Even with microfinance, loan sharks still thrive

(First of three parts)

Sharon Salgado starts preparing for work well before most people get up in the morning and works well into the night. She runs a small eatery in Suki Market in Quezon City, where her home-cooked meals are frequented by wet market workers and jeepney, tricycle and taxi drivers.

Business is booming, and she wanted to expand her stall or at least replace some of the four worn out “Monoblock” table and chair sets (seating eight in all) to accommodate more diners.

But financing is always in short supply—or more accurately “affordable financing” is.

“When the situation is tight, I borrow from the bumbay,” speaking to the Inquirer in Filipino and referring to informal money lenders.

“You can borrow quickly from them especially if you have a good track record of repayment. No documents needed, no questions asked, as long as you pay when the time comes.”

Salgado pays a monthly rent of P20,000 for her eatery’s strategic corner location at the busy market, and her eatery requires a steady cash flow to maintain daily operations. And the informal money lender— known colloquially as “five-six” in reference to their standard 20 percent interest rate (“you borrow five, you pay six”)—is a reliable source of financing for her when cash is short. Reliable, but expensive.

This problem of loan sharks charging usurious rates for short-term lending was supposed to have been solved by now.

Fifteen years ago, the government brought what was then a little known scheme called microfinance into the banking mainstream, with no less than the General Banking Law of 2000 mandating the Bangko Sentral ng Pilipinas (BSP) to propagate this lending method.

Microfinance was aimed at ultimately alleviating poverty by encouraging entrepreneurial activity, by giving underprivileged individuals access to the capital they needed to start their own businesses or help existing ones. It was meant to provide aspiring entrepreneurs from the lower socioeconomic strata with collateral-free loans, because most of them could not cough up the collateral like real estate and other acceptable assets required by banks for loans. And most importantly, it was supposed to drive five-six loan sharks out of business by offering significantly lower interest rates.

That was the idea then. But today —despite notable successes made by policymakers and many microfinance banks that have opened over the last decade—there remain many would-be entrepreneurs who have never even heard about microfinance.

“There have been notable successes in microfinance but, admittedly, there are still many challenges to overcome if we want this to be available for more Filipinos,” said Leonilo Coronel who is a trustee of the Rafael B. Buenaventura Micro Finance Resource Center Foundation Inc.

Coronel was the executive director of the Bankers Association of the Philippines in 2000 when the late Rafael Buenaventura, then the Governor of the BSP, took the unusual route taking microfinance under the wing of the normally “big picture”-oriented central monetary authority.

“What we wanted to do then was improve access to capital because we could see that there were many entrepreneurial Filipinos who were not getting the breaks they needed because they had no access to banking,” Coronel said. “Microfinance had the potential to change that.”

But for every would-be entrepreneur that benefits from the access to cheap loans that microfinance lenders provide, there are millions more who are beyond the scheme’s reach. Eatery operator Salgado has little choice but to borrow from five-six lenders.

“Borrowing P5,000 means you have to pay them back P6,000 after 60 days,” she explained, which means the 20-percent rate over two months translates to a staggering interest rate of 120 percent per year.

Salgado said she recently borrowed from an itinerant “lending agent” who offered her a revolving collateral-free loan of P50,000 with a 60-day payment period, with interest payments collected daily.

For once, it seemed that microfinance had finally found its way to her. But the terms imposed on her by the lender were familiar: The P50,000 loan would have to be repaid at a total of P60,000 in 60 days —the exact same terms and interest rate offered by the loan sharks, but with the loan value scaled up by a factor of 10.

Fifteen years after the introduction of microfinance, many borrowers find their financial world no different from when five-six lenders were their only options.

To be continued