In reform, bad habits die hard

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Ben D. Kritz

THE latest target of the wrath of President Rodrigo Duterte is one of the cornerstones of the Philippines’ vast informal economy, the “Bombay,” or 5-6 lender, a type of loan shark that fills the wide gap between very small businesses – including farmers – and the formal financial system.

The 5-6 model, which is a loan at 20 percent interest, is not the only one used by informal lenders; another common one is what we in the US would recognize as true loan sharking, a loan for which a preset amount of interest is periodically paid—daily, weekly, or monthly—for as long as it takes for the borrower to repay the principal amount as a lump sum. There are other variations as well, particularly in rural areas where farm produce can be treated as capital (My colleague Marlen Ronquillo had some very good insights about the subject in his column this past Saturday).

Whatever form they take, informal loans are patently illegal; engaging in the business is a violation of the Lending Company Regulation Act of 2007 (RA 9474), and maybe also the Truth in Lending Act (RA 3765), although informal lenders as a rule are not unclear about the interest they charge.

It is right, in a broad sense, for the government to enforce its duly enacted laws and put a stop to informal lending. Unfortunately, the self-styled reformers who currently lead the government have adopted some bad habits in their various efforts, and appear to be taking the same approach to this issue.


Why single out the Indians? It is true that many Indians in the Philippines are engaged in informal lending, and that should not be condoned, but it is also true that most informal lenders (based on several studies about informal lending, about 75 percent) are Filipinos. Yet President Rodrigo Duterte is not targeting informal lending as an industry, he is specifically targeting the Indians; Justice Secretary Vitaliano Aguirre even had the bad taste to refer to “Bombays” in comments to the media about a week ago.

It is not much different than the Duterte regime’s approach to his “drug war,” which for all his crowing about having “lists” that included mayors, governors, policemen, has yet to count more than a few large-scale drug distributors among its casualties. At least 6,000 low-scale pushers and users, however, are dead, with at least a few more joining them every day. The underlying problem of why drugs are in such high demand has not been touched, nor has the basic supply chain that feeds that demand; without a real change in the overall environment, those who have been killed on either the supply or demand side are easily replaced.

The same thing will happen if the government’s attention span is actually long enough to pursue Duterte’s anti-Bumbay policy: It may be successful in removing the Indian moneylenders, but all it will do is leave a relatively small hole for the rest of informal lending sector to fill, and the practice will persist.

To be fair to Duterte, he is not acting any worse than any other typical Filipino politician; he did not invent the approach of attacking the most vulnerable symptom rather than the disease. And because he’s not particularly innovative in that sense, he is unlikely to be able to claim any more success against the country’s pervasive problems than any of his predecessors.

The problem the Duterte administration should be addressing is the country’s appalling income gap, which leaves a majority of the population earning below what they need for reasonable subsistence and at the mercy of lenders to plug essential financial holes. The government should also address the excessive risk-off orientation of banks and other financial institutions that causes them to reject small-scale lending. The informal lending sector flourishes in part because, despite the heavy interest cost, it offers consumer convenience—very few eligibility requirements, virtually no documentation, no floor on loan amounts, and rapid processing; the response time for a loan request from a borrower is usually only as long as it takes the formed thought to move from the lender’s brain to his mouth.

Loosening up the financial sector, even to the extent of considering legalizing some form of single-operator “palengke lending” should be a key priority, if the government seriously wants to stamp out informal lending. Just like drugs, the best way to eradicate something that is ultimately harmful to society is to eliminate demand for it.

ben.kritz@manilatimes.net

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