PATTERNS OF OVERSEAS REMITTANCES AND HOUSEHOLD BEHAVIOR:
AN ASSESSMENT OF FINANCIAL MANAGEMENT PRACTICE OF
FILIPINO HOUSEHOLDS IN LEGAZPI CITY
By
Dylan B. Degarcillanosa
Lea Andrea S. Luna
Paul Higinio M. Riñon
A Research Proposal Presented
To the Faculty of the
College of Business, Economics and Management
Bicol University
Daraga, Albay
In Partial Fulfillment
Of the Requirements for the Degree
Bachelor of Science in Accountancy
Dr. Eddie S. See, Ed. D., MBA, RPAE
Adviser
March 2016
CHAPTER 1
INTRODUCTION
A. The Problem and Its Setting
Introduction
Overseas Filipino Workers (OFWs) have increased in numbers for the past years, so as overseas remittances as well. These remittances makes an invaluable contribution to the spending of a particular household, as it is to the economy as well. It forms part of the significant source of human capital development since such goes directly to household units. These remittances are used to cover various household needs such as food, education, shelter and clothing. Due to this, the Bangko Sentral ng Pilipinas (BSP) has provided financial literacy programs to OFWs and their families to assist them on how to manage these resources well. However, despite the BSP's best intentions, some remittances are still not channeled to proper investments. Consequently, it leads to over consumption having less to save or even nothing to be saved for future use. With the urgency for being financially literate of our OFWs and their respective families more importantly, it is deemed necessary that the correlation between the overseas remittances and their conforming savings and expenditures be studied. Also, to determine where most of the remittances go. The study is also necessary in order to assess the household behavior towards those remittances.
The increase in the number of OFWs leads to rapid growth on the amount of international remittances. Several studies have stated that Philippines is one of the world's largest recipients of remittances. These remittances have been essential in measuring economic growth of the country. Remittances are also considered as single most important source of foreign exchange to the economy and a significant source of income for recipient families. Due to the great influence in the economy, a lot of research works about international remittances have been conducted. However, these studies have focused on the aggregate level of effects of remittances. On the other hand, micro level studies are important and relevant since households are the direct beneficiaries of those remittances. In this study, we will focus more on the specific impacts of the remittances to Filipino household.
Statement of the Problem
The primary objective of this study is to assess the financial management practice of Filipino households and to answer the following questions:
What are the trends or pattern of Filipino household behavior in spending overseas remittances in terms of:
a. Savings
b. Investments
c. Expenditures
What are the financial management practices of OFW households in Legazpi City?
What are the challenges encountered by Filipino households in financial management?
Scope and Delimitation
In this study, it covers all the necessary variables in order to materialize the research. It includes the selected families in Legazpi City who are dependent on overseas remittances, Bangko Sentral ng Pilipinas, National Statistics Office and other organizations that provide information about overseas remittances and its conforming disbursement items. It excludes the families who are not dependent on overseas remittances and families who have income aside from overseas remittances.
Significance of the Study
This research is necessary in order to identify and evaluate the financial management practices of Filipino households on overseas remittances. This will be beneficial to the following:
Families dependent on overseas remittances. After publication of the results obtained and recommendations were made, they will be the direct beneficiaries if certain activities are to be conducted in order to strengthen their knowledge about proper financial management.
Bangko Sentral ng Pilipinas and other organizations. BSP is known to have financial literacy programs where OFW households were the beneficiaries. The result obtained from determination of the trend or pattern of overseas remittances and household behavior will help the BSP in assessing their aforementioned program.
Bicol University. This will serve as stepping stone of the university to widen and deepen their ideas in conducting research. This study also will help the university to extend their external activities to families dependent on overseas remittances.
Department of Accountancy. DOA is under advancement and expansion of their research. This study will contribute to the research aspect of the department since topics about overseas remittances are only few.
The Proponents. Not just for compliance purposes, the researchers' knowledge about the topic will be extended.
Other students. This study will encourage the other Accountancy students to research about overseas remittances or topics that will help in poverty reduction and knowing collective behaviors in finance.
B. Theoretical Background
This section is about the related literature and studies that is correlated with the importance of conducting this research and about how this study should be conducted. This chapter also includes the synthesis of the art, conceptual and theoretical framework.
Related Literature
Personal remittances from overseas Filipinos amounted to US$2.7 billion in December 2015, posting a 4.9 percent growth year-on-year. This is the highest monthly level recorded so far. Consequently, full-year personal remittances from overseas Filipinos reached US$28.5 billion, higher by 4.4 percent than the previous year's level and exceeding the BSP's projection of 4 percent for 2015. Remittances are funds transferred from migrants to their home country. For many developing countries, remittances from citizens working abroad provide an import source of much needed funds. The bottom line is that remittances are an important factor in the global economy as well as in both household and abroad. Remittances are seen as the source of income in each of the sample household in conducting this study.
Expenditures, as defined by the business dictionary, is a payment of cash or cash-equivalent for goods or services or against available funds in settlement of an obligation as evidenced by an invoice, receipt, voucher, or other such document. It is usually proved by receipts and bills provided in most businesses. However, some household transactions are not properly documented with receipts. These expenses are considered small part of household expenditures because large expenses are usually supported with adequate evidences. It can be sub divided in education, food, medical care, travel, household operations and leisure goods.
Saving is the act of economizing money for future use. Savings help workers to achieve financial goal or even financial freedom. It can be use for emergencies, retirement, and vacation and whenever money is needed. Households may save in bank, trust funds, time deposits and other financial institutions or even just at home. Large amounts of savings might have intent of future retirement benefits or college matriculation fee. Small amounts of savings might be use for emergencies, and leisure goods. It is the purpose of saving that determines the amount of savings.
Individual behavior is greatly affected by different factors such as age, income, existing assets and liabilities, and family responsibilities.These factors are important in assessing the financial management practices of Filipino Households.
Age is relevant since it determines both the time span over which regular savings can take place and the level of risk that can be accepted. Age affects the spending and saving of individuals. Expenditures and savings of young people differ from the expenditure of old people. Age determines the needs and varying tastes and preferences that could lead to greater or lesser expenses.
Income, including prospective future income, has considerable significance. Not only a high income allows for high savings but a high prospective future income might also be seen as permitting greater risk taking. Stability of prospective future income is important because a stable and predictable income takes a better position to accept risk from investments than someone with an unstable and uncertain future income.
The form of existing wealth has implications for the nature of additional investments. If existing wealth is low risk, there may be a greater willingness to accept risk from new investments or aversion on taking risk. Financial liabilities also impact on investment decisions. A person with a large mortgage commitment may be reluctant to allocate money to risky investments. Indeed the best strategy might be to use any available money to reduce the debt rather than make investments.
Financial liabilities could also be in the form of family commitments. Someone with dependent children is in a very different position to a person who has no dependents. A person with no dependents can save more and take greater risks with the savings.
Related Studies
"Filipino households' saving rates have been declining", according to Akiko Terada- Hagiwara (2009). According to her studies, households considerably reduced their saving and increased their consumption. Her paper explains that it is due to developed social security system. As a result, household's consumption growth had been higher than income growth from the period 1994-2006.
After being considered as one of the world's largest recipients of remittances, the Philippines received remittances roughly 12% of its gross domestic product in 2008. Remittances have become the single most important source of foreign exchange to the economy and a significant source of income for recipient families. In the study of Alvin P. Ang, Guntur Sugiyarto, and Shikha Jha (2009), major part of the remittances were spend on food consumption. It also showed that those remittances do not have a significant influence on other key items of consumption or investment (education and health care).
Another study also was conducted by Dennis Mapa and Lisa Grace Bersales (2008) about population dynamics and household savings. Their study reveals that high population growth had caused in low household saving rate, thus, resulted to low economic growth. The study also shows that remittances from migrant workers are a major source of aggregate household savings. Another result that they found was the fact that older population which comprises of ages 65 ang above, still saves. Unfortunately, in Philippines' setting, elderly are being victimized by several forms of "scams". It suggest that elderly should be aware or should have at least a background or knowledge regarding proper investment.
"Overseas remittances influence spending patterns of Filipino families", according to Audrey Tabuga (2008). In her studies, families with remittances tend to allocate more on food consumption. The results indicate that having remittance-income influences families to allocate more on basic household needs (such as fuel, light water, household operations, and transportation and communication) and housing and minor repair. It must also be noted that consumer goods and vices, though of little percentage amongst expenditures, sometimes has a larger than of the savings. It should also be highlighted since, it shows that there are families who were not aware of proper financial management.
Audrey Tabuga (2009) studied about how do Filipino families use the OFW Remittance. Stated in this study that investing the money in productive enterprises yields bigger impact on the local economy. The expenditure patterns and investment behavior of remittance-receiving families reflect the general condition of the country, specifically its investment climate. Since remittance-receiving families have tendencies to work more on self-employment activities and enter into enterprises, the government should enhance its role in providing necessary support mechanisms such as sound credit facilities and trainings on entrepreneurship for them to stay in business and expand their enterprises.
Synthesis of the Art
It was evident that some of the reviewed literature and studies were found to be closely related to the present work. There were also some aspects wherein the previous studies differed from the present work and also they have differences based from the previous related study conducted. Researches of Alvin P. Ang, Guntur Sugiyarto, and Shikha Jha on Remittances and Household Behavior in the Philippines; and Aubrey D. Tabuga on International Remittances and Household Expenditures: The Philippines Case, these studies were closely related to study because it analyzes about the effects of remittances on household spending and saving behavior. Akiko Terada-Hagiwara: Explaining Filipino Households' Declining Saving Rate and Population Dynamics and Household Savings: Evidence from the Philippines by Dennis S. Mapa and Lisa Grace S. Bersales explained about the reasons and effects of declining saving rate of Filipino Households which is relevant to the present study.
Gap Bridged by the Study
Based on the review and synthesis of the art, the researchers discovered that there were several studies regarding the household behavior on overseas remittances. These studies primarily focused on one aspect, its either Savings or Expenditures. Some focused on the factors which affect the consumption of those remittances. However, there was no study conducted about relating overseas remittances into savings and expenditures at the same time using quantitative and qualitative analysis.
This was the gap identified by the researchers that the preset study bridged. The researchers therefore, assessed the patterns of overseas remittances and the conforming household behavior towards it. In other words, this study will assess the financial management practice of OFW Households.
Theoretical Framework
In this study the researchers adopted the three major theories of consumption and saving behavior namely, life-cycle and permanent income theories and relative income hypothesis. All three theories have their conceptual roots in the microeconomic theory of consumer choice. These theories are guides to conduct this kind of study.
The life-cycle theory by Franco Modigliani and Richard Brumberg in 1954 has been utilized extensively to examine savings and retirement behavior of older persons. This hypothesis begins with the observation that consumption needs and income are often unequal at various points in the life cycle. Younger people tend to have consumption needs that exceed their income. Their needs tend to be mainly for housing and education, and therefore they have little savings. In middle age, earnings generally rise, enabling debts accumulated earlier in life to be paid off and savings to be accumulated. Finally, in retirement, incomes decline and individuals consume out of previously accumulated savings.
In 1957, Milton Friedman proposed the permanent income theory. It is a theory of consumer spending which states that people base their consumption on what they consider their "normal" income. They attempt to maintain a fairly constant standard of living even though their incomes may vary from time to time. The level of expected long term income then becomes thought of as the level of "permanent" income that can be safely spent. A worker will save only if his or her current income is higher than the anticipated level of permanent income, in order to guard against future declines in income. As a result, increases and decreases in income which people see as temporary have little effect on their consumption spending. An increase in income should not immediately increase consumption spending by very much. These traditional consumption models state that source of income doesn't matter in consumption behavior. Thus, we should expect that households receiving remittances behave like any other households with all other things the same.
The relative income hypothesis was theorized by Dusenberry in 1949. Relative income hypothesis states that the satisfaction of an individual derives from a given consumption level depends on its relative magnitude in the society rather than its absolute level. There are two conclusions about the theory: aggregate saving rate is independent of aggregate income and the propensity to save of an individual is an increasing function of his or her percentile position in the income distribution.
Conceptual Framework
As shown in the Conceptual Framework (Figure 1.2), the household behavior towards overseas remittances is the main idea of the study. This study will identify the behavior towards savings and consumption or spending. In order to assess the financial management practice of OFW households, two methods will be used: quantitative and qualitative method. The researchers will use existing data in order to identify the pattern of remittances and its corresponding household behavior. Guided by this pattern, a structured interview will be done in order to explain and interpret the results obtained from data analysis.
Overseas Remittances
Overseas Remittances
Financial Management Practices
Financial Management Practices
SpendingSaving
Spending
Saving
Life Cycle TheoryPermanent Income TheoryRelative Income Theory
Life Cycle Theory
Permanent Income Theory
Relative Income Theory
Figure 1.1: Paradigm of Theoretical Framework
Input Process Output
1. Statistical Tools* Coefficient of Correlation2. Analysis and Interpretation of Data* Weighted Mean* Percentage1. Trends and Patterns of Household Behavior2. Report on Financial Management Practices of Overseas Filipino Workers Households1. Existing Records or DataBSP's report on Overseas RemittancesNSO's Family Income and Expenditure Survey (FIES) and Labor Force Survey (LFS)2. Responses from Interviews
1. Statistical Tools
* Coefficient of Correlation
2. Analysis and Interpretation of Data
* Weighted Mean
* Percentage
1. Trends and Patterns of
Household Behavior
2. Report on Financial Management Practices of Overseas Filipino Workers Households
1. Existing Records
or Data
BSP's report on Overseas Remittances
NSO's Family Income and Expenditure Survey (FIES) and Labor Force Survey (LFS)
2. Responses from Interviews
Relative Income TheoryLife Cycle TheoryPermanent Income Theory
Relative Income Theory
Life Cycle Theory
Permanent Income Theory
Figure 1.2: Paradigm of Conceptual Framework
Definition of Terms
The following terms are conceptually and operationally defined for better understanding of the readers.
Patterns. A model or representation used to illustrate the overseas remittances and household behavior of OFW households.
Household behavior. Saving and spending approaches of OFW households.
Overseas Filipino Workers. Filipinos who are presently and temporarily out of the country to fulfill an overseas work contract for a specific length of time or who are presently at home on vacation but still has an existing contract to work abroad.
Overseas Remittances. A transfer of money from a migrant worker to their families or other individuals in their home countries.
Consumption. The utilization of economic goods in the satisfaction of wants or in the process of production resulting chiefly in their destruction, deterioration, or transformation.
Savings. The excess of income over consumption expenditures. Consist of the amount left over when the cost of person consumer expenditure is subtracted from the amount of the disposable income that he/she earns in a given period of time.
Expenditure. A payment in cash or barter credits or the incurrence of a liability by an entity, in exchange for goods or services.
Payment of cash or cash equivalent for goods or services or a change against available funds in settlement of an obligation as evidenced by an invoice, receipt, voucher, and other such document.
Migrants. A person that travels to a different country or place, often in order to find work:
Aggregate Saving Rate. An estimate of the amount of income left over after subtracting consumption costs and expenditures. National savings include savings left over from personal, business and government.
Aggregate Income. The total of all incomes in an economy, without taking inflation and taxes into account
NOTES
Hagiwara, A.T., (2009). Explaining Filipino Households' Declining Saving Rate (Working Paper Series No. 178).
Ang, A.P., Sugiyarto, G., & Jha, S., (2009). Remittances and Household Behavior in the Philippines (Working Paper Series No. 188).
Tabuga, A.D., (2008). International Remittances and Family Expenditure Patterns: The Philippines' Case (Volume XXXV, No. 2).
Tabuga, A.D., (2007). How do Filipino Families use the OFW Remittance? (Policy Notes, ISSN 1656-5266).
Mapa, D.S. & Bersales, L.G.S., (2008). Population Dynamics & Household Savings: Evidence from the Philippines.
http://www.investopedia.com/terms/n/nationalsavingsrate.asp
http://www.businessdictionary.com/definition/aggregate-income.html#ixzz419ArOE8x
CHAPTER 2
METHODOLOGY
A. Research Design
This section is about the methods that will be used in conducting the study. It includes the research method, sources of data, population and samples of data.
Research Method
The descriptive method of research will be used in the study. Descriptive method of research focuses on prevailing conditions, or how a person or group behaves or functions in the present. It is also concerned with conditions of relationships that exist, practices that prevail, and trends that are developing. Since the present study is concerned with patterns of overseas remittances and household behavior, and the financial management practices of household units in Legazpi City, the descriptive method of research is the most appropriate method to use.
Sources of Data
The data necessary to determine the trends or patterns of Filipino household behavior in terms of overseas remittances shall be sourced out from existing records. The Bangko Sentral ng Pilipinas provides annual reports on international remittances. The National Statistics Office's Family Income and Expenditure Survey (FIES) and Labor Force Survey (LFS) includes information about remittances with specifications to where it is being forwarded in terms of spending and savings. This shall be significant in the conduct of the study.
In terms of interpreting and evaluating the result obtained from data analysis, Qualitative information is needed which shall be obtained from the responses in the structured interview. The respondents will be families from Legazpi City who are dependent on overseas remittances. The questionnaires shall be administered unto the selected families dependent on overseas remittances in the same place.
Population and Samples of the Study
Legazpi City is a home for many families who rely on remittances coming from relatives - overseas Filipino workers. Because the study will focus on assessing the financial management practices of the household units in Legaspi City, to make the assessment possible, a sample of fifteen (15) families will be chosen. The sampling units will be chosen through pure random sampling. Pure random sampling enables every element in the sample population to be given an equal chance of entering the sample, and the use of it in the study is deemed the most appropriate.
B. Methodology
Research Instrument
A structured interview schedule designed by the researchers will be employed in the data gathering. The respondent will be asked based on a predetermined and identical set of questions.
The instrument schedule was divided into four parts. The first part consists of the necessary basic information about the respondents. The second to fourth parts deal with the required pieces of information relating to income, expenditures, and savings. Such are significant in assessing the financial management practices.
Data Gathering Procedure
The methods of collecting data that will be used in the conduct of the study are through analysis of secondary data and structured interview. This is concerned with yielding a more complete and valid information. Since the present study concentrates on assessing financial management practices, such methods will be the most appropriate in gathering the necessary data.
The secondary data will be obtained through the published records of the Bangko Sentral ng Pilipinas and National Statistics Office's Family Income and Expenditure Survey (FIES) and Labor Force Survey (LFS) which are both available on the internet. The secondary data will be utilized because it is more convenient to use for it is already condensed and organized. The instrument to be used in collecting data will be through an interview schedule. This will be used because it gathers data faster than any other method since the researcher can get a purposeful face to face relationship with the respondents. The researchers will visit their target respondent in their respective houses where the interview will be conducted.
Statistical Treatment
All gathered data will be organized, tallied, recorded and finally evaluated by the researchers.
The following statistical tools will be used to analyze the data gathered:
Coefficient of Correlation. This will be used to determine how the data about the remittances vary with the data about the expenditure items of Filipino households.
Weighted Mean. This tool will be very helpful in determining the quantitative measure of the responses in the value scale. The descriptive value in the scale will give the corresponding interpretation of every piece of information.
Percentage. This will be used to express the size of one figure in comparison with the others. Its formula is:
P = (f / n) x 100
where: P = percentage
f = frequency
n = total number of respondents
