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THE URBAN INFORMAL CREDIT MARKETS: AN INTEGRATIVE

REPORT

Mario Bo Lamberte WORKING PAPERSERI ES NO. 88-25

December1988

PhilippineInstitutefor DevelopmentStudies


Tab_ of Contents

• ..

I

..

Introduction

,O,,

II.

Major Structure of the Informal Credit • Markets, Size and Trends in. Size, and Policy and Legal Environment .............

II1.

Savings, ConsumptlonCredi.tw Allocation Efficiency, Equity, Interaction with Formal Sectors and Implications for Monetary. Policy and DepositOr Security "

IV.

Referencek

2

"

14

Inretest Rate Formation and Trend_, C.ompetitlon BetweenFormal and Informal Sector.,.ICMs as a POskible Source of Innovations, Interl,inkage of Credit with_. Transactions In other Markets, Promoting Links with the Informal Sector ......,..,

26

V

1

eoDooooooeeoeQeeoeooeoeeeeooooe

Conclude.

'

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Comments '

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••eeQ•meOQOOQOOQi•Wj•e•

" "

,

-46

0

47


List of Figures and Tables

Figure

:

The

Phllippine

Financial

Sector

...... ...

5

Tables 1.

Comparative Performance of Selected Credit Unions, Pawnshops and Banking Institutions ................... ,......

13

Types of Credit of Sector .........

the Manufacturing ., .................

15

3.

Saving

CCU

4.

Borrowing Behavior January-September

2.

5.

6. 7.

Behavior

of

Members

of CCU 1987

....

.......,..

18

Members, ... ..............

2g

Alternative Sources of Loans, Maturity Period and Interest Rate ...... .......... ruses

of Loan

Proceeds

..... .............

21 23

Trends in the Interest Rates on Savings Deposits .... ...... •.......... ...... ....

28

8.

Lending

29

9.

Interest Rate Charged Per Annum by Maturity, Size and Type of Borrower

I_.

ii.

Rates

of

CCUs,

1986

..... ........

....

31

Components lenders

of Lending Rates of Money...., .................... ......

32

Components

of

34

Lending

Interest Rates

Rate

...

12.

Trends

13.

Characteristlcs of the Six "Paluwagan" Units ...... ....... ....... ...... .......

39 •

DiStribution of Member Loans Granted by Moneylenders According to Type of Loans ...... . ......... ........... ...

42

14.

in the

Effective

... ..........

37


PHE URBAN AN

INFORMAL CREDIT MARKETS: INTEGRATIVE REPORT by

Mario

I.

B째

Lamberte*

INTRODUCTION

This

paper

pulls

together

the

major

results

of

the

various

i_/ Studies

on

topics for

are the

favorably during

urban

organized

country

considered

TOR

helm

credit

according

study

considered

a workshop

The

informal

country

study.

of

the

Philippine

informal)

and

the

limited

all

the

suggested

*Vlce-Presldent, Studies.

and

range

of

topics

system the

study

(TOR)

which

were

countries

1986.

which the

major

reference

participating

However,

for

The

(1986)

28 - 30 May

financial

budget

of

Ghate of

on

(ICMs).

terms

up by

in Manila

terlstics

including

the

researchers

cover.s a wide

in the

to

drawn

by

markets

ought

peculiar (both

to

charac-

formal

preclude

be

us

and from

topics.

Philippine

Institute

The views expressed in this Study are do not necessarily reflect those of the

for

those of Institute.

Development

the

author

i_/ See Lamberte (1988); Lamberte and Bunda (1988), Lamberte and Balbosa (1988), and Lamberte and Jose (1988). These are parts of a larger Study on ICMS in the Philippines, sponsored by the Asian Development Bank (ADB).


2

In

an

findings are

effort

which

are

purposely

discussed

to unique

left

later,

in the

II.

MAJOR STRUCTURE TRENDS IN SIZE,

and

fashionable

Credit the

other

which the

orbit

to

say

[1987]).

market

the

the

case

with

in

achieve

the

one

are

and

so

of

degree

that

to

the

are

system

that

hand,

there by

state

officially

one

Sector

has to

we

than

participants. properly the

by

the

On (ICMs)

regulated

finance"

the

financial

a big

jump

This

others

whereby

Similar

problem

now

to

is not

varying they that

of

is where

to

segments

FCMs.

in

is a continuum at

and

a

formal

regulated

identify

has

"outside

of

almost

ICMs

It

operate

instead

the

The

markets,

markets

the other.

market

AND

agencies.

to make

have

flexibility

to

on

SIZE

exist

but

regulated

belong

studies

characterized

o

financial

be

latter.

functions

that

can

will

credit

credit

financial

we

Study

it iS neces-sary

informal

What

of

under

all

ICMs,

characterization

segmented

unregulated line

ICMs

informal

regulated

the

This

less

the

LDCs

financial

in the

a greater

the

exist

Philippines.

Some

completely

are

impression

participants

degrees.

draw

from

results

and

On one

which

(Chandavarkar

to go

the

important

implications

belonging

that

institutional

leaves

of

Some

project.

formal

segments

certain

of

the

studying

the

there

perform

order

with

between

(FCMs)

hand,

TOR,

policy

this

financialsystem.

markets

the

OF THE INFORMAL CREDIT MARKETS, AND POLICY AND LEGAL ENVIRONMENT

first

identify

dualistic

under

proceeds

a line

then

been

one

Major

integrating

Philippines

Before

closely

to ;the segments

out.

after

ICMs

to draw

follow

of

the


3

The ICMs

most

are

flexible

regulations reserves deposit

important

Central

rates,

mandatory

CentralBank

can

classify

consists

two

of

those

agency

but

Central

If

subjected of

to

their

have

been

financial Bank

of

participants

are

The are be

Central

and

not

is

known

sanctions,

will

because

after

definition,

we

of

that

can

group govern-

imposed of

the

agen-

have

to

very

nature

they can

be

be

be

are

not

applied

Central

only

by

financial

government

authorities. all,

One

then

sanctions

to

of

composed

they

that

supervision

ICMs.

any

the

financial

regulations

however,

sense

only

a particular

with

regulations

become

to Bank

extended

to

institutions.

Philippines,

quite

through

are

group

registered,

the

intermediaries

regulations

from

and

reporting

that

this

with

capital,

intermediaries

say

the

of

lending and

direct

in

registered

to

on

audit

Given

law

Note,

in

effected

by

other

Bank

registered

the

ICMs.

purview

respect

then the

registered

exempted

would

they

regulations

In

groups

illegal

once

officially

the

which

the

financial

may

under

flexibility.

Philippines,

on

to

operations.

,necessarily them

regulations

fall

and

the

belong

which

they

In

not

are

with

targets,

We

is

ceilings

do

Bank.

intermediaries cy.

credit

ICMS "outside

sector

supervision.

which

the

formal

such

its

the

function

[1986]).

imposes

under

of

requirements,

(Ghate

Bank

they

the

liquidity

intermediaries

the

on

and

directly

ment

because

imposed

requirements"

hallmark

now

the which

a number years. once

registered

of It

is

operated with

and

regulatory worth outside supervised

changes

noting of

that Central

by

it.


4

A description review

of

its

issues.

The

financial

the

Philippine

regulatory financial

supervising

The

Central

system

all

banking

was

meant

ensure

instruments. reserve

was

The

the

usual

requirements,

these

became

more

sophisticated.

nies/

entities

registered

in the

Central

Bank.

tutes,

started

arose

as

On

a

financial

toemerge

esponse

the

to the

basis

of

registered

financial

categories

namely:

the

lending

of

in

of

funds

obtained

own

debt

which funds

from

instruments notes,

regularly from

the

All

obtained

(2) institutions

promissory

the

market.

other

than

engage public

in

the

(either

several

compa-

such

etc.;

and funds

as deposits

or

parby

the

substi-

innovations system.

operations, into

in

the

three

regularly

the

deposits,

of

agencies

engage

through

lending

system

financial

public

regularly

participations,

financial

these

be grouped

the

and

applied

deposit

their

which

from

public

the

of

may

which the

of

nature

were

regulated

called

(i) institutions

deposits;

being

policy

capital

government

instruments,

institutions

funds

the

196_s,

without

repression

monetary

etc.,

grew,

to oversee institutions

minimum

ceilings,

specific

the

grouping

agency(ies)

mandate

the as

in the

markets

by

banking

of

economy

with

the

such

Thus,

credit

New

the

these

described

over

effectiveness

As

clarify

I).

given

rate

a brief

regulatory

control

interest

and

help

be

the

regulations,

institutions.

tioipated

best

explicitly Its

system

can

(see Figure

institutions. to

can

under

them

Bank

financial

environment

intermediaries

directly

to

of

engage

in

form

of

the in the

issuance

broad

lending of

their

as

acceptances,

(3)

institutions

but

do

their

not own

obtain debt


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6

instrumentS). financial • first The

the

restwere

and

Exchange

with

then

caused

a major

financial Bank.

Funds much

tried

and

Bank. and

of

This

the

this under

or

According

groups, Bank

of Trade

(e.g. and

of

control they

regulated

rates.

This

less

1972

by putting and

along

the

Central

lines

the

the

Central interest

threatened

the

reforms

banking

institu-

of

Central

the

suggested

Bank

196_s, of

paid

Supervision

the

and

in the

financial

all

they

ICMs.

of

because

The

1972.

Securities

resources

NBFIS

policy.

the

Industry),

the

total

direct

only

although

especially

of

non-bank

before

Bank,

agencies

NBFIs,

control

to

three

Central

volume

weakness the

called

as Segments

the

the

monetary

is more

Shaw.

to

to

than

NBFIs

the

the

in the

are

the Central

government

of

subject

to correct

tions

growth

shifted

effectiveness

the

Department

decline

higher

of

be considered

system

groups

Of

by

other

Commission,

could

third

(NBFIS).

regulated

The phenomenal

rates

and

Supervision

not

registered

such

Second

intermediaries

wasunder

were

as

The

by

Gurley

definition,

NBFIs

include:

(a)

A

person

or

government

Such

financing

company,

pawnshop,

insurance and A

financial

investment

house,

non-stock

savings

with

financial investment

dealer/broker, •funds

lending

any

_ntercompany, invest-

manager,

cooperative,

and

association,

loan

association.

which

intermediary,

registered

a non-bank

broker,

loan

entity

and/or

as

securities

money

and

or

body

as an

company,

building person

licensed

regulatory

medlary,

or,

(b)

entity

holds Such

itself as

by

out the

as

use

a of

non-banklng a

business


name,

which

includes

"investment",

"lending"

whlch.connotes advertises engaged

the and/or

financial Itself

in

a

term

"financing',

wordphrase

of

intermediation,

as

a

function

financial where

or

'finance" similar

an

import

entity

intermediary,

finahcial

which and

is

intermediation

is

implied.

In general, The

term

time.

NBFIs

"public"

refers

However,

banking" the

NBFIs

functions,

public

they

All

the

supervision

the

or more

case

from

they

are

the

creditors

a license

deposits

to

not

at

public. any

have

allowed

are

They

Bank

are

all

this For

than are

institutions

Central

entities.

instruments

to borrow

obtain

that

although

requirements

twenty

in which

financial

(FCMs_).

financial

to

allowed

one

"quasi-

to borrow

•among

from

the

debt

under

the

issue.

of

requirement,

not

may

provided

instruments

markets

are

belong

varies

to

banks

are the

the

across

example,

to

to

subject

non-banking

subject

which

formal minimum

capital

different have

reserve

types

higher

institutions.

a specific

credit

of

capital

Their requirement

debt ratio.

!/ Their

borrowings

accounts, vlslon orial

are includes

powers

mented,

and

and

loan

frequently not

only

as well if violated,

portfolio,

monitored the

so that

mere

by

particularly

the

issuance

regulations

sanctions

can

Central of can

DOSRI

Bank.

rules, be

Super-

but

visit-

fully

Imple-

be effectively

imposed

on

violators.

!/ DOSRI •Stockholders

accounts•are and related

bank loans interests.

to

its

directors,

officers,


8

It

is

pawnshops other

then

clear

and

lending

countries.

Succeeded

•in

It

a

acted

crisis

hit

Insurance under

the

companies limited sale

to of

engage

their

own

insurance similar

companies

are

Central

country,

System,

and

to

insurance

associations providing the

to

submit is

to

supervise its

companies

of

to

deposits their

rural

be

financial They

from

which

at

over

the

are

it

is

still

from

insurance tO

effects

of

situation this

total

is

of

other

registered

at

end.

the the

of

the

the

FCMs.

cooperative

savings

members

their

allows

the

mutual

the

of

liquidity

part

the

of • debt

statistics the

to

insurance

mainly

Since

their

Insurance

that

exchange

like

never

issuance

considered

operate

have

However,

institutions

members

banks

the

them.

may

come

ascertain

control

Bank

although

funds

and

Central

empowered

noted

financial

to

only

The is

by•NBFIs.

credit

maintain

be

from

issued

purpose

raising

cooperative

those

to

course,

public

public,

Bank.

lending,

not

the

an

violators.

body,

is

policieS,

(CCUs).

loans

direct

monetary,

group

unions

It

Their

to

not

Bank

Another credit

the

Central

members.

The

on

the

of

The

and

independent

in

1981. the

getting

were, and

in

companies

without

government

of

an

of

unlike

finance

authorities in

companies,

•FCMs,

These

license

both

the

public

system

the

required

Bank.

operations

the

finance

several

Bank.

companies.

also

instruments

Central

is

to

when

the

financial

supervision

insurance

time

to

revoking

which

• belong

Central

companies,

Commission, regulate

a

known

the

by

the• Philippines,

from

the

became

swiftly

been

was

borrowing from

illegal.

in

investors

There

authorization

when

that

and

one

end

Except

•as rural

loan and for banks


9

under of

the

the

Rural

Banking

Central

reports

to

Bank.

the

Development

are

portfolio

or

intermediation

the they

ating

under

cooperative and

credit

thrift

CCUs

are

liabilities of

the

are

not

no

Central

and

loan

supervised

from

functions. their

portfolio,

Bank

Neither

result,

than

the

on are

they

many

have oper-

of

these

rural

banks

some

Central

regulations they

cooperative

Some own

subject

Segments

other

intermediaries

larger

loan

operate

Central

Interestingly,

by

Bank-like

institutions/individuals

not

financial

even

and

unions

the

a

the

can

be

Bank,

imposed considered

and

since

on

their

as

segment

ICMs.

Aside

use

As

their

of

jurisdiction.

Bank.

to

are

However,

credit by

of

banks.

Since there

its

rules.

unions

Department

requirements

under

Bank's

the

reserve

imposed

financial

Cooperatives

a monitoring

cooperative

supervision

submit

include

of

Central

the

of

CCUs.

compared

Central

to

Bureau

regulate

regulations

the

flexibility

The

do not

intermediaries by

required

to

Thus,

any

under

to

imposition

of

monitored

greater

and

taxes.

financial

they

not

iS attached

empowered

the

are

Bank.

which

minimal

free

CCUs

are

Central

iS

functions

virtually

Nor

(BCOD),

Agriculture,

Act,

of

of

funds

them for

to Central the

landlord-lenders, farmer-lenders,

ICMs.

credit

that

perform

raise

deposits

on-lending. Bank These

professional

include

there

financial

To

the

Suppliers,

are

on-lending.

the

extent they

Others

that are

or

trader/miller among

they

are

considered

"paluwagan"

moneylenders,

many

intermediation

for

regulations,

traders/input and

unions,

ROSCAS, lenders,

others.


10

The the

financial

past

two

introduced, the

reductfon

policy

decades.

In

including

the

of

to encourage

of

the

with

the

phased

out,

fully

deregulated.

of

To have

iS not

to say

In

fact,

a wedge

on

the four

a

of ROSCAS;

suppliers.

AS he

relatives

the

of

We

have

least formal

be

a segment

one

can

ceilings

and

the

insti-

latter

part

redlscounting

rate

credit

programs

were

market

is

regulations

regulations

Also,

and

now still

are

existing

deposit

this

examples

intermediation

lending

of

of

the

ICMs

credit the

However, ICMs

in

markets.

The Also,

especially in other

of

rate

this

in the

are

countries.

of

we have

ICMs,

which (4)

the

importance

we

urban

and

results

of not

is input

various friends/

emphasized

studies.

project

because

institutions

they

are

are

belonging

analysis

inter-country

if pawnshops

study,

"paluwagan"

comparative the

this

uDion;

in our

financial

inclusion.

facilitated

(2)

relative

the

pawnshops among

their

the

credit.

segment

included

the

through

(TOR)

of credit

moneylenders;

goes

financial

of

reference

Sources

observe

regulated

richer'with can

was

financial

financial

ceiling

(3) Cooperative

as Sources

role

of

major

(i) professional

the

the

the

restrictive

between

terms

namely:

the

of

in

imposed.

focused

studies,

that

altered reforms

rate

Towards

special

drive

Satisfy

form

types

Likewise,

[1987]).

being

interest

rate.

(see Lamberte

greatly

financial

to align

portfolio

Still

of among

and

that

of

competition.

Bank

Branching

taxes

been

started

This

SuCh

has

a set

removal

more

Central

market

remain.

1980,

differentiation

tutions 1985,

environment

is

to made

comparisons considered

as


11

The budget

project

not

constraint.

Thus,

the

studying A

did

role

the

Sample

operating

Metro

role

and

Manila

The

markets

of

this

trade

was

to

provide

much

to

establish

Sapang 20 mated

ratio

no

iS

one

the

estimated

On

a

The formal found

Size

of

that

is

members

28

of

the

"paiuwagan"

a

to

institutions

percent

per

193.

of

the

860 also

Since it

of

Marikina,

it

virtually ICMs,

However,

some

studies.

be

is

active

of

found

with

1987.

means

to

be

number that

In

operating,

households.

the

input

urban

various

as

to

in

the

size.

to

unions

regards

institution

found

community.

utilized

makes

their

by

study.

size

from

were

As

to

used.

credit was

the

million

esti-

Thus,

the

Twenty

(20)

active

of

with

stalls

virtually

in all

"paluwagan".

basis,

estimated

the

in

_1.05

191,

are

financial

of

financial

of

cumulative

"paluwagans"

project

obtained

"paluwagan"

are

this

were

urban

industry

of

moneylender

market

Stallholders

be

of

membership

public

footwear

trends

formal

resources

business-oriented an

the

analyzed

ICMs.

subject

in

moneylenders

combined

density

the

was

members the

due

was

market-based

in

the

mainly

approach

low-income

their

estimate

can

where

professional

as

method

one

Segment

an

figures

Palay

and

survey

"paluwagan"

and

utilized

impossible

indicative

in

credits,

chosen

case

and

Manila

approach

less

the

moneylenders

Metro

the

Suppliers

of

a national

institution-based

in

examine

Instead,

financial

of

conduct

resources reach must

_7.2 be

raised million

large

operate. sample

members

even For of

by pesos in

the in

1987.

areas

example, institution-

ten

where it

was and


12

market-based

credit

contributed

an

September

mobilizing

has

been

It

seems

credit

little

there

is

were

1,469

Of

up-to-date

information

a

"paluwagan"

between

potential

of

non-wealthy

combined

and

assets

four

(CCUs)

about

their

active

167,844

sources

the

of

_19,096

the

unions

known

membership

their

of

that

among

members

and

January

the

to

"paluwagan"

individuals/households

overlooked.

very

that

also

amount

deposits

Cooperative yet

are

average

1987.

in

unions

(see

credit USAID

about

are

popular

size.

A

unions

in

[1987]).

their

funds.

In

Table

the

44

members

of

NAMVESCO

credit

rec_nt

combined

of

institution-based

the

unions

I,

country,

study

1980

with

However,

uses

of

in

stated a

there

total is

assets

as

we

together

put

plus

the

included

in

no

well

as the

assets the

of

study.

/

AS

of

real 28

1986, terms

percent

in

the

of

the

the or

_278.7

of

the

same

The

What faster

figures

lated

as

(i.e.,

CCUs)

pawnshops)

expense

of

highly

these

million

Thus, a

is than

it

can

is

of

expanded regulated

all

least is

as that

during financial

the

These in

that large its

and

regulated

_40.4

pawnshops

surmised

therelative

least

to

terms.

pawnshops

that the

of be

at

interesting

amounted

nominal

assets

that

and

CCUs

in

system

alsosuggest

(i.e.,

system).

of

combined

year.

CCUs

pawnshops. growing

assets

the as

million are

roughly

the

country

total

that

absolute

the

financial crisis

institutions

of

size of

the

size

banking

sizes

in

the

is

system. unregu-

institutions period (i.e.,

at

the

banking


Table COMPARATIVE PERFORMANCE PAWNSHOPS AND

Selected

Credit

mml--m

Year

Real Assets (PM)

Unions

Growth (%)

Rate

I

OF SELECTED CREDIT BANKING INSTITUTIONS

UNIONS,

Pawnshops Real Assets (PM)

Banking Growth Rate (% )

Real Assets (PM)

System Growth (%)

Rate

1980

-

-

101.6

9.7

63,206.2

6.0

1981

-

-

105.9

4.2

67,343.8

6.6

1982

21.6

-

iii.i

4.9

1983

25.1

16.2

114.1 p

2.7

1984

21.8

13.2

108.3

1985

25.5

17.0

1986

40.4

58.4

Sources:

Table 2 Financial

(Lamberte [1988]); Statements of a

75,061.5

11.5

82,801.7

10.3

-5.0

65,587.1

-20.8

119.3

10.1

55,810.0

-14.9

146.6

22.9

41,160.0

-26.2

NAMVESCO sample of

Annual Reports (various years); Cooperative Credit Unions.

and

...%

&u


14

Wehave which

we

a more obtained

Central

Bank

terms.

Sector

Both

the

increasing

before felt. 1985

full

When

banks 1986

manufacturing

The grossly the

to

footwear

industry

the

top

the

value

8_

percent of

10_0

to _22

andrelative

1979

and

of

to

of

the

increased

trade

top

the

the

the

Sample

value firms

in

credits

1983,

averaged

had

a

year

crisis

was

dependence

on

of of

trade

data

of

the

corporations

study

firms

of

the

belong

to

82 percent

inputs. million

have since

manufacturers

material _1.4

credits.

credits

comprise

footwear

in the

2 could

from

In our

none

of and

In

1986,

while

annual

III.

SAVINGS, CONSUMPTION CREDIT, ALLOCATION EFFICIENCY, EQUITY, INTERACTION WITH FORMAL SECTORS AND IMPLICATIONS FOR MONETARY POLICY AND DEPOSITOR SECURITY

Savin_gs mobilization

of the

ICMs.

In

general,

_0.4

trade

in Table

credits

their

nominal

economy,

sample

averaged

trade

the

of

ments

inputs

of

in

by

value

The

material

of

billion

the

the

only

where

the

of

by

of

volume

trade

of

prepared

activities

presented

use

credits

lending

1000_corporations.

sales

of

their

instability

actual

in Marikina

trade

availed

a peak

reduce

their

made

of

balance-of-payments

credits

the

size

reached

the

corporations,

of

table

amounted

table

the

size

in 1986

underestimated

belonging

flow-of-funds

continued

on

the

credits

effect

sector

of

Trade

absolute

flow-of-funds

Sales

the

in view

figures

estimate

2).

since

the

and

from

(see Table

manufacturing

been

precise

role

million.

varies

professional

according

to

moneylenders

the do

Segnot


15

mobilize for

depositS.

on-lendlng

The

come

results

mainly

of our

from

Table

TYPES

OF

Year

CREDIT (In

their

study

Support

earnings

from

Funds

employment

2

OF THE MANUFACTURING Million Pesos)

Loans

this.

Trade

Credits

SECTOR

Total

1979

112,836.2 (89.3)

13,540.5 (10.7)

126,376.7 (100.0)

1980

115,553.1 (84.7)

20,894.1 (15.3)

136,447.2 (100.0)

1981

129,477.2 (86.7)

19,916.3 (13.3)

146,393.5 (100.0)

1982

140,146.7 (83.8)

27,079.0 (16.2)

167,225.7 (100.0)

1983

155,369.0 (83.0)

31,878.8 (17.0)

187,247.'8 (100.0)

1984

119,154.0 (88.2)

15,891.0 (11.8)

135,045.0 (100.0)

1985

77,091.6 (73.5)

27,753.9 (26.5)

104,845.5 (100.0)

1986

79,718.4 (78.1)

22,376.0 (21.9)

102,094.4 (100.0)

Source:

Table

VI.I

(Lamberte

and

Jose

[1988])


IIB

business.

One

husband

who

exception

started

works

to

moneylender banker,

She

interest

found

80 banks

much

higher

than

date

of

interview,

the

combined

of

of

her

moneylenders

ant

is

ire

and

that

CCUs

can

access

have with

Simply e.g.,

public

individuals, it deposits

based

and

CCUs

CCUS. bank

In is

out

low-income

credit

like

payroll

contrast,

prohibitively

limited and

vendors, to

deduction

high.

a

in

the

transactions Our

study,

those

for

are who

banking

low

cost

the of

for

9ase

do

system. cost setting,

etc.

cost

of

These

employees,

case

import-

means

fairly

in

70

attract-

to

collectors

with

be

geographic

a

the

transactions

cater

install

of

capability

is

earners.

the

hiring

the

that

of

etc.

easy

to

facilities

market

very

seems

low

amount

about

the

assist

in

an not

As

important

very

pays

an

comprised

to

entail

one

depositors

designed

offices,

e.g.,

51

an

and

_5,000,

instrument

are

operate

is

an

an

indigenous

afford.

What

"paluwagan"

institutions they

collecting

deposits.

is

opportunity

demonstrates

earners.

markets,

situation,

This

low-income

the

can

_40,200.

_100

is

to

institutions

these

because

earners

her

Palay, an

as

an

had

among

to

is

moneylender

fashion

to

low

of

there

of

deposit

This

income

Sapang

role

as

This

time

funds.

deposits

not Saving

this

mobilize

and

self-help

a

low-income

to

basically

neous

what

In

for

annum.

the

However,

the

deposits

amounting

they

mobilizing

playing

minimum

affordable

The

be

per

loanable

using

Arabia.

whose

deposits

percent

to

percent

by

observation.

time

by

money

Saudi

general

accepts

of

provided

in

this is

lending

homogeIn

Such

system of

of

market-

institution-based depositing

instance,

shows

in

a

that


_7

a

bank

depositor

_13.93

every

One tions

facilitate

As

of and

and

on

save

with

to save

results,

the

from

informal

a bank.

if

they

savings

of

low-income

a variety

of

"paluwagan" problem

that want

to

institutions

decisions

consumption

institu-

expectation

more

the

average

savings

t_e

these

overcome

12

by

of

times

of it

creasing

earners.

In

offers

of

them

indivisibl-

in accordance

with

their

"paluwagan"

are

quite

means

that

"paluwagan"

fixed

on

insignificant

There

amount

are

"paluwagan"

of

their

by _967

per

past

mobilized

indications

that

about

For

instance,

among

have

deposits

with

net

the a

for

by

bank,

CCU and

_9,145.

average has

In

to

been of

8.7

been

in-

Sapang

Palay,

averaging

_26,_80

These

such

fixed

studyhave

are

not

institutions.

existence

addition

at

the

initial

an

years.

the

sample

stood

member

or kitty two

interview,

the

year.

savings

brought

of

each

"sahod"

the

average

unions

average,

the

of

members

respondents

the

for

clear

has

than

received

"paluwagan"

date

CCU

credit

deposit

members

the

sample

that

respective

and

of

greater

their

his

the

AS

the

Considering

members

CCUS

3).

deposit

is about

not

save

(see Table

deposits.

do

existence

mobilized

fixed

savings.

the

money

these

tend

spends

capacity.

substantial

from

they by

investment

Savings

years,

and

to

in

financial

This

of

Members

shown

the

opportunities

average

feature

saving-investment

particular,

Palay

he deposlts/wlthdraws

borrow,

more.

lities

in Sapang

reciprocity.

can

borrow

time

attractive

is

they

living

of CCUs

total

members, among

and

financial almost the

half sample


18

Table

SAVING

BEHAVIOR

FixedDeposlts No.

Ave.

3

OF

CCU

MEMBERS

Savings Amt.

No.

Deposit Ave.

(P)

i.

CCU

2.

Banks

3.

*Two

82*

9,144.25

-

-

Paluwagan

Source:

Figures Table

Deposits

No.

Ave.

(P)

46 13,301.6_ (56.1) 45

38,584.10

....

respondents

Note:

Amt.

Time

(P)

-

12 22

did in V.16

not

give

parentheses (Lamberte

the

answer.

are

percent.

and

Balbosa

[1988]).

Amt,

-

32,287.54 19,_96.26


19

"paluwagan"

members,

72 percent

Interestingly,

among

bank

able

from

a bank

to borrow

Segmentation the

FCMs.

Seems For

"paluwagan"

tend

homogeneous,

like

employees Input

of

suppliers

credits

only

them.

Even

,suki"

or

do

the

low

questioned. percent of

loans

above

loan

capacity

ors

can

interest results interest than

to

while

_i,@@@

with

formula

depositors.

Show

that

rate big

on

not

it charges

credit

suppiiers

trade

credits

footwear

impact

or

members. and

cash

materials

from

lending

into

to

question

the

degree

of

high

by

of

union

up

from

ICMs

was

to _5_0

channeling

of

unions

are

larger the

fact

according tend

with

a per

12 months. using,

big

ÂŁhan

those

that

the

to

risk.

to charge

to small

can

found

13 percent

period

times

manufacturerS.

to

their

puts

only

a maturity

input

down

fairly

locality,

trade

raw

The

credit

adjusted

grant

in and

are

only

buying

than

uses.

loans

Several

were

unions

same

institutions

equity

is aggravated

iS

they

ICMs.

these

for

which

amounts

This rate

the

one

given

this

them

ICMs

members

in the

to narrow

productivity

annum

5 months

is,

Indeed,

example,

per

borrow

tend

favorable

For

where

directly

of

to high

in the credit

are

That

to prevent

perceived

period

same.

clients.

seems

25.2

Loans

of

bank.

5).

pronounced

vendors

firm.

in a

a handful

4 and

in areas

market

moneylenders

segmentation

only

deposits

cooperative

to manufacturers

functions

The

are

same

prime

from

to be more

the

have

(see Tables

to operate all

not

depositors,

instance,

allocative

funds

do

footwear

higher

also

be

charging maturity annum

for

With

the

depositof

small

effective Likewise, effective

manufacturers


20

Table BORROWING

Sources

of

BEHAVIOR

OF

CCU

4

MEMBERS,

JANUARY

(i) No. of Respondents

Credit

- SEPTEMBER

(2) Average Amount Borrowed (_)

1987

(3) Average Maturity

(4) Average Interest

days

(%)

!/ i.

CCU

80 (97.6)

21,760..30 (23,615.20)

258.7 (572.4)

19.5 (5.8)

2.

Banks

4 (4.9)

12,750.00 (18,191.12)

322.5 (75.0)

19.5 (7.33) \

3.

Professional Moneylenders

7 (8.2)

2,785.70 (2,118.50)

65.7 (30.3)

4.

Friends/Neighbors/Relatives

14 (17.0)

10,607.14 (10,388.93)

95.0 (60.0)

5.

Traders/Suppliers

51,613.46

53.5

29.3

(19.3)

(4.2)

120.0 (0.0)

2_/

3j

6.0 (-)

6_/ 26 (51.0) 6.

Paluwagan

(121,792.49)

22 (26.8)

19,096.26 (41,486.10)

-

-

i_/ Effective interest rate which discounted in advance plus

is the interest all charges.

Refers to only 7 respondents. loans without maturity.

The

other

rate

7 respondents

have

3_/ Refers not

4/ Refers 5_/ Refers 6_/

to only charged

one respondent. The other interest on their loans.

to only

those

to an

average

who

are

amount

engaged borrowed

Price differential between goods This is based on theresponses Note:

Source:

13

respondents

in a business. per

month.

bought in cash and on from 15 respondents.

Figures in parentheses in column (I) are percent, while in columns (2) - (4) are standard deviations.

Table

V. 21

(Lamberte

and

were

Balbosa

[1988]).

credit.


21

Table

ALTERNATIVE

Source

SOURCES

OF

LOANS,

5

MATURITY

Respondent Number % of Total

PERIOD

Average Maturity Period (Days)

INTEREST

Average Interest Rate (%/ annum) *

Average Amount• Borrowed (B)

0

0

Savings Association

4

8.9

67.5

66.2

1,137.50

Moneylenders

9

20.0

76.4

iii.ii

1,558.89

Relatives

8

17.8

10.62

0.0

2,525.00

12.58

0.0

3,481.67

13.7

12,021.43

24

Others (friends, neighbors, etc.)

7

Source..

Table

V. ll

53.3

15.6

(Lamberte

23.43

and

Bunda

[1988]).

-

RATE

Bank

Traders/ Suppliers

-

AND

-


22

••

In

general,

loan

proceeds,

Table

6 shows

and

This how

It

are

to be

loan

noted,

was

of

the

important

to

dealt

the

data

model results

that for

is

indeed

is,

however,

of

various

studies

can

such

be

the

sample

of

CCUs

proportion

of The

loans

working

prompted

capital.

proportion

I_t

of

such

acquisiton

as of

consumption

from

an

are

• the

family

household

seems

substitutes

important

unfortunate do

hypothesis.

obtained

the

purposes,

sectors

It

test

uses

to

be

loans.

informal

other

CCU

purposes.

significant

other

from

the

these

their

ICMs.

and

a great

of

of

of

savings

of

producti_e

Productive

of

these

members Thus,

a

with.

to

most

for

etc.

and

each

the

extent

augmenting

uses

formal

plementary

a

large

use

obtained

to

repairs/improvement,

education,

Whether

be

for

loans of

period

used

house

the

the

•features

members

used

however,

proceeds

appliances, one

them

restrict

of

that

maturity

not

attractive

vendors.

was

use

consumption,

kinds

market

short

borrowers

the

do

allocated

noted

proceeds

relatively

to

be

ICMs

of

determine

should

loan

the

one

The

"paluwagan"

the

is

is

institutions

loans.

in

borrowers

"paiUwagan".

credit

and

lenders

not

issue

that

permit

us

Nevertheless,

the

or that

studies.

sectors

is

must

the

nature

to

construct

some

various

com-

of a

indicative

One

inaicator

i

of

the

the

expense

Some

substitutability of

Segments

the of

only

information

hand,

it

economic

must crisis

be

of

other.

the

urban

available recalled during

both We

ICMs to that

the

can

perhaps

through us. the

period

that

examine time

When

-

1986.

the

since

looking

Philippines 1984

one

at

at

behavior

of

these

are

the

data

suffered As

expands

may

the be

the on worst

seen

in


23

Table USES

6

OF LOAN PROCEEDS (In Percent)

•Uses

CCU

Business

Paluwagan

60.0

49.2

5.8

3.2

1.9

10.2

6.4

9.6

3.7

12.3

1.7

2.4

Savings

0.9

7.8

Education

8.1

0.5

2.5

-

1.2

-

-

i.I

Jewelries

0.1

-

Others

7.7

3.8

Household House

repairs/improvements

Family

consumption

Payment Loans

appliances/furniture

of

loans

to others

Medical

care

House/lot Application

Sources:

acquisition for

overseas

job

Table V.8 (Lamberte and Bunda (Lamberte and Balbosa [1988]).

[1988])

and

Table

V.13


24

Table

I,

ing

the

real

system

crisis

assets

had

been

period,

the

real

while

those

Pawnshops;

which

are

2,

The

same

both

bank

be

1984.

dropped

precipitously.

manufacturing

credits

when

that are

from

during

loans

the

to

normal

each

qualified already

credit, informal Table However, bility organized

out,

One

for

non-wealthy

%he

4 and

Table

among seems

to

partly

5,

is only of

exist.

For

free

formal

and

observation the

markets

credit fast

and

implying

that

on

move

from who

one

do

not

handful

the

ICMs,

instance,

members

from

to

trade

both

had

should

market

to

have

CCUS

element and

moneylenders.

be

results. are

can

substi-

however

LDCs

access

some

sectors

are

As

severely the

access

between As

suggest

informal

survey in

irrelevant. a

Table

of

seem

times,

substitutability

segments

to

dependence

of

terms

recovered

its

abnormal

individuals

sectors

types

loans,

consideration

of

in

absolute

results

the

general

easily

question

credit

both

financial

cannot

that

shown

in both

finan-

scarcer.

during

into

been

as

bank

perspective,

This

taking

pointed

fragmented. Thus,

while

had

formal

As

credits

to

the

increasing.

pattern

crisis trade

became

the

grew

increased

times,

other.

by

credits

relative

macro

complementary,

tutes

size

among

bank,

during

been

credits.

economic

sector

bank

Viewed

trade

the

system

had

growth

trade

However,

their

CCUs

same

and

However,

banking

regulated

of

the

the

selected

the

CCUs

1984.

of

least

and

During

increased

the

the

said

lo_ns

before

even

of

selected

before

follow can

the

assets

the

institutions,

CCUs.

both

growing

shrinking

cial

of

other. to

formal

be

gathered

to

bank of

bank and from

credit.

substituta-

"paluwagan" Thus,

were only


25

very

few

Even

the moneylender

lend

to the

of

CCU

trade

and

"paluwagan" who

members

credits

members

organized

of her has

borrowed two

moneylenders.

"paluwagan"

"paluwagan".

somewhat

from

units

Also,

reduced

the

the

demand

does

not

availability

for

credit

from

moneylenders.

There sectors. Banks

seems

to be a weak

None

of

serve

as

deposits

with

assets.

The

popularity (see viewed

banks

comprised

CCU

from

formal

borrowed

CCU

funds.

only

6 percent which

may

Also,

borrowed

ever

scheme"

federations

details).

between

CCUs

of

"interlending

for

ever

sample

a depository

among

below

the

linkage

a bank

a

bank.

in

weaken

total gaining

this

linkage

moneylenders

finance

1986

their

currently

the

to

from

of

is

of

informal

However,

further

none

and

inter-

their

lending

operations.

Input sources Suppliers

additional

funds.

borrowed

obtained

a

assets

formal

money

long-term

while

working

why

have

of

suppliers

the

capital. credit

the

access

market

majority to

suppliers materials.

Only

trade availed

the

credits. trade

contact

two

of

banks

in

to finance

the

the

seems

informal

borrow

In fact, credits

nine

bank

all from

One

loan

to be

of

to

market. that the

of

them

of

fixed his

link The

the

reason

they

sample

manufacturers

as input

to augment

able

is

banks

sample

acquisition

credit

from

with

1987.

a short-term

latter

the

didnot

of

Only

Secured

with

limited

from

loan

other

very

have input

of

raw


/26

Depositor

Security

participants

in

few/years, full

ICMs.

a number

of

claim

the

s%ories

their

of

about

(PDIC).

experienced

a

"paluwagan",

two the

on

defaultee's

liabilities.

the

thereby

members.

semblance

IV.

of

determining which

to

are have

average

segments the the

the

most their

bank interest

consistently -

-

organized

rate

on

lower

the

gesture

is

were

then

tried

sample

of

CCUs

the

Sample

defaulted

after

the

"sahod"

from

assumed

expected the

of

the

"paluwagan"

contributions

members

to

Insurance

managers

of

past

also

of

gives

some

"paluwagan".

on

ICMs

rate

During savings

on

the i r

deposit

Segments

the

of

period of

1 percentage

own

and the

savings

deposits

about

COMPETITION BETWEEN A POSSIBLE SOURCE OF WITH TRANSACTIONS IN THE INFORMAL SECTOR

have

savings

among

by

case

to

the

who

the

a member

security

interest

rates.

in

Deposit of

turns,

the

rate

that

prevent

core

concern

depositors

the

that

of

of

interest

based

prevailing

be

In

To

a

Newspapers

INTEREST RATE FORMATION AND TRENDS, FORMAL AND INFORMAL SECTOR, ICMS AS INNOVATIONS, INTERLINKAGE OF CREDIT OTHER MARKETS, PROMOTING LINKS WITH

Va r ious

to

the

presence

stability

noted

none

(kitty).

This

of

Philippine

claimed

succeeding

The

be

of

contrast,

ensuring

less

collapsed.

deposits.

"sahod" the

should

the

managers

in

be

predicament

In

decreasing

managers

banks

from

run

to

It

the

deposits

Corporation

receiving

seems

loans. ICMs

deposits 1982 CCUs

way

is

of CCUS

claimed on

the

1986,

the

observed

to

than

the

point

c

3_/ Core "paluwagan"

members units.

are

those

who

have

been

members

of

the

Same


27

average

deposit

rate

Interestingly,

savings

seem

to beinsensltive

when

the inflation

savers

have

been

In Sapang interest

pays

than

banks

(See

of

the CCUs

dropped_sharply by

where

bath

CCUs

and

no Ejnancial

In particular,

the

moneylender

the

for

inflation

the

rate

Table

than

banks

for

one

1986

percent,

banks.

the

operate,

opportunity

who

deposits

in that

7).

and

except

institutions

to reflect

annum

Thus,

to less

seem

per

both

rate.

deposits

80 percent

higher

rate

rates

inflation

penalized

on

by

deposit to

Palay

rate

capital.

given

year

cost

mobilizes

in 1987.

of

deposits

This

which

the

was

is much

only

3.8

percent.

Lending loans, the of

rates

maturity

degree CCUs,

in

the

period,

of monopoly the

ICes

vary

repayment power

determination

according scheme,

exercised of

the

complicated.

Interesh

rate

advance

and

charges

(i.e.,

tion

insurance,

collection

charges)

have

the

of

the

shows

effect

that

is only

the

half

of

raising

nominal the

rate,

effective

for

by

the

advanced

charges.

Indeed,

the

average

lending

rate

of

CCUs

charge

the

off-repeated

claim

banks.

that

being

iS what

and

to

In

fee,

loan

rate.

lending This

lower

8

half

being

and

other of

disproved

lending

these

members,

rate

has

in

Table

to

other

is

redempAll

known

the

case

rates

collected

on _ interest

effective

the

imposed.

is

rate,

banks.

lenders

are

interest

payment

of

lending

service

interest

size

of

and

lenders.

payments

effective

accounted

approximates

by

are

which

type

effective

somewhat

additional

to type

rates

CCU the than


28

Table

TRENDS

IN THE

7

INTEREST RATES ON SAVINGS (Percent Per Annum)

CCUs Year Nominal

1982

8.6

1983

Source:

8.6

---Real

DEPOSITS

Banks .... _'-" ...... Nominal Real

-1.6

9.8

-0.4

-1.3

9.7

-0.3

1984

8.7

-41.6

9.9

-40.5

1985

8.6

-14.5

10.8

-12.3

1986

8.0

8.6

7.8

Table

IV.I

(Lamberte

7.2

and

Balbosa

[1988]).


29

Table

LENDING

8

RATES OF CCUs, (In Percent)

CC US

NR

1986

NRC

NER

i.

BVDCI

6.5

ii. 9

13.5

2.

PSPDCi

7.0

18.7

23.0

3.

CMDCI

6.5

17.3

20.9

4.

DTDCI

10.8

21.6

27.6

5.

MCMCCI

7.9

22.3

28.7

6.

MVDCI

6.5

20.9

26.4

7.

UPCCI

10.0

12.2

13.8

8.

FEUCCI

9.0

13.0

14.9

9.

DSE (CBP) KBCI

9.0

10.

PECCI

Note:

Table NR

IV.2

= nominal

(Lamberte lending

NRC

= nominal

lending

NER

= nominal

effective

ii.i

12.0

14.0

16.3

8.5

16.2

19.6

Average

Source:

10.0

and

Balbosa

[1988]).

rate rate

plus

lending

other

charges

rate

discounted

in

advance.


3O

Interestingly, operating

in

federation

Metro

lending

have

rates

rate and

among

to

the

geographic

in view

curred

a

entrants

to examine The

the

informal

substantial

surprising

ability

among

demand

for

nominal

components

shown

spread

of

charge

to

percent

be

incurred

other

D and

lower

among

do

lending

moneylenders

from

one

in-

are

new

considered

themselves

F who

not

moneylender

enjoyed

It

the seems

transfer

rates. and

in

have

spread.

borrowers

a

G,

moneylenders

the largest

that

shift

four

mixed_

F and

to establish

of

despite

could

relatively

borrowers

somewhat

they

realized

rates

1.5

rates

Since

necessary

lending

community.

lending

10 are

rate

exercise

that

operations.

the loss

to observe

this

namely

Moneylenders

clients

interest

in

the

quite

moneylenders

find

only

is

the the

of

In

differential

moneylenders,

lending

costs

to

in Table

markets.

rate

credit

margins.

of

the

completely

maturity

they

profit

who

Same

in

the

credit

to check

The

of

the

same

marketS.

though

moneylenders dispersion

sunk

the

credit

number

CCUs

the

be

interest

since

Two

the market,

that

bother

a net

rate.

of

According

results

into the

to

in

cannot

9).

the

in their

of

across

variation

differences

of

excess

loss

part

biggest

the

lending

as

The

loans

not

A realized

high

vary

belonging

rates

found

moneylenders

of

tried

Moneylender

do

other

moneylenders.

very

Table

they

by

the

location

we

for

(see

interviewed,

to

CCUs

rates.

lending

community,

substantial

We

due

the

moneylenders

futile

Even

lending

greatly

charges.

in

urban

charged

Manila.

is mainly

Variation

a Small

rates

different

service

attributed

lending

The

the to

lack

to wide of

another


31

Table INTEREST

9

RATE CHARGED PER ANNUM BY SIZE AND TYPE OF BORROWER

MATURITY,

r

Moneylenders

A.

B.

A

B

C

D

-

-

91%

E

F

G

-

-

120%

-

By Maturity (i)

1 -

(2)

15 days

........

(3)

30 days

-

-

195%

224%

-

120%

-

(4)

45 days

97%

-

195%

-

-

-

96%

(5)

60 days

70%

97%

-

137%

-

-

-

(6)

90 days

-

193%

-

-

175%

12@%

By

7 days

97%

Size

(i) small (less than V2,000)

same for all

(2) large

-

97%

same for all

193%

same same for for all all

....

60%

same for all

120%

-

(V2,000 and C.

By

type

of

borrower

(I) new

(2)

Source:

iI

more)

120%

old

Table

same for all

84%

IV.7

(Lamberte.and

-

same for all

190%

same for all

same for all

same for all

-

140%

-

-

-

Bunda

[1988]).


Table COMPONENTS

OF

LENDING

Items

A

59.2

Less.

45,0

of Funds

Gross Spread LeSS : Transactions Costs 1. Processing/ 3/ Collection Costs 2.

3.

RATES

B

weighted average I_] lending •rate

Cost

10 OF

MONEYLENDERS

C

E

F

G

126.8

135.4

131.2

90.0

72.6

60,'0

60,0

60.0

60.0

60.0

60.0

14.2

48.8

66,8

75.4

71.2

30.0

12.6

4.2

10.4

1.8

2.5

0

0

0.7

8.5

15.3

17.4

4.6

22.9

85.8

5.7

Administrative Costs Cost due to 5/ delayed payments

108.8

D

0

0

0

9.2

0

9.8

17.3

0

0

0

0

0

20.0

1.8

9 4.

Cost

of default

Total Net

12.7

25.7

19.2

16.3

22.9

115.6

25.5

1.5

23.1

47.6

59.1

48.3

-85.6

-12.9

Spread

!/ The and

maturity

lending rate is computed on

is weighted by the relative frequency of loans by the basis of nine months (i.e., January - September).

2_/ Refers to the actual cost of borrowed funds for moneylenders A and E. The rest refer to the opportunity cost of using own capital which is assumed to be the same as the cost of borrowed funds of moneylender E who is mobilizing deposits. All are computed on the basis of nine months.

_3/ Taken

from

Table

IV.8.

(Lamberte

and Bunda

[1988]).

4_/ Part-time

Salary of the moneylender is equivalent to one-half

5/ Interest 6_/ Refers Source,:

Table

rate

due

to actual IV.12

based day.

to delayed cost Of

(Lamberte

and

loan

on

the

minimum

wage

of

payments

(see Table

IV.9).

default

(see Table

IV.9).

Bunda

[1988]).

754.5@

per

day.


33

are

indeed

an

prevailing

even

The

of

checks

and

interest

explicit

plain

in

case

their

the

components

The pl_in

trade

plain

interest

trade

credit

twice

as

greatly

as

who

retailers

Supply

of

ments

with

reduce have

explicit on

of

on

check

post-dated the

or

The

trade

of

results

credits

and

the

same

for

of

the

rate

on

is almost

The

same

is true

implicit

interest

between

the

two

sources

charged

by

also

implicit

inputs

the

rate

rate

II.

credit.

interest input

alternative of

usually

of

trade

input

Suppliers

is

rate

charged

by

suppliers'

This

arising

on production.

inputs,

for

their

marketing

assure

result

This

from

in

is the

non-delivery

Since products

wholesalers/traders

contracts

themselves

theyengage

manufacturers.

risk

outlets

TO

manufacturers,

footwear

no control

have

or exporters.

footwear

business

Sources

rate

to

explanation.

Wholesalers/traders big

found

arrangement.

implicit are

Palay.

is

hand,

differential

post-dated

the

other

in Table

interest

credit

rate

the

. markets

Sapang

discount

i_terest

differs

implicit

trade

credit

However,

like

The

the

price

tie-in

rate.

wholesalers_traders needssome

on

and

high

of

capital

rates.

On

presented

credit

The

into

"tie-in"

rate

on

implicit

effective

are

discount

credit.

of

community

rate,

out

fragmented

rate

and

interest

estimating

urban

down

arises

the

severely

interest

be broken

rate

outputs of

the

further

of

in a Small

effective

consist can

indication

footwear

of

a

tie-in best

of

with steady

arrange-

way

goods

they when

manufacturers

and

have

also

are

therefore

can they have

alternative compelled

to


4-

Table COMPONENTS

OF

EFFECTIVE

Source/Component

A.

Plain

Trade

ii INTEREST

Percent

per

RATE

year

Percent

Share

Credit

_Inpu t/Suppl iers:); Discount post-dated

rate checks

Plain

interest

Price

differential

on

rate

Total

B,

33.18

28.51

7.35

6.32

75.84

65.17

116.37

100.00

31.84

40.67

9.60

12.26

36.85

47.07

78.29

i_0.00

Tie-in Credit (Whole_@lers/t_aders who are als0 input @uppliers) Discount rate on post-dated check Plain

interest

rate

Price

differential

Total

Source:

Table

IV-20

(Lamberte

and

Jose

[1988]).


3_

give

footwear

This

is

manufacturers

corroborated

co_es

to

dealing

manufacturers The on

for

which

have

products.

that

when

traders,

dictated

contract

their

shows

wholesalers/

to

credit

price

finding

with

marketing

the

better

another

claimed

products. default

by

a

the

also

wholesalers/traders

it

footwear

price

of

their

reduces

the

risk

of

extended

to

footwear

manufacturers.

This solely

is

of

borrowing

with

the

trade

power

is

The suppliers

and

are

and

116.37

pointed

out

implicit

It

reflected

78.29

the

to

footwear higher

than

charged

their

they

extended

noted

the

difference

rate

charged

implicit

that

these

informal

can both

their

accounts rate

credits

rate

charged

by

on

by

input

suppliers As

already

are

to the

trade for trade rates

pawnshops

substantially

pricing

attributed of

tied

inputs.

input

interest

trade

moneylenders,

also

neces-

is

of

charged

sources

interest

not

of

are

customers.

degree

mainly

rate

their

the

respectively. be

effective

are

are

annum,

interest

the

for

rates

who

capital

to some

who

by

effective

interest

However, by

the

find

overpricing

interest

per

suppliers

working

exercise

greater

percent

total

manufacturers

companies. those

the

be

in

input

manufacturers

wholesalers/traders

above,

of

with

since

can

effective

bothcases,

iS

credits

interest

proportion

them

suppliers

total

case

Footwear

from

input

which

the

inputs.

Therefore,

In

however,

supplying

slty up

not,

credit. the

major

credits. paid

by

substantially and different

finance from


36

In that In

determining

input

suppliers

particular,

firms.

The

established

are

charged

customers

of

the

latter

retailers,

and

addition,

large

words,

risky

trade

determine

their

firms

are than

the

relative

are

a

charged

by

than

large

big,

well-

Isetann,

COD,

these

customers

issued

lower

discount

get

lower

firms.

rates

found

to

small

rate.

have

In

better

with

terms.

implicit

are

by

compared better

show

large

those

are

to

and

usually

suppliers

able

small In

interest

other

rate

on

firms.

result

the

with

input

results

Shoemart,

issued

command

small

interesting first

are

manufacturers

they

credits

Another

adjust

with

small higher

as

checks

they

footwear

therefore,

larger

their

such

compared

therefore,

power

and

stores,

Post-dated

rate,

between

firms

less

bargaining

interest

Small

etc.

considered

effective

discriminate

department

Fairmart,

ones,

the

total

we

found

effective

shares

of

is

that

interest

explicit

and

input

suppliers

rate,

and

implicit

then

interest

rates.

Table

12

segments

of

the

when

interest

rates

greatly

Banks add

and the

lending

vary

then been

Segments

rates

CCUs

the

rates

and were

among

appear

to

the of

liberalized

up

segments

have

the

rate

to

among

financial the

the

sectors

effective

highest

of

informal

these

interest

the

of

a comparison

formal

implicit

checks, have

presents

various

lowest the

interest the

of

segments

to

1986.

the

discount rate

rates

starting

on

trade

the

markets.

rates. on

If

of

the

financial

we

post-dated

credits

Interestingly, of

1981 lending

financial

rate

rates

among

from The

lending

interest

markets.

lending

could various

the

real market


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established

an

interrupted

in 1984

and

23.1

increasing

percent,

itself

in

1986

implication

of

bank of

market

gave

It

has

been

the

removal

Results the

the

to

sector

For

a credit rate on

the

create

financial

borrowers.

variety

of

on

much

how

pattern. small of

have

contribution

one

may

(see

raise

the

intothe

sustainable

that

join

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which

raise

a da_ly or one

13).

rate

on

demands

since

[1987]).

lending

rates

in

sector.

long-run,

tend

flow

her

to

pattern

we

choose

the partly

ICMS

cash

"paluwagan"

that

rates.

repayment

can and

liber-

widened

informal

the

effects

oligopolistic

community,

a member to

the

Lamberte

used.

well

the

restrictive

has

Loan

being

in

lending

in the

high.

Suit

rate

interest

in the

over

interest

the

increase

wants

Table

of

the

from

contribution

the

One

negated

(see

a low-income

he/she

have view

to 5_.3

stabilize.

overly

ceilings

practices

practices

the

rate

to be

financial

money

of

competition

to

be reasonably

"paluwagan"

amount

more

spread

spilled

market

In

Thus,

the

as

was

it re-established

bank

that

soared

that

system,

real

trend

to

In

the

interest

should

hinges

of

that

rates

again

could

opportunity

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started

such

policies

suggest

formal

repayment

policies,

an

observed

Seem

then

is

thebanking

banks

of

but

liberalization. of

1981.

inflation

encourage

branching

structure

alization

when

economy

to

Other

rate

since

results

failed

and

interest

the

these

system.

entry

1985

respectively, when

liberalization financial

and

trend

found

a

depending cash

flow

that

requires

a bigger

amount


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CCUs into in

have

also

consideration

the

case

Salary

of

15th

from

because

CCUs the

are

the

high

maturities

loan

institution

cash

their are

maturities because

of

they

are

where a daily

turnover

are

receive

to members

use

Thus,

repayments•

longer

CCUs

take

members.

loan

granted

that•

members

month,

in the

schemes their

where

market-based

loan

of

In addition,

tenure

of

repayment

pattern

of

days.

of

Understandably, 200

30th

In contrast,

scheme

flow

5 to 48 months

security

working.

cash

and

on•these

ranging their

the

out

institution-based

every

scheduled

fashioned

repayment

of

their

members.

much•shorter,

not

exceeding

to

different

days.

Moneylenders borrowers are

to

suit

three

scheme

month.

It

of

loan are

latter's

but

is up

mostly

borrowers'

businesses.

Under

this

fore

do

not

stay

may

select

either

pal

and

interest.

vance.

A

paying

the

when

observed. this

are

the

scheme

to pay

do is

part,

the

"suki"

preferred

There

One

principal

under

who

capacity.

payment

not

every

the

whole

or

the

a

paid

"steady"

of

have

payment

moneylenders.

shareholders

of

the

••

iS called

loans idle

have

of

this

"revolving" maturity

hands

the

weekly

Interest

the

definite

in the

daily,

variation

on

become

scheme

scheme,

and

under

Borrowers

businessmen

moneylenders

second

Loans

borrower

principal.

schemes

schemes

interest

to the

payment

needs

payments

the

in effect,

The

various

"steady".•

date •

the

the

(3) general

is called

maturity

scheme

offer

of

of

scheme

are is one

dates

payment

not

scheme.

and

borrowers.

hi-monthly

payments

payment

Borrowers of

princi-

collected

which

has

there-

in no

adfixed


41

amortization

schedule.

principal

and

date.

This

the

interest scheme

only

should

is

be

offered

requirement

paid

to

within

anybody

is

the

who

that

agreed

is

the

maturity

willing

to

pay

interest.

The Under

third

this

any

called

"balik

to

Same

the

line

credit

line.

ng

inventory.

scheme

arepaid

Table

loans

the

distribution

the

abovementioned

"steady"

In post-dated

is

33

scheme. number on

the

trade

of

loan

makes

This

one

it

of

of

iS

considered

go

back

have

borrowers

to

interest

the

scheme

a

of these

finance

under

this

As

of

loans

types

of

loan.

credit.

total

can of

from

15

to

most

be

loans to

absence

instrument the

number

of to

attractive

Security

are

maximum

cash

type

The

the

always

the

three

varies

very

borrowers

week.

number

granted.

same

Usually,

the

percent.

Substantial

loans

need

and

this

proportion

credits,

check.

83

the

borrowers

among

popular

under

to a

The

or

themost

granted

granted

total

maturity

to

from

moneylenders

in

shows

loans

ranges

are

from

they

facility.

principal day

loan

a pre-established

one

credit of

effect,

within

according

proportion

In

this

who

(returnees).

these

is,

creditworthy

of

a

that

without

most

the

for

Tagalog,

borrow.

avail

Both

14

"Revolving"

the

"Balikbayan"

ask

In

borrowers,

businessmen

their

may

moneylenders

can

called

want.

to

Only

are

granted

they

balik"

with

is

borrowers

time

moneylenders

borrowers

scheme

moneylender

credit

the

payment scheme,

moneylender

the

The

The

number

of

observed, under

42 of

the

percent any

of

fixed

borrowers.

created highly

is

the

negotiable


42

Tabie 14 DISTRIBUTION

OF NUMBER LOANS GRANTEDBY ACCORDING TO TYPE OF LOANS (In Percent)

MONEYLENDERS

Moneylenders

Type

of

Loans

A

B

C

D

E

F

G

I.

"Steady"

17

20

42

30

15

20

31

2.

"Revolving"

83

50

33

40

6@

80

69

3.

"Balikbayan"

30

25

30

25 i

Total _2

Source:

----

Z

5Z''2 _

10_ _

Table

_

_

C

IV.5

100

____

(Lamberte

'

and

,

100

11_

_

Bunda

[1988]).

10_

100

10_

i


43

instrument.

In case

the

manufacturer

who

still

to the

footwear

credits trade

is

issuer

liable

formal

inclined

reason

the

and

size

that

by

used

check

a security

Supplier

defaults,

for

who

program

hls

trade

granted

him

Bank

The

In fact,

the

The

footwear

it tries

usually

percentage

point

suppliers. limited and

the

that less

post-dated the

the

checks

the

"prime"

sector

financial floating

participation

of

the

discount

of

checks

Stores competes

in

instruments. around PCIB

the

With

in the

in the

which

with

Industry

its

special

the

input

discount

up

the

units

suppliers

rate

put

problem

patterned

a Shoe

a lower

of

locations, are

input

to

such

Small

not

with

competition

department

formal

risky

below

fit

Philippine

certain

clientele

compete

One

region

this

are

opened

by offering

so-called

well-known

suggests in

to

However,

to solve

manufacturers,

to

checks

target

not

the

operations

not

ICMs,

in the

in

PCIB

are

institutions

These

to operate

Lately,

post-dated

input

trled

or

do

namely

moneyshops'

discounting one

bank,

"moneyshops". Bank

the

techniques i

financial

(PCIB),

slow

by

be operating

big

branch.

are

areeither

introduced

would

moneylenders.

Marikina

suppliers.

try,

input

formal

One

Central

markets.

of

in its

credit

they

so-called

the

public those

DeSk

of

it as

innovative

the

scale.

the by

notably

of

International

licensed

only

post-dated

institutions

thoSe

them,

of

creating

big

the

innovations

is that

doing

Commercial

the

character

diseconomies

after

financial

to adopt

probable

Still

of

creditS.

The

by

the

in rate

charged by

bY is

issued

by

are

PCIB

country.

This

informal

sector

the

large

volume

Marlklna

shoe

indus-

market

for

post-dated


44

checks •washardly

felt

by

the majority

of

the

input

suppliers

we

interviewed.

One among

innovative

federations

or central our

rural

not

have

whenever they

banks.

•they to

the

times

would

have

CCUs

or

credit credit

those

activity

devising

program

is

institutions.

by

Bank

excess

federations

have

to deal

funds which

since

access with

to their

CCUs and

scheme,

is

contri-

can

borrow

surplus while

in the

CCUs

deficit

•demand

without

have

do

scheme"

funds,

increase

external

not

Member

this

CCUs

Also,

federation

With

like

profitability

"interlending

the

their

banks,

for

resorting

this

scheme

to find

profitable.

with•the

seriously banks

which, designed

do

scheme"

banks,

their

problem.

sudden

to Strengthen

in which

federations

for

access CCU

being

this

managed

unit

funds.

CCUs

The

with

competing

schemes

scheme

insufficient

experiencing

highly

of

to enhance

of •the Central

outlet

rationing.

basically

sector,

popularity

"interlending

of commercial

contribution.

immediately

Instead

This

fund

their

are

problem.

to cope

a ready

can

or

is gaining

So-called

mechanism

informal

general

which

branches

window

mainly

several

CCUs

liquidity

designed to

fund.

excess

the

rediscounting

bute

is the

transfer have

Scheme

CCUs

Unlike

funds

short-term

such

of

liquidity

belong

the

such

financial

in turn,

Those

their

considered

provide

to exploit

ICMs,

some

linkage

the

with

is the

wholesale retail

them

to

which

are

the

currently

ICMs.

One

"wholesale-retail"

credlt

comparative

federations

banks

to credit

their

member

advantage have

union CCUs. of

both

already

an


45

"interlending Such

Should

find

less

difficulty

in

adopting

scheme.

The earlier We

scheme"

wish

from

issue

on

interlinkedtransactions

when

we

discussed

to

discuss

the

results

theurban a

sample

24

percent

credits

from

product

markets

is

Of

by

mainly foreign

the ting direct

the

practice also

total

the

sharp

the

markets. local

contact

supermarkets.

are

with

of

in

1986, are

because

the

to

show

they

have

footwear

customers,

export

that

about trade

suppliers. with

the

manufacturing

obtained

by

were

input

for

department

contri-

recently footwear are

markets

manufacturers

the

suppliers.

who

difficulty

like

in

behavior

input

percent

demand

gathered

obtained

declined

the

we

urban,

also

have

ICMs.

borrowing

wholesalers/traders more

Obviously,

local

in

15

the

credit

credits

transactions

catering

also

the

trade

who

decrease

markets

are

interlinking

in

Apparently,

suppliers

the

with

transactions

Results

who

prevalent value

which

manufacturers

Of

manufacturers

buyers.

local

studying

footwear

interlinked

to

by

dealt in

interlinked

manufacturers.

wholesalers/traders

Accordingly,

The

wholesalers/traders

footwear

buted

examined

formation

information

study.

sample

the

rate

additional

footwear the

interest

the

were

that

sector.

input

of of

seems

sample

of

sector

of

It

here

waspartly

in

than

due by also to

penetracan

have

stores

and


48

V.

CONCLUDING

This the

paper

various

certainly segments have

COMMENTS

has

tried

studies

on

increased of

the

non-wealthy

our

urban

successfully

to pull the

together

urban

ICMs.

understanding

ICMS.

For

mobilized

been

devised

flow

pattern

of

by

the

of

significant

ICMs

borrowers.

major The

the

instance,

individuals/households.

have

the

take

into

This

helps

results

workings

informal

amount

Loan

findings

of

of

have some

institutions deposits

repayment

from

schemes

that

the

cash

consideration ensure

of

high

repayment

i

rates. be

Certainly,

obtained

project

are

once

better the

integrated.

insights

results

of

on all

the

operations

studies

on

ICMs

of

ICMs

under

can this


47

References

Chandvarkar, Avand G., The Informal Financial Sector opi,g Countries: Analysis, EM!denceLÂą@nd Policy SEACE_ Occasional Paper No_2 (Augustl9B7).

In DevelImplications,

Ghate, P. B., "Some Issues for the Regional Study on Informal Credit Markets," A Background Discussion Paper, Economics Office. Asian Development Bank (May 1986). Lamberte, Mario Paper," PIDS

B., "Comparative Bank Working Paper Series No.

Study: A Background 87-04 (April 1987) .

, "An Analysis of the Role of Pawnshops in the Financial System, " PIDS Working Paper Series No . 88-04 (February 1988).

_-

__

;

Markets Palay,"

and in Low-Income PIDS Working

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Ma. Urban Paper

Theresa Bunda, "The Financial Communities: The Case of Sapang Series No. 88-05 (March 1988).

Joven Z. in the Unions,"

Balbosa, "Informal Savings Urban Areas: The Case PIDS Working Paper Series

and Anita Abad Jose, Sector and the Informal Credit Markets: Credits in the Footwear Industry," Series No. 88-@7 (May 1988).

"The The PIDS

and of No.

Manufacturing Case of Trade Working Paper


48

PIDS.WORKING PAPERS W_P.No. 88-01

A General Assessment of Fcceign Trade Bat-tiersto Philippine Exports. ErlindaM.MedaUa (P23.00)

W_P.No. 88-02

Economics of Upland Resource Depletion: Shifting Cultivation in the Philippines, Marian S. delos Angeles (P23.00)

"W.P.No.88-03

W.P.No.88-04

W_.No. 88-05

W.P.No. 88-06

W.P.No. 88-07

WP.No. 88-08

The Size, Financing and Impact of the Public Sector Deficit, 1975.1984 Ros_io G. Manasan (P17J30) An Analysis of the Role of Pawnshops in .the Firianclal System, Mar/o B. Lamberte (P14.00) The Financial Markets in Low-Income Urban Communities: The Case of sapang Palay. Mar/o B. Lamberte (P23.00) Informal Savings and Credit in the Urban Institutions Areas: The Case of Cooperative CreditUnions. Mario B. Lamberte and Jovm Z. Balbosa (P37.00) The Manufacturing Sector and the Informal Credit Markets: The Case of Trade Credits in the Footwear Industry. Mario B. Lamberte and Anita Abad Jose (P31.00) Japan's Aid to ASEAN. Present Realities and Fut]Jte Challertge.Filologo Pante, Jr. (PI2.00)

WP.No. 88.09

ces.oo) W.P.No. 88-10

W.P. No. 88.11

W.P. No. 88.12

WJLNo. 88-13

W_P.No. 88-14

WP.No. 88-15

W_P.No. 88-26

W_P.No. 88.27

Copies may be obtained at the: " WP. No. 88-28 RESEARCHINFORMATIONSTAFF (RIS) PHILIPPINEINSTITUTEFOR DEVELOPMENTSTUDIES ROOM307, NEDA SA MAKATIBUILDING 106 AMORSOLOSTREET, LEGASPIVILLAGE MAKATI 1200, METROMANILA,_INF.S TELS: 86.57..05 / 88-40-59

The Effect of an Exchange Rate Devaluation on a Small Open Economy with an External Debt Over. hang.Josef T. Yap Financing the Budget Def'r,it in a Small Open Economy: The Ca_eofthe Phi]ippine_,1981.86. Ma. Socorro 8. Gochoco (P23.00) Nhe On-site and Down° streamCosts of Soil Erosion. W//frMo de Cruz/ Herm/n/a A. F_nc/s¢o/ Zena_la T_wan-Conway (P58.00) " A Review of policies Impinging on the Iaformal Credit Markets. Mdiga 1t. Agabin_27.00) Flexible .Fttaction_ Form . Estimates of Philippine Demand Elasticities for Nutrition Policy Simula. fion.AgnesQui=onbing Political Economy of Credit Availability and Financial Lfoeralization: Notes on the Philippine Experience. V. Bruce J. Toientino(Pll.O0) Rural Deposit Mobiliza. tion in the Philippines, 1977-1986.Rhenee Blanco andRichard Meyer fP13.00) The 1989 Program of Government Expenditures in Perspective. Rosario G. Ma_asan (P14.00) A Review of Investment Incentives in ASEAN Countries. Rosario G. Manasan (PI4.00) Scien¢_ and Tedmology and Economic Develop. ment. Maria K Lamberte (Pl0.00)


The Urban Informal Credit markets: An Integrative Report