Starting a Small Money Lending Business in the Philippines
Who can get a Digido loan?
- The growth rate of the consumer lending market is about 25.7 percent a year
- Money lending business is perfectly legal and profitable in the Philippines
- You will need a valid SEC license and a capital of one million pesos to launch your lending business
- Interest rates are limited to 6 percent a month in the country
- Digido offers short-term loans with 0% interest rate for new customers
Table of Contents
The Philippines, one of the largest emerging markets in the world, has increased its GDP by 7 percent over 2023 and continues doing so in 2024 . For 2024, economic projections are looking even more favorable, with growth anticipated to be between 6.5 and 7.5 percent (1). This steady growth supports the rise of the country’s consumer lending sector. According to Fitch Ratings, household consumer lending has grown throughout last year (2).
The economy grows; people take more and more loans. That means now is the perfect time for starting a small money lending business Philippines to capitalize on that trend. In this article, we will explain how the lending business works, what benefits it offers, and guide you through the process of launching it.
What is a Small lending business in the Philippines?
According to the Lending Company Regulation Act of 2007 (RA 9474), a lending business in the Philippines is “a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than 19 persons” (3). It is usually a relatively small joint stock company that provides consumer loans to its customers. Most of them focus on so-called payday loans, or short-term loans with high interest rates, which are in high demand.
The RA 9474 definition does not cover any of the following financial entities:
- Savings and loan associations
- Banking and investment institutions
- Financing and insurance companies
- Pawnshops, cooperatives, and so on.
Lending companies are regulated by the Securities and Exchange Commission (SEC). This financial regulator certifies all such businesses in the Philippines and supervises their activity.
How does a lending business work?
Every lending business operates according to the same pattern: you allow people to borrow money for a certain period of time in exchange for interest.
Some lending companies focus on cash and keep large networks of brick-and-mortar offices all around the country. However, you can always start small by providing loans online. All you need for that is a website and publicity. There are no laws prohibiting web services for quick lending via transfers, so that is a perfectly legal business model.
While entering the market, make sure to adhere to the principles of responsible lending and to comply with the customer service standards. Calculate your risks in advance and try to mitigate them, that way you will have less chance at dealing with irresponsible lendees and overdue payments.
Lending companies vs. financing companies
As the RA 9474 states, lending companies and financing companies are not the same (4). They have a number of principal differences related to operations and regulation:
|Work only with private consumers
|Mostly work with corporate clients: commercial, industrial, or agricultural companies
|Can be 100% owned by foreigners
|At least 40% of the business must be owned by citizens of the Philippines
|Can only grant loans
|Can issue bonds and engage in trust or money market operations
|Require a capital of PHP 1,000,000
|Require a capital of PHP2,500,000
Why should you start a lending business in the Philippines?
There are several benefits of running a lending company in the Philippines:
- Lending business is legal and heavily regulated in the country. The SEC imposes strict rules to make sure you won’t have to compete with the illegals. The list of the licensed lending companies is published on the SEC website with free access: you can use it to prove your business’s reliability to potential customers.
- While there are legal limits on interest rates, you can still receive up to 6 percent per month, excluding additional charges and fees.
- The lending industry has been steadily growing for several years now, and this trend will most likely remain upward in the upcoming years.
- Even if you are a foreign citizen, you can legally own a lending business in the Philippines.
How to start a lending business in the Philippines?
Let us review the essential steps for starting your own micro-lending company. First of all, you should carefully check the legal requirements for engaging in lending activities — that will probably save you from many mistakes and unnecessary losses in the long term.
Step 1. Make a business plan
You cannot run your business without a clear plan. You have to understand what financial milestones you’re aiming at and how you will achieve them. This includes building your marketing strategy, operational plans and forecasts.
Take your time to carefully analyze the market environment. Think about who is going to borrow your money and for what, define your target audience, and match your conditions to their needs.
Since an online lending company doesn’t usually have face-to-face contact with borrowers, a comprehensive risk assessment system is a must in this business. You can use probabilistic methods of credit scoring based on data collected from different sources, such as credit histories, mobile top-up data, and social profiles.
Establish a clear system of interest rates, charges, and fees to maximize your profits — just don’t forget about the RA 3765. Make sure that your business complies with the current legal acts and is in line with the consumer protection policy. Practicing sustainable methods is a crucial factor to win partners’ and customers’ trust in the financial industry, so focus on responsible lending principles and transparency while elaborating your business plan.
Step 2. Check official lending business requirements
The Lending Company Regulation Act, or RA 9474, is the most important legal act when it comes to micro-lending. The act stipulates that every lending business in the Philippines must be established as a stock corporation, i.e. a company that divides its capital into shares and distributes them among investors.
There are currently no limits on foreign participation: according to the Lending Investor Financing Companies Foreign Ownership Act of 2016 (RA 10881), a lending business “may be owned up to 100 percent by foreign nationals” (5).
Another crucial document for lenders is the Truth in Lending Act of 1963 (RA 3765) (6). It binds any lending business to disclose the true cost of credit to its customers. This means you are legally obliged to inform potential borrowers about all applicable charges and to present interests as a simple annual rate.
Step 3. Register with the SEC and apply for a license
First, register your company with the SEC. While picking the name for your business, there are two main rules you should consider:
- It must neither be used by any other company, nor be misleading, deceptive, or obscene.
- It must clearly indicate the primary activity, i.e. granting loans, with phrases like lending company or lending investor.
You can check whether a name you have selected is available and see the full list of documents you will need to proceed on the official SEC website.
Prepare and sign your papers, such as an application form, a name reservation payment confirmation, articles of incorporation, a treasurer’s affidavit, a valid NBI clearance, an information sheet, etc (7). Have them notarized, and submit your application to the regulator. Don’t forget to include a proof of a paid-up capital for your company. The minimum capital is PHP1,000,000 (8). If you decide to open an extra branch of your company, be wary that there are additional financial requirements:
- PHP 300,000 for the companies located in Metro Manila and first class cities
- PHP 150,000 for other cities
- PHP 75,000 for municipalities.
Note: At least 51 percent of your funds must be used for direct lending purposes.
Now, wait for your documents to be processed by the SEC — it usually takes at least a week. If the documents you presented are insufficient, the SEC’s officials will contact you to request lacking papers. Once you have received the certificate, you must start financial operations in 120 days; otherwise, your license might get revoked.
Be wary that the official SEC license is mandatory for running a lending business in the Philippines. Operating without a valid license is punishable by a fine or imprisonment.
Step 4. Register with relevant public institutions
Getting your SEC license is not the final step — you will also need to register with other institutions, such as:
- Your local barangay. Provide your SEC license, and get a clearance. It normally takes a day.
- The mayor’s office. Present the clearance, and receive a Business Permit in a week.
- The Bureau of Internal Revenue (BIR). Provide the permit, fill out the forms, register your book of accounts, and claim your certificate.
Besides these authorities, you also have to register your company with the SSS, HDMF, and Philhealth. Keep in mind that the present list of documents is not exhaustive. The purpose of the list is to show you the overall logic of the process. You can check the necessary papers on the websites of these institutions.
Step 5. Hire a team, build a website and promote it
For an online lending service, a convenient website is a must. Create one and start investing in its promotion. Although it is reasonable to attract commercial traffic in the beginning, do not discard the organic methods as they have proven effective in the long term. Make sure your web page is easy to navigate, has an appealing design, and works smoothly — and customers will come.
You do not have to do everything from web design to accounting all by yourself — build a team of experts to support your business. You do not need a large staff: a team of a web designer, a SEO specialist, a lawyer, and an accountant is already a good start.
Tips for starting a small lending business in the Philippines
Let’s summarize what we’ve learned about starting a small money lending business in the Philippines in a few essential tips:
- Make sure you understand how the lending process goes
- Learn who your competitors are and implement their best practices
- Obtain an official SEC license to operate legally in the country
- Prepare a detailed business plan with a clear growth strategy
- Gather a professional team to ensure things run smoothly
- Create an attractive website, make sure it generates traffic and brings leads
A lending business in the Philippines might require serious investments in the beginning. If you do everything right, however, it can quickly become a stable and lucrative source of income. Just make sure to do some market research and get the necessary permits first.
How much do you need to create a lending business in the Philippines?You need a paid-up capital of at least one million pesos to get the SEC license and start operating.
Is lending business legal in the Philippines?Yes, it is legal and under strict control.
Is lending business profitable in the Philippines?The lending sector tends to be extremely profitable, as consumer lending has grown by 25.7 percent YOY in 2023.
Can you run a lending company in the Philippines as a foreigner?Yes, it may be 100 percent owned by foreign citizens.
Is there a limit for interest rates in the Philippines?By law, the interest rates are limited to 6 percent per month.
Is 5-6 lending illegal in the Philippines?Yes, it is illegal. The 5-6 lending suggests that you borrow 5 pesos and return 6 pesos at the end of the month. Such an operation involves a 20 percent interest rate per month, while the legal limit is 6 percent.
- 1. Diokno: PH's robust economic growth to continue in 2024
- 2. Fitch Ratings: Philippine Banks Consumer Lending Growth Signals Rising Risk Appetite
- 3. SEC Philippines: Republic Act No. 9474
- 4. SEC Philippines: Frequently Asked Questions on Lending and Financing Companies
- 5. Dayanan Consulting: Republic Act No. 10881 - Lending Investor Financing Companies Foreign Ownership
- 6. MF Transparency: Philippines BSP Truth in Lending Act of 1963
- 7. SEC Philippines: 2021 Checklist for Lending Companies
- 8. SEC Philippines: Minimum Paid-Up Capital Requirements for Lending and Financing Companies
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