Thursday, 29 September 2011

Sympathy for loan sharks (No, not really)

The papers have recently been full of stories about the impact certain government decisions might have on the micro-lending industry. Apparently the decision to stop deducting payments from government staff directly from their salaries will adversely affect the companies that have lent them money. I suppose the assumption is that if public service employees have to make these payments themselves from their bank account they’re more likely to spend the money on having fun rather than honouring their financial obligations.

That’s probably true of some of them although it’s certainly unfair to the vast majority of public servants who are decent and honourable. They’ll make sure that they pay their bills some other way. I’m sure that the banks will make it easy for people with debts to make their monthly payments by direct debit. Who knows, maybe the banks might come up with ways of transferring people’s debts from micro-lenders to the banks? At least that way they’ll be indebted to an industry that is effectively regulated? I imagine that the borrowers are the sort of people the banks want anyway, they’re all employed by the Public Service after all, they’re very unlikely to lose their jobs. OK, they might if they go on strike again and withdraw essential services but salaried Public Service workers must be a pretty safe bet for the banks.

So I suppose I should feel some sympathy for the micro-lending industry? Even though perhaps just a small proportion of their victims, sorry I meant customers, will fail to make the repayments it will nevertheless hit the lenders hard and in the place it hurts the most: their corporate bank balances and the miserable dividends they’ll be able to pay their. So yes, I should be really sympathetic towards them. My heart should bleed.

Sorry, I can’t keep this up any longer.

It’s hilarious, it really is. Micro-lenders are finally facing a challenge. They’re finally facing the reality of the moneylending marketplace. Their deeply creepy business model is facing the prospect of failure for the first time.

My heart does not bleed for them, not even a little bit. My reaction to their plight? Tough. And that’s the polite version. The wonderful irony is that this challenge isn’t coming from a regulator or some nasty, mean and unforgiving government agency, it’s just coming from the marketplace. For reasons beyond their control much of their customer base is being removed and I think it’s really rather enjoyable. Yes, I know it’s mean and heartless of me but I don’t care. Every so often the universe aligns itself in the direction of justice and this is one of those occasions.

For too long the micro-lending industry has had thing their own way. The disreputable part of their industry has been abusing people shamelessly for years. Even the more reputable lot has been charging shocking levels of interest.

Just a few months ago we received a complaint from a victim of one of the less scrupulous loan sharks. Sorry, am I meant to call them all micro-lenders? The victim had borrowed P1,000 for 2 months. However, and he claims without foreknowledge, the borrower ended up in hospital for a while and was unable to pay the shark his money back. However, being a decent guy he kept the shark informed and was told not to worry about it. Indeed he wasn’t worried at all until he finally got in touch with the shark nine months later only to be informed that he now owed the fishy character a massive P10,500. Before you react badly I feel obliged to say that the maths was correct. Ignore an initial debt loan of P1,000 for 9 months at an interest rate of 30% per month and you will indeed end up owing P10,604.

For comparison, if he’d borrowed the same amount from a bank (I’ve used the highest monthly bank interest rate I could find) he would have ended up owing a mere P1,838.

It was when faced with this enormous bill that he came to us, asking if there was anything he could do to avoid this hideous debt. Just before he contacted us he said the shark had threatened to write a letter to his employer and to take legal action against him.

The wonderful irony is that being taken to court by this slimy fish would be the very best thing that could have happened to him.

There is a little-known piece of common law called the “in duplum” rule. According to the very learned Judge Dow:
“the in duplum rule serves to aid debtors in financial difficulties by holding that it is unlawful to recover interest equal to or more than the capital sum upon which interest had accrued” [and that] “the in duplum rule cannot be waived and circumvention of the rule cannot be tolerated by courts”.
In simple terms a loan shark cannot enforce a debt of over P10,000 for an initial loan of a mere P1,000. The court will laugh in the loan shark’s face. However many micro-lenders are relying on borrowers’ understandable fear of going to court to extort these enormous repayments. Nobody wants to end up in court but the irony is that that’s where the law is best applied. Outside of court the shark can demand whatever he wants. As soon as real law is applied things are more decent.

Of course I’m not suggesting that the big micro-lenders, the ones that are currently spending all day in the lavatory wondering if they’ll still exist in a few months time, are like this. Of course they’re not. But am I sympathetic to any micro-lender?

No. Let them stay in the toilet where they belong.

This week’s stars
  • The management team at Beares for fixing a problem with maturity, professionalism and style.

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