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I have seen Filipinos and foreigners doing this, with and without license, successfully over the years. I also have seen many fail. It is hard work and no sure thing even if you have a family you can trust and chose your lender carefully. Many think it carries bad karma and it can be dangerous. Beware, it is not for the faint of heart.
Yes, lending directly to small businesses may be quite lucrative.
Also sometimes lending to professional who have a steady source of income is just as profitable.
How profitable? Take a look at the calculations below:
If you charge 5 percent per month for two months on a P10,000 loan, that yields P1 000 in inter est. Compare that with very high T-bill rates of 25 percent per annum 011 the same loan for the same two months: P417 interest. (Actually T-bile rates are much lower.)
And what is the reason for the big discrepancy? The "measly" 5 percent per month translates into 60 percent per annum, a level which the banking system just can't match.
Other questions come to mind. Why are borrowers willing to live with such astronomical interest rates?
One reason is the very nature of the firms which borrow.
Many small enterprises have high rates of return—due to their small size, they have to maintain such levels just to keep going.
They can thus afford to pay high interest.
Secondly, the loans are small and short-term. While the rates may be high, the actual amount they borrow is low.
A third factor is speed or timeliness. While firms have to go through time-consuming procedures in the banking sector, alternative lenders can provide instant loans.
But aren't money lenders exploiting the needs of others? Some may regard them as the "Fagin’s" "calloused thieves" of finance. According to research findings, the borrowers themselves do not share that view. To them, these lenders extend help regularly and especially when they are in dire need. They provide an economic service for the small fry which the big time banks may not bother with.
But isn't the practice illegal? Actually, no: Check the law books to verify this.
Some may fear that the risk involved here is large. Contrary to that view, money lending appears to be quite a safe enterprise, according to research.
The key is to ensure SMALL and FREQUENT payments. It is also important to know the client sufficiently.
Years ago Social Weather Stations conducted - a study on the informal credit market for the Asian Development Bank. The research used the case-study approach.
One lender interviewed was a doctor who examined applicants for insurance policies. She had been in the money lending profession for 15 years, and the practice actually comprised half her income.
Her source of funds was savings from her profession as a physician. Her outstanding loans totaled P300,000 distributed among 10-15 persons.
The doctor said she determined the reliability of the borrower through guarantees from friends and relatives. She lent on1y cash, with P7,500 being the most common amount, while maintaining a loan ceiling of P20,000.
She charged an interest rate of 20 percent but required no collateral. The doctor claimed that there were no risks nor defaults. At worst, she only had to put up with very delayed payments. In the SWS research, a total of 27 cases were analyzed. The following were some highlights of the study.
• The majority of the lenders were businessmen or professionals.
• A majority of 17 considered money lending as no risk, six as minimal risk and only three as big risk.
All denied there was a security risk in terms of robbery and default in payments. They considered delayed payments as part of the whole business.
• Many of those who could borrow from banks still turned to moneylenders.
• Money lending provided substantial returns.
• Businessmen borrowed from moneylenders at interest rates higher than those charged by the banks. This might be because businessmen needed the money for immediate investments.
The difference between the banks and moneylenders rate could be offset by the high profit the businessmen earned from such timely investment.
• Almost two-thirds of the lenders derived half or all of their income from money lending, while only two cases said it represented only 10 percent of their income.
• The predominant source of funds used for money lending was their own savings. Only four borrowed from the bank.
In 11 cases, the outstanding loan was from P20,000 to P60,000 and in eight cases, from P100,000 to P315,000. It was significant that majority of the amounts borrowed were in the range of what could be saved by individuals.
• Payments were frequent, with most on a monthly basis and some every 15 days or even on a weekly basis. A few collected even daily.
• Loan maturity was often from one to three months. Some went as long as six months.
Thus each moneylender could lend out four times a 1 year to the clientele.
The very frequent payment and the short maturity of loans might be related to the informal method of determining the reliability of clients. This was done through friends, relatives or simply an assessment of personal character.
• Most respondents did not feel the competition among colleagues, because they knew that there was a constant demand for loans.
• Imposing collateral for loans was seldom practiced by moneylenders.
There was an underlying bond of trust between moneylenders and borrowers. Loan agreements were made verbally and seldom were promissory notes signed. Most of the defaults were men, not women. Women here may have a harder time getting credit and value having it more then men, want to keep it.
Such relationships were possible because of % the proximity of residence or business activity. They lent to officemates or friends of officemates, to people they see once a week.
I would hedge on that feature though. To be on the safe side, it is still best to have some collateral and signed documents on hand. And yet, wonder of wonders, the lenders I talk to claim, there are few or no cases of default despite the absence of collateral.
I do know of some isolated cases where someone may put up a stolen car or other stolen property for collateral. The lender can still suffer loss with such illegal collateral.
Again, unless you understand and respect the Filipino character, and values, have a family and connections, doing business here is hard, especially the very lucrative money lending business. See your lawyer here if you want to get information on licensing and other business requirements.