The Role of Land Pawning in Securing Loans: The Case of Sangla in the Philippines

This paper explores the concept of 'sangla' - a land-pawning contract in which the pawner temporarily transfers his cultivation rights to the pawnee in return for a loan and can redeem these rights upon loan repayment.

The paper:

• Examines literature about the background and determinants of choosing 'sangla' and discusses the problems associated with these views;
• Presents evidence that 'sangla' is a more profitable measure for borrowing than the land-pawning contract stipulating that mortgaged land can be forfeited in the event of loan default;
• Describes the situation of land-pawning and the basic conditions under which 'sangla' increased through a comparison of five rice-growing villages;
• Contains a comparative profitability analysis of two types of land-pawning;
• Presents an alternative hypothesis on the determinants of choosing 'sangla' and offers empirical evidence to support the hypothesis;
• Explains the reasons why small-scale farmers, who are engaged in high-salaried off-farm jobs, prefer to lend their surplus funds to large-scale farmers.

The paper concludes that:

• 'Sangla' contracts were chosen by income-maximizing farmers, on the basis of rationality, irrespective of reform-law restrictions;
• 'Sangla' is a rational institution that promotes the mobilization of unused investment funds in rural areas, and is an institutional innovation devised by farmers to adapt to changing economic circumstances.

The paper recommends that the government prioritize reforming the legislative system to improve rural credit markets and promote indigenous innovations like 'sangla'.