Predatory lending practices within the U.S. payday loan industry are becoming more widely recognized as advocates, including many in the faith community, push for reforms.
The Consumer Financial Protection Bureau (CFPB) has been analyzing the industry for several years, recently publishing a set of proposed regulations to address, among a number of issues, exorbitant interest rates and hidden fees that engender debt cycles.
Many columns and news stories on this issue have appeared on EthicsDaily.com.
A free PDF download to aid congregations in understanding and engaging this issue has been published – including links to resources from the Christian Life Commission of the Baptist General Convention of Texas and from the Cooperative Baptist Fellowship.
In observing the steady increase in concern about predatory lending within the payday loan industry, I’ve wondered: How widespread is this problem within the microfinance industry?
I first looked into the pros and cons of these small loans that are often provided to entrepreneurs to fund business initiatives as a means to escape poverty in a 2013 column.
Microfinance appeals to the ultimately mistaken, but nevertheless influential, concept of “pulling yourself up by your own bootstraps.”
It seems to strike a balance between the much-used dichotomy of giving a “hand up” rather than a “hand out.”
It has appealed to those who wish to help impoverished persons better their lives, and a number of Christian organizations have either established their own microfinance initiatives or set up means to support other organizations’ lending efforts.
Hugh Sinclair, a microfinance consultant who works to ensure fair lending practices within the industry, contacted me soon after my 2013 column was published.
He shared some insights based on his personal experience, and several of his columns highlighting problems within the industry have appeared on EthicsDaily.com.
While an altruistic motive remains the driving motivation behind many microfinance initiatives, Duncan Duke, assistant professor of management in Ithaca College’s School of Business, explained that many for-profit banks are now involved in microfinance.
As a result, the loans “are not always tied to starting or operating a small business,” explained Duke. “Now people can just use them for personal consumption; to buy TVs, to pay their children’s school fees, or to repay other loans.”
He is currently researching microfinance in northern Mexico and is seeking to determine “to what extent microfinance has gone from being an instrument for addressing poverty to becoming the new moneylender – essentially payday loans and predatory lending.”
Chuck Waterfield, founder of Micro-Finance Transparency, addressed negative aspects of microfinance in a 2015 interview with The Wall Street Journal.
“It is rare to find a microloan with interest of less than 30 percent, and in many countries the average rates are 75 percent to 100 percent,” he explained. “There are serious doubts about the client being better off after paying all that interest.”
Waterfield also noted that microloans often have flat interest rates requiring borrowers to pay a fixed percentage on the original loan amount until it is fully paid off – increasing significantly the amount of interest owed.
Keith Collet, editor-in-chief of the Arizona Journal of International and Comparative Law, also highlighted the shadowy side of the industry in a detailed 2015 analysis.
“Some microfinance institutions have done little more than take the place of the loan sharks and moneylenders that preceded them, and borrowers are in the same impossible predicament when it comes to repayment of loans,” he said.
Loans are often not properly vetted to ensure the borrower can repay the debt, Collet explained, and individual loans are often “secured with the personal belongings of the borrower.”
“Under this system, borrowers risk losing possessions such as silverware, clothing and furniture,” he noted. “Microfinance banks frequently act upon their ability to claim borrowers’ personal property.”
Collet concluded, “Free-market forces have failed to police the organizations involved, change must come from a new direction: approaching predatory lending as an issue of human rights instead of fiscal policy or international enterprise.”
The central issues within microfinance relate to loan terms that are determined largely by the lender’s motive. Is the lending initiative primarily philanthropic (a means to address poverty) or economic (a means to make money)?
With regulations / oversight, as well as proper personal / organizational motives, microfinance can be a means to fund entrepreneurial initiatives to help people work toward a better financial situation.
Otherwise, as with payday loans, they too easily become simultaneously a crutch for borrowers that enables unwise financial decisions and a means for unscrupulous lenders to exploit already-impoverished individuals and families by trapping them in debt cycles.
Awareness of, and opposition to, predatory lending practices within the U.S. payday loan industry is a welcome trend.
Hopefully, this increasing skepticism and scrutiny of loan terms and outcomes will carry over into global microfinance initiatives – particularly with those run and/or supported by people of faith.