Mari Kondo
As a developing country, the Philippines has a large informal sector comprised of micro-enterprises. Many of these are severely resource-constrained small vendors operating in public markets, whose survival in business relies heavily on access to financing. This usually comes from the informal sector sector as well in the form of informal financiers called “5-6.” Two types of 5-6 financiers are found in Philippine public markets, each with a distinctive lending mechanism, Filipinos and Indians.
This paper considers the implications of having different financiers contribute to the development of micro-enterprises. I discuss Filipinos, but give central attention to Indian financiers for several reasons. First, regarded as last resource lenders, this group is crucial to the most marginalized micro-entrepreneurs. Second, a part of their lending money flows in from India through informal channels, quite an interesting phenomenon in this part of the world.
And third, despite their importance to Philippine micro-enterprises, little has been written about their financing practices. In the late 1980s and 1990s, extensive studies on micro-financing were conducted by the Philippine Institute of Development Studies, the Social Weather Stations, and other organizations (see Ghate 1992). Since their purpose was to grasp the concept of both formal and informal micro-financing institutions for the purpose of macro policy formulation, differences across institutions by ethnicity were not highlighted. As a result, although Indian financiers are widely known among Filipinos, studies regarding their business practices are virtually non-existent.
In addition to the usual review of literature, this study is based on economic anthropological field studies conducted in a public market in the town of Santa Rosa, Laguna province, and in Binondo (Chinatown), Manila. The public market in Santa Rosa depicts the workings of several micro-enterprises in a typical town in the Philippines. Binondo is considered the center of Chinese commerce through which “informal money” is coursed in and out of the Philippines. The field study was carried out with Ms. Marie Aquino, a researcher and a resident of the town of Santa Rosa with a background in anthropology, who conducted extensive interviews from 2000 to 2003.
The Role of Micro-Enterprises in the Philippines
The Philippines has lagged behind neighboring countries in economic growth; one major reason is that the country has been slow to develop a strong industrial sector (Yoshihara 1994). The contribution of manufacturing to employment has remained at about 10 percent for more than three decades (National Statistics Office 2003). Dramatic population increase and the deterioration of public education have created a pool of unskilled workers who now account for 29.3 percent of the total labor force (National Statistics Office 2003; World Bank Group 2001; Amante et al. 1999). Rural poverty, aggravated by population growth, has pushed rural folk to migrate to cities. But the failure of the stagnant industrial sector to absorb them has caused many workers to remain unemployed (defined as lacking a job or business and not looking for work because of a belief that no work is available, temporary illness/disability, bad weather, or pending job application/interview) or underemployed (working less than 40 hours during the reference period and wanting additional hours of work). Around 30 percent of the labor force in the Philippines has been consistently un- or underemployed (National Statistics Office 2003). Most of the underemployed are found in the informal sector within the service sector, running the micro-enterprises discussed below. The sound development of micro-enterprises is therefore a serious undertaking that needs to be addressed.
The Santa Rosa Public Market and Its Players
Although the business of micro-enterprises in the Philippines varies, this paper focuses on vendors and the informal financiers catering to them in the half-hectare public market in the center of Santa Rosa town. There are formal financing institutions on hand as well – cooperatives, lending investors, and rural banks – but these are not generally used by micro-entrepreneurs. There are also several pawnshops in the market whose usual customers are workers or residents of the town. For operational capital, though, the Santa Rosa vendors rely on funds raised through their own businesses and on informal financiers.
The Vendors. Of the 450 market vendors in the Santa Rosa public market, 75 percent are women. Ranging from poor to middle class, these vendors fall into four categories determined by size, location, and type of enterprise: ambulant vendors, rolling store vendors, stall vendors, and multiple stall vendors/private storeowners.
Ambulant vendors account for more than 50 percent of the total and include the poorest vendors in the Santa Rosa public market. Numbering about 230, some 90 percent have completed elementary education or less. Ambulant vendors sell smoked fish, vegetables, fish balls, and the like. Unable to buy or rent a stall, they market their goods along the sidewalks, in front of the larger stalls, or at the back of the market near the fish and meat vendors. Many are wives of fishermen living along the coast or of small farmers who sell their own harvest supplemented with fish bought from other, cheaper markets. The ambulant vendors are those most in need of informal financing. If they cannot sell enough one day, they need capital in order to buy goods to sell in the market the next day.
Rolling store vendors sell food, dresses, or shoes in customized vehicles, eliminating the need to rent a stall. They occupy spaces at the back of the public market together with other vendors. In August 2000, the number of rolling store vendors at the Santa Rosa public market reached forty, or 9 percent of the total. Most were residents of Santa Rosa or nearby towns, former salaried workers who had decided to start their own business. Their educational attainment was the highest among the four groups. They are also the most independent vendors because of their mobility, often moving from one public market to another in search of bigger profits. Some did not drive their own rolling store, but had assistants run their business in the field.
Stall vendors, totaling 150 in August 2000, made up 34 percent of the total. Their number has risen in past last two years since the Santa Rosa public market underwent expansion. Stall vendors are required to be residents of Santa Rosa and pay PHP 15,000 per stall annually. Although the regulations of the public market do not allow it, some stalls were sublet to non-residents and other vendors who had been unable to rent directly from the municipal hall. For this privilege, they paid PHP 20,000 annually to the stall owner and were responsible for keeping the area well-maintained.
The twenty-five multiple stall vendors and private storeowners comprised 6 percent of the population of public market vendors. They are residents of Santa Rosa and/or offspring of vendors in the old public market. Multiple stall vendors pay the local government PHP 19,100 annually for two stalls. They may rent a maximum of three stalls if their goods or line of business require a bigger area. The private storeowners – of drugstores, grocery stores, imported goods shops, and rice stores – are considered the “local rich” or old families of Santa Rosa. Unlike stall vendors, private storeowners paid only PHP 12,000 per annum because they completed the construction and furnishing of their stores.
Five-Six Moneylenders. So-called because of the manner in which they lend, five-six (5-6) moneylenders charge a nominal interest rate of 20 percent over an agreed period of time. A person who borrows 5 pesos from a 5-6 moneylender over a period of one week repays 6 pesos, including 1 peso interest. Neither Filipino nor Indian 5-6 moneylenders require collateral or documents from their borrowers. The success of a borrower’s business and loan repayment history provide a gauge of the borrower’s credibility.
At the Santa Rosa public market, 5-6 moneylenders undertake daily collection of payments in the morning, afternoon, or both. A client’s daily payment is determined by the sum of the principal borrowed plus its 20 percent nominal interest divided by the credit term. The loan arrangement is flexible; if the client fails to pay one day, it is understood that he or she will pay for the day missed the next time around.
Renewal of loans depends on the moneylender’s policy. Some 5-6 moneylenders will renew clients’ loans only after the previous loan is paid in full. More accommodating lenders will renew a client’s loan earlier, subtracting the outstanding balance of the old loan from the new loan and issuing the client the remainder.
Filipino and Indian 5-6 lenders play different roles among the vendors at the Santa Rosa market, although the essence of the 5-6 business is the same. The significant difference lays in the fact that Filipino 5-6s are resident “insiders” in the Santa Rosa community, while the Indians, as immigrants, are clearly identified as “outsiders.”
Filipino 5-6s: Community Insiders
Of the twenty to twenty-five Filipino 5-6 moneylenders operating in the Santa Rosa public market during the period of our survey, about 75 percent were women. Many are middle-class, long-time residents of Santa Rosa. The “big-time” lenders had other businesses, such as selling jewelry on installment. Many of the “small-timers” entered the 5-6 business to invest income generated by returning overseas contract workers (OCWs), either themselves or relatives.
Client Development and Location. The favored clients of informal moneylenders are proprietors of small businesses (such as vendors) and small service providers (owners of groceries, eateries, tailor shops, and hair salons). Since the lenders’ standard collection schedule is daily, businesses that generate cash on a daily basis are sought. Food-related businesses are ideal because of the perishable nature of food, their daily need for working capital in the form of cash, and their daily generation of profits.
A key success factor for 5-6 businesses is the development of a large, good-quality client base which continually borrows and repays without default. However, as micro-entrepreneurs of tiny businesses, the clients of 5-6 financiers are vulnerable to any shocks – external, such as economic downturn, and internal, such as family sickness. In short, regardless of their willingness, micro-entrepreneurs’ ability to repay tends to be unreliable. Therefore, an existing “good” customer for a 5-6 business can easily become a “bad” customer. Thus, simply to maintain the current size of a 5-6 business, the lender needs to look for new clients constantly.
For Filipino 5-6s, developing new clients is rather easy. First, people are more inclined to borrow from them as fellow Filipinos. They speak local languages freely, giving them a superior capacity to collect information – including rumors – about their borrowers’ credibility. Many Filipino 5-6s are women, and their preferred clients are also women, who aid in information collection and are easier to pressure for repayment. Because of their heavy reliance on information networks, Filipino 5-6s seek clients in wet markets and other sites where vendors congregate.
Credibility Check. Filipino 5-6s frequently use the mutual help scheme paluwagan to generate funds for their 5-6 business and at the same time check the credibility of their clients. The paluwagan is a kind of rotating savings and credit association: a group of people contribute the same amount of money toward a common fund and take turns collecting the total, often called the “salary,” over a fixed period (e.g., every seven days, every thirty days). The paluwagan is a common mechanism for saving money among Filipinos who do not enjoy access to banks.
A paluwagan scheme at the Santa Rosa public market typically involves five or ten stall vendors contributing over a period of months – five months if five members, ten months if ten members. Some paluwagan are much shorter – four members contributing for one month – so that the collected money is received weekly. The Filipino 5-6 moneylender usually serves as “manager” of the funds, collecting paluwagan contributions daily together with 5-6-loan payments. To compensate for the extra service involved in collecting the paluwagan money, managers “pocket” the payment of the last day of the month (1/30 or 3.3 percent of the amount collected). Members draw lots to decide who will receive the salary first, with earlier payment more advantageous. In some cases, the manager reserves the right to withdraw the salary first and uses the money to support her 5-6 business. In both cases, paluwagan members pay extra (or negative interest) to gain access to a savings mechanism provided by the Filipino 5-6 moneylender.
In the Santa Rosa market and more generally, members of the paluwagan are also lending clients of the manager. Vendors must have a good 5-6 payment history to be invited into a paluwagan because it will test one’s capacity to save money while repaying a 5-6 loan. The cost of joining a paluwagan could also be considered a premium payment for membership in an informal social “insurance” system, because in time of need, the Filipino 5-6s try to provide financing to paluwagan members first and on favorable terms.
As an informal savings system involving no legalities, the paluwagan is vulnerable to members running away with the money and to delayed or missed payments. The paluwagan system therefore operates among people who know each other – who work in the same office, live in the same neighborhood, or can otherwise keep a check on each other. The paluwagan organizer has to be particularly trusted by the members, making this a client development mechanism available to Filipino but not Indian 5-6 moneylenders.
Collection. Filipino 5-6s collect payments daily, talking to their clients and other vendors in a cheerful manner. This style is important as it allows updates on the creditworthiness of borrowers. A customer who does not want to pay may try to hide, but this tactic is not very helpful for clients of Filipino 5-6s, who, as residents of the town, can simply visit the borrower’s house. It is also dishonorable to default, so considerable community pressure will be felt to pay back the moneylender.
Still, in times of crisis, if a borrower asks a Filipino moneylender to wait for repayment, he or she will do so. As a good member of the community, the moneylender cannot refuse such requests. Filipino moneylenders are expected to show compassion to people experiencing difficulty. Eventually, however, this practice will increase the non-performing loans in their portfolio. This, along with community pressure to lend to non-creditworthy people, is a downside to being an insider.
Indian Financiers: The Unwelcome People
Indian financiers are called “Bombay 5-6s.” Mostly men, they number between fifteen and twenty in the Santa Rosa public market. Filipinos in general have a strongly unfavorable image of Indian 5-6 moneylenders.
“If you do not behave, I will give you away to a Bombay 5-6,” goes a warning issued by Catholic Filipino parents in an effort to discipline their children. History has it that the mother of Jose Rizal, the Philippine national hero, used this expression to discipline him in the 1860s. The warning remains in use today. (In 1999, all 80 Catholic Filipino students enrolled in the Asian Institute of Management, aged between 22 and 30, and coming from various parts of the Philippines, including the Visayas and Mindanao, recalled having heard this from their parents or nannies. Approximately thirty mothers working at the AIM also confirmed that they know and sometimes use the phrase.)
Who are these Indian 5-6 moneylenders who strike a certain amount of fear in Filipinos? The people called “Bombays” are overseas Indians and people of South Asian descent. Filipinos usually refer to people with South Asian features, regardless of actual nationality or origin, as “Bombay.” Because micro-credit financiers charge high interest rates, the term “5-6” can also invoke the image of a loan shark.
In the Philippines, there are two Indian communities – Sikh and Sindhi. In reality, many so-called “Bombay 5-6s” belong to the Sikh community. (It is said that Sikhs copied the money lending activities conducted by the Sindhis.) Not knowing the difference between the communities, Filipinos often believe that many Indians in the Philippines are in the 5-6 business, and the words “5-6” and “Bombay” are frequently used interchangeably to point out people of South Asian origin. Both words have negative implications.
Client Development. The preferred clients of Indian 5-6s are the same as those of their Filipino counterparts. However, Filipinos enjoy access to relatively bigger and more established businesses than Indians, who are generally seen as lenders of last resort. It is rare for a micro-entrepreneur in need of financing to approach an Indian; he or she instead seeks referral to a Filipino from an existing client. Filipinos say they are afraid of these foreigners who look “scary” and extend loans at usurious rates and that Indians are known to resort to violence if they have difficulty collecting payments. This renders it difficult for Indian 5-6 moneylenders to attract many “good clients,” and they have adopted certain techniques to meet this challenge.
Seeing a thriving business, an Indian 5-6 moneylender will often approach its owner. Almost all those interviewed acknowledged that Indian 5-6 moneylenders take the initiative. But lacking inside information, Indian lenders conduct careful observation in order to pre-screen the profitability of their prospects by the following criteria:
Size and location of the store – Bigger stores are deemed more creditworthy. Stores located inside the wet market have a lower chance of repayment default compared to ambulant vendors who can easily disappear.
Inventory – A large inventory indicates good credit standing with suppliers and a profitable business.
Volume of customers – The busier the store, the better the business.
Presence of other 5-6s – Some clients borrow from multiple moneylenders and this can indicate creditworthiness. One Indian 5-6 explained, “I know one of my clients borrows from six Indian moneylenders. Do I give loans to her? Most likely, yes. If many moneylenders have transactions with her, then her business must be good and she must be a good payer.” This can also be checked directly through other Indians who have had business with the client.
Indian moneylenders also prefer female customers and told us they seldom have male clients. If a store is run by a couple, Indians prefer the husband to be absent when they make their initial approach. They cited the following reasons:
Easier to begin a relationship – Women are responsible for purchasing small household items. One Indian 5-6 said, “Women are easier to convince because they tend to show off. They throw parties and celebrate even if they do not have enough money to spend. Then, after, they notice that their business capital is not enough, they start borrowing.”
Security concerns – Since the initial acceptance of business is rare, an Indian 5-6 moneylender needs to stay in the store to build rapport. Women are less violent than men and will not kick him out.
Confidentiality – Some women prefer to borrow without consulting their husbands and are afraid to go to Filipino 5-6s, since the information may leak out and reach their husband, other relatives, or friends. In this case, a stranger with little connection to the community is more likely to maintain confidentiality.
Prevalence of women in business – Unlike in South Asian countries, women traders, storeowners, and service providers are common in the Philippines.
Better chance of repayment – Though it was not explicitly stated by Indian moneylenders, a study on micro-credit shows that women borrowers have higher repayment rates than men.
Initial Approach and Credibility Check. Although many Filipinos speak English, for daily communication they use their local language, either Tagalog (Filipino) or a regional language in non-Tagalog regions. Indian 5-6 moneylenders can also speak some English, but many are more fluent in the local languages in which they conduct almost all their business.
The first transaction with a new client is considered by the Indian 5-6 to be an investment. Though his business is moneylending, he initially offers not money but goods to be paid back on installment, an arrangement called hulugan. (Earlier, some Indian moneylenders had engaged in door-to-door peddling and some eventually ran shops still known for their hulugan business.) The standard items offered in the initial transaction are umbrellas, towels, bedsheets, and small electrical appliances. There is nothing special about these goods except that they are needed by everyone. The moneylenders purchase them in Manila wholesale markets such as the Divisoria or in Chinatown, where they are sold at very low prices. The lender then goes to the store of a prospective client with these goods and simply asks her to purchase on an installment basis.
Selling goods on installment to prospective money-lending clients has various advantages. First, it provides tangible proof that the new client will obtain financing. Second, the mark-up is high: “We can sell goods in cash [not installment] if the price quoted by a client is 50 percent higher than our cost. However, the margin we can get is small compared to installment sales. We prefer to sell on installment, unless we feel that the collection from this client will be too difficult.”
A towel purchased for 200 pesos can be sold for 300 pesos cash (a 50 percent markup), but for 500 pesos on installment at 5 pesos per day for 100 days (a 150 percent markup). The difference in spread between the hulugan markup and the 5-6 nominal interest rate of 20 percent within a given time period can be considered a high-risk premium given to a client with no track record.
Today, most sales are on installment. Indian 5-6 moneylenders achieve “economies of scope” and use their collection time wisely by conducting their hulugan business simultaneously with their 5-6 business. In addition, proceeds from the hulugan business are an important component of funding for the 5-6 business.
A Humble But Persistent Approach. The Indian 5-6 moneylenders admit that it is difficult to convince potential customers to do business with them. The key to penetrating the market is to be humble but persistent. One described his approach – “Ma’am, would you like to buy something from me?” – while he started to show his goods. The usual reaction of Filipinos is to decline instantly, saying “No, I am not interested,” because they prefer not to associate with a strange “Bombay.” But the Indian is persistent. Another moneylender showed us his customer development techniques. Suddenly, he raised the pitch of his voice so that it became gentler. He also changed his posture, almost kneeling so the prospective client could physically look down at him, as though begging that she buy his goods.
Of course, potential clients do not quickly agree to purchase. However, this behavior can be understood by the Indian 5-6 as proof of a person’s prudence. Thinking the customer potentially a good payer, he does not give up, but woos the client once, twice, or even more times, showing his products one by one. He pleads, “Ma’am, please, please. You try it. This is good. You try,” or “Please, please, just try – even just one.” His persistent begging continues so that eventually, the initial fear and embarrassment of talking to the “Bombay” gradually dissipates and the Filipino woman feels some pity for him. She eventually says, “OK, OK, show me the items,” and then “I don’t like this, I don’t like this – but I like this towel.” She asks the lender the price of the towel, he quotes her the price and explains that he would collect payment daily. “It’s five pesos per day for 100 days.” He stresses how small the daily payment is – “It’s only five pesos” – and the customer considers the daily payment reasonable and agrees to the sale.
Client Location and Business Mix for Risk Diversification. The time required to effect daily collections constrains the number of clients a moneylender can have and therefore profits. In order to increase collection and monitoring efficiency, geographically concentrated clients are better. Thus, wet markets, where hundreds of small stalls operate, are preferred by anyone in the 5-6 business.
However, Indian 5-6 moneylenders avoid too much geographical concentration of clients. As foreigners, they fear bad treatment if their Filipino borrowers unite. For example, a group of clients in a market could complain to the police about the “Bombay” and have moneylender harassed. If, as a result, the moneylender cannot come to the market, the borrowers do not have to repay. If a lender’s clients are concentrated in just one market, this would mean the end of his business. (Theoretically, the same could happen to Filipinos, but as they are more likely to penetrate the social network of the borrowers, they can take counter-measures quickly.) Therefore, Indian 5-6s geographically disperse their clients at the expense of efficiency.
Indian 5-6s also try to develop a client base operating in varying businesses, preferring that their clients not know each other. One Indian “old-timer” explained: “If we lend to one meat vendor and do not lend to other meat vendors, the others would insist that we also lend them money. You see, Filipinos are fond of gossip. For example, if I lend to Mr. Juan, he will tell others in his business or in the market how much I lent him, the terms of payment, etc. If other vendors see that he was able to get a loan from me easily, they will want to get loans from me also. The trouble is, if Mr. Juan decided not to pay back to me for one reason or another, then the rest of the people in his business or in the market will do similarly. Who will suffer then? I will. So, we choose our clients and the location of their business. We prefer our clients who have the same business to be far apart. In that way, they will not know each other and will not gossip about us and the business terms we have with them.”
Terms of the Transaction. Perhaps as a reflection of the difference in risk involved, Indian 5-6s offer shorter credit terms than their Filipino counterparts. The renewal of credit before completion of repayment is also more difficult with Indian than Filipino moneylenders.
In 5-6 transactions, while legal documents are not signed, lenders get their customers’ signatures in notebooks, calendars, or even on a piece of paper. Some lenders maintain these books at home, some keep the book with the customer and make an entry every day, and some do both. They make entries in their own handwriting so the customer cannot tamper with the record. We encountered one case, however, where an Indian 5-6 used a signed promissory note for a big loan. The contract was not notarized, however, and was therefore not legally binding. It was simply an IOU to psychologically bind the borrower to the lender.
Collection from New Clients. The time spent on daily collection visits provides the lender an opportunity to assess the whether the client will pay daily without delay and in what manner. Upon receipt of goods, some clients insult, malign, or shout at the “Bombay” 5-6 when he comes to collect. When this happens, especially with a first-time client, the Indian lender is often quiet and tolerant. He tells the client that he will come back the next day.
A customer who does not want to pay the Indian 5-6 usually hides. She asks her storekeepers or neighbors to “Tell the ‘Bombay’ we are not here,” and when he comes back the next day, they say the same thing. Though the moneylender may be aware that the borrower is at the back of the store, he cannot do anything but return the next day. If the borrower’s store is located along his regular route, the lender tries to visit every day for one or two months. If the borrower still does not appear, the lender gives up. According to one: “We are becoming beggars. Before giving money, we are good to them. Once we lend the money, we are bad to them. We have to have patience in collecting.”
From the moneylender’s perspective, it is important for the first-timer to make full payment peacefully, since he or she is unfamiliar with the behavior and connections of a new client. The moneylender may discover that the client is connected to gangs in town, in which case he or she will stop dealing with the borrower as soon as the latter repays in full. Even if the customer seems interested in borrowing money or buying more goods, the transaction cost for the 5-6 in such cases is much too high. One informant’s way of declining further business was to say: “According to our company policy, my boss would not allow me to lend to you any more.”
Customers who pay the amount agreed upon on time without harassing the lender are considered good prospective clients. When payment is completed, the Indian 5-6 offers other goods and also capital for the customer’s business. Sometimes, although a customer may skip a payment, he or she finishes paying within the agreed period and is still deemed a good client. Since the 5-6 business requires rolling funds, Indian lenders prefer customers who pay as little as five pesos daily to customers whose payment patterns are not constant.
But the default rate of Indian 5-6 clients, especially new ones, is quite high. One Indian lender told us that only 20 percent of new customers are good enough for them to continue to cultivate. The other 80 percent are dropped from the customer list as soon as they finish repayment.
Daily Collections and the Motorbike. Daily collection of payments is key to the success of 5-6 businesses. If clients of Indian moneylenders are located in the wet market, collection is usually conducted in the morning while they are selling their commodities. The wet markets open as early as 4:00 a.m., and by 8:00 a.m. vendors will have accumulated the day’s profit. Many Indian 5-6 moneylenders start their collections around this time or earlier in the case of a difficult client who has not paid for some days so that he or she is the borrower’s first collector of the day. Wet market vendors are busy until around 10:00 a.m., so many moneylenders finish collecting there by 11:00 a.m. For those clients whose stores are not in the market, the 5-6 collects later in the morning or in the early afternoon.
Usually, the moneylender collects payments himself. If his business expands, family members or friends may help out. In very successful cases, non-family members, even Filipinos, are hired on a salary or commission basis to serve as collectors.
Unlike Filipino 5-6s, Indian lenders ride motorbikes when collecting payments. (In an exceptional case, we encountered one who uses a car, but he is an established lender with helper collectors.) Motorbikes are essential because they enable the 5-6 lenders to cover the wide areas in which their clients are dispersed. They are cheaper than cars, pass easily through the narrow streets where their clients do business, are seldom caught in traffic jams, are less likely to be “carnapped,” and facilitate quick escape if the lender is attacked.
Special Security Risks for the Indian 5-6
For various reasons, Indian 5-6 moneylenders are prime and easy targets of hold-ups while on their collection routes. First, they are easily identified because of their appearance, often including a turban and beard as proof of being Sikh, and they are always on a motorbike. Second, their chance of having cash are high. “We are like a walking cash dispenser,” said one. Third, their everyday route is fixed and reliable so that borrowers can have payments ready. This predictability makes it easy to plan a hold-up once a “Bombay” 5-6 is targeted.
Fourth, it is uncommon for Indian hold-up victims to report the incident to the police. Many are illegal immigrants without the required papers to conduct business in the country. Even if the hold-up is reported, the police may not be sympathetic to someone considered a violent foreign loan shark exploiting good Filipino citizens. Finally, the social penalty imposed by Filipino communities upon a person who robs an Indian 5-6 is likely to be less than if a Filipino 5-6 were held up.
The professional syndicates that kidnap wealthy Chinese businessmen leave the Indian 5-6 moneylenders alone, considering them too petty. It is the goons of the markets and neighborhood gangs who find the Indians attractive targets. They also target utility collectors for water, telephone, and electricity companies, but since utility payments have been shifting to banks and collection centers, the number of collectors walking around with cash has decreased markedly. To compensate for this opportunity loss, gangs have increasingly held up Indian moneylenders. When the MERALCO electric company put up collection centers and eliminated collectors, Indian 5-6 moneylenders reportedly experienced a substantial increase in hold-ups.
All Indian moneylenders interviewed had either experienced a hold-up himself or had a close friend or family member who had been robbed, and death was not an unlikely outcome. One lender in business two years told us he had been held up twice thus far. Another successful Indian 5-6 moneylender, in business for seventeen years, was shot five times during his stay in the Philippines. On one occasion, he was paralyzed and hospitalized for one year. A big-timer, he does not use a motorbike but owns one van and one car. He hires two Filipino drivers who also serve as his bodyguards. When he moves around to collect money or to develop new customers, he always carries a cellular phone for security reasons.
This big-time Indian 5-6 has a good relationship with the police. Once he was seen parking his car in front of the public market when no parking space was available. The traffic policeman merely stood by, giving him a smile instead of a ticket. We are sure that this big-time moneylender pays the policemen a certain amount, but how much is unknown. In one case, the policeman was also the moneylender’s client.
In another case, a policeman in the public market actually handled the 5-6 business among the vendors, with the big-time “Bombay” serving as his financier. This moneylender also enjoys good relations with the goons in the area. Every two to three weeks, he tells the small neighborhood general store owner, also a client, to provide a crate or two of beer to the goons, charged to him, saying, “You can tell them that it is my birthday today.” He told us he allocates around PHP 1,000 per month for relationship-building with the neighborhood gangsters. We do not know how much he actually pays.
In spite of the common belief that Indian 5-6 moneylenders resort to violence to collect from delinquent borrowers, because they are vulnerable to Filipino retaliation, it is actually difficult for them to be aggressive or violent toward people who default. And if an Indian lender does become violent, his bad reputation will spread rapidly and make it difficult for him to acquire new accounts. One lender recounted: “I had a fight with a client who was drunk. He refused to pay and threatened me with a knife. I could not do anything, so I left the place quietly.”
Funds from India
The availability of cheap and abundant funds is crucial for a financing business and shapes the ability of any moneylender to expand his business. The same holds true for 5-6 lenders. One distinctive characteristic of Indian moneylenders is their ability to source funds from India. Coming to the Philippines to break free of poverty, many Indians still have families and relatives at home who send money through the sale of land and other assets. This arrangement indicates that some marginalized Filipino businesses are financed by the Indian poor.
These funds are channeled through banks and through an informal mechanism called hawala, which is historically prevalent in India, the Middle East, and other parts of Asia. Through hawala, money is transferred from one part of the world to another outside formal banking channels. Brokers procure foreign exchange abroad and arrange payment in the destination country through associates or paid employees. Payment may be in US dollars or in local currency, using the exchange rate in effect when the money was procured abroad. A code or password is often conveyed from sender to recipient allowing money to be collected anywhere in the world. The sender need not reveal his name. Transactions carried out between countries may, over time, be adjusted for accounting purposes. As a result, the physical movement of cash is minimal. If a balance does build up, settlement can be made through the transfer of cash, gold, or trade invoices.
The Binondo district of Manila, historically the heart of Chinese-Filipino business, is said to be one of the centers for hawala transactions in the Philippines. In the 1970s, the black market there, referred to as “Binondo Central Bank,” dictated exchange rates in the Philippines by channeling money via hawala. Binondo is also known as a hub of drug trafficking, kidnapping, and arms smuggling, the proceeds of which are often transferred out of the country through hawala transactions free from bureaucratic inquiry or paper trail.
Hawala transactions similar to those in Binondo are employed by many Indian 5-6 moneylenders to channel funds to and from India. The system allows them to apply the preferred exchange rate in a transaction process that is simpler and quicker than that done through banks.
Impact of the Financial Crisis on Vendors and Moneylenders
The Asian financial crisis of 1997 devalued the peso by more than 100 percent, causing inflation and a high rate of unemployment and forcing many Filipinos to spend less on food. Instead of the preferred beef and pork, people shifted to fish and vegetables and made less frequent trips to the market. This adjustment had a differential effect on vendors. Ambulant vendors who sold fish and vegetables benefited from the financial crisis, and during this period their number increased by 15 percent and their average profits by 40 percent. Other market vendors suffered decreasing sales and profits.
Ambulant Vendors. Before the financial crisis, ambulant vendors’ preference for borrowing from Filipinos was evident at the Santa Rosa public market. Sixty percent of their funds came from Filipino lenders, while a mere 10 percent was borrowed from Indians. After the crisis, however, the Filipino proportion decreased to 40 percent while that of Indians increased to 20 percent. Ambulant vendors earned higher prices than before, but the price of the goods they sold also rose, increasing their need for credit. At the same time, the crisis affected the availability of funds of Filipino 5-6s so that they hesitated to lend to such clients, leaving the ambulant vendors with no choice but to increase their reliance on Indians.
Both Filipino and Indian moneylenders were forced to provide larger funding to their clients. Filipinos did this by nearly doubling the repayment period, leaving daily collections the same or less. Before the crisis, the typical loan was PHP 10,000 for 80 days, with a daily payment of 150 pesos. This changed to PHP 15,000 for 150 days with a daily payment of 120 pesos. The effective interest rate, or internal rate of return (IRR), was reduced since the money did not roll in as quickly as it used to. In this way, Filipino 5-6 moneylenders helped their good clients survive the crisis. The effective interest rates of Indian 5-6s also decreased, although the adjustment was usually made in the nominal interest rate, not by extending the term, probably because their clients tended to be the most marginal. Indian 5-6s gave reliable clients lower interest rates (12 percent) at the same term (80 days); vendors without good credit standing got a smaller discount (18 percent) and a shorter term (48 days).
Rolling Store Vendors. The sales of all rolling stores were hurt by the crisis as people stopped buying snacks and variety goods. Daily sales ranging from PHP 5,000 to 6,000 decreased to between PHP 4,000 and 5,000, although profit margins varied depending on the products sold (interview with 21 rolling store vendors, August 2000). Four out of the forty rolling stores were forced to close, but were soon replaced by newcomers, often relatives, because many retrenched employees received substantial separation compensation. As a result, the number of rolling stores remained the same.
Before the crisis, Filipino 5-6s were the rolling store vendors’ sole source of operational funds. The most highly educated group, these vendors were afraid of the supposedly violent Indian 5-6s. After the crisis, however, just as their lenders of choice experienced a lack of funds, rolling store vendors, the group hardest hit by the crisis, saw their credit-worthiness deteriorate. Filipino 5-6s thus reduced the average amount lent to rolling store vendors from PHP 20,000 to 15,000. For reliable clients, Filipino lenders doubled the repayment period, decreasing the effective interest rate. But rolling store vendors who were no longer extended favorable terms by Filipinos had to tap the Indian 5-6s who extended loans of up to PHP 20,000 on the same terms as for ambulant vendors.
Stall Vendors. Stall vendors were unevenly affected by the crisis, with beef and pork vendors hurt the most. Daily sales of beef vendors decreased from PHP 15,000-20,000 to PHP 13,000-16,000. Sales of pork vendors declined from PHP 10,000-15,000 to PHP 8,000-12,000 per day. Dry goods vendors saw a decline in sales from PHP 4,000-5,000 daily to PHP 3,000-4,000. The gainers were fish stall vendors, whose daily sales rose from PHP 3,000-4,000 to PHP 5,000.
This group of vendors enjoys significantly higher credibility than ambulant or rolling store vendors because they have a fixed place of business. The ability to pay the cost of a stall signifies a successful business; further, their fixed site means they can not easily hide from creditors. Before the crisis, stall vendors financed their businesses from various sources, the largest of which was personal funds (30 percent). Filipino 5-6s, Indian 5-6s, rural banks, and lending investors made up the difference. Their reliability made them favorite clients of the Indian lenders, who cultivated their business by selling goods on hulugan and financed 25 percent of their business needs. Although Filipino 5-6s were more favored by the stall vendors themselves, the fact that they required more funds than ambulant or rolling store vendors meant that Filipino lenders alone could not finance their business, supplying only 15 percent.
After the crisis, stall vendors’ personal funds available for business decreased from 30 to 15 percent of the amount needed. Indian and Filipino 5-6s increased their financing to 85 percent, with 50 percent coming from Indian and 35 percent from Filipino lenders. As in the case of ambulant vendors, 5-6 lenders increased the amount loaned and reduced the effective interest rate, Filipinos by increasing the credit period and Indians by decreasing the nominal interest rate.
Multiple Stall Vendors and Private Store Owners. Although multiple stall vendors and private storeowners occupy the best location in the market, they had to raise prices and saw sales decline by 18-22 percent. From PHP 20,000-25,000, the daily sales of drugstores and rice stores decreased to PHP 15,000-20,000. The daily sales of imported goods and grocery stores decreased from PHP 10,000-12,000 to PHP 8,000-10,000.
Before the crisis, multiple stall vendors were supported mainly by personal funds (45 percent) and rural bank loans (20 percent). Rural banks find multiple stall vendors more credit-worthy than single stall vendors; these children of old market vendors tend to have more solid collateral bases. Being established in Santa Rosa town, these vendors are also socially close to the Filipino 5-6s and turn to them before Indians. Filipino lenders prefer to lend to this financially prudent group as well.
After the crisis, the multiple stall vendors’ contribution of personal funds decreased to 30 percent. The contribution of rural banks did not change because multiple stall businesses require larger capital at lower interest rates. (It should be noted that a credit crunch did not occur in the Philippines after the Asian financial crisis. Commercial interest rates stayed level, or even decreased due to the sluggish economy. The rural banks in Sta. Rosa did not change their lending rates.) However, the share of financing from Filipino 5-6s increased from 15 to 30 percent. Again, the lending conditions of 5-6s changed in ways outlined above.
Private storeowners belong to the “rich families” of Santa Rosa town. They do not need to borrow much and sometimes even finance Filipino 5-6 businesses. Naturally, if they are short on cash when a supplier makes a delivery, they ask a Filipino 5-6 to finance the gap and are offered the easiest credit terms. They do not borrow from Indians. Before the crisis, private storeowners personally financed 80 percent of their businesses’ operating funds and borrowed 20 percent from Filipino lenders. After the crisis, personal funds decreased to 70 percent, and Filipino 5-6s increased their lending to make up the remaining 30 percent.
The Role of Indian 5-6 Moneylenders
In short, market vendors in all categories needed to borrow more money during the crisis. Filipino and Indian 5-6s both increased the amounts lent, but because of larger loans per client, slower repayment, and higher default rates, Filipino 5-6s could not serve all their clients. They prioritized based on client credibility and created a gap that was filled by Indian 5-6s.
Both Filipino and Indian lenders decreased effective interest rates to help their customers survive the crisis. Filipino 5-6s’ “insider” status helped them identify reliable vendors for whom they extended repayment periods and issued more funds while maintaining the level of daily payments. As “outsiders,” Indian lenders were not comfortable extending the duration of the repayment period. Their way of helping clients was to drastically reduce effective interest rates.
Small Filipino 5-6 moneylenders were badly affected by the high number of bad debts. Bigger lenders had other, stable sources of funds, such as the Filipinos’ paluwagan and the Indians’ hulugan, and were able to recover from the crisis, while small-time lenders, more dependent on daily collections, become indebted to their own financiers. Many went bankrupt and as they left the market, neophytes took their place.
The Indian 5-6 moneylenders remained confident about their business even when bad debts became prevalent. And although they suffered from defaults and delayed payments, none went out of business. These lenders were able to survive by tapping funds from India, where the Indian rupee was little affected by the Asian financial crisis. They in turn financed the most marginalized and least credit-worthy Filipino businesses during and after the crisis.
It is notable that Indian moneylenders are considered socially undesirable people in the Philippines. However, this study found that hosting Indian 5-6s with their different risk diversification strategies can be an asset for Filipino society, especially during economic downturns. The owners of micro-enterprises in a developing country are particularly vulnerable to the external shocks of globalization, and informal financing mechanisms with global funding sources, such as that of the Indian 5-6 lenders, may assist in alleviating such volatility.
Mari Kondo is associate professor at the Asian Institute of Management. She can be reached at mari@aim.edu.ph.
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