For the longest time, our financial system has been lopsided against the poor. I’ve long believed that a key reason poverty is more prevalent and persistent in the Philippines compared to most of its neighbors is the failure of our financial system to make credit and finance widely accessible to those who need it most. And these are our small farmers, the bulk of whom are poor, and small businesses, for whom lack of financing for startup and working capital is consistently cited as the top hurdle to sustaining, let alone growing, their farm or business.
Years ago, a top businessman borrowed hundreds of millions of pesos from a state bank, collateral-free, to buy that same bank’s shares in a corporation, then turned around and sold the shares for a fabulous profit. No ordinary Juan dela Cruz, no matter how trustworthy, can similarly borrow a far smaller amount from a bank to grow the money via such opportunities the financial markets might offer, much less to buy inputs for a small farm or firm, promising as it may be. It’s a lopsided picture indeed.
We widely lament how agriculture has failed in this country and there are many reasons why. Foremost is our age-old failure to finance small farmers. Our scientists spend entire careers developing technologies to make farming more productive and lucrative. But for the farmer to adopt these, he needs money to buy better seeds and productive inputs like fertilizers and equipment. Often, he resorts to borrowing from the same traders to whom they are obliged to sell their produce come harvest time, at prices lower than they could otherwise get. Without access to cheap formal credit, he sticks to his old ways and is unable to stand up to competing imports produced more cheaply with the same technologies he does not have the money for. So he demands that government keep those imports out, and the latter obliges, believing it’s the right way to help the farmer—and forgetting that allowing food costs to stay high hurts all Filipinos, especially the hungry poor who far outnumber (and also include) the farmers it thinks it is helping.
There’s another way failure in finance is killing our agriculture. Rural folk appear to be turning away from farming and shifting to other occupations like construction or informal public transport (especially motorcycle taxis or “habal-habal”), and the reason goes back to finance. There is international evidence that the poor frequently prefer jobs that provide a steady cash flow over even higher-paying options but with irregular income. This is because, in the absence of savings or credit, they need predictable funds to meet their daily needs, minimize debt, and maintain financial stability.
Danielle Guillen, in her 2008 doctoral thesis for the University of Tsukuba, noted how habal-habal drivers in Davao preferred their occupation over farming or other regular work where earnings are not received on a daily basis. Nobel Prize 2019 laureates Abhijit Banerjee and Esther Duflo, in their 2011 book “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty,” observed that many low-income people in developing countries prefer small-scale, daily-paying occupations like vending or laboring, over seasonal or contract work that could pay more but is unpredictable. Jonathan Morduch and Rachel Schneider in 2017 documented in “The Financial Diaries: How American Families Cope in a World of Uncertainty” how low-income American families tend to prefer even lower-paying jobs with regular income because they need cash to cover frequent expenses and avoid debt. They found that sporadic income can lead to financial stress, leading people to seek jobs that provide predictable income. This seemingly irrational preference for lower incomes would not happen if credit were readily accessible to smoothen cash flows across irregular but potentially higher income streams (including from farming), and more families could potentially be lifted out of poverty. And Filipino farmers and their children could be less likely to shun farming.
“Financial inclusion” has become a buzzword in development circles, and is a major thrust of the Bangko Sentral ng Pilipinas. It means making financing accessible to all and starts with promoting wide financial literacy and education. Other needed changes include strengthening the rural banking network; creating more streamlined, accessible lending processes for rural folk; establishment of government-backed credit guarantee programs for agriculture; widening government farm insurance programs, and harnessing digitalization of financial services to reduce financial barriers, spread financial services to underserved regions, and ensure that the rural poor have access to affordable, reliable credit sources.
On all these, Thailand, Taiwan, and South Korea have rich lessons to share. We only need to pay closer attention, study them well, and yes, copy what they’ve done.
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