The money-go-round

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MIKE WOOTTON

MIKE WOOTTON

One area in which the Philippines probably excels is in chasing payments for consumer bills. If only the vigor with which these payments are chased were applied to developing the national economy, the Philippines would undoubtedly be ranked at least much higher than it is in its development progress.

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Thinking about this led me to having a look at interest rates. Credit card rates run between 2.75 percent and 3.5 percent per month, or 33 percent to 42 percent per year.

They have slightly dropped over the past year or so. LIBOR, the London Interbank Offering Rate, which represents the various interest rates banks charge each other for borrowing money, has been hovering below 1 percent per year since about 2010 and the US Prime Lending Rate, the rate at which banks will lend to their most creditworthy customers, is currently at 3.5 percent per year.

Credit card interest rates in the US are about 10 percent to 16 percent per year and in the UK, about 18 percent. Mind you, in Brazil, the rates are anything between 250 percent and 350 percent but the currency—the Brazilian real—is pretty unstable and inflation in the past has been at astronomical levels.

A lot of work has been put into making the Philippine peso stable, or fairly stable at least, and inflation, according to published statistics, seems to be fairly reasonable, so the rationale behind the outrageous Brazilian credit card interest rates does not work for the Philippines.

This begs the general question as to why interest rates in the Philippines are so high. Perhaps it is because there is no effective usury law, whatever the parties agree on is deemed acceptable, and of course, given the excruciatingly difficult process of actually trying to borrow any money at all, it can be no surprise that interest rates are jacked up to whatever the punter can be persuaded to agree to.

Is there no effective control on interest rates, or are they just left to totally free market principles? Of course, there is no such thing anywhere as a totally “free market,” and the Philippines would be among the last places to look for one!

There is surely something not quite right in a society that allows dead bodies to be disinterred and shoved down a hole in the ground if the rent for the grave is not paid in a timely fashion. That forces people to pay in advance—otherwise, proper medical attention is not available to them, and they can die on the hospital steps—or allows a significant percentage of the population to live homeless in the street.

It’s all about money, sometimes out of sheer desperation but mostly because of greed as in the case of banks with the additional burden of funding the cost of incompetence and their inability to understand risk—for why would every loan need to be collateralized sometimes by factors of four or five over the actual loan money, if financial risk really was properly understood?

There is no cheap credit in the Philippines—that’s a fact, and to use “consumer confidence” judged by the amount of money people spend on consumer items, is no more than a measure of personal indebtedness that people are allowing themselves to be sucked into.

Unemployment remains very high, there is little or no manufacturing investment, salary levels are relatively low and remittances must fund less and less as real inflation increases at a higher than published rate. But despite the great pressure that many ordinary people are under to even make ends meet, interest rates remain very high and collection pressure is reaching insane levels—two or three days late with a monthly credit card payment and the calls start.

This indicates to me that the lenders think that everybody is really living on the edge (which many probably are) and that they need to get their money in as soon as humanly possible. This efficiency would be commendable if only it were for a positive rather than a negative purpose.

The other side of the coin shows the difficulties encountered by people who are trying to get paid in a timely manner by large organizations. Despite what the contract may say about payment terms, it is not unknown for suppliers to have to pay the clerk who is responsible for actually making a payment happen, a bribe of some sort to facilitate the release of the money properly due and already approved for payment.

So it is efficient to chase for payment and get the money in on time. The thing is, if you happen to be a Philippine bank, what do you actually do with all that money that has been efficiently collected? For sure the banks don’t then lend it out to stimulate real home-based economic development. Pity they don’t.

Mike can be contacted at mawootton@gmail.com.

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