Pawnshop Theoretical Background Free Essay Example

Pawnshops offer financial services known as micro-lending which is an important source of credit in many developing countries, especially in Asia. Pawnshops can provide these financial services to poor and low-income households for a variety of reasons. One is that pawnshops fall under less regulation than other financial institutions. Pawnshops used to operate like a sari-sari store with very little government control. In fact the only time these units came into contact with government agencies was when they paid business registration fees and income taxes.

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They were not even covered by the usury law enacted in 1916. (Mario Lamberte – 1988) Another reason pawnshops can provide these financial services to poor and low-income households is that their loans are backed by hard assets which lowers the transaction cost to the borrower and the lender and eliminates the need to analyze the borrower’s creditworthiness.

Over time the pawn item has changed. In the past, for example, Mario Lamberte noted (1988) that “pawnshops have preferred lees bulky items high-value items like jewelry.

With the advent of more competition pawnshops have broadened the type of items they accept as collateral” (page 14). This change continues today with the acceptance of computers, cell phones and other electronic devices as collateral. Because of the efficiency of pawnshop operations, they have been shown to be a profitable business.

A study for the Philippine Institute for Development indicates that efficient management of pawnshops allows 25% of the gross operating income to flow to the bottom line as net profits (Lamberte, 1988). In 1999, there was one (1) pawnshop for every 8,756 people in the country and today in the Philippines there are more than 10,000 registered pawnshops and 5,000 pawnshop owners according to BSP that is up close to 3000 Pawnshop in 2000.

This figure far exceeds the number of banks and bank owners in the country.

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