Regulation of pawnshops (First of Two Parts)

PAWNSHOPS have proliferated in the country. Have you ever wondered if they are supervised by any government agency to protect financial consumers?

According to the Integrated Supervision Division II (ISD II) of the Bangko Sentral ng Pilipinas (BSP), the financial system is composed of two groups: banks and non-financial intermediaries (investment houses, savings and loan associations, brokerage, etc.).

Pawnshops, which are considered non-financial intermediaries, are small in terms of required capitalization. As an industry, they represent a very minimal portion of the Philippine financial system.

The Bangko Sentral’s ISD II, headed by Deputy Director Ma. Belinda G. Caraan, said the total pawnshop industry resources make up just 0.30 percent (P26.403 billion) of the total Philippine financial system as of 31 December 2010.

Nonetheless, pawnshops still play a key role in the economy by lending to people who would otherwise fail to qualify for loans from banks.

Pawnshops easily appeal to those in quick need of money because loans are granted without the need for a credit investigation -- the collateral or the pawned item is the sole basis for granting the loan.

As I mentioned earlier, pawnshops can be found everywhere, from supermalls to public markets, to urbanized cities and the rural countryside.

While the pawnshop industry’s total resources pale in comparison to other financial institutions, the Bangko Sentral notes that the industry’s strength can be drawn from the sheer number of its operating units which dominate the financial system.

As of September 30, 2011, BSP-registered pawnshops totaled 15,596, consisting of 6,367 head offices and 9,229 branches. On the other hand, banks and other financial institutions that are under the supervision and regulation of the Bangko Sentral totaled only 8,913, consisting of 766 head offices and 8,147 branches.

Since 2005, the number of pawnshops has grown by 6,368 units (61.4%) -- or an average of 900 units per year.

So what are the laws and regulations covering the Philippine pawnshop industry? The late President Ferdinand Marcos signed into law Presidential Decree No. 114 or the “Pawnshop Regulation Act” on January 29, 1973.

PD No. 114 gave the Bangko Sentral’s predecessor, the Central Bank of the Philippines, the task to regulate and supervise the registration and operation of pawnshops in the Philippines.

The Bangko Sentral, for its part, has the Manual of Regulations for Non-Bank Financial Intermediaries-P Regulations, which contains the rules and regulations governing pawnshops.

The central monetary authority also issues circulars and memoranda to strengthen its supervision over the pawnshop industry. Among its more recent issuances were Circulars No. 711 and 656 dated January 28, 2011 and June 2, 2009, respectively. Both of the circulars significantly updated the country’s pawnshop regulations.

Highlights of these regulations are the following:

• Requirements in the application of new pawnshop and new branch;

• Application of the “fit and proper” rule to the board of directors and officers of corporate pawnshops;

• Requirement to maintain a prudential capital ratio based on the amount of loans, i.e., 50% or P1.5 million capital for the first P3 million loans; additional 30% for loans in excess of P3 million;

• Explicit provisions on Know-Your-Pawner procedures to address Anti-Money Laundering Act (AMLA) requirements as well as Anti-Fencing Law concerns;

• Submission of Audited Financial Statements by the top pawnshops (those with assets of P50 million and above);

• Provisions on collateral business such as remittance, money changing and bills payment;

• Transferring and closing of a pawnshop head office or branch; and

• Reports to be submitted i.e. Consolidated Statement of Condition and Consolidated Statement of Income and Expenses.

It should be mentioned that pawnshops are considered as “covered institutions” and are required to abide by Republic Act 9160, or the Anti-Money Laundering Act (AMLA), as amended by RA 9194.

(To be concluded next week)