THE 2015 Ratings Services survey of Standard & Poor showed that only 25 percent of Filipinos are financially literate. That means about 75 million Filipinos have no idea about inflation, risk diversification, insurance, compound interest and, maybe, even about keeping a savings account in a bank. I believe that the 25 percent financially literate consists of the wealthy (upper 10 percent of the population) and the educated, working and middleclass that use the services offered by banks, insurance companies and other financial institutions. The S&P survey was conducted in 143 countries. Denmark, Sweden and Norway shared the top spot.
The results of the survey are not really new to me as I used to be part of the other 75%. Growing up in a squatter area near Manila, I’ve experienced poverty and lack of access to financial products. I remember seeing, about 20 years ago, my mother handing a 100-peso bill to a motorcycle-riding Indian moneylender, locally known as Bumbay, who visits almost every day. I later on learned about that informal money lending activity as the “5-6” (so-called because a person who borrows 5 pesos for a period of one week from these moneylenders repays 6 pesos, including 1 peso, or 20 percent, interest). Part of the proceeds of that loan was spent to buy my school uniforms, notebooks and other school supplies. Good thing no tuition fee needs to be paid to the public school I went to; otherwise I might have spent the entire summer break scavenging for and selling scrap metals, copper wires, newspapers and empty bottles to the nearby junk shop as I did some time later during the early part of my college life. Most of my schoolmates were also financed by 5-6 moneylenders. At the time, I computed and realized how wealthy those moneylenders become earning 20 percent interest every week, which makes 1,040 percent per year.
Being a young student-leader and student-journalist at the time, I was so compassionate about my countrymen and I thought that charging 20 percent interest per week or even per month is tantamount to a highway robbery in broad daylight. My mom, an unemployed banking and finance graduate knew it, but she didn’t have a choice because financial services to the masses in the Philippines are clearly remote if not non-existent. She tried to get a personal loan but the bank denied because both she and dad were jobless. They approached registered micro-lending enterprises and they were asked for a guarantor or co-maker neither of which they could provide. The easiest and most convenient source of financing for them then and up to these days, is the 5-6 like the Bumbay.
The last time I saw a Bumbay was one a Saturday afternoon before the interment of the remains of my mom who died of heart attack shortly before my college graduation. He told us he would stop collecting from then on. “Death extinguishes obligation,” according to my business law professor.
Do we have to wait until one dies or before one gets charged an interest of 1,040 percent a year? What can the Philippine government and Internet start-ups like MoneyMax.ph do to alleviate poverty? How can we disrupt this market and create a win-win solution for businesses and the Filipino masses?
Enter the Internet proliferation in the country. According to Google Southeast Asia, Filipinos spend a staggering 27 hours per week online, which is the highest in Southeast Asia! Online behavior includes social media and entertainment, searching services like travel, restaurants and bars, and apartment and housing. Those Filipinos who spend 27 hours per week are almost the same as the 25% who are financially literate, educated, and the working middleclass. Why? The Internet in the Philippines doesn’t come cheap and it is too slow due to lack of good Internet infrastructure and inadequate government support.
5-6 moneylenders like Bumbay continue to dominate the D and E classes in the population. They don’t need the Internet because most Filipinos don’t have access to it. Quite ironic for a country that is said to have a fast-growing Internet population! Right? Filipinos would generally go online just to watch the replay of past episodes of AlDub KalyeSerye rather than search for a financial product that they have no idea about.
For a win-win situation, the government and businesses can use the Internet to address the financial literacy gap and convert it to profit and increase the country’s GDP and per capita income. The following steps are worth considering:
The government must fix supporting infrastructure. A study that Ookla conducted in May 2015 has found that at 2.5 megabits per second, the Philippines has the second slowest Internet in Asia, after Afghanistan. Big telecommunication companies pointed to expensive tower fees and red tape as the main hindrances on building more towers and expanding more coverage. On the other hand, IT experts asserts that the refusal to “IP peer” with other ISPs by the country’s telcom leader is also one of the reasons for the slow internet connection. Clearly, the government must intervene to fix and align both camps to ensure smooth progress.
Destroy oligopoly in the telecommunications industry. The telecommunications sector is an oligopoly today due to recent mergers and acquisitions of some big telecommunications firms. By allowing foreign giants and a handful of budding local ones, price and quality will improve through healthy competition.
Promote financial literacy and entrepreneurship in the school curriculum. I really love to see that Internet companies like MoneyMax.ph advocate financial education awareness through its blog and through partnerships with newspapers, news channels and financial literacy movements in the Philippines. The advocacy has been helping millions of Filipinos to get introduced to various choices for them to save time and money, paving their way for the step in their journey towards personal financial freedom. On the other side of the spectrum, Finance concepts like cash flows, compound interests, and investments should not just be part of the curriculum of business students. Schools must stress the importance of personal finance and entrepreneurship in a growing economy and teach students to be future business owners, not just employees. It will surely increase financial literacy in the country.
To promote online spending, invest more offline. Startups, be it in tech or non-tech industries, should not look at the Philippines as a stereotype of other Asian markets where people can easily be lured to adopt the online marketplace. Filipinos are way too conservative and skeptical than most of their Asian neighbors, and given the increasing online fraud and investment scams in the country these days, fewer people trust the internet as their major source of product information. Traditional advertising can never go wrong and therefore, can be even used to introduce the online market systems. Again, a better ROI can be achieved by offline and online mix – investing first offline and then converting them online.
Tax incentives and ease of regulations for startups. This is closest to my heart, being a Finance man in-charge of tax planning and compliance, accounting, statutory reporting, cost savings and cash flows maximization. The rate of Philippine income tax—30 percent on corporate income and 32 percent on personal income—is the second highest in the region. These high rates along with the inefficient processes of setting-up and even winding down businesses in the country, and very tedious regulatory compliance make it unattractive for foreign investors (especially if these businesses don’t have good finance person who knows how to go around or make use of existing laws to mitigate the burden). While everybody knows that corruption plays a big factor, the government must at least address the issue by creating and giving tax incentives, grants and removing some burdensome regulatory compliance requirements for startups and SMEs.
Here in Hong Kong, I usually roam around on weekends as photography is my hobby. My lenses will surely capture fellow Filipinos who work as domestic helpers here enjoying their Sunday holiday in Central. It is my fervent hope that someday the children they have left behind in the Philippines will be financially literate, educated and will be well-informed of their financial choices so that they can break their ties with usurious 5-6 moneylenders.
Jay Olos is the Group Head of Finance ofCompareAsiaGroup. CompareAsiaGroup operates the leading online comparison platforms for financial, telecommunications and utility products across Asia.