Paluwagan has existed in the Philippines for many years. It is a group forced savings system and similar money saving systems exist in other countries and cultures, however, in the Philippines, and regardless of what the Bangko Sentral ng Pilipinas (BSP – the Central Bank) says, it is almost ubiquitous. Paluwagans exist in the cities such as Metro Manila and down to the farms on Mindanao and Samar. Even retired folks have been know to be part of a paluwagan.
So, what is it exactly? It is a means of group saving or money lending. A group of people, perhaps workmates, friends, extended family and such, get together and agree an amount they can afford to “save” or deposit to the paluwagan. They agree on who will hold the funds, how frequently payments will be and then the order of receiving payments – the order is usually random unless there is a compelling reason to help out one or two members of the paluwagan group first.
The mechanics are quite simple. Each member contributes the same amount each week (or month or whatever cycle is selected). One member then receives the collected funds each cycle. The next week all contribute again and the second member receives the collected funds. This continues until all members receive the full funds after which the paluwagan then terminates. In many respects, it is like the terminating Building societies of 18th century England.
A paluwagan payment set of cycles could look like:
There are six members and all agree to contribute 1,000 pesos per month for six months. The payment order is agreed, in this case, Anne, Bob, Charlie, Dave, Edwin and Francine. In January all contribute 1,000 pesos and Anne is then given 6,000 pesos. In February all contribute 1,000 pesos and Bob is then given 6,000 pesos. The cycle repeats until everyone has received their 6,000 pesos.
The benefits of paluwagan are:
- quick access to a lump sum of money
- easy to set up
- no fees
- forces saving
- prone to money problems (dishonest members)
- strained relationships among friends and family
- no interest or profits
The paluwagan however, is effective among friends, colleagues, co-workers and family where all can be trusted and if there is a large group, say 10 to 20 people, and they are contributing 1,000 pesos each cycle, then the lump sum of 10,000 to 20,000 pesos is very useful.
As with all things in the 21st century, there are a number of online frauds and scams to be avoided. However, when lending face-to-face to the paluwagan among a group of trusted friends, colleagues etc. the risk is low.