Agent Bank: The 5–6 Money Lending Buster?

It was an honor to get invited to the 66th RBAP (Rural Bankers Association of the Philippines) Annual National Convention and General Membership Meeting last May 20 and 21, 2019 at the Cordillera Conference Hall of the Baguio Country Club, Country Club Road, Camp John Hay, Baguio City.

Wow! It means that the rural banks have been serving their communities for sixty-six (66) years or three (3) generations, from grandparents-parents-grandchildren.

This year’s theme: “RURAL BANKS: BRIDGING THE GAP IN FINANCIAL INCLUSION.”

There were so many highlights on the RBAP two-day event. I am grateful for the leaders of the rural banks for sharing their life lessons (personal and business). Their life lessons are remarkable and inspiring.

There’s one topic on the RBAP convention that I want to tackle in this article, the 5–6 money lending scheme. As a Fintech practitioner, I want to share how “technology + rural banks close ties to its communities + sound policies from the BSP (Bangko Sentral ng Pilipinas) + help from the government” can eliminate or at least drastically reduce the long-standing 5–6 money lending scheme.

5–6 Economy a Php 30B Industry

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, which usually comes from the informal lenders called “5–6.”[1] The estimated market size of the 5–6 economy is around Php 30B[2].

The loans entail the payment of six pesos for every five pesos lent out usually after 30 days, implying an interest rate of 20 percent a month or 240 percent a year[3].

What is Agent Bank?

Thanks to BSP Circular №940 — Guidelines on Deposit and Cash Servicing Outside of Bank Premises. In essence, in agency banking, banks employees (agent/authorized mobile bank teller) can fan out to areas like the public market where they don’t have branches to conduct banking transactions such as account opening, loan application/payment, cash deposit/withdrawal, and bills payment.

Sound Policies from the BSP (Bangko Sentral ng Pilipinas)

The Philippines is known for having one of the best regulatory frameworks for microfinance, and as a global leader in terms of having a conducive environment for financial inclusion. As a Fintech practitioner, I can’t thank enough the BSP for the following policies. It’s a testament for having a conducive environment for financial inclusion.

1. BSP Circular №940 — Guidelines on Deposit and Cash Servicing Outside of Bank Premises.
2. BSP Circular №992 — Framework for Basic Deposit Accounts
3. BSP Circular Nos. 950 and 1022 (Reduced KYC for low-risk accounts)

Let’s go back to our use case, the customers of the 5–6 money lending (i.e., vendors at the public market). The 5–6 customers’ experience is that the 5–6 lender is the one who visits them at their stall to lend and collect loan payments. Thanks to the issuance of the BSP Circular №940, agent bank can now also go to the customers’ place like the public market to conduct banking activities.

Now that our agent bank can now go to the vendors at the public market to offer bank products such as the opening of a bank account. We need to address the following roadblocks for our potential customers’.

1. Opening amount
2. Minimum maintaining balance
3. Valid IDs for KYC (Know-Your-Customer)

Before, the opening amount/minimum maintaining balance for a bank account usually starts at Php 2,000. Many of the small vendors operating in the public markets don’t have spare cash because they use it to fund their operational capital. Thanks to BSP Circular №992 — Framework for Basic Deposit Accounts.

1. Opening amount: Not more than Php 100 (So it means, even Php 1.00 is acceptable)

2. Minimum maintaining balance: None

Now, our public market vendors can now open a basic deposit account.

The next challenge is the valid IDs for KYC. Thanks to BSP Circular Nos. 950 and 1022 it dramatically reduced KYC for low-risk accounts.

Figure 1–1, Page 17 of 35 “BSP Circular 950”

Practically, the reduced KYC allows the customers’ to open an account even without a valid ID. That’s what you call sound policy for having a conducive environment for financial inclusion.

Help from the Government

One may argue that these small vendors aren’t creditworthy, and it will be risky for the banks to provide a line of credit. If the majority of the 5–6 money lending customers are unable to repay their loans, then the 5–6 economy should have ceased to exist a long time ago. Today, the 5–6 money lending scheme continues. Therefore, logic dictates that these small vendors can repay their loans, which proves that they’re bankable.

Figure 1–2, P3 (Pondo sa Pagbabago at Pagasenso)

On the 2nd day (May 21, 2019) of the 66th RBAP National Convention, a representative from SBCorp (a government financial institution) explained that the P3 fund is designed to be lent out to micro enterprises with asset size not exceeding P3.0 million at not more than 2.5% per month all in the interest rate and service charges. This 2.5% monthly cap is an effective rate, based on diminishing balance of the principal portion of the loan.

5–6 lending imposes an interest rate of at least 20% monthly and could go significantly higher given the weekly or daily collection schedule. As shown in Figure-1–2, P3 total funds released to partner MFIs (Micro Finance Institutions) reached Php 2.74B. The SBCorp representative encouraged the RBAP (Rural Bankers Association of the Philippines) members to become a P3 CDP (Credit Delivery Partners). What’s in it for the rural banks? Revenue share model (80/20) between the SBCorp and the rural bank P3 CDP or 2% loan interest per month for the rural banks and 0.5% for SBCorp to cover the administrative cost. Win-win for all the parties involved, much lower loan interest for the micro-enterprises, practically almost zero risks for the rural banks since the funding for the loans comes from the government.

Rural banks close ties to its communities

Rural banks business is relationships driven. Rural banks have close ties to their communities based on a relationship of trust. Furthermore, there are more rural banks branches (close to 3,000) compare to the number of branches of the top three (3) banks (2,505) and have more coverage in the countryside[4].

Technology and Beyond

Figure 1–3, BSP Deputy Governor Chuchi Fonacier at the 66th RBAP Annual National Convention

“Technology is changing the way banks do business. It is possible for technology to enhance relationships rather than replace them.” BSP Deputy Governor, Chuchi Fonacier.

Before we dive into the agent bank technology, let’s have a recap on the key ingredients to eliminate or reduce the 5–6 money lending scheme in the Philippines. We have covered the “Sound Policies from the BSP (Bangko Sentral ng Pilipinas),” “Help from the Government,” and “Rural banks close ties to its communities.”

Figure 1–4, Pearl Pay ABS (Agent Banking Solution)

As shown in Figure 1–4, Pearl Pay ABS (Agent Banking Solution) uses a mobile POS device specifically designed for agency banking that will allow installation of front-end application to enable an agent bank (bank’s authorized employee) to perform customer onboarding and other bank transaction outside the banks’ premises. However, the mobile POS device and the front end-application for agency banking covers only half of the agent bank system. To fully secure the profound benefits of agency banking, we must fully integrate the agent’s mobile POS device and the front-end application, with the bank’s backend application (Core Banking).

Figure 1–5, High-Level System Overview of Agency Banking

Fintech is about improving peoples’ lives. We believe in the importance of rural banks in rural development and their critical role in supporting our local farmers and fisherfolk. We understand that the majority of rural banks in the Philippines are not participating in the electronic money landscape due to the high cost of banking applications. Because we want to democratize access to world-class banking applications where no rural banks will be left behind, Pearl Pay partners with Mifos X. Mifos project was formally launched by Grameen Foundation in 2006 to provide a cost-effective software system to operate microfinance institutions, rural and cooperative banks and help them more efficiently and effectively deliver financial services to the poor.

Figure 1–6, Pearl Pay team together with the Founder of Grameen Bank and Nobel Peace Laureate, Professor Muhammad Yunus

Today, more than 250 financial institutions are using Mifos X, serving 3.5 million people across thirty-seven (37) countries.

Figure 1–7, Pearl Pay E-Wallet White Label Solution

Technology is changing the way banks do business. The emergence of financial technology companies or Fintechs is dramatically changing the delivery of financial services in payments and even in the underwriting of credit. It is possible for technology to enhance relationships rather than replace them. BSP Deputy Governor, Chuchi Fonacier

As aforementioned, RBAP (Rural Bankers Association of the Philippines) recently held its 66th Annual National Convention, serving three generations within their rural communities. For their customers, the brand of rural banks serves as a hallmark of trust. With Pearl Pay E-Wallet White Label Solution, rural banks can now launch their own branded E-Wallet and offer it to their customers to enjoy mainstream financial services such as internet banking, bills payment, online shopping, cash-in/cash-out, and send/receive money.

Pearl Pay will enable rural banks to gain access to global markets.

Figure 1–8, Pearl Pay REMIT

As aforementioned, there are close to 3,000 rural banks branches in the Philippines, and the majority of these branches are untapped touchpoints to provide the last mile facility for OFW money remittances. Pearl Pay REMIT uses blockchain technology to bring down the cost of money remittance and allow the wallet-to-wallet transfer of funds (Pearl Pay REMIT to Rural Bank E-Wallet). By partnering with Pearl Pay REMIT, it will allow rural banks to generate a new revenue stream by providing the last mile facility for OFW money remittances. Please see Figure 1–9, Pearl Pay Hong Kong, and Pearl Pay the Middle East- Coming Soon!

Figure 1–9

Are there any Pearl Pay Customer?

“PearlPay is one of, if not, the most promising enablers out there.” Doc Armando “Boc” Bonifacio, President of BHF Rural Bank Inc.

Figure 2–0, Pearl Pay and BHF Rural Bank Inc., featured in Inquirer. Read the story.

The most important question for a rural bank, “How much?”

Figure 2–1, Pearl Pay Commercials

Regardless of how many branches a rural bank have? How many users? Whatever the amount of the total loan portfolio? It starts at US$99/month.

With this pricing, there will be no rural banks will be left behind!

P.S.

1. If you believed in the rural banks, please share this post.
2. If you’re an employee/owner/director of a rural bank, we want to hear from you. Email us — hello@pearlpay.com

Endnotes

1. “The “Bombay 5–6”: Last Resource Informal Financiers for Philippine Micro-Enterprises.” Kyoto Review of Southeast Asia. Accessed June 02, 2019. https://kyotoreview.org/issue-4/the-bombay-5-6-last-resource-informal-financiers-for-philippine-micro-enterprises/.
2. Lagua, Benel D. “The Campaign against 5–6 Lending.” The Manila Times Online. December 27, 2018. Accessed June 02, 2019. https://www.manilatimes.net/the-campaign-against-5-6-lending/488824/.
3. Entrepreneur Philippines. “Despite High Rates, ‘Bombay 5–6’ Loans Helped After Asian Crisis, Study Says.” Entrepreneur.com.ph. Accessed June 02, 2019. https://www.entrepreneur.com.ph/news-and-events/despite-high-rates-bombay-5-6-loans-helped-after-asian-crisis-says-study-a36-20170113.
4. Republic of the Philippines. Bangko Sentral Ng Pilipinas. FACTBOOK The Philippine Banking System. 2017 ed. Vol. 1. 1–3.