Poor Filipinos in need of immediate cash usually borrow money from 5-6 lenders, a lending scheme started by Indian nationals who charge an interest of 20 percent per month. This means that when someone borrows P500, he has to pay back P600. There is no available information on the number of 5-6 lenders in the country, but they could easily reach more than 42,000, or one in every barangay. This makes the 5-6 lending business a billion-peso “industry.”
Loan sharks continue to thrive in the Philippines because of the country’s large informal sector composed of micro enterprises that have no access to financial services. To sustain their businesses, micro entrepreneurs depend on informal lenders that require no collateral for their loan.
The Bangko Sentral ng Pilipinas (BSP) said that as of the second quarter of 2021, data showed that 41 million Filipinos are unbanked, which equates to a little over half, or 53 percent, of the country’s adult population.
The BSP defines financial inclusion as “a state in which everyone, especially the vulnerable sectors, has effective access to a wide range of financial services.” Effective access means not only the availability of financial products and services, but that these products and services are appropriately designed, of good quality, and responsive to the varied needs of individuals and businesses—whether for saving, payments, financing, investing, or getting insured.
Former BSP Governor Benjamin Diokno launched the “National Strategy for Financial Inclusion 2022-2028” on January 27, 2022. He said: “The NSFI 2022–2028 signifies our greater collective commitment and aspiration for a more financially included and empowered citizenry.”
Lack of access to financial institutions hampers financial inclusion. In 2019, there were 510 cities and municipalities in the country with no banking presence. That’s why majority of Filipinos use Express Pera Padala centers, pawnshops, and ATMs for their financial transactions. Surprisingly, most Filipinos are unaware of rural banks. In fact, there are more rural banks in the country than commercial banks. These institutions are scattered throughout the Philippines and are easier to reach compared to big banks.
The BSP said “financial exclusion disproportionately affects millions of Filipinos in the lower income classes and those who are unemployed, less educated, and belonging to the younger generation. Other underserved and unserved segments include senior citizens, migrant workers and their families, persons with disabilities, indigenous peoples, forcibly displaced persons, and other marginalized segments.”
Financial exclusion is also prevalent in the agriculture, MSMEs, and startup sectors, as well as among informal workers. Among MSMEs, for instance, lack of financing and capital was cited as the top barrier for microenterprises and the second largest barrier for small enterprises in the Asian Development Bank’s 2021 Survey of MSMEs. In contrast, in the same survey medium enterprises ranked lack of financing as the sixth largest barrier, indicating that financing is especially problematic for the smallest enterprises.
As the country tries to recover from the health crisis and regain its economic growth, inclusion of MSMEs into the financial system is crucial. The agriculture and MSME sectors are the primary sources of livelihood for many Filipinos. In 2020, MSMEs accounted for 99.5 percent of total enterprises in the country and generated 63 percent of total employment. Unfortunately, the amount of bank loans to MSMEs as a percentage of their total loan portfolio has been declining. On the other hand, the agriculture sector showed a steady share in the country’s GDP at around 10 percent. Since 2018, however, agricultural loans have been declining as well.
Financial inclusion in the country is still impeded by economic, physical, and behavioral issues that the government and the financial sector need to address. It would do well for the Marcos administration to help farmers and MSMEs gain access to capital and financial resources. As we said earlier, these sectors are key drivers of employment; they can help spur national economic growth.