BUSINESS

Understanding lending or pautang in Pinoy context

WRITTEN BY: Ednan Orallo

Lending or “pautang” has been one of the major business producing income of the Indian community here in the Philippines. The term “5-6” has been tagged to a person who lends money, which is also commonly called “Bombay”—An Indian national, typically wearing a pagri or turban wrapped around the head, and riding on a motorbike, or sometimes walking with umbrella.


The practice of “5-6” has been around since the early 70s; but it was not quite popular—not until the usury law was made legally inexistent. The underground practice of 5-6 seemed like gossip that only busybodies carry like disease to their immediate neighbors. But when the fangs of the usury law was minified [1], 5-6 became nationally popularized not only to rural areas but to the urban places as well. The practice of 5-6 lending was accepted to the extent of being part of “pinoy culture”.

The nature of 5-6

5-6 simply means, the amount you borrowed must be returned with 20% interest added. Example: I borrowed 1,000, then I should pay it back with 20% interest: 1,000 x .20 = 200. I have to pay 1,200 in return. Some moralist argue that 20% interest is usurious because it will worsen the situation of the borrower’s capability to pay. Whatever your stand is, we cannot blame those poor people who succumb to this kind of transactions. It’s up to the lender if he or she has conscience to listen to.

Various types of lending

Aside from the “usurious” 20% interest, there are other modes of payment a lender has to choose from.

Fix interest

Fix interest is the interest a lender puts on the amount borrowed. This is the most common form of method that many private lenders practice. Depending on the amount to be borrowed, the lender and the borrower usually make verbal agreement on how long would it take for the loan to be paid. As an example, the borrower borrows  1,000 and promise to pay it within a period of 45 days. The lender can give an option of daily, weekly, or full-payment method scheme—Bombays always opt to collect daily, for whatever reason, it’s more convenient for them.

Diminishing interest

Unlike fix interest, this kind of scheme is more considerable, sometimes, favorable for the borrower. The concept is that the borrower, who chooses to pay on a monthly installment basis, will pay the capital but the interest will reflect based on the outstanding balance.

Example:

The borrower borrowed 1,000 with 20% depreciating interest. The borrower has to pay a minimum of amount of 300 per month.

This payment method is similar to a credit card payment scheme where the outstanding balance will accrue interest until the balance is not fully paid. It will take seven months for the borrower to settle his/her debt should he/she choose to stick with 300 per month. The lender will be accumulating 808.41 interest in seven months. This can be avoided if, however, the borrower with settle the debt not more than two months.

Incremental interest

This kind of payment scheme forces the borrower to settle his/her debt as soon as possible to avoid paying double the amount of what he/she borrowed. This will secure the lender continuous profit while the principal (money) is in the borrowers possession. The lender could start with 3% interest and increments 1% every month.

Recurring interest

Recurring interest are often practiced in both public and private offices where the lender will collect the agreed interest until the lender has not paid his/her debt in outright payment.  Outright payment means the lender will not accept installment payment but rather chooses to receive the lent money in full. This is similar to a pawnshop method of pawning.

Pooled money scheme (or locally termed as: “Paluwagan”)

Paluwagan is the local concept of mutual fund. But this “fund” doesn’t go directly to a broker. In Fact, this system has been so popular in the Philippines especially in the rural region. Informal settlers are also fond of this kind of practice because this is where they can get the fund to buy the appliances they wanted.
The concept of Paluwagan is to pool the participants money, by means of daily, weekly, or even monthly collections to be collected by a leader (sometimes called Aling or Manong).  The participants will be having a “bunutan” (casting lots) to know who will receive the total pooled money. And believe me, this is a “fiesta” if one gets to be the first! Others would prefer to choose not to be the first and not to be the last, but rather somewhere in the middle.
There are other ways on how paluwagan system works. It’s up to the participants on how they should plan on what kind of rotation they will implement. But the bottom line is that they don’t have to hunt for a Bombay to borrow money because they can borrow the fund in the paluwagan. This is one advantage of being in this local practice.

Private lenders over banks

There are a lot of small businessman who are opting for private lenders over reputable banks because private lenders do not ask for legal documents—small time entrepreneurs don’t want the hassles of filling out applications, only to find out they are not eligible to have a bank loan. Various documents requisites serve as stumbling blocks for our less educated kababayans not to borrow money from lending institutions and rather approach the most approachable but strict looking, savior-of-the-day, Bombay. Their scent have become a palatable delight in the borrowers’ sense of smell. Oh, let me rephrase my statement, it’s the Bombay who  will approach you, for your convenience, and will give an irresistible offer: “Utang ka? Bente lang, arawan hulog.” (Want to borrow money? Daily installment is 20 pesos only).

The down side of lending

It is very clear in The Constitution of the Philippines: 

section 2. No person shall be imprisoned for debt or non-payment of a poll tax.

Because of this prevailing law, many lenders don’t have security over the money they lent. In fact, the lender himself might be the one to go to jail by committing Light Coercion that is stated in the Revised Penal Code. Art. 287 [2]. The only way a lender can legally claim something from a delinquent borrower is if he has a Court Order that is called Writ of Execution. But this is a tedious process, and sometimes to the disadvantage of the complaining party.
What a lender can do to avoid this kind of scenario is to get collaterals from the borrower as a security for his/her money. Sometimes agreement between the lender and the borrower are put down in paper for legal purposes. There are now small court claims which a lender can file against the offending party and documents or proof are highly needed.