The President has declared that the money lending activities of the “Bombay” which is popularly known as “5-6” must now end. This received mixed reactions from the borrowers of these money lenders. Some want the system to end because the interest is very high while most lament that it is very convenient for them to borrow under the “5-6” scheme because there are no documentary requirements. Of course this system of borrowing money if the one who borrows does not pay on time or he is unable to pay the amount borrowed. One valid concern is the lack of business permit and the non-payment of the corresponding tax for the transaction. According to the President the government will put in place a money lending scheme but there are worries that people who want to avail of a loan must have to pass certain requirements making it difficult for the common people to borrow much needed cash. But is 5-6 really illegal?
Illegal Interest
The Usury Law (Act 2655) has been suspended by the Central Bank Circular 905 meaning there is no more limit as to the rate of interest that may be imposed on a borrowed money. So it would appear that the 5-6 system is not illegal after all because the suspension of the Usury law removed the limit as to the imposable interest. In so many cases however, the Supreme Court struck down as illegal certain rates of interest and lowered the rate to just 1% per month or 12% per annum. The reason for the ruling is not the Usury Law since it was suspended but more on the interest being unconscionable therefore against public morals. The Civil Code gives contracting parties the freedom to agree on any term “provided they are not contrary to law, morals, good customs, public order, or public policy” (Art. 1306). There is, however, no exact rule as to when an interest may be considered unconscionable and the Supreme Court consistently said that it would depend upon the circumstances of each case. The SC in Almeda vs. SC (G.R. No. 113412 April 17, 1996) said that “while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets”. This ruling became the basis for the cases on interest that followed and the interests were all reduced to 1% per month or 12% per annum. In some exceptional cases, however, the High Court upheld the stipulated interest because it found that it was not unconscionable. There were instances that the Court considered the interest of 23% per annum as not unconscionable and did not reduce it to 12% as in most cases.
5-6 Scheme
The 5-6 scheme is so named because when a person borrows “5” he will return “6”. So if he borrows 25,000.00 he will have to pay back the amount of 30,000.00. The money lender requires no documents or other requirements and merely relies upon the borrower’s word. Art. 1956 of the Civil Code states that “No interest shall be due unless it has been expressly stipulates in writing”. The lender actually runs the risk of not being paid the agreed interest because it was not in writing. The principal may be demanded in court but not the interest since the rate was not stipulated in writing. So in this sense, 5-6 is not per se illegal. The applicability to individuals of the Lending Company Regulation Act of 2007 may still be debatable so there is no certainty if in fact legal warrantless arrests can be made on individuals engaged in 5-6 as stated in some news articles. This matter has to be carefully studied by the government since it might have unforeseen consequences to small business and to a large sector of our society.
