Why credit is misunderstood and what can be done to fix it

By Pia Arellano

THERE’S a lot to look forward to in the Philippines. The country is emerging as one of the fastest growing economies in the Southeast Asian region. Going from 5.6% economic growth in 2021 to 7.6% in 2022, with continued recovery and reform efforts, the World Bank also forecasted that the Philippines is set to become an upper middle-income country in two years’ time.

While these reports are promising, it also sheds greater light on the need for economic growth to be more inclusive. It is widely believed that financial inclusion aids economic growth and development. Specifically, financial inclusion efforts expand access to financial services for more people, increasing their economic opportunities and improving their lives.

Financial inclusion in the country must continue to be accelerated to enable more Filipinos to benefit from wider financial services. Yet for so many Filipinos, access to financial education and information remains limited. In a financial literacy survey conducted by the Bangko Sentral ng Pilipinas in 2021 showed that only 2% of Filipinos correctly answered all questions pertaining to basic financial literacy. 

Understanding financial access to credit is a basic pillar of financial literacy. With its ability to enable consumers to access goods or services on the premise that payments will be made in the future, credit has the potential to change lives for the better. That’s why it is a must for vast sectors of the population should be able access credit on both reasonable terms and in a responsible manner.

MANY FILIPINOS STILL SEE CREDIT AS ‘BAD DEBT’Local efforts to facilitate greater access to credit cannot come without changing prevailing, deep-rooted stigma surrounding it. The notion of credit may unnerve many Filipinos. Understood as “utang” in Tagalog, the word itself carries notions of a debt to shoulder and the product of financial irresponsibility — something Filipinos would prefer to shy away from.

This deep-rooted negative stigma surrounding utang in the country may also influence how Filipinos perceive credit. According to a TransUnion study on credit perceptions in the country, 57% of Filipinos believe people who acquire credit products tend to overspend, while 50% believe that those who do are already in debt. Despite these perceptions, there is still a high reliance on informal credit systems, with 72% of Filipinos turning to family and friends when it comes to borrowing money. Given the data, financial institutions need to reframe the conversation surrounding credit from “utang” to an enabling force for more financial services and opportunities.

These largely unfounded misconceptions can be attributed to ways in which Filipinos acquire their financial knowledge. Many among both the general and unbanked population rely on family and friends as well as social media for financial education.

This presents a great opportunity for both the public and private sectors to work together to establish more formal and reliable channels for Filipinos to acquire financial knowledge. By doing so, the formal financial system can help change existing narratives surrounding credit from bad debt to a gateway to improved economic opportunities.

USING INFORMATION FOR GOODGreater financial inclusion can indeed unlock opportunities for more Filipinos to improve their economic standing, especially among those belonging to lower-income segments of the population. However, this cannot be achieved without addressing long-standing issues of trust surrounding credit and other financial services.

By understanding local credit perceptions as well as the factors that influence them, banks and other financial institutions can work towards the idea of credit to be both appealing and empowering. Through a more direct approach that highlights the benefits of credit, Filipinos will be more willing to see credit as better opportunities for financial access rather than a hindrance.

This can be achieved with the life-changing power of information. As a global information and insights company, TransUnion Philippines is dedicated to finding innovative ways to utilize information for consumers to manage credit, and for businesses to manage risk more efficiently. Through the power of information, more Filipinos can be “seen” by the formal financial system and access its services to change their lives and the nation for the better.

Pia Arellano is the president and CEO of TransUnion Philippines. She has over 25 years of industry experience across banking, payment solutions, telecommunications, and remittance services. She has been instrumental in establishing TransUnion as a leading private consumer credit reference agency and an information and insights partner of banks, fintech companies, and other institutions in the Philippine financial system. Questions can be e-mailed to tuphcomms@transunion.com.