Credit Financing Options of Local Government Units

In the Local Government, credit financing has an important role in local

development. Prior to the Enactment of the Local Government Code, PD 752 was issued
to answer for the increasing demands of the Local Government’s financing. It authorized
the Local Government Units to avail of credit facilities in order function and develop. The
law however, provides that the Local Governments may only get loans from the Local
Government Financial institutions and therefore is limited.

The Local Government Code however, broadens the power of the Local
Governments to create indebtedness and to enter into credit and other financial
transactions. According to the Local Government Code, Local Governments may avail of
credit lines from the government or private banks and other lending institutions for
purposes of stabilizing local finances. It provides:

Section 296. General Policy. -

(a) It shall be the basic policy that any local government unit may create
indebtedness, and avail of credit facilities to finance local infrastructure and
other socio-economic development projects in accordance with the
approved local development plan and public investment program.

(b) A local government unit may avail of credit lines from government or
private banks and lending institutions for the purpose of stabilizing local
finances

The Local Government code also provides that:

Section 297. Loans, Credits, and Other Forms of Indebtedness of Local

Government Units. -

(a) A local government unit may contract loans, credits, and other forms of
indebtedness with any government or domestic private bank and other
lending institutions to finance the construction, installation, improvement,
expansion, operation, or maintenance of public facilities, infrastructure
facilities, housing projects, the acquisition of real property, and the
implementation of other capital investment projects, subject to such terms
and conditions as may be agreed upon by the local government unit and
the lender. The proceeds from such transactions shall accrue directly to the
local government unit concerned.
 (b) A local government unit may likewise secure from any government bank
and lending institution short, medium and long-term loans and advances
against security of real estate or other acceptable assets for the
establishment, development, or expansion of agricultural, industrial,
commercial, house financing projects, livelihood projects, and other
economic enterprises.

(c) Government financial and other lending institutions are hereby

authorized to grant loans, credits, and other forms of indebtedness out of
their loanable funds to local government units for purposes specified above.

Under the Local Government Code however, the issuing of bonds, securities and
other modes of acquiring credits is still subject to limitations set forth by the Bangko
Sentral ng Pilipinas and the Securities and Exchange Commission.1

By availing of this credit financing system, the Local Government Units ready
source of funds for whatever necessities that may arise. They can readily implement
projects that will redound to the benefit of its constituents especially for infrastructure,
health care, education, water system, disaster management, power generation, etc. .

There are 4 steps for a Local Government Unit to initiate the making of a credit.
First, they must Prepare a Local Development Plan (LDP) and an Annual Investment Plan
(AIP) as a pre-requisite, a basis for local credit is necessary. This includes listing the
projects that the Local Governments will carry out. Second, they must secure Authority
from the Sanggunian. The Sanggunian shall issue an Ordinance authorizing the Local
Government Units concerned to borrow. Information and documents, duly signed by the
Sanggunian, must include purpose, source, amount, terms and conditions of the
borrowing and the commitments of the Local Government Unit. Third, they should
empower the Local Chief Executive to negotiate. The ordinance and shall authorize the
Local Chief Executive (LCE) to negotiate for and in behalf of the LGU. And last, assign a
person or team to coordinate and prepare the requirements in detail assigned
person/team shall report directly to the LCE on the task at hand.2

There are different forms of local indebtedness; loans, credits and other forms of
indebtedness, bonds and other long-term securities, inter-local government loans, grants,
and other subsidies, loans from funds secured by national government from foreign
sources.3

1 An Act Providing for a Local Government Code of 1991 [Local Government Code], Republic Act No. 7160, § 299
(1991)
2
Local Government Credit Financing, 25 NTRC TAX R.J. 1,4 (2013)
3 Gereibeth Dela Torre, LGU Credit Financing in the Philippines, available at

https://www.unescap.org/sites/default/files/PHILIPPINES_presentation.pdf (last accessed March 14, 2019)

 Bank loans offered to Local Governments can be classified into four (4) categories:
Term Loans which the Local Governments use for capital projects and which mature
usually after a year; Transaction Loans which are loans granted for specific purposes;
Line of Credit in which a special arrangement where banks allows the Local Governments
to borrow a maximum amount of money at any one time; and Revolving Credit where the
bank’s commitment to lend a maximum amount for a duration that an LGU can withdraw
upon request.4 They may avail of these loans from Government Financial Institutions
(GFI) such as the Land Bank of the Philippines, Development Bank of the Philippines,
and the SSS.5

The goal of every local government is to develop projects and improve services.
This needs heavy amount of funding. Local Government Units can avail credit financing
through a number of ways to enable them to finance projects. With this, they will be able
to fully develop and achieve the constitutional mandate to have self-reliant local
governments with more resources and responsibilities.

4 Local Government Credit Financing, 25 NTRC TAX R.J. 1,7 (2013)

5 Id.