrowed plus its 20% nominal interest divided by the credit term. The loan arrangement is flexible; if the clients fails to pay one day, it is understood that he or she will pay for the day missed the next time around( Mari Kondo). Renewal of loans depends on the money lenders policy. Some “5-6” money lenders will renew clients only after the previous loan is paid in full. More accommodating lenders will renew a client’s loan earlier, subtracting the outstanding balance of the old loan from the new loan and issuing the client the remainder. The favored clients of informal money lenders are proprietors of small businesses (such as market vendors, small scale retailer and small service providers). A key success factor for “5-6” business is the development of a large, good- quality client base which continually borrows and repays without default.
SCOPE AND LIMITATION
An informal money lender is a vast subject and its operations how existed from time immemorial, the researcher limited the study on informal money lenders, its client which are informal sectors who reside and operate in the Barangay. Though informal money lender in the Philippines and us seem all over the Philippines. The researchers this study only to the Barangay Batasan Hills Quezon City. This study concentrated only in money lenders and money borrowing. These money lenders are mostly the so called five-six and the borrowers are mostly the informal sectors within the Barangay who operate in the vicinity. The scope of the study is limited to the lenders operating practices and problems encountered with their operation with respect to the informal sectors of the Barangay and their borrowing practices.
SIGNIFICANCE OF THE STUDY
This study aims to focus on the informal lenders in the Philippines. How can they affect small enterprises, market vendors and store owners and even such individuals. The economic and social growth of any country depends on an effective financial system it is responsible for financing vital programs and projects that promote and accelerate social and economic development.
This study will be useful to the Central Bank of the Philippines to knowing the informal financial institutions procure with, how they to operate this kind of institutions and what are their formalities. These study are useful the of Bureau of Internal Revenue (BIR) and Municipalities because they controlled and protect the illegal informal institutions. Such things are ignored because they had an “under the table” process to not report this kind transaction. Department of Trade and Industry to know the management practice s of these informal financial institutions for regulation papers. More over it will be helpful for the formal financial institutions to be diligent thus reducing their defaults. Further the modusoperandi of these money lenders in terms of their operational and debt collections could be a source of additional information. This study will also help the entrepreneur to know how these informal financial institutions are managing their business.
This study will likewise be also useful to the student academe and researcher who wants to conduct further studies on the informal financial money lenders and their contribution and effects to the economy.
DEFINITON OF THE TERMS
Formal finance -a financial institution with well defined structures objectives and functions and based on government laws and policies.
Informal finance -an establishment of unlicensed money-lenders does operate without the requirements and documents before to start the business.
Informal -money lenders they are not licensed to accept from the public such are coincident illegal because they charge very high interest.
Credit -confidence in a purchaser’s ability and intention to pay without immediately payments displayed by entrusting the buyer with goods or services.
Underground economy- refers to the part of the economy that generates income, but goes untaxed. It is a part of the lender who earns profit and money bur goes untaxed.
Underground- business that operates illegally.
The conceptual model that will be used in this research study is the input-process-output model where it shows the series of boxes that are connected to each other. Wherein , in the input boxes shows the problem encountered in underground lending business in the Barangay Batasan Hills Quezon City. On the second box which is the process shows the instrument used by the researcher for gathering data and last box which is the output shows for the solution, recommendation and conclusion for the problems encountered.
Problem encountered in underground lending business in assess in the Barangay
solution for the problem encountered by both money lenders and the respondents-borrower
recommended alternative courses of action for the problem encountered within the lending business
conclusion for the subject matter of the research study
STATEMENT OF THE PROBLEM
This study aims to know about the informal money lenders in the Barangay Batasan Hills Quezon City, to make up a segment of the underground financial market, their credit practices and credit management and how can they attract clients. This study also looks into the profile of the money lenders, money lenders client, their collection and paying practices and terms & conditions of transaction.
The main purpose of the study is to assess the problems encountered in the underground lending business.
Specifically it sought to answer the following sub problems.
What is the demographic profile of the respondents in terms of the following variables?
1.3 Civil Status
1.4 Years in business
1.5 Sources of Loans
1.6 Sources of Initial Capital
1.7 Prefer to ask for a Loan
1.8 Higher in interest rate
1.9 Initial & Present Capital
What is the demographic profile of the money lenders in terms of the following variables?
Years of business
From whom trade learned
Size of clients
Sources of funds
2. How do the respondents rate the problems in terms of:
2.1 Internal Environment
a. Money lenders prefer women as a potential borrower
b. Difficulty in paying the informal money lenders
c. Difficulty in the renewal of another loan from a Indian money lenders
d. Difficulty in the renewal of another loan from Filipino money lenders
e. Most convenient to ask a loan
- Informal money lenders
- Formal institutions (ex. Banks)
f. Prefer mostly by the respondent to ask for a loan
- Informal money lenders
- Formal institutions (ex. Banks)
g. Turning of the respondent into the informal money lenders after failing to get a loan from the banks, relatives, friends and other.
h. Important to know the rights and responsibilities
i. Indian as a moneylender
j. Filipino as moneylender
2.2 External Environment
a) Respondent action by the Barangay Batasan Hills on underground lending business.
b) Formal Institution threatened o informal money lenders.
c) Effect of underground lending business on our economy.
d) Imposing of taxes by the government on the informal money lenders.
e) Money lending exists because there is a strong demand for them.
3. Is there any significant differences as how the respondents rate the informal money lenders against the formal institutions on which they prefer to ask for a loan.
4. What alternative course of action is necessarily to address the problems encountered as perceived by the respondents?
a) They will register with the barangay from which they were conducting and operating their business.
b) Imposing taxes on the informal money lender.
c) Registration of their money lenders business.
d) Conducting seminars on the barangay by the money lenders within the community on how to earn profit from money lending.
Various attempts have been made by the Reserve Bank of India (RBI) - to regulate and bring into its preview, the functioning of money lenders and indigenous bankers. Recommendations from RBI that detailed accounting styles, rediscounting and deposit taking functions, support by commercial banks etc. were not accepted by associations and unions of lenders, disagreeing with some of the provisions made by RBI [Sundharam, 1996: 5.23-5.27].
Money Lenders in India come under control of the Money Lenders Act, promulgated by each of the different states. The Act essentially sets out the appointment of a Registrar-General of Money-Lenders who maintains a Register of Money-lenders in their jurisdiction. The Registrar provides for a license to money lenders to carry out their business, regulates the terms and conditions under which a loan is provided to borrowers, and arbitrates in disputes between money-lenders and borrowers in cases of default or other aspects. Compliance with the Act is rare however, and majority of the money-lenders do not obtain such a license to operate.
According to Feliciano R. Fajardo,
“In general informal money lenders charged much higher interest rates than banks and other lending institutions. Those of them who charged very high interest rates are called ‘’usurers or loan sharks” their victims are always the poor people who are not qualified to borrow from banks according to him there are two kinds of financial institutions. They are formal financial institution and informal financial institution. The formal financial institution are licensed lenders, examples are banks etc. the informal financial institutions are unlicensed money lenders, who charged much higher interest rates.
In Depth by Manny Canto
In Negros Opinion. On his article he states that “ it is an open secret that these Indian Nationals are doing business all over the Philippines and their business is within the ambit of economy. According to his research “Underground Economy: refers to the part of the economy that generates income, but goes untaxed.
Sun Star, Cebu by Godofredo M. Roperos
On taxing “5-6” lenders. He states that “money lending among those whom the banks, would never extend a loan to, and those who believe borrowings from the banks is a lot of paper work and red tape, is a highly lucrative business operation, able it a lot of hard work, sacrifice and patience. Interest, I think it is well worth their sacrifice and patience. This kind of lending that is all over the rural areas is operated only by the so- called “Bombay” or the Indian Nationals.
Press Release by Alliance of Volunteer Educators (AVE). a party-list representative states that there is need for the money-lending sector to come up with a one-stop for a small-medium entrepreneurs to avert further proliferation of the so called ”5-6” lending business. AVERep. Eulogio “amang Magsaysay” said that the rising number of people engaged in money lending in the country is a positive indicator that the so-called “underground economy” is thriving. He also states that the illegal money lenders exorbitant interest rates, don’t pay taxes to the government and violate trade rules. That the money lenders exist because there is a strong demand for them.
Maro Kondo on his article on “The Bombay 5-6”. Last Resource Informal Financiers for Pilipino Micro-Enterprises states that she considers the implications of having different financiers contribute to the development of micro-enterprises. She gives central attention to the Indian Financiers for they are regarded as last resource lenders, that their group is crucial to the most marginalized micro-enterprises and a part of their lending money flows in from Indian through informal channels, guide an interesting phenomenon in this part of the world.
The Great Greek Philosopher Aristotle has openly expressed his opposition against Money Lending on interest. He says:
‘’Money maybe a useful instrument of exchange but when it tempts people to pile up unused gains or accumulate wealth by lending money, it is sterile or unproductive and it promotes disparity in riches and financial irregularities.
A Nigrian Nationals named I A. H Ekpo and O.J Umin on their writings in “The Informal Sector”. They states that in Nigerian there are also informal money lenders, saving and credit associations and credit unions. Money lenders are believed to be highly exploitative with high rates of interest through which they extract economic surplus provided by peasant labour, capital and land. The savings and credit associations as well as credit unions operate in more formalized ways than the esusu associations.
Article On Women and Informal Credit:
Lessons from Morotele, South Africa report by M. Kongolo that on The Majority of women in South Africa’s developing areas still have no access to formal credit and inputs. Informal credit is part of the economy in which financial transactions that take place are not officially regulated or monitored; however it should not be dismissed as unimportant system.
According to Eugene Mutura
in Kigali on her write up about informal money lending, he states that “this illegal money lending has high side effects because it affects property and individual’s security as well as crippling the nation’s economy”.
In United Kingdom (UK)
Loan Sharks with are normally unlicensed money lenders will offer loan to those who need cash. However, there is always a major catch-how much has to be paid back. The terms on offer will usually be very poor. There are many cases of people borrowing small sum and paying double, a loan shark is a person or triples that original sum in interest. By definition, a loan shark is a person or body that offers illegal unsecured loans at high interest rate to individuals, often backed by blackmail or threats of violence. A loan shark is an unlicensed money lender who provides credit to those who are unable to obtain credit from a legitimate financial organization.
As the population continuously on growing still there is a informal money lenders in every area, in every places in the Philippines. Their numbers has still growing until nowadays.
Credit/Importanceof Credit-confidence in a purchaser’s ability and intention to pay without immediately payments displayed by entrusting the buyer with goods or services.
According to the Asia Development Outlook “Informal money lenders can be Categorized into four divisions: Intermittent Lenders, United Credits, tied Credit and Group finance (Tomy Thalachirazkuchy).
FIJI Daily post news on Money Lending (2009)
It is a result study commissioned by the Consumer Council and the FIJI institute of Applied Studies (FIAS), found among other things, that there was a relatively significant demand for credit by urban and pre-urban households that commercials banks could not satisfy for many reasons, which includes the lack of collateral.
According to the Doctor Ganesh Chand a director of FIJI Institute of Technology, he conducted a study and states found out that there is a relatively significant demand for credit by urban and per-urban households that commercial banks cannot satisfy for numerous reasons, with includes the lack of collateral. The study observed that people were turning to moneylenders after failing to get a loan from banks, relatives. Friends and other sources. Doctor Ganesh Chand conducted a interview regarding on money lending. According to him “Repeat borrowing is a major feature of money lending industry in FIJI. This occurs largely for short-term borrowers who promise to pay at the next pay day whether this be weekly, fortnightly or monthly. Reasons given for borrowing.
Money were investment, daily family needs, bill payment, children’s education purposes, special occasions, pocket expenses, drinking, socializing, fundraising for church activities, fathers bus fare, visa arrangement, travel to village rent, fundraising for matagali and payment for gang came cutting.
Wulan on the states in his study that informal money lending, informal credit in supply of formal credit in developing countries. Despite an increase in supply of formal credit in rural areas, informal lenders remain the dominant source of credit for the poorest households. Improvements of productivity are important in a development process. Productive investment requires funding and the access to credit us crucial for the purpose. Credit might also be a mean tide over bad time caused by sudden illness or an upcoming wedding for poor individuals. Previous studies of the informal credit market demonstrate extremely high informal interest rates charged on loans to poor individual order to make policies that can positively affect poor people’s living conditions; we must understand how informal lenders set the interest rates.
As a developing country, the Philippines a larged informal sector comprised if micro-enterprises. Many of these are severely resource-constrained vendors operating in public markets, whose survival in business relies heavily on access to financing. This usually comes from the informal sector as well in the form of informal financiers called “ 5-6”. Two types of 5-6 financiers are found in Philippines public markets, each with a distinctive lending mechanism, Filipinos and Indians.
The Vendors ranging from poor to middle class, these vendors fall into four categories determined by size, location, and type of enterprise: ambulant vendors, rolling vendors, stall vendors, and multiple stall vendors/private store owners.
Ambulant vendors sell smoked fish, vegetables, fish balls, and the like. Unable to buy or rent a stall, they market their goods along the sidewalks, in front of the larger stalls, or at the back of the market near the fish and meat vendors. Many are wives of fishermen living along coast or of small farmers who sell their own harvest supplemented with fish bought from other, cheaper markets. The ambulant vendors are those in need of informal financing. If they cannot sell enough one day they need capital in order to buy goods to sell in the market the next day.
Rolling store vendors sell food, dresses, or shoes in customized vehicles, eliminating the need to rent a stall. They occupy spaces at the back of the public market together with other vendors.
Five-Six Moneylenders. So-called because of the manner in which they lend, five-six (5-6) moneylenders charge a nominal interest rate of 20 percent over an agreed period of time. A person who borrows 5 pesos from a 5-6 moneylender over a period of one week repays 6 pesos, including 1 peso interest. Neither Filipino nor Indian 5-6 moneylenders require collateral or documents from their borrowers. The success of a borrower’s business and loan repayment history provide a gauge of the borrower’s credibility.
Renewal of loans depends on the moneylender’s policy. Some 5-6 moneylenders will renew clients’ loans only after the previous loan is paid in full. More accommodating lenders will renew a client’s loan earlier, subtracting the outstanding balance of the old loan from the new loan and issuing the client the remainder.
Filipino and Indian 5-6 lenders play different roles among the vendors at the Santa Rosa market, although the essence of the 5-6 business is the same.
Of the twenty to twenty-five Filipino 5-6 moneylenders operating in the Santa Rosa public market during the period of our survey, about 75 percent were women. Many are middle-class, long-time residents of Santa Rosa. The “big-time” lenders had other businesses, such as selling jewelry on installment. Many of the “small-timers” entered the 5-6 business to invest income generated by returning overseas contract workers (OCWs), either themselves or relatives.
Client Development and Location. The favored clients of informal moneylenders are proprietors of small businesses (such as vendors) and small service providers (owners of groceries, eateries, tailor shops, and hair salons). Since the lenders’ standard collection schedule is daily, businesses that generate cash on a daily basis are sought. Food-related businesses are ideal because of the perishable nature of food, their daily need for working capital in the form of cash, and their daily generation of profits.
A key success factor for 5-6 businesses is the development of a large, good-quality client base which continually borrows and repays without default. However, as micro-entrepreneurs of tiny businesses, the clients of 5-6 financiers are vulnerable to any shocks – external, such as economic downturn, and internal, such as family sickness. In short, regardless of their willingness, micro-entrepreneurs’ ability to repay tends to be unreliable. Therefore, an existing “good” customer for a 5-6 business can easily become a “bad” customer. Thus, simply to maintain the current size of a 5-6 business, the lender needs to look for new clients constantly.
For Filipino 5-6s, developing new clients is rather easy. First, people are more inclined to borrow from them as fellow Filipinos. They speak local languages freely, giving them a superior capacity to collect information – including rumors – about their borrowers’ credibility. Many Filipino 5-6s are women, and their preferred clients are also women, who aid in information collection and are easier to pressure for repayment. Because of their heavy reliance on information networks, Filipino 5-6s seek clients in wet markets and other sites where vendors congregate.
Credibility Check. Filipino 5-6s frequently use the mutual help scheme paluwagan to generate funds for their 5-6 business and at the same time check the credibility of their clients. The paluwagan is a kind of rotating savings and credit association: a group of people contribute the same amount of money toward a common fund and take turns collecting the total, often called the “salary,” over a fixed period (e.g., every seven days, every thirty days). The paluwagan is a common mechanism for saving money among Filipinos who do not enjoy access to banks
Collection. Filipino 5-6s collect payments daily, talking to their clients and other vendors in a cheerful manner. This style is important as it allows updates on the creditworthiness of borrowers. A customer who does not want to pay may try to hide, but this tactic is not very helpful for clients of Filipino 5-6s, who, as residents of the town, can simply visit the borrower’s house. It is also dishonorable to default, so considerable community pressure will be felt to pay back the moneylender.
Indian financiers are called “Bombay 5-6s.” Mostly men, they number between fifteen and twenty in the Santa Rosa public market. Filipinos in general have a strongly unfavorable image of Indian 5-6 moneylenders.
Who are these Indian 5-6 moneylenders who strike a certain amount of fear in Filipinos? The people called “Bombay” are overseas Indians and people of South Asian descent. Filipinos usually refer to people with South Asian features, regardless of actual nationality or origin, as “Bombay.” Because micro-credit financiers charge high interest rates, the term “5-6” can also invoke
Client Development. The preferred clients of Indian 5-6s are the same as those of their Filipino counterparts. However, Filipinos enjoy access to relatively bigger and more established businesses than Indians, who are generally seen as lenders of last resort. It is rare for a micro-entrepreneur in need of financing to approach an Indian; he or she instead seeks referral to a Filipino from an existing client. Filipinos say they are afraid of these foreigners who look “scary” and extend loans at usurious rates and that Indians are known to resort to violence if they have difficulty collecting payments. This renders it difficult for Indian 5-6 moneylenders to attract many “good clients,” and they have adopted certain techniques to meet this challenge.
Seeing a thriving business, an Indian 5-6 moneylender will often approach its owner. Almost all those interviewed acknowledged that Indian 5-6 moneylenders take the initiative. But lacking inside information, Indian lenders conduct careful observation in order to pre-screen the profitability of their prospects by the following criteria:
Size and location of the store – Bigger stores are deemed more creditworthy. Stores located inside the wet market have a lower chance of repayment default compared to ambulant vendors who can easily disappear.
Inventory – A large inventory indicates good credit standing with suppliers and a profitable business.
Volume of customers – The busier the store, the better the business.
Presence of other 5-6s – Some clients borrow from multiple moneylenders and this can indicate creditworthiness. One Indian 5-6 explained, “I know one of my clients borrows from six Indian moneylenders. Do I give loans to her? Most likely, yes. If many moneylenders have transactions with her, then her business must be good and she must be a good payer.” This can also be checked directly through other Indians who have had business with the client.
Indian moneylenders also prefer female customers and told us they seldom have male clients. If a store is run by a couple, Indians prefer the husband to be absent when they make their initial approach. They cited the following reasons:
Easier to begin a relationship – Women are responsible for purchasing small household items. One Indian 5-6 said, “Women are easier to convince because they tend to show off. They throw parties and celebrate even if they do not have enough money to spend. Then, after, they notice that their business capital is not enough, they start borrowing.”
Security concerns – Since the initial acceptance of business is rare, an Indian 5-6 moneylender needs to stay in the store to build rapport. Women are less violent than men and will not kick him out.
Confidentiality – Some women prefer to borrow without consulting their husbands and are afraid to go to Filipino 5-6s, since the information may leak out and reach their husband, other relatives, or friends. In this case, a stranger with little connection to the community is more likely to maintain confidentiality.
Prevalence of women in business – Unlike in South Asian countries, women traders, storeowners, and service providers are common in the Philippines.
Better chance of repayment – Though it was not explicitly stated by Indian moneylenders, a study on micro-credit shows that women borrowers have higher repayment rates than men.
Initial Approach and Credibility Check. Although many Filipinos speak English, for daily communication they use their local language, either Tagalog (Filipino) or a regional language in non-Tagalog regions. Indian 5-6 moneylenders can also speak some English, but many are more fluent in the local languages in which they conduct almost all their business.
A Humble but Persistent Approach. The Indian 5-6 moneylenders admit that it is difficult to convince potential customers to do business with them. The key to penetrating the market is to be humble but persistent.
Client Location and Business Mix for Risk Diversification. The time required to effect daily collections constrains the number of clients a moneylender can have and therefore profits. In order to increase collection and monitoring efficiency, geographically concentrated clients are better. Thus, wet markets, where hundreds of small stalls operate, are preferred by anyone in the 5-6 business.
Terms of the Transaction. Perhaps as a reflection of the difference in risk involved, Indian 5-6s offer shorter credit terms than their Filipino counterparts. The renewal of credit before completion of repayment is also more difficult with Indian than Filipino moneylenders.
In 5-6 transactions, while legal documents are not signed, lenders get their customers’ signatures in notebooks, calendars, or even on a piece of paper
Some lenders maintain these books at home; some keep the book with the customer and make an entry every day, and some do both. They make entries in their own handwriting so the customer cannot tamper with the record. We encountered one case, however, where an Indian 5-6 used a signed promissory note for a big loan. The contract was not notarized, however, and was therefore not legally binding. It was simply an IOU to psychologically bind the borrower to the lender.
Collection from New Clients. The time spent on daily collection visits provides the lender an opportunity to assess the whether the client will pay daily without delay and in what manner. Upon receipt of goods, some clients insult, malign, or shout at the “Bombay” 5-6 when he comes to collect. When this happens, especially with a first-time client, the Indian lender is often quiet and tolerant. He tells the client that he will come back the next day.
Daily Collections and the Motorbike. Daily collection of payments is key to the success of 5-6 businesses. If clients of Indian moneylenders are located in the wet market, collection is usually conducted in the morning while they are selling their commodities. The wet markets open as early as 4:00 a.m., and by 8:00 a.m. vendors will have accumulated the day’s profit. Many Indian 5-6 moneylenders start their collections around this time or earlier in the case of a difficult client who has not paid for some days so that he or she is the borrower’s first collector of the day. Wet market vendors are busy until around 10:00 a.m., so many moneylenders finish collecting there by 11:00 a.m. For those clients whose stores are not in the market, the 5-6 collects later in the morning or in the early afternoon