BANKING AND OTHER FINANCIAL INSTITUTIONS - PAWNSHOP PDF

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PAMANTASAN NG LUNGSOD NG MAYNILAModule 5: THE NON-BANK FINANCIAL INSTITUTIONSPAWNSHOPSA BRIEF OVERVIEW OF THE ROLE OF PAWNSHOPS IN THE PHILIPPINES Our parents used to tell us: the moment you start earning, buy some jewelry and other properties. You can pawn them whenever you encounter financial dif...

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VILLAGA, MARJORIE GRACE S. PAMANTASAN NG LUNGSOD NG MAYNILA

2021

Module 5: THE NON-BANK FINANCIAL INSTITUTIONS PAWNSHOPS A BRIEF OVERVIEW OF THE ROLE OF PAWNSHOPS IN THE PHILIPPINES      

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Our parents used to tell us: the moment you start earning, buy some jewelry and other properties. You can pawn them whenever you encounter financial difficulties. Mario Lamberte – 1988 PAWNSHOPS can provide these financial services to poor and low-income households for a variety of reasons. One is that pawnshops fall under less regulation than other financial institutions. PAWNSHOPS used to operate like a sari-sari store with very little government control. In fact, the only time these units came into contact with government agencies was when they paid business registration fees and income taxes. They were not even covered by the usury law enacted in 1916. Mario Lamberte – 1988 Beginning in 1972, The Bangko Sentral ng Pilipinas (BSP), known as the central bank in 1973 was given the authority and responsibility to regulate pawnshops. PRESIDENTIAL DECREE 114 (29 JANUARY 1973) AND THE CENTRAL BANK CIRCULAR NO. 374 (13 JULY 1973) set out specific regulations covering the operations of pawnshops. Pawnshops are still among the least regulated business that fall under the authority of the BSP. Under the BSP’s regulations pawnshops are authorized to lend, but cannot accept deposits and are required to submit regular financial reports. The BSP has financial audit authority over pawnshops and can inspect book records and general business practices. It also has the authority to sanction a pawnshop. Although in 2009, the BSP did issue a new, more stringent, set of rules that will govern all pawnshops operating throughout the country. The new rules will replace the existing implementing rules and regulations of PRESIDENTIAL DECREE NO. 114 also known as the PAWNSHOP REGULATION ACT ISSUED IN 1973. The new rules are designed to enhance consumer protection and foster confidence in the pawnshop industry by the pawning public. For instance, proprietors, partners, incorporators, directors, stockholders, and officers of pawnshops must meet certain “fit and proper” standards to ensure that pawnshops are owned and run by people without any derogatory record and to promote good governance. Pawnshops are now required to maintain a minimum level of capital or net worth in relation to their loan portfolio as the existing statutory capital of P100,000 has become too small and it is susceptible to the proliferation of “fly-by-night” operators. Another reason pawnshop can provide these financial services to poor and low-income households is that their loans are backed by hard assets which lowers the transaction cost to the borrower and the lender and eliminates the need to analyze the borrower’s creditworthiness. Over time the pawn item has changed. In the past, for example, Mario Lamberte noted (1988) that “PAWNSHOPS HAVE PREFERRED LEES BULKY ITEMS HIGH-VALUE ITEMS LIKE JEWELRY. WITH THE ADVENT OF MORE COMPETITION PAWNSHOPS HAVE BROADENED THE TYPE OF ITEMS THEY ACCEPT AS COLLATERAL” This change continues today with the acceptance of computers, cellphones and other electronic devices as collateral. Because of the efficiency of pawnshop operations, they have been shown to be a profitable business. A study for the Philippine Institute for Development indicates that efficient management of pawnshops allows 25% of the gross operating income to flow to the bottom line as net profits (Lamberte, 1988) The pawnshop industry in the Philippines has seen spectacular growth. This growth has largely been attributed to - (1) the role that pawnshops serve as filling a demand that is not being filled by the more traditional banking system: It gets credit to those who don’t have access to those who do not have access to traditional bank loans and - (2) pawnshops operate with large profit margins. This has not gone unnoticed by small entrepreneurs and job seekers in the Philippines as they have flocked to the pawnshop industry. The number of pawnshops in the country have multiplied in the recent years and has been in fast-paced growth in terms of operations and revenues, which gave rise to a proposal to enact a new law regulating pawnshops (the existing law is PD 114) Based on the data from the Bangko Sentral ng Pilipinas (BSP), there is a total of ₱10.1 billion worth of loans that pawnshops have been provided at the end of 2004 or almost double from the ₱5.5 billion worth of loans they extended in 1995 According to BSP, there are 11, 942 pawnshops operating in the country as of November 2009 from only 4, 173 pawnshops 10 years ago or in 1995. Furthermore, pawnshops’ total assets stood at ₱14.6 billion at the end of 2004, from only ₱7.7 billion in 1995. Moreover, pawnshops consolidated capital base was increased from ₱4.2 billion in 1995 to ₱7.7 billion in 2004

VILLAGA, MARJORIE GRACE S. PAMANTASAN NG LUNGSOD NG MAYNILA

2021

GOVERNING LAWS PRESIDENTIAL DECREE NO. 114 (Pawnshop Regulation Act) On APRIL 30, 2009, the BSP approved a new set of rules to replace the implementing rules and regulations of P.D No. 114. The new BSP rules are designed to “ENHANCE CONSUMER PROTECTION AND FOSTER CONFIDENCE IN THE PAWNSHOP INDUSTRY BY THE PAWNING PUBLIC. Some of the changes are: 1.

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Proprietors, partners, incorporators, directors, stockholders and officers of pawnshops must meet certain “fit and proper” standards to ensure that pawnshops are owned and run by people without any derogatory record and to promote good governance Pawnshops are required to maintain a minimum level of capital or net worth in relation to their loan portfolio. The existing statutory capital of ₱100,000 has become too small. Pawners have 90 days after maturity to redeem their pawned properties and pawnshops must notify their clients within the 90-day period before they can sell the pawned items in an auction for the convenience of pawners, the new rules will require them to indicate in the pawn ticket their preferred mode of receiving the notice, whether by mail/courier or by SMS/text. Pawnshops will be required to comply with explicit “Know Your Pawner” procedures consistent with the requirements of the Anti-Money Laundering Act and to address the concerns on the Anti-Fencing Law. For transparency and minimizing malpractices, pawnshops will be required to post in their premises the Acknowledgement of Registration or Authority to Operate issued by the BSP, their business days and hours, and their interest rate and charges for loans, among others.

DEFINITION OF TERMS PAWNSHOP – shall refer to a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage. PAWNER – shall refer to the borrower from a pawnshop. PAWNEE – shall refer to the pawnshop or pawnbroker. PAWN – is the personal property delivered by the pawner to the pawnee as security for a loan. PAWN TICKET – is the pawnbrokers’ receipt for a pawn. It is neither a security nor a printed evidence of indebtedness. PROPERTY – shall include only such personal property as may actually be delivered to the control and possession of the pawnshop: Provided, however, that certain specified chattels such as guns, knives and similar weapons whose reception in pawn is expressly prohibited by other laws or regulations shall not be included. VOTING STOCK – shall refer to a portion of the authorized capital which is subscribed and entitled to vote. In addition to the above terms, the Manual of Regulations for Banks and Other Financial Intermediaries, Book IV, pertaining to pawnshops clarified the following terms: VITAL RECORDS – shall consist of loans extended/paid registers, general ledger/journal covering the current and at least the proceeding two years of operations unused accountable forms and partnership, stock-certificates, etc. BULKY PAWNS – shall refer to household appliances, office machine and the like, which occupy considerable amount of space that is measuring at least 1.5 x 1.5 x 0.5 feet PREMISES – shall refer to the area where the pawnshop conducts its business and maintains office. It includes office or storage spaces maintained and/or sued by the pawnshop which are adjacent to the pawnshop’s location.

VILLAGA, MARJORIE GRACE S. PAMANTASAN NG LUNGSOD NG MAYNILA

2021

FORMS OF PAWNSHOP BUSINESS ORGANIZATIONS Pawnshops may be either in the form of SINGLE PROPRIETORSHIP, PARTNERSHIP, or CORPORATION. Nevertheless, whatever may be the form of business organization, the requirement of Philippine citizenship is of paramount importance. SINGLE PROPRIETORSHIP – The requirement that only Filipino citizens may own and operate a pawnshop as a single proprietorship is provided in SECTION 8 OF PD NO. 114. The same sentiment is reiterated and echoed in SECTION 4 OF CB CIRCULAR NO. 374. Such requirement is made mandatory upon the effectivity of the said Presidential Decree. Therefore, pawnshops established as a single proprietorship of a non-Filipino owner prior to January 29, 1973, may continue as such during the lifetime of the registered owner. This is the same requirement imposed by the Republic Act No. 1180, as amended, nationalizing the retail trade business in the Philippines PARTNERSHIP – At least 70% OF ITS CAPITAL IS REQUIRED TO BE OWNED BY FILIPINO CITIZENS . The implementing rules on the other hand, made it clear that pawnshops established as partnership prior to January 29, 1973, with nonFilipino partners whose aggregate holdings amount to more than 30% of the capital may retain the percentage as of January 29, 1973, of their aggregate holdings, and said percentage is required not to be increased, but may be reduced, and once reduced is required not to be increased thereafter beyond 30% of the voting stock of such pawnshop (Section 41, CB Circular No. 374) CORPORATION – in case of a pawnshop organized as a corporation, at least 70% OF THE VOTING STOCK THEREIN IS REQUIRED TO BE OWNED BY FILIPINO CITIZENS, or if there be no capital stock, at least 70% of the members entitled to vote should be Filipino citizens. The percentage of foreign-owned voting stock in a pawnshop corporation is required to be determined by the citizenship of its individual stockholders. If the voting stock in a pawnshop corporation is held by another corporation, the percentage of foreign ownership in that pawnshop is to be computed on the basis of the foreign citizenship of the individuals owning voting stocks in, or members entitled to vote of, the stockholder corporation. A pawnshop registered as a corporation with foreign equity participation in excess of 30% of the voting stock, or members entitled to vote, of the pawnshop may retain the percentage of foreign equity as of January 29, 1973, and said percentage is not to be increased, but may be reduced and once reduced, is not to be increased thereafter beyond 30% of the voting stock, or number of members entitled to vote, such pawnshop (CB Circular No. 374, Section 41). REQUIREMENTS OF REGISTRATION AND LICENSING Pursuant to the approval under MONETARY BOARD RESOLUTION NO. 514 dated 28 March 2019 of the amendments to Regulations of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) as issued under CIRCULAR NO. 1039 dated on 03 May 2019, the following OPERATIONAL GUIDELINES shall be observed in the application for license/authority to operate a pawnshop and activities requiring prior BSP approval or notification. The foregoing supersedes the provisions under Memoranda Nos. M-2017-OO6 and M-2017-OO7, both dated 22 February 2017. 1. GENERAL GUIDELINES A. MINIMUM REQUIREMENTS. Pawnshop operators shall adhere to the following minimum requirements for the application for license/authority to operate a pawnshop and activities requiring prior BSP approval or notification. Otherwise, the application or notification shall not be accepted. 

DOCUMENTATION. Complete, valid and accurate documentary requirements, i.e., BSP-prescribed forms and supporting documents, shall be submitted. The BSP prescribed forms, Data Entry Template {DET) user’s guide, checklists of requirements and relevant BSP issuances are downloadable from the BSP website.

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AUTHORIZED SIGNATORY. The prescribed forms shall be signed by the authorized signatory, I.€., the proprietor/managing partner/president or officer of equivalent rank and function, or as otherwise indicated in the form. FEES. Proof of payment of non-refundable filing fee of P1,000 per office and per business activity (i.e., RTC, MC/FXD) shall be included in the application or notification

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PAYMENT MAY BE MADE THROUGH ANY OF THE FOLLOWING:  CASH DEPARTMENT AT THE BSP HEAD OFFICE, A. Mabini Street, Malate, Manila from 9: OO am to 2:00 pm (secure an Order of Payment to the Sectoral Operations Management Deportment before proceeding to the Cash Deportment);  CASH DEPARTMENT AT ANY BSP REGIONALOFFICE/BRANCH from 9: OO am to 2: OO pm; or  MANAGER/S CHECK (MC) OR POSTAL MONEY ORDER (PMO) payable to the Bangko Sentral ng Pilipinas.

VILLAGA, MARJORIE GRACE S. PAMANTASAN NG LUNGSOD NG MAYNILA

2021

B. MODE OF SUBMISSION. All applications and notifications shall be addressed to the Director of Financial Supervision Department lX, Bangko Sentral ng Pilipinas, BSP Complex, A. Mabini Street, Malate, Manila and submitted via personal filing or postal/courier services to Sectoral Operations Management Department. PROCEDURAL GUIDELINES. The detailed/step-by-step procedure in accomplishing and submitting the DET is listed in the User's Guide downloadable from the BSP website. A. APPLICATION FOR LICENSE/AUTHORITY TO OPERATE. Entity shall submit to BSP an application for license/authority to operate a pawnshop using the DET Generated Form No. 01-001, together with the documentary requirements listed in FSS Licensing Form No. O1-OO2, for evaluation. Upon receipt of notice of approval, entity shall pay the corresponding fees i.e., licensing fee and metal plate for the release of Authority to Operate. 2.

B. ACTIVITIES REQUIRING PRIOR BSP APPROVAL Pawnshop operators shall seek prior BSP approval on the activities enumerated below: FORM NO. 2P

ACTIVITY Transfer of Ownership

DOCUMENTARY REQUIREMENTS DET-Generated Form No. 2p, together with the documentary requirements listed in Forms No. 2P-1, 2p-2, 2p-3, as applicable. 3P Change of Registered/ Business DET-Generated Form No. 3p, together with the documentary requirements Name listed in Form No.3P 01 – 001 Reclassification of Pawnshop Refer to the documentary requirements on: a. application for license/authority License to operate; and/or b. application for registration as RTC and MC/FXD covered by a separate memorandum, as applicable. 4P Surrender of Pawnshop Operator DET-Generated Form No. 4p, together with the documentary requirements license Due to Closure of Business listed in Form No.4P C. Activities Requiring Notification Pawnshop operators shall notify BSP on the activities enumerated below FORM NO. 5P

ACTIVITY Establishment of Additional Branch

DOCUMENTARY / REQUIREMENTS DET Generated-Form No. 5P, together with the documentary requirements listed in Form No.5P

6P

Transfer of Business Location/ Change of Branch Name Voluntary Closure of Pawnshop Office/Branch

DET Generated Form No. 5P, together with the documentary requirements listed in Form No.6P

DEADLINE within five (5) business days from end of month of start of operations of new branches within five (5) business days after the effectivity of transfer

DET Generated Form No. 7P, together with the documentary requirements listed in Form No.7P

within five (5) business days after the effectivity of closure

7P

BANGKO SENTRAL NG PILIPINAS REQUIRES PAWNSHOP TO SECURE LICENSE TO OPERATE THE GUIDELINES -- under CIRCULAR 938 posted on the BSP’s Web site over the weekend -- require pawnshops to secure an authority to operate from the central bank, compared to the old requirement of simply registering as entities covered by the regulator. THE BSP MAY GRANT FOUR KINDS OF LICENSES: -

TYPE A, or a basic license for pawnshops with up to 10 branches; TYPE B license for those with more than 10 branches that also run another BSP-registered business activity; TYPE C license for pawnshops with more than 10 branches that also run a remittance service. TYPE D license covers virtual operations called e-pawning, whereby customers can offer assets through electronic channels.

BASIC CONDITIONS    

The BSP said it will not issue licenses to the last three types of pawnshops if these belong to a single proprietorship or partnership. Pawnshop operators are also required to adhere to the “know your customer” rule which aims to thwart efforts to launder money or engage in other illegal practices. Pawnshops are required only to notify the central bank upon start of operations of a new unit. The central bank also requires licensed pawnshops to submit reports regularly. A pawnshop may also engage in “corollary” businesses like money changing and remittance services and as bills payment agent, the central bank said, although such accounts should be “separate” from pawning activities and must be disclosed to the regulator.

VILLAGA, MARJORIE GRACE S. PAMANTASAN NG LUNGSOD NG MAYNILA

2021

Interest rates and loan surcharges must be in line with market conditions. In the absence of an express contract on loan rates, the default is at 6% per annum, the central bank said. The new rules also provide a maximum service charge of P5 or else not exceeding 1% of the principal loan. PAWNSHOP BUSINESS A duly organized and licensed pawnshop has, in general, the POWER TO ENGAGE IN THE BUSINESS OF LENDING MONEY ON THE SECURITY OF PERSONAL PROPERTY WITHIN THE FRAMEWORK AND LIMITATIONS OF PD NO. 114 AND CB CIRCULAR NO. 374, subject to the regulatory and supervisory powers of the Monetary Board of the Bangko Sentral ng Pilipinas. THE BANGKO SENTRAL IS AUTHORIZED UNDER PD NO. 114 SECTION 17 TO: 1. 2. 3. 4.

Issue rules and regulations to implement the provisions contained in the said decree Require from pawnshops reports of condition and such other reports necessary to determine compliance with the provisions of the decree Exercise visitorial powers whenever deemed necessary Impose such administrative sanctions including the imposition of fines for violations of the said decree and regulations issued by the Bangko Sentral in pursuance thereto.

CAPITALIZATION The minimum paid-in capital of any pawnshop which may be established after the effectivity of PD No. 114 must be ₱100,000. However, pawnshops established and in operation prior to January 29, 1973, must comply with the minimum capitalization requirement indicated above within such time as may be prescribed by the Monetary Board of the BSP, which time, in no case be less than three (3) years from the date of the effectivity of PD No. 114 (Section 7). In this connection, Section 40 of CB Circular No. 374 provides that: Pawnshops established and in operation prior to January 29, 1973 and whose capital is less than ₱100,000.00 shall comply with the minimum paid-in capital requirement of ₱ 100,000 by January 29, 1976. THE MANUAL OF REGULATIONS HAS THIS TO SAY WITH RESPECT TO “CAPITAL OF PAWNSHOPS”:     

No pawnshop may be established and registered unless its minimum paid-in capital is ₱100,000 Paid-in capital shall mean cash and other properties, including real estate and improvements; provided, that such properties are necessary for the conduct of the pawnshop business Properties forming part of capital in accordance with the preceding paragraph may be valued at acquisition cost less depreciation or at any other value not exceeding the appraised value as fixed by an independent appraiser, ...