Loans in the Philippines
Monday, 14. August 2006, 09:49:13
I don't post on Filipino anymore because it is too much trouble answering the hate mail, but I have to post this.
The average villager has a monthly cash income of 1500 to 2000 pesos ($30-40), the average city dweller in my area makes 8000-12000 ($160-240) per month. What happens when you have an emergency? Your baby gets sick, you need to build a new house, or go rescue a daughter in Manila who is working as maid but is being held as a slave (yes, it happens a lot)? You need 5000 pesos but don't have it.
Your options:
1) 5/6 loans. You borrow 5000 pesos and have to pay back 6000 after a month, usually as 200 pesos each day. This is by far the most common way to borrow money and anyone with capital is involved in the business. There are agents who work specific companies, making loans to the employees. Teachers and other government employees are favorite loan targets.
In most villages, the ladies who run the church make loans. This struck me as very odd, church-going ladies as loan sharks, but they are trusted and have respect in the community. So they are more likely to be repaid and offer more lenient terms.
2) Prenda/sangla. You can pawn whatever you have of value, usually at 50% of its value. Pawnshops are on most blocks in most cities because of the huge profits they make. If the person who pawns the item redeems it, they pay 4.5% interest per month. This is relatively low because the owners know that most items will not be redeemed. That is also why there are few dedicated jewelry shops in the country: pawnshops are the primary sellers.
Prenda extends farther than pawnships, however. My wife was offered the following deal today: loan 4000 pesos, receive all income from a farm for 2 years, or longer if the 4000 pesos cannot be repaid in 2 years. The minimum expected income is 9000 pesos per year. If, and it's a big if, the money is repaid, then she will get 18,000 pesos profit on a 4000 peso loan. If it is not repaid, she will own the farm. Because she is married to a Westerner, she is offered these deals every week.
3) Loans to friends. It's not often that a loan to a friend is interest-free. Typical interest is 10-15% per month.
Why are interests rates so high? The Philippines is a low-trust environment. People default on debts all the time. If it is a large sum, say $400, they may move away. There are no credit bureaus, no credit checks, just personal relationships. The high interest rates pay for the high default rate. If you prenda a farm, there is a basic contract signed with the neighborhood leader (barnagay captain).
I mentioned that anyone with capital is probably making loans. This includes Westerners who live here. In Manila, few foreigners were involved because they were afraid that the rich Filipinos would have them beaten or killed for interfering in the business. In my current city, several guys run loans. I consider this to be a slimy business because someone with money is making extortionate interest from people with no money. Their view is that the loanees can go down the street and get the same deal from a Filipino so they are doing no harm and might be doing some good.
Generally speaking, all wives of Westerners make these loans to earn extra pocket money.
This is one issue that prevents the creation of small businesses. Let's add some reasons:
1) Access to capital is very expensive, as I said above
2) The land in most provincial cities is owned by a small number of (dominantly) Chinese-Filipino families in each locale. They control land prices, rents and what kind of businesses can be opened.
3) There is no innovation in goods and services offered. You will find the same items in every clothing store, grocery store, sari-sari (small convenience store) because distributors offer little selection. (Anecdote: a buddy told me that the government took over land in his city from squatters and built a series of small storefronts. Of the 100 stores, 43 were cellphone stores selling the same used phones and phone credits.)
4) Want to open a store in a mall? The rents are attrocious: at my major mall, the rent is about $1000 per month plus 10% of gross sales. Nearly every store in the mall is run by the mall owners because no one else can afford to pay that much. (This structure allows you to pay 400 pesos for the same t-shirt that costs 100 pesos in the local market.)
5) Structural issues. Do you want small change for the till? You can't get it for free. 500 pesos of change will cost you 550 pesos. Want to run an internet cafe? Be aware that blackouts or power glitches will knock you offline frequently. Want to run a delivery service or passenger service? Note that the roads are terrible and vehicle repairs will be a monthly occurrance (the rumor is that 1/3 of road money goes straight to the mayor's family).
5) Corruption. The local small mall owner claims that the local McDonalds owner pays 10% of gross to the mayor to remain open. Your business permit may be 'lost' and your business closed if you make the wrong enemy or make too much money. The most frequent robber of a business? The security guard (or ex-security guard) which most businesses must hire.
Overall, it is a depressing place to be ambitious. It is even more depressing that voters overwhelmingly re-elect mayors like this because of renewed promises to fix things.
The average villager has a monthly cash income of 1500 to 2000 pesos ($30-40), the average city dweller in my area makes 8000-12000 ($160-240) per month. What happens when you have an emergency? Your baby gets sick, you need to build a new house, or go rescue a daughter in Manila who is working as maid but is being held as a slave (yes, it happens a lot)? You need 5000 pesos but don't have it.
Your options:
1) 5/6 loans. You borrow 5000 pesos and have to pay back 6000 after a month, usually as 200 pesos each day. This is by far the most common way to borrow money and anyone with capital is involved in the business. There are agents who work specific companies, making loans to the employees. Teachers and other government employees are favorite loan targets.
In most villages, the ladies who run the church make loans. This struck me as very odd, church-going ladies as loan sharks, but they are trusted and have respect in the community. So they are more likely to be repaid and offer more lenient terms.
2) Prenda/sangla. You can pawn whatever you have of value, usually at 50% of its value. Pawnshops are on most blocks in most cities because of the huge profits they make. If the person who pawns the item redeems it, they pay 4.5% interest per month. This is relatively low because the owners know that most items will not be redeemed. That is also why there are few dedicated jewelry shops in the country: pawnshops are the primary sellers.
Prenda extends farther than pawnships, however. My wife was offered the following deal today: loan 4000 pesos, receive all income from a farm for 2 years, or longer if the 4000 pesos cannot be repaid in 2 years. The minimum expected income is 9000 pesos per year. If, and it's a big if, the money is repaid, then she will get 18,000 pesos profit on a 4000 peso loan. If it is not repaid, she will own the farm. Because she is married to a Westerner, she is offered these deals every week.
3) Loans to friends. It's not often that a loan to a friend is interest-free. Typical interest is 10-15% per month.
Why are interests rates so high? The Philippines is a low-trust environment. People default on debts all the time. If it is a large sum, say $400, they may move away. There are no credit bureaus, no credit checks, just personal relationships. The high interest rates pay for the high default rate. If you prenda a farm, there is a basic contract signed with the neighborhood leader (barnagay captain).
I mentioned that anyone with capital is probably making loans. This includes Westerners who live here. In Manila, few foreigners were involved because they were afraid that the rich Filipinos would have them beaten or killed for interfering in the business. In my current city, several guys run loans. I consider this to be a slimy business because someone with money is making extortionate interest from people with no money. Their view is that the loanees can go down the street and get the same deal from a Filipino so they are doing no harm and might be doing some good.
Generally speaking, all wives of Westerners make these loans to earn extra pocket money.
This is one issue that prevents the creation of small businesses. Let's add some reasons:
1) Access to capital is very expensive, as I said above
2) The land in most provincial cities is owned by a small number of (dominantly) Chinese-Filipino families in each locale. They control land prices, rents and what kind of businesses can be opened.
3) There is no innovation in goods and services offered. You will find the same items in every clothing store, grocery store, sari-sari (small convenience store) because distributors offer little selection. (Anecdote: a buddy told me that the government took over land in his city from squatters and built a series of small storefronts. Of the 100 stores, 43 were cellphone stores selling the same used phones and phone credits.)
4) Want to open a store in a mall? The rents are attrocious: at my major mall, the rent is about $1000 per month plus 10% of gross sales. Nearly every store in the mall is run by the mall owners because no one else can afford to pay that much. (This structure allows you to pay 400 pesos for the same t-shirt that costs 100 pesos in the local market.)
5) Structural issues. Do you want small change for the till? You can't get it for free. 500 pesos of change will cost you 550 pesos. Want to run an internet cafe? Be aware that blackouts or power glitches will knock you offline frequently. Want to run a delivery service or passenger service? Note that the roads are terrible and vehicle repairs will be a monthly occurrance (the rumor is that 1/3 of road money goes straight to the mayor's family).
5) Corruption. The local small mall owner claims that the local McDonalds owner pays 10% of gross to the mayor to remain open. Your business permit may be 'lost' and your business closed if you make the wrong enemy or make too much money. The most frequent robber of a business? The security guard (or ex-security guard) which most businesses must hire.
Overall, it is a depressing place to be ambitious. It is even more depressing that voters overwhelmingly re-elect mayors like this because of renewed promises to fix things.
WIDGETIZE
Anonymous # 2. September 2006, 03:14
Mostly, the comments of the writer are exagerated. Maybe he is in the far flung or rural area of the Philippines. We are living in Metro Manila that business is booming. Take a visit to the flourishing malls where you can see the latest gadgets and cellphones. These stores will not be there for a long time if business is bad as described by the author. The author should have been more specific as to where is his location and that what kind of people he is dealing with in his locality. Most likely, they maybe mountain people with no formal education and iliterate.
Anonymous # 27. September 2006, 22:47
This is our very real situation. If you are living and confine in Metro Manila, then you may have a very different assessment. The very fact that what's happening in Manila is not true to the entire Philippines makes this situation true. One has to visit far flung places in order to make the real assessment. A kind of visit not to the tourist spot but to the far flung community. You can get the real picture if you spend a couple of months living with the community.