This document summarizes various sources of credit in the Philippines, including individual money lenders, retail stores like sari-sari stores, pawnshops, commercial banks, commercial paper houses, savings banks, rural banks, development banks, investment banks, savings and loan associations, finance companies, credit unions, and insurance companies. It provides details on the origins and operations of each type of credit source.

1. Sources and Bases of Credit (Ref.: Money, Credit and Banking by Miranda)
Important Sources of Credit
Individual Money Lenders
-individual money lender who may lend his surplus to those in need so that it will bring some
income to him
-no collateral is required on the part of borrowers to secure the loan of whatever sum money
-the money lender may be constrained to collect a very high rate of interest over and above the
legal one in order to protect his personal interest and thus become what is known as “loan-shark”
The unlicensed money-lender, who is often referred to as a “loan-shark”, does a thriving
business in the grant of loans at very exorbitant rates of interest.
Usurious money lenders are called as “loan-sharks” simply because once they get hold of a
borrower, they rarely let him go. These lenders are not interested in the repayment of the loan
but in keeping the borrower continually in debt. Most of them refuse to accept any payment
except the full amount, and all of them charge exorbitant rates of interest. They find their
customers among those who are ignorant of, or unable to borrow from reputable sources.
Retail Store
Easily the biggest source of merchandise credit in the Philippines is the retail store, more
particularly known as the “sari-sari” store. This becomes evident when one takes into account
the number of such sari-sari stores in every barangay of our communities. These stores cater to
the everyday needs of the consumers, which explain their large numbers. Such stores are run by
Filipinos and aliens alike, although after May 15, 1954, in accordance with the provisions of the
Retail Trade Nationalization Law, no alien is permitted to engage in this type of business.
Pawnshops
The present-day pawnshops owe their origin from the Montes Pietatis which were established
by Franciscans (Friar Minor as they were invariably called then) in Italy. The terms mons referred
to any form of capital accumulation and pietatis from the Latin “pietas” meaning pious. As such,
montes pietatis consisted of charitable funds from which loans came from, which were
exempted from interest, but secured by pledges. Such loans were granted to the poor.
According to Lien Sheng Yang, a Harvard professor of Chinese history, pawnshop is the “oldest
credit institution in China” whose origin could be traced to as early as the middle of the Six
dynasties (about the 5th century) when Buddhist monasteries practiced pawnbroking with large
amount of donated wealth in their treasuries.
In the Philippines, pawnbroking is also one of the oldest credit institutions and is believed to
have been introduced by the Spanish friars when we were under the Crown of Spain. It may be
interesting to point out, in this connection, that the oldest saving bank, the Monte de Piedad,
was granted the privilege of lending money against pledge of jewelry.
Commercial Banks

2. Commercial banks are engaged in the grant of loans not only to businessmen, but also to
individuals for personal purposes. Generally speaking, in the case of personal loans, borrowers
are required to furnish the bank with the written guarantee of two or more responsible persons
that the contract will be faithfully performed. These guarantors of the credit of the borrower are
called “co-makers”. Legally, they can be held for principal and interest due, in the event that the
borrower for whom they acted as guarantors fails to discharge his obligations incurred with the
bank. As a common banking practice, a charge of 6 to 12% of the entire loan is deducted in
advance to represent the interest.
There is also what is known as “character loan” wherein no guarantors nor pledges are required.
Such loans, usually consisting of small sums of money, are based upon the character of the
borrower. Hence, the descriptive term “character loan”. This kind of loan is being granted by the
PNB.
In the case of loans granted by the bank for commercial purposes, the borrower may be given
the amount of applied for and approved in terms of cold cash. In other cases, the bank furnishes
the borrower not with money, but instead allows him to deposit against which the said
borrower can draw checks. These deposits are created as part of the lending operations of the
bank.
Commercial Paper House
The commercial paper house is a financial institution that brings together the buyer and seller of
short-term commercial paper, that is, the lending institution and the borrowing business
enterprise. The commercial paper includes notes, bankers’ acceptances, trade acceptances, and
foreign exchange bills. A commercial paper house also buys issues outright at a discount and
resell the notes at a slightly higher price to investors. Under such an instance, the commercial
paper house assumes the risk of loss that may result from sudden change in money rates in the
market, or even, of buying an issue that cannot be sold because investors shy away from it.
Most of the paper bought by a commercial paper house takes the form of unsecured single -
name promissory note.
Savings Bank
Since savings banks accumulate the small savings of depositors, such accumulated funds are in
turn invested in bonds or in loans secured by bonds, real estate mortgages, and other forms of
security.
In its broadest meaning, the term savings banks include mortgage banks as well as savings and
loan associations. Savings and loan associations are established on the principle of cooperation.
Rural Banks
In the rural areas of the Philippines, rural banks provide the chief source of credit especially for
those engaged in agriculture who need these facilities badly. Such type of banks were unknown
in this country prior to the enactment of RA 720, known as the Rural Banks Act.

3. The growth and development of these banks attest to the pressing need of the people in the
rural areas for loanable funds. Undoubtedly, the existence of rural banks in the towns and
communities has greatly minimized the existence of usurious practices of some money lenders,
which has victimized our poor people who cannot avail themselves of the credit facilities which
may be offered by commercial and savings banks because of certain requirements imposed by
them.
Development Banks
Like those of rural banks, development banks from an important part of our banking system
extending the necessary fund for purposes of hastening development. They have been largely
responsible for the birth and development of certain industries that are now quite common on
the Philippine scene.
Investment Banks
Investment banks, at times termed as investment houses, bridge the gap between those who
have idle funds not knowing where to invest them and those in dire need of such funds.
As sources of credits, they help raise the needed funds that are not easily procurable elsewhere
for use because of the sizeable amounts involved and the length of time for their use.
The funds provided by investment banks are important not only to entrepreneurs, but to
government as well, which requires huge expenditures to support the various economic projects
that are part of its program.
Savings and Loan Associations
Another source of credit are savings and loan association which may be described as “that
corporation engaged in the business of accumulating savings of their members as stockholders,
and using such accumulations, together with their capital in the case of stock corporations, for
loans and / or investments in the securities of productive enterprises or in securities of the
Government, or any of its political subdivisions, instrumentalities or corporations.
Finance Companies
As an industry, it shares with government the universal goal of achieving a strong and healthy
financial system. Given an conducive regulatory environment, finance companies can effectively
mobilize resources needed for productive investments. They have developed into a major
source of funds for consumer, sales and commercial financing.
Finance companies may be divided into three categories:
1. The installment sales finance companies-discount consumer installment notes arising
through the sale of merchandise
2. The consumer finance companies-engaged in lending cash directly to the consumer
3. Commercial finance companies-which through various types of loans serve business and
industry
Credit Unions
Credit unions are corporate organizations which lend savings of members to some of the
members of the group. However, in order that credit unions can be successfully operated, they
should consist of closely knit, cohesive, natural groups of employees with low labor turnover.

4. Advantages
1. Low cost of operation, ordinarily, the office space for such purpose is donated by the
management
2. Losses are very small in view of the fact that there exists an intimate relationship among all
the members of the credit union
3. Rates charged for interest by credit unions are very much lower than those charged on
similar loans by commercial lenders
4. Member-borrowers also become entitled to the receipt of patronage dividends when the
same is distributed by the credit union
Insurance Companies
The business of insurance companies is to enter into insurance contracts with those who wish to
provide for such contingencies as death or fire. They receive premiums and pay out money on
the occurrence of the particular contingencies covered by the contracts. Insurance companies
cannot, therefore, be regarded as financial institutions per se, like banks. They are, however,
important participants in the money and capital markets, because they must accumulate
insurance premiums to build up funds to meet policy claims, and they must meanwhile employ
these funds in loans and investments. Thus, their financial functions are a necessary
consequence of their proper business of insurance.
Other Sources
GSIS-Government Service Insurance System
SSS-Social Security System
IGLF-Industrial Guarantee Loan Fund / Agricultural Guarantee Loan Fund
Pag-Ibig Fund-intended to boost housing development in the country
KKK-Kilusang Kabuhayan at Kaunlaran-established as a priority program under EO 715 on August
6, 1981 is intended to involve the whole citizenry and calls for the mobilization of the
people to direct their creative energies and resources toward productive participation in
development
C’s of Credit
1. Character. Character is the most important consideration in the proper determination of the
credit rating of an individual. The character of an individual is the aggregate of distinctive mental
and moral qualities belonging to him. It denotes his good moral built up by long years of honest
dealing. The character of the borrower indicates his willingness to discharge his financial
obligation, that is, to repay the loan as promised. However, it does not indicate his probable
ability to pay.
2. Capacity. As a basis of credit, capacity signifies the ability to pay when a debt is due. It need not
be stated very strongly that no matter how desirous an individual may be in discharging his
financial obligations, however, if he suffers from lack of ability to pay, that is, lack of adequate
income, he will represent and remain a poor credit risk.
One’s capacity in business likewise is circumscribed, among others, by factors relating to
income, that is, the difference between sales and cost of operation.
3. Capital. For credit purposes, credit represents the financial strength of the risk, that is, it
consists of the amount and quality of goods and property, expressed in terms of money, which
an individual or firm possesses over and above, his financial obligations.

5. From the standpoint of mercantile credit, it may present the firm’s property like equipment,
building and the like. A bank making loans to business concerns focuses its attention on the
financial statement filed by the borrowing concern.
4. Collateral. Speaking of collaterals, creditors as a general rule would prefer loans or credits to be
backed up by collaterals as much as are necessary for their self -protection.
Thus, collateral must therefore be something of value, which can be easily converted into cash,
deposited as a pledge with a lender to secure the repayment of a loan. If a borrower is unable to
discharge the loan obligation when due, the lender is free to sell the collateral and collect the
debt from the proceeds of the sale. The collateral, which may be required, may vary with
respect to kind of and amount sought to be obtained as a loan and the term under which the
loan is granted.
As a common banking practice, the amount of the collateral must be 40% bigger than the
amount of the loan. Such a practice may be explained by the desire of the bank to protect itself
against undue fluctuations in the market value of the collateral that may take place during the
period of the loan obligation. Collaterals may partake of various forms, as real estate property,
fishpond, or corporate securities like stocks and bonds. Collateral however cannot and should
not be made as substitute for character as a basis of credit.
5. Conditions. Economic conditions exert profound effect upon the grant of loans and credits. It
may be rightly mentioned that loans and credits may be extended at certain times and may be
denied at other times.
6. Country. Since, as had been stated time and again, the sale of goods and services in any part of
the world on credit involves risk, it follows that every factor should be carefully considered and
scrutinized insofar as they affect credit risk.
7. Currency. Not only is the stability of the country of importation an important factor to reckon
with in the consideration of credit risk in international trade transactions but, equally so is that
which pertains to that of currency. The risk of exchange must also be taken into account.
Confidence. After having indicated and discussed the various bases of credit, one is led to
conclude that, in the ultimate analysis, credit is founded on confidence – which by far is the
principal C of credit. For any credit transaction to take place, the businessman, whether he be a
seller of goods or services on credit must have confidence:
- on the character of the buyer, that is, whether he is trustworthy and, as such,
represents a good moral risk
- on the capacity of the buyer to enter into a valid contract and conduct his business
profitability
- on the adequacy of the capital possessed by the debtor to support the transaction
for which credit is required
- on the fact that the collateral put up by the debtor is something of value and will
not become subject to wide and violent fluctuations in the market
- on the soundness of policies of the government of the country of importation in the
case of foreign trade
- on the stability of currency
Briefly, observed then, confidence is the cornerstone of every credit transaction-the prime
mover of credit economy.