For the last half of 2012, I was desperate to find a decent bank willing to lend me money to finish my house at an interest rate that I can afford. My wife, another Certified Public Accountant in the house besides myself, went through an options analysis including the Home Development Mutual Fund (HDMF) and a few commercial banks that promise interest holidays, or low interest rates, or fast processing and so on and so forth. She found out that when one borrows from HDMF at an amount beyond Php750,000, the interest rates converge with that of commercial banks so we decided to apply a housing loan from both PS Bank and Bank of Commerce.
The experience was not that pleasant. Both banks were slow at responding to request for information and failed several times to get back to us as to the status of our applications. PS Bank, for example, treats us as miserable clients, not worthy to be lent some money despite our positive and highly liquid cash position, because our access road is not yet developed though it exists. In an age of cash-flow lending, its lending system is stuck to collateral issues that despite our explanation, our application got disapproved twice. They told us we need to pave our access road so that our loan will be approved. That time they did this assessment, our house was already 60% complete.
Bank of Commerce, on the other hand, eventually lent us the money, but not without making us feel miserable as well. They said that after application, we will be able to get the approval we need and the first release in a month’s time. After two months and after exhausting our savings, nothing happened. All promises and a string of requirements; not until I burst in anger towards the close of 2012 did we get a positive response. Both my wife and I felt that the bank employees enjoyed our powerlessness; they enjoyed hearing our pleas for consideration.It made us realize that banks exist not for financially insignificant people like my wife and me. But we continued pleading to almost the point of losing our sense of dignity. Had we the choice, we would not go through the same experience again.
Banks, or financial access to banks, are just for the rich. I should say. Or with our case, the persistent poor who got angry towards the end.
In Abhijit Banerjee’s and Esther Duflo’s book, PoorEconomics, they posited the argument that “credit constraints are likely to be much tighter for very poor borrowers than for somewhat richer ones”. However, they also presented cases, where capable, educated people, with strong business models were never trusted by banks. They also presented cases that those that lent to the poor are not your banks – these are micro-finance institutions like Yunus’ Grameen in Bangladesh, Padmaja’s Spandana in India, or TSKI in the Philippines. Banks are not for the poor. When the world’s largest micro-finance institutions start to behave like banks, they might also start to lose the advocacies that in the first place, gave birth to their existence. Microfinance institutions then, are the options for the poor, as these institutions offer lesser interest rates than usurious money lenders, but less stringent in terms of requirements as compared to banks.
But where will those in the middle range of the income spectrum, like me, go? Surely, banks find us less bankable and more risky. Microfinance institutions will also find us ineligible.There are limited options for us, as there are limited options for the poor. In one study we conducted at the end of December 2012 in 11 agricultural barangays in Batuan, Duero, Guindulman, Pilar, and Sierra Bullones, we found out that the poor could not access banks, not even microfinance institutions as indicated in the graph below:
When I talked with a friend who teaches at a local university here in Tagbilaran as to her sources of credit, she mirrored the results of the community study as depicted in the graph above. Banks have not granted her loan. If she needs immediate cash, she goes to her friends and family. For bigger requirements, she borrows from the employee’s cooperative to which she is a member. But at one time in her life, she wanted to put up a business venture but failed to do so because no single bank would finance her business and she was rated “not credit worthy”.
Banerjee and Duflo’s book, while not necessarily referring to the middle income group said that these borrowers “run the risk of being too large for the traditional moneylenders and microfinance agencies but too small for the banks”. Funding this set of people with financing needs will remain a challenge.
So you’re planning to go to the bank for your financing needs? Think again.
This post is written by Michael P. Cañares. This is also available at http://www.boholanalysis.com.