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Paluwagan: A Local Lending Method Used by Close-Knit Communities in the Philippines

A community-based lending scheme that enhances communal bonds and practices accountability and commitment.

Photo of Melvin Alvarez
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I Wanted to Buy a New Video Game

Back when I was in high school in the Philippines, me and my friends wished we had enough money to buy something that we really wanted. For me, it was the Final Fantasy IX game that just came out. If I saved up my lunch money and the money I earned from doing my classmate's art homeworks, I could get the game in the next three weeks... I wished there was a way for me to get it sooner!

My friends were facing the same financial dilemma so we decided to embark on Paluwagan, a simple financing scheme coined from a tagalog word which roughly translates to "loosening up." 

How It Worked

Me (Melvin) and my friends Narissa, Kevin, and Karen agreed to contribute one hundred pesos each every Friday for four consecutive weeks. We agreed that the order of who gets the total pool of four hundred pesos would be Melvin on Week 1, Narissa on Week 2, Kevin on Week 3, and Karen on Week 4.

Paluwagan cycle

This enabled me to buy the video game by the weekend instead of waiting for three more weeks in exchange for contributing a hundred pesos on the next three Fridays so my friends could all have their turns in getting their four hundred peso pool.

Not Just for Video Games

Paluwagan is widely used by various communities in the Philippines to allow each of the members to acquire finances in a shorter period from the amount pooled together by their group.

The idea behind this financing scheme is to regularly pool together a set amount of money on a set amount of time and provide the total to one of the members. The cycle goes on until all of the members get their turn in acquiring the total money pool. Every detail of the scheme (how much to contribute, when to contribute, the line-up and who gets to keep track of contributions) is agreed upon by the members and it would only work if everyone delivers. 

This simple scheme can be started by a group of at least three people and is used by various communities in the Philippines particularly in low income areas and in close-knit groups who trust each other. 

Paluwagan only works when each of the members contribute, which is why most communities who partake on the scheme only agree on pooling in small amounts of money that they do not urgently need together with people they trust. During the cycle, one of the members can be entrusted to keep track of member contributions and enforce accountability.

Known Downsides

During our third week of Paluwagan, I was twenty pesos short of the contribution. This meant that Kevin will only be getting a total of three hundred and eighty pesos instead of the agreed-on four hundred. Since we were close friends, my failure to provide a hundred pesos wasn't a big of a deal.

Trust is a key factor in order for Paluwagan to work. If one of the members fail to deliver, then the whole system will fall apart. The risk of the scheme to fall through increases with the total number of participants. One member failing to contribute their part would cause a domino effect so this would only work well if each member is committed to deliver or if each of the members agree on some sort of compromise.

Things I've Learned

My experience with Paluwagan was a success despite my minor setback during the third week of the cycle. Although this system is mostly done without any written agreements and is mainly based on consensus, I felt that my bond with my friends have been strengthened as it allowed us to help each other out and the process signified that we trust each other financially especially at the end of the cycle when each of us got our total pool.

Why It's Popular

Paluwagan continues to be a popular lending scheme in Filipino communities as it is simple and does not require a solid binding agreement that would cause serious legal repercussions if a member fails to stay accountable during the financing cycle. Although the system is far from perfect, the act of helping each other out promotes inclusivity in the community as well as financial accountability.

I think this simple system can be improved upon to minimize risks as well as help communities form a stronger bond, allowing them to help each other become more financially empowered.


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Photo of Trevor z Hallstein

I love the creative collective approach. Thanks for sharing!

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