Part Three: Informal Loan Trap - Bombay 5-6 lending's effect on Micro-entrepreneurs in Tacloban City, Philippines

By IMTFI Researchers Rosalita M. Dula and Marilou P. Grego

This is the third and final post in a three-part series about the informal loan negotiation practices between ambulant vendors and a group known as "Bombay 5-6 lenders" in Tacloban City, Philippines. Dula and Grego describe the effects of these lending practices on the household and business activities of vendors who live and work on the edge of a precarious existence.

Businesses are put up to generate income. For some micro-scale entrepreneurs like the ambulant vendors, there is a starker purpose in engaging in their trade. For those who live a hand-to-mouth existence, their business is their bread and butter - maybe more.

Maria, 51 years old - Ambulant Vendor (Photo Credit: Rosalita M. Dula)

The results of our study indicated that most respondents borrow money for either educational or medical expenditures for the family. Moreover, the frequency of their loans are significantly related to poor health conditions of family members and lack of savings. Since household subsistence has higher precedence over repayment of loans, vendors rely heavily on daily income to sustain daily household needs and are always a day away from potential default. Once an ambulant vendor experiences default, there is a high possibility that a series of such defaults will be experienced. Because lack of income is the primary cause of default, defaults have a domino effect as daily income goes toward loan repayments in a circular course.

To have a debt is hard. To be caught in a cycle of debt is even harder. To be bound in a cyclical debt for a long period of time is beyond comparison. A person would normally feel ashamed if anyone knows that they are mired in debt. At the onset of this research study, we struggled to find prospective respondents because no one would ever admit to having a loan with a Bombay 5-6 lender. Realizing this, we re-phrased our question asking instead; “Do you know anyone among your fellow ambulant vendors who have existing loans from a Bombay 5-6 lender?” Amused by our question, one vendor referred us to another, who then referred us to another, until we found ourselves back with the first three (3) ambulant vendors we spoke with (who initially denied having such a loan). If only we knew then what those colorful beach umbrellas stood for.

Most of the respondents have children who are still attending school. Most are in secondary school and at college level. Education for them is very important, as is their health. Most of our respondents have lost some perception of the magnitude of the economic situation in which they are entrenched. But one remarkable thing we discerned from our respondents is their sense of responsibility to provide their children with a chance for a brighter future - one quite different from parents’ own current situation. Earning at a subsistence level from their businesses is challenging for heads of family who work to maintain the robust health of family members or confront financial challenges when one person in the household requires medical attention.

Focus Group Discussion with ambulant vendors (Photo Credit: Ericson D. Acebedo)

During our focus group discussions and in-depth interviews, one of our central questions was “Why Bombay 5-6?” We received a plethora of answers, of course, and as extensive as those documented in previous studies. In substantiating how accessible the Bombay 5-6 lenders are, one of our participants explained rhetorically: “If you have a sick family member and you don’t have money for their medication, would you approach formal financiers for a loan whence you’ll have to wait a month for the proceeds?” The answer would be the same when we asked why they go for a loan. It’s a matter of urgency, even survival.

We have heard many justifications from ambulant vendors about why they have messed up with Bombay 5-6 lenders. With this study, we were able to gain insight - from a financial perspective - on how these marginalized traders are operating their businesses. Though not exhaustive or comprehensive, our study provides an important overview of the economic system encompassing vendors and lenders. Referring to the segmented cycle illustrated above, money borrowing can commence at any point (household, Bombay 5-6, or business). This is due to the absence of savings that could serve as a buffer between the three entities involved. Since the scale is at a daily subsistence level, an active and ongoing spin is understandable.

In the long run, what was once considered disruptive becomes normal. This is one reason why most of our respondents showed no remorse over having a loan. Domingo Omoy, Sr. who has been an ambulant vendor for more than three (3) decades, said he cannot recall anymore a night where he had trouble sleeping because of a loan with a Bombay 5-6 lender. He reaffirmed that so long as the intention of taking on debt is for the welfare of his family, he will always find peace within himself and the determination to settle it. He admitted, though, that he does get a bit anxious whenever he fails to keep up with the repayment.

Today, Domingo has two children who have finished college and who now work as elementary school teachers. And yet, he still borrows money from Bombay 5-6 lenders. Three more kids to support, he said, but soon the two of them will be done with their college studies. When asked if he would be over with his Bombay 5-6 affair by that time, he replies that he certainly does not know for sure. But one thing he is sure of, he said, is that he will make it through.

An artist's depiction of Bombay 5-6 lending (Artist: Jakes)

The level of courage and endurance that Domingo and the rest of our respondents show is amazing. They have withstood the battle, but seem to have forgotten the urge to retire from their cyclic money borrowing activities. Some may already have achieved fleeting financial freedom on their own terms, but remain unaware that they are kept in a trap by deeply ingrained habits of making do.

Maria, 51 years old and an ambulant vendor in Tacloban city imparted to us: “For thirty years of peddling and thirty years of borrowing from Bombay, life is still the same. Constrained, striving, and impoverished - yet we still endure. I hope that assistance from the government can reach to those who are marginalized - like us.”

For earlier posts in this series, see part 1 here and part 2 here

Read their final report, Informal Loan Trap: Bombay 5-6 And Its Effect On Micro-Entrepreneurs In Tacloban City, Philippines, here 

Part Two: Up close with informal money lending - Loan Negotiation Practices between Bombay 5-6 lenders and Micro-entrepreneurs in Tacloban City, Philippines

By IMTFI Researchers Rosalita M. Dula and Marilou P. Grego

This is the second of a three-part series about the informal loan negotiation practices between ambulant vendors and a group known as "Bombay 5-6 lenders" in Tacloban City, Philippines. Dula and Grego describe the effects of these lending practices on the household and business activities of vendors who live and work on the edge of a precarious existence.

Tacloban City is the center for trade, commerce and culture in the Eastern Visayas Region of the Philippines. It has attracted both local and multinational franchises to invest in the city. At present, Tacloban City has a total of 43 financial establishments comprised of 15 bank companies and other formal financial institutions from government and private sectors. On the other end of the spectrum are the informal money lenders who are thriving in the area. The most interesting of these are the Bombay 5-6 lenders who, based on word-of-mouth, have been continuously operating and dominating this business for the longest period. A majority of their client base are those engaged in micro-scale businesses like those of the ambulant vendors.

Ambulant vendors' most popular food items (Photo Credit: Rosalita M. Dula)

Our study used purposive sampling to identify as respondents a total of 100 ambulant vendors who have existing loans from Bombay 5-6 lenders. The study looked into respondents’ socio-economic and business profile, the determining factors of preference that led ambulant vendors to strike a deal with Bombay 5-6 lenders in Tacloban city, and the loan negotiation practices of lenders and ambulant vendors.

Females comprised seventy-eight percent (78%) of all respondents. Lenders consider it to be easier to begin business relationships with female ambulant vendors than with male vendors (Sonny, Bombay 5-6 lender). Aside from the actual instances where it is mostly women who are left to oversee and operate the business, women are often highly approachable and can easily be pressured to re-pay debts. In contrast, their male counterparts are described by lenders as stubborn and not easily persuaded to repay. A Bombay 5-6 lender would typically lend money to a male ambulant vendor with quite a bit of hesitation. In addition, women - especially the wives of male vendors, are customarily the ones who manage financial matters in a Filipino household.

Forty-eight percent (48%) of the respondents depend solely on their entrepreneurial income, which averages to P10,001 – P15,000 per month, to cover all their business and household expenses – from food, to utilities and education, among others. Forty-one percent (41%) of the respondents are engaged in street food vending. Street foods are both budget-friendly and handy at the same time, making it very popular among Filipinos. On an ordinary day of hustle-bustle in the city streets, it is usual to see pedestrians stopping to grab some street food as they go about their day. Prices per serving seldom exceed twenty pesos (approximately USD 0.50). Banana cue, camote cue, fishballs, squid balls, hotdog on a stick, kwek-kwek and tokneneng, kikiam, sorbetes, peanuts, corn, batchoy, and barbeque are some of the street foods sold near schools, churches, plazas, and public transport terminals. Street food vending requires a small starting capital, and its appeal for ambulant vendors gets an added boost from its potential to realize a return on investment within a shorter period of time (Domingo Omoy, Sr.).

An aggregate of eighty percent (80%) of our respondents’ loans are taken out as capital for starting or maintaining their businesses. Forty-nine percent (49%) of respondents’ loan transactions were offered by a Bombay 5-6 lender. Instead of offering cash loans up front, Bombay 5-6 lenders will initially entice their client to purchase various goods to be paid for on an installment basis (Ligaya, ambulant vendor). Beach umbrellas, towels, and appliances are some of the first commonly recommended goods. It is even amusing to learn that beach umbrellas – aside from providing shade – also serve as an indicator among ambulant vendors of those who have messed up with Bombay 5-6 lenders.

On the very first transaction, Bombay 5-6 lenders do not directly mention the total cost of the merchandise they sell. They undermine clients’ prudence by blowing the small details out of proportion so that numerical figures appear to be clearly surmountable. A transaction amounting to PhP500.00 will be carried out as a good sold for only PhP25.00 per day in a 20-day period (Maricel, fruit vendor).

The virtually omnipresent beach umbrellas providing a silhouette
 for ambulant vendors (Photo Credit: Marilou P. Grego)

Trust and confidence built up through the debtor’s good payment standing becomes the basis for a Bombay 5-6 lender to eventually offer a cash loan. The sum offered depends on the value - inferred by the lender - of the merchandise on display. More volume and variety of merchandise suggests a larger amount is dispensable. A borrower’s background is not checked, hence also making the lender vulnerable to acts of deception. For instance, in an isolated incident, a person pretended to be one of the ambulant vendors by borrowing goods and merchandise from a friend, occupied a space in the open thoroughfares as if they were the owner, and was thus able to borrow money from a Bombay 5-6 lender. The following day, the perpetrator was nowhere to be found (Evelyn, ambulant vendor).

Loans are paid out daily for a nominal 45-60-day period. However, the loan duration may be shortened or extended depending on the capacity of the vendor to pay. Bombay 5-6 lenders conduct their daily collection routine during idle times in the afternoon when most, if not all of their clients have already accumulated money from sales. Bombay 5-6 lenders explained that they collect payment on a daily basis in order to check up on a client’s business status and to ensure that the latter will be repaying the loan in manageable amounts. For the ambulant vendors, this arrangement is preferable in order to circumvent the burden of paying the full amount all at once and reducing the likelihood of the amassed funds being misappropriated. Collection is sometimes undertaken by the lender alone or in groups. On rare occasions, a Bombay 5-6 lender is accompanied by a local in anticipation that this will guarantee them safety. In worst cases where a robbery can’t be averted, the local individual can help them identify the culprit. Sonny recalls incidents of robbery that have occurred over Bombay 5-6's twenty-five years of money lending operations in Tacloban city, but they reported none of these to authorities.

Seventy-eight percent (78%) of the respondents in our study reported some experiences of default in repayment. A majority (67%) of all such cases were attributed to lack of sales. To mitigate the consequences, most (83%) of the respondents who were in default pleaded for an extension, while others (10%) doubled their payment the next day. On the worst end of the arrangement are those in the remaining seven percent (7%), who secured yet another loan from another source or multiple sources in order to repay their loan to the Bombay 5-6 lender. Sonny explained that lenders grant extensions in order to regain the capital they lent to vendors. But for vendors without a good repayment standing, further loans will not be granted. Bombay 5-6 lenders do not take goods as payment. They only accept cash. In extreme cases where the vendor is at a great disadvantage and can’t keep up with repayments, lenders arbitrarily lower the interest rate to help clients liquidate their debts.

The hallmark of informal lending is a lack of fuss over documentation. Thus, keeping a record of payments is not much of an issue for either the ambulant vendors or the Bombay 5-6 lenders. Payment records may be written on a notebook or a piece of paper and kept by either the vendor or the lender in some cases, while others don’t record payments at all.

Bombay 5-6 lenders are the most preferred lenders according to the majority of the respondents in our study, based on the following attributes arranged in descending order: 1) no collateral, 2) no imprisonment, 3) no formal requirement needed, 4) easy and fast loan transaction, 5) fast cash, 6) Bombay 5-6 lenders are approachable 7) accessibility, 8) flexible mode of payment, and 9) they have no other choice. Many respondents prefer informal lenders even if the interest rate is high because the borrower’s transaction cost is minimal (Limpao-Osop, 1998*). Other than the interest rate, the borrower does not incur additional costs such as commissions, application/processing fees, other indirect charges, or transaction costs such as feasibility studies and financial statements, among others.


References
*Limpao-Osop, Arah D. (1998) "Case Study Informal (5-6) Money Lenders." Final Draft. November 23, 1998. Unpublished Report for Chemonics International Inc. Davao City, Mindanao, Philippines. Under contract No. 492-C-00-98-00008-00 USAID Office of Economic Development, Manila, Philippines. Pp. 1-21.

Stay tuned for Part Three and Final Report
For Part One, see here

Part One: In every economic crisis comes business opportunity - Bombay 5-6 lenders and the micro-entrepreneurs in Tacloban City, Philippines

By IMTFI Researchers Rosalita M. Dula and Marilou P. Grego

This is the first of a three-part series about the informal loan negotiation practices between ambulant vendors and a group known as "Bombay 5-6 lenders" in Tacloban City, Philippines. Dula and Grego describe the effects of these lending practices on the household and business activities of vendors who live and work on the edge of a precarious existence.

October 15th: a sunny day in Tacloban City, Philippines, and yet another busy day for Domingo Omoy Sr., 63 years old, and his 59-year-old wife, Paula. They have 3 children to feed and send to school. They’re one of the families that have worked as ambulant vendors, rolling their business on the streets of the city, for more than three decades.

A female ambulant vendor in the busy streets of a public market area,
Tacloban City, Philippines (Photo credit: Rosalita M. Dula)

Early this morning, Domingo went to the public market to buy the necessary supplies for their food vending business; afterwards, he and his wife began preparing various food stuffs. At around 8am, Domingo pushed a cart containing their merchandise to a nearby school where they set up before the class break. Around 3pm, a guy on a motorbike wearing a checkered long-sleeved polo shirt approached the vending couple. The guy’s look and physique did not resemble that of locals, but the guy and Domingo exchanged pleasantries in the local dialect, to no one’s surprise. While engaged in their brief conversation, Domingo handed over a tiny notebook and some cash to him. After scribbling something, the guy on the motorbike handed back the notebook to the old man. Everything went smoothly, as if their moves were well-rehearsed and expected. In a jiffy the guy and his motorbike vanished. Classes ended around 5pm. Domingo then pushed the cart back home, concluding a routine day of business.

Domingo is a native of Tacloban City, the regional center for education and trade of Eastern Visayas, Philippines. It is comprised of 138 barangays (villages) and a population of 242,000 based on a 2015 census by the Philippine Statistics Authority. It gained global publicity and attention after being massively hit by super typhoon Yolanda (internationally known as Haiyan) on November 8, 2013. Based on the severity of damage it was deduced that the city was the typhoon’s ground zero. Fortunately, not long after Haiyan’s devastation, prominent local and multi-national franchises have either opened or reopened their businesses in the city, allowing for a rapid bounce-back of the local economy.

Commensurate to the escalation of big corporations’ is the economic activities and contributions of micro entrepreneurs, specifically the ambulant vendors. Domingo and those belonging to this micro-enterprise sector who sell their merchandise in the open thoroughfares of the city, commonly live in a hand-to-mouth existence. Unable to buy or rent a stall, they market their goods along sidewalks, by transport terminals, in front of the market, or near public or private establishments. They are peddling goods such as street foods, fruits and vegetables, condiments, accessories, and they render services like shoe and cellphone repairs. Meanwhile, considering the nature of business and being known to have an income generally below subsistence level, ambulant vendors are not compelled by the Bureau of Internal Revenue to pay income tax returns. This somehow adds an appeal to ambulant trading as a viable prospect for those who want to start their foray into a micro-business venture with very minimal capitalization and low tax overhead. Ambulant vending is a boon to those on tight budget that demand easily accessible goods and/or services at a very affordable cost. A serving of banana cue, for instance, would only cost approximately $0.2 from an ambulant vendor compared to $0.3 at canteens or food stalls.

Most of the ambulant vendors rely on their daily business income to sustain their daily household needs. In lean seasons, when income hits rock bottom, a lack of savings spells doom for the family and business. It is during these vulnerable times when most of the micro-scale entrepreneurs like ambulant vendors would seek the help of institutions engaged in money lending to keep their business afloat. Unfortunately, with very little to no access to formal financing and the absence of property that could serve as loan collateral, these distressed traders eagerly grab hold of informal money lenders’ helping hands.

A Bombay 5-6 lender scurrying off after collection of payments from ambulant
vendors in the downtown area (Photo credit: Marilou P. Grego)

The prevalent practice of informal money lending in Tacloban City, and probably most other cities in the Philippines, is dominated by the “Bombay 5-6” money lenders. The term “5-6” is based on the two lowest numerical figures to clearly represent the nominal 20 percent interest rate. Hence, a person who borrows 5 pesos will have to repay 6 pesos over an agreed period of time (Kondo, 2003)*. Bombay 5-6 is a group of enterprising Indian nationals who have been covertly operating their informal money lending business in the Philippines for a long time. According to Sonny, a Bombay 5-6 lender, their family and relatives have been operating in Tacloban City for almost two and a half decades. Their business operation has been bequeathed from one generation to the next. The considerably high interest rate cleverly imposed on smaller amounts enables them to offer attractive loan deals to locals, and get the returns in two-month’s time or even less. Their clients are mostly micro-scale business entrepreneurs.

Bombay 5-6 lenders’ long-term presence in the area has paved the way for them to make friends with the locals, learn their language, adopt their culture, and engage in business with them. In turn, members of the group were able to create a persona, gain the trust of locals and attract them to borrowing money from them. As with many informal money lending practices, obtaining a loan from Bombay 5-6 is plain and straightforward with the absence of paperwork and required documents superficially sweetening the deal.

Domingo is amongst those who depend heavily on Bombay 5-6 lenders for business’ and even household’s financial needs. For him, even at its paramount, the interest rate fades into oblivion when he is glaring at the absence of means for survival. He is one of those who has stuck around and continued to push his business even beyond the silver-year milestone of peddling. He was able to go the distance because of his perseverance in bringing his trade close to those who needed it. Domingo and his family may be one of the few who deserve to be admired for exhibiting a vibrant picture of resiliency. Yet on the other side of this resiliency is his daily business visitor, the guy on the motorbike wearing his checkered polo shirt and rocking his motorbike across the distance, booting obstacles along the way to bring Domingo a link for the chain that holds their mutual existence on a continuum.

References
*Kondo, Marie. October 2003. “Bombay 5-6”: Last Resource Informal Financiers for Philippine Micro-Enterprises.”Issue 4. Kyoto Review of Southeast Asia. Retrieved from http://kyotoreview.org/issue-4/the-bombay-5-6-last-resource-informal-financiers-for-philippine-micro-enterprises/

See here for Part Two.

Barriers to mobile money adoption among rickshaw pullers in Delhi: Part two

This is the second of a two part post (see here for part one). IMTFI sponsored researcher Mani Nandhi highlights barriers to mobile money adoption among rickshaw pullers in Delhi by sharing her notes from the field.

How do rickshaw pullers like Vinod 
Kumar cope with everyday debt relations?

Vinod Kumar is about 27 years old from Bilheri Village, Chattarpur district in Madhya Pradesh. After finishing middle school he was not allowed to study, so he ran away to Delhi at the age of 16. He became a puller because of his tekedar (rickshaw contractor), who is also from his village. He had tried to open a bank account in his village by providing the necessary documentation (e.g. voter’s ID, ration card) about 3 years ago, but his application was rejected because the fellow villager who signed his application form was not deemed eligible. Vinod could not find another person who could sign for him. When he learned about mobile banking, he was happy that he could open an account because he owned a mobile phone. On 26th October, 2012 he opened his ICICI –EKO mobile banking account with Rs.600 (about US $10).

But when I contacted Vinod in December to check his progress, he had lost his phone. Despite knowing that he had to get a duplicate SIM card to access his account using his voter’s ID card, he said that he had left the card in his village and would have to ask the next fellow villager coming to Delhi to get it from his house. As he ran out of excuses, I sensed that there was more to the story than met the eye. Over the course of a number of small personal meetings (in the rickshaw or on the pavement away from his slum where the tekedar kept a watch), I pieced together the story.

High stakes card games drag borrowers like
Vinod into cyclical debt relations with
tekedar-cum-lenders 

Gambling with cards was the main issue. He had accumulated a huge debt to his tekedar as well as a few fellow villagers. He plays cards to relax after the working day. He played much more during Dipawali (a major Indian festival of lights) because if you win a card game during the festival the Goddess Lakshmi is said to bestow good luck and prosperity on you.

Vinod explained to me that whilst small amounts are taken on a reciprocal basis, bigger amounts of money lent by the tekedar (the rickshaw contractor) or malik (the rickshaw owner) are repayable with interest. For instance, a loan of Rs.1000 (US $17) would have to be repaid in a week's time with an interest amount of Rs.250 (US $4) per every Rs.1000. Vinod's debts totalled Rs.115,000 (almost US $2,000). He said he normally earns about Rs.500 per day, which is his net earnings (after basic expenses and rent for rickshaw) from pulling a rickshaw. So that would mean repaying the debt in 7 to 8 months!

When I asked Vinod if he was frightened about such a huge debt, he shot back “Why would I be scared? I know I will have to earn and repay if I lose, but if I win I will be able to clear off some debts.” When I asked what he would do if he needed to send money home, his answer was “tekedar will lend for that purpose, if the need arises.” On seeing me shaking my head, he said calmly: “Madam, I have a small diary maintained about my loans,” and he was ready to show it to me.

There are eight tekedars in this kandhar (the Hindi term for "wasteland"), and three are frequent lenders. Vinod explained that the tekedars and maliks are happy to lend when the juwa (card games) are on, but rarely lend for other purposes. Many pullers like Vinod deposit their daily earnings from the rickshaw with the tekedar. However, the deposited earnings and the loans are treated separately. The earnings deposited are also treated as collateral when a puller borrows from the tekedar. He said that in one of the games he won Rs.40,000 (US $670). The stake was doubled in the next game by his tekedar, who encouraged him to gamble, and he was unable to resist the temptation. He fell for it and lost Rs.80,000 (US $1,340). He was forced to borrow big sums of Rs.10,000 (US $168) from three tekedars and small amounts from others. Vinod stole Rs.55,000 (US $922) in cash from his brothers at home during his visit for Dipawali, hoping that he would win big in the next game. Now he owes this huge amount to his brothers, too.

"Lena-dena hota hai and isab kitab ban jati hain" -
 "Normally there is give and take when we play;
we square up debt obligations
depending on who wins or loses."  

Vinod explained that many people in the kandhar are tempted into playing cards and thus fall into a debt trap. Normally debts are squared between winners and losers. If a friend wins big one week, he will lend to his friends who have lost and borrow from them the next, “like a moving wheel.”

But the relations with the tekedar seem different. I witnessed an ugly spat between Vinod and his tekedar. The tekedar would not let him take out the rickshaw that day because his rent for it was overdue by five days. His tekedar issued Vinod an ultimatum to clear off all dues (Rs.4300, about US $72) in ten days time. But from Vinod’s explanation this was just one of a number of debts that would need to be settled at the same time: “I will repay each lender alternately because if I repay one and not bother about repaying another, I will face the wrath of the lender who is not getting back the loan from me.”

Vinod has aspirations, but when gently reminded about saving in his newly opened mobile banking account, Vinod simply said: “How can I think of saving or bother about Rs.600 savings in my mobile banking account when my mind is concerned only with now and only about returning the huge amount I owe people? Such things are far away in my mind now.” His answer echoed his life situation that dangles between desires and actual choices made under harsh circumstances.

1. Link to their full report: Evolving Participatory Relationships for Uplifting the Urban Poor Rickshaw pullers: Next Step Forward.