The Paluwagan System


BAGUIO CITY – In the second quarter of 2015, the Bangko Sentral ng Pilipinas (BSP) reported that households with some form of savings reached an all-time high of 33.9 percent from the previous quarter’s 31.6 percent. Although this news was positively received, the sad fact remains that only 1 out of 3 Filipinos have some form of savings. According to the respondents, they save money for the following reasons: (a) emergencies, (b) education, (c) health and hospitalization, (d) retirement, and (e) business capital and investment.

The report shows that more than two-thirds (68.8 percent) of these household savers had bank deposit accounts while 38.3 percent kept their savings at home and 22.6 percent put their money in cooperatives, other credit/loan associations, as investments and interestingly in “paluwagan”.

Paluwagan: Informal savings mechanism

A “paluwagan” is a decades-old system of “savings and lending” that has persisted among co-workers, neighbors and other closely-knit groups in the Philippines.  The term “paluwagan” is a Filipino word that roughly means “loosening up”.

The BSP defines a paluwagan as a non-registered organization “that pools the participants’ money, by means of daily, weekly, or monthly collections to be collected by a leader. The participants will cast lots to determine the order by which each of the members will receive the pooled money”

Under the paluwagan system, the pooled funds will be given to a certain member who is appointed as collector and “manager” of the funds on an agreed date, normally on a monthly basis (during paydays). The pot of money collected for the period is then given to the person scheduled to receive it. This cycle continues until all the members have received their share. Paluwagan systems should at least include three members with no limit as to how many members could join and there usually are no specific membership criteria. The more members involved, the bigger the pot becomes.

The most cited purposes of the paluwagan are to help members save and enable them access to a much bigger amount of money in one lump sum. Joining a paluwagan has been helpful for some people, as they develop a savings habit and get easy access to credit or a bigger amount of money.

There are many factors that make paluwagan quite popular other than simply getting access to credit or a bigger amount of money. One is that the idea is simple and does not involve complex interest computations. Second, it involves cash disbursements in small amounts that create the illusion of no or little risk. Third, joining a paluwagan is convenient to form as there are no complicated membership requirements and documentation. Lastly, and more importantly, people in a paluwagan usually know each other. This adds another dimension to a group’s relationship and creates a much deeper sense of community especially in the work place.

Risks in Paluwagan

However, Salve Duplito, ANC’s resident financial adviser, said that the Department of Trade and Industry (DTI) tagged the paluwagan system as a form of pyramid scheme. She described a paluwagan system as similar to a pyramid scheme because of the fact that the first person to receive the pot is actually the one who will get the most benefit from the system. The initial recipients of the pot are likened to the people who are on top of a pyramid scheme and the last persons to receive the pooled funds will have the most to lose if the system collapses. This usually happens when other members refuse or avoid contributing to the pot since they have already received their respective shares.

Basically, the appeal of the paluwagan system is also its major weakness.  The paluwagan system, just like other financial services, heavily relies on trust and is also prone to fraud. The fact that the paluwagan system is unregistered and has little or no documentation, the risk of loss is high. There is no assurance that all members will be receiving their scheduled payout and there is no formal grievance mechanism.

In many instances, the person assigned to collect fail to give the pot of money to the scheduled recipient. In other cases, some members delay payment of their share in the pot leaving the scheduled recipient with less than the total amount promised. Thus, a successful paluwagan is highly dependent on trust with committed and honest members. Persons intending to join a paluwagan are advised to carefully consider the character of the people who will be joining the group.

Recent reports of investment schemes allegedly using the concept of paluwagan has surfaced and the Securities and Exchange Commission (SEC) has issued a public warning against these schemes. Most of these schemes are actually Ponzi schemes disguised and marketed as paluwagan. These scams usually involve some form of “interest” as well as giving incentives for recruiting additional members.

Alternatives to Paluwagan

As Duplito pointed out, there are alternative mechanisms or financial instruments which are already “tried and tested” that can help people save as well as invest.  The most basic are opening savings and time deposit accounts with reputable financial institutions and joining large credit cooperatives. For those who would want to make their money grow through fund pooling, Duplito advised them to place it in unit investment trust funds (UITF), mutual funds or exchange traded funds (ETFs). Investing in stocks and retail bonds is also suggested for those willing to learn.

The paluwagan system is basically an honest-to-goodness way for Filipinos who have no or limited access to credit, savings accounts and other financial products to save as well as build a much deeper relationship within their group.

However, the changing financial market in our country has created new yet proven financial products that can help individuals meet their financial needs, build wealth and achieve their life goals much better than a paluwagan system. The real challenge now is for financial institutions and government agencies to educate household members in the various financial products available in the market and help them make smart decisions when dealing with their finances. By KEVIN PHILIP D. GAYAO