THE Department of Trade and Industry (DTI) unveiled a promising new financing initiative for Filipino entrepreneurs this week with the launch of a program to provide loans on similar terms – but at much lower interest rates – as the notorious “5-6” lenders who are a source of funds for hundreds of thousands of vendors and micro enterprises.
The fund, called “Pondo Para sa Pagbabago at Pag-Asenso,” has an initial budget of P1 billion from the Office of the President, and is intended to assist micro enterprises, defined as those with less than P3 million in assets. According to the DTI, the new program, which will be run in cooperation with “five or six” experienced microfinance institutions, will “cripple” the 5-6 lending business.
The program is unlikely to accomplish that, but it is a step in the right direction toward giving Filipino entrepreneurs and family businesses better alternatives to the persistent, exploitative practice of “5-6.”
5-6 lending, which the Securities and Exchange Commission in October estimated to be worth P3 billion annually, is a type of informal lending in which the borrower pays a flat monthly interest of 20 percent – in other words, six pesos for every five borrowed – until the principal amount is repaid, a scheme that can easily amount to an annual interest rate of nearly 200 percent. In the public mind, the 5-6 lending business is associated solely with Indian residents in the Philippines, although they are certainly not the only ones who engage in the practice; most 5-6 lenders are believed to be Filipinos.
5-6 lending takes advantage of borrowers who often have no access to formal credit, nor any less costly options, and is clearly illegal; it violates both the The Lending Company Regulation Act of 2007 (RA 9474) and the Truth in Lending Act (RA 3765). Because of the stiff interest terms, many borrowers can fall into a debt trap, never able to entirely repay what they owe and forced to regularly borrow to make ends meet. It goes without saying that any program that can help to end the practice of 5-6 is one that contributes to the overall financial health of the country’s population.
However, in trying to give the people who make up the ready market for 5-6 lenders better, formal financing alternatives, policymakers ought to consider the advantages the scheme offers. A borrower need only demonstrate to the 5-6 lender that he or she has a source of income; their creditworthiness, their reputation as a borrower, is a matter of word-of-mouth. The funds they need are nearly always available at once, and even though the interest charged on the loan is usurious, repayment terms are made very easy to manage, usually just a few pesos per day. Best of all, the 5-6 borrower need not go anywhere to either borrow money or make a loan payment; the lenders are only too happy to visit the borrowers at their places of business.
Any program the government devises must be competitive, not only in terms of the financial details but also other features, with the existing informal credit framework. The DTI seems to have a clear understanding of how “5-6” works, but whether the program they are devising truly appreciates the effort it will take to lure borrowers away from a means they’re already comfortable with remains to be seen. We hope it does, and can build on success to offer the alternative to more micro enterprises and families. But obliging prospective borrowers to complete too many requirements, travel too far from their workplace, and queue for too many process steps will discourage many who could benefit, and make the “5-6” business even harder to get rid of.