Shadow banking alive and well in PH

Beting Laygo Dolor

Beting Laygo Dolor

Conventional wisdom says that businesses should always resort to bank loans when they need funding, be it short, medium, or long-term. If not banks, then the funds they need should come from financial institutions that specialize in lending.

Here, however, countless small and even medium-sized enterprises often turn to shadow financing when in need of quick cash.

For many decades, at least since the post World War II years, small businesses could easily avail of the so-called 5-6 loans, often from Indian lenders. Back then, the turbaned ‘bumbay’ could easily lend out whatever sum an entrepreneur needed, as long as the borrower agreed to pay off the loan on a daily basis.

The loans were called 5-6 because a P500 loan, for example, would result in P600 payable, or a 20 percent interest rate. That payment would depend on the agreement between borrower or lender. Would it be paid within 24 hours, one week, or one month?

Paying P600 for a P500 loan is ridiculous, of course, but there are enough businesses which can earn big sums overnight to justify the usurious rates.

Those ‘bumbay’ were called such on the mistaken notion that they were from Bombay, India. In fact, some of them were not even Indians at all, but were the mortal enemies of the Indians. They were actually Pakistanis.

In the 50s and 60s, the shadow bankers rode in bicycles. By the 70s, 80s, and 90s, however, they had moved up and were going about their business of lending and collecting in motorcycles.

I may be wrong, but more recently they seem to be moving about in owner-type jeeps. So the shadow banking industry has come a long way from its humble beginnings. And not only that. They have also moved up in the totem pole. No longer do they limit their lending activities to small enterprises.

A friend who owns a business which qualifies as a medium-sized enterprise says that he occasionally gets emergency loans from such lenders. Since he owns a couple of gasoline stations, one would expect that he would have a healthy cash flow, and would have easy access to bank loans.

Not necessarily so. In the rare instances when he needs a hundred thousand or so, he calls on his friendly, neighbourhood ‘bumbay’ to provide the quick cash.

Like all businesses, he experiences cash squeezes every now and then, such as these days of regular flooding. In theory, business should be good because heavy traffic means all vehicles are likely to load up, but this is not necessarily so. Still, he has a payroll to meet and suppliers to pay. He has cheques that need to be funded, rain or shine. So he turns to shadow banking to make ends meet.

Incidentally, the turbanned lenders have competition coming from a variety of sources. Fast and easy loans are also available from Chinese lenders who charge similar rates. Supposedly, some of them come from China, and are here because the local market still prefers to go to informal channels, instead of to banks.

Then there are the normal Pinoys who have excess liquidity. They, too, can provide short-term loans with no documentary requirements. All that’s needed is a handshake and the understanding that non-payment of loans can result in a broken leg or two.


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  1. Your article avoids looking at why businesses go to shadow lenders and use the underground economy. Banks and loan companies have too much “red tape,” demand grossly excessive paperwork, require borrowers with fixed income or collateral, take days or weeks to grant loans when the borrower’s need is immediate. Bottom line? Shadow lenders are more efficient. And Filipinos can break legs too, meaning the money lender has to have a cooperative relationship to the borrower. It is much more sensible to borrow from the “bumbay.” And in the process the government loses the income from taxing the profits from lending. Is it time that loan companies woke up, became more efficient, responded to the actual needs of customers and stopped losing business?