Contingent Loan Repayment in the Philippines

This paper is the result of a study of credit repayment among 200 rural Filipino households in four villages in the Cordillera Mountains of northern Philippines, during three visits between July 1994 and March 1995.

The study sought to answer the following questions:

• Is contingent repayment organized through debt rescheduling, partial or complete debt forgiveness, or debt roll-over?
• Under what circumstances does payment in kind of in labor replace payment in cash?
• Do lenders take advantage of borrowers' difficulties to force them into a debt trap (debt peonage or labor bonding)?

Through detailed statistical reasoning, it formed the following hypotheses:

• If borrowers are risk averse, debt repayment should be contingent on shocks affecting the borrower;
• If lenders are risk averse, repayment should be contingent on shocks to lenders;
• If penalties can be inflicted upon defaulting borrowers, free debt contracting leads to permanent indebtedness or labor bonding for unlucky borrowers;
• If penalties for default are low, reversals of financial flows should be observed: fresh money should flow from lenders to borrowers when borrowers are faced with large negative shocks.

The paper follows with quantitative analysis of the data gathered by the study, and detailed statistical testing of the aforementioned hypotheses on contingent repayment. The study found that:

• The timing of loan repayment depends on shocks affecting both lender and borrower;
• Amounts repaid and debt forgiveness are not correlated with shocks;
• Borrowers occasionally repay debt in labor when forced by a bad shock;
• Contractual interest charges often are reduced, but these reductions do not depend upon shocks except through timing of repayment.

According to the authors, these findings represent restraint on the part of the lenders. Possible reasons for this leniency are:

• Moral condemnation and other social pressures;
• The perception that contractual interest is not enforceable due to the informal nature of the contract.