Social issues caused by loan sharks and how it could be combated by cooperatives supported by technology, in addition to an Environmental, Social and Governance (ESG)-focused supplier management programme
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Photo by Tima Miroshnichenko
Written by Zeng Han Jun
The pandemic has left many people without proper means of survival in many countries. Several countries have turned to borrowings so that they could extend handouts to businesses and people. Some countries have begun to study the possibility of tendering out large construction projects to create new infrastructures and jobs. Massive reorganisations are taking place at the international and domestic levels.
A few cities are focussing their efforts on international trade through online platforms and repositioning with a blue and green economy because their traditional means of livelihoods might be disrupted in the near future. A small number are readying some of their industries as if preparing to pounce on new opportunities. In short, it is dizzying to see so much action within such a short period, more so when the pandemic has exposed weaknesses of many personal decisions, sectors and governance systems.
One particular issue stood out glaringly for me during the pandemic, i.e. Loan Sharks. Loan sharks usually provide financing services to those from the lower-income group. These people usually do not have stable income and also do not have proper documentation to obtain loan from a traditional bank. This is where loan sharks will step in to value-add.
Just to share a little about my undergrad experience; I worked as a part-time credit officer at Standard Chartered Bank throughout my university days and my work involved performing credit analysis for the consumer branch and later I helped out with the administrative work for the credit risk covering the industries. At the end of that stint, I found out that money lending is not really that easy because it is a challenge for the money lender to ensure that the borrower is able to pay up.
To this, the credit officers might have to ensure that they have liens over some form of assets that are held by the business or individual. In case the business or individual is unable to cover the loan payments over a certain period (usually three months – we used to refer to it as three buckets), the bank will be able to exercise their rights to claim these assets and recover at least a part of the debt. Additionally, we were also instructed to pore over the cash flow records of the businesses or individuals and ensure that only borrowers with healthy cash flows are eligible for loans. Naturally, loan applicants who are working in certain stable professions, were the safe ones to endorse for lending.
I used to think that credit officers are at the short end of the stick. Later I found out that somehow or rather everyone is at the short end of the stick because ultimately, private enterprises are not charities and every department has bottom lines to meet and positions to secure. Even charities have KPIs, returns and positions to secure! Some loan applications seem like “there’s more than meets the eyes” so we need to call up the frontline sales officer to explain about the situation and maybe get them to obtain more documents from the customers.
We often get back an earful from those front-office lots, about how they are bringing in the business to the bank and sustaining the salaries of those like us. And that we are just sitting by the phone, mouthing no to everything without a single idea of how the real world works. At the other end of the table, my supervisor will warn that if we let a bad apple in, our head will be on the chopping boards, not her fault and also not the front-line sales officer’s fault. I was just an undergrad part-timer! Luckily back in those days, we had vending machines that provided free drinks to cool us off from these ordeals.
So the lesson from this experience (for myself) is that; getting a loan from a bank is not as easy as one might have expected, and this is even when the loan applicant already has the full set of proper records. A lot of effort is spent on verifying the sources of income, assets and existing debts, all of which depends first on having proper documents.
So what about those without proper records or from lower-income groups?
Well, they mostly turn to loan sharks.
When I was serving my national conscription as a law enforcement officer, I spent about one year as a uniformed patrol officer and later had to be transferred away to assist with the plainclothes operations for another year. We supported very deep operations against anti-vice activities, illegal immigrants, gambling activities and also, loan sharks activities. At that time, I already thought that loan sharks are a very troublesome group of people.
Loan sharks.
The fact is; these loan sharks provide financing service to those without proper cash flow records and usually to those who belong to the lower income group or maybe even illegal immigrants. They charge interest rates beyond what the banks offer because the risk that they undertake is very high. In some instances, borrowers often have nothing else to their names except their lives. Sometimes, the borrowers have to borrow even more money to pay off the interest incurred from the earlier debts and this might trap the borrower in the debt cycle forever.
Depending on the situation, some borrowers might end up becoming labour for the loan sharks, as a means to pay off the debt. In others, a few borrowers end up committing suicide. For example, in some societies, farmers borrow money to buy seeds in hope that they can sell the produce for a profit later. However, the resulting crops might be paltry because of poor weather conditions, poor farming techniques, poor soil condition or maybe a mixture of these conditions. Unable to pay their debts and stuck in an infinite debt cycle, some hang themselves and sadly, a few turn to selling their children to finance a little of their debts in order to survive.
It’s heart-breaking.
Companies could unknowingly tap onto this pool of workforce or exacerbate this problem in some ways when they procure products and services, which is why it is very important to include responsible sourcing as part of a Environmental, Social and Governance (ESG) – focused supplier management programme. Responsible sourcing is a method of approaching sourcing and supply chains. It occurs when a company actively and consciously sources and procures products and services for its operations in an ethical, sustainable, and socially-conscious manner. This means that an organisation must ensure that its business practices – both within its own corporate walls and throughout its supply chain – have no negative impact on the environment AND the people.
Working through the supplier management programme is one way to lessen the social effects from loan shark lending.
Other than that, I am suggesting another approach, a more hands-on and albeit more difficult one. It’s more like a long-term Corporate Social Responsibility (CSR) project that underpins its approach with support from right-sized technology and the idea of setting up a cooperative ecosystem.
As written on Wikipedia, it stated that cooperatives are:
“A cooperative (also known as co-operative, co-op, or coop) is “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise”. Cooperatives are democratically owned by their members, with each member having one vote in electing the board of directors. Cooperatives may include:
1. businesses owned and managed by the people who use their services (a consumer cooperative)
2. organizations managed by the people who work there (worker cooperatives)
3. multi-stakeholder or hybrid cooperatives that share ownership between different stakeholder groups. For example, care cooperatives where ownership is shared between both care-givers and receivers. Stakeholders might also include non-profits or investors.
4. second- and third-tier cooperatives whose members are other cooperatives
5. platform cooperatives that use a cooperatively owned and governed website, mobile app or a protocol to facilitate the sale of goods and services.”
In the case of farming, a farming cooperative manages a number of interconnected activities such as production planning, growing and harvesting, grading, packing, transport, storage, food processing, distribution, and sale. This type of cooperative can also be formed to promote specific commodities such as various types of spices, vegetables or shrimps, etc. It is better to structure cooperatives according to the range of commodities that are being farmed within a region. This so that the farmers who are better at producing certain products, could share their best practices with the rest who may not be performing as well.
When farmers band together like this, they also enjoy synergies such as having the ability to promote their product together which in turn improves their bargaining power and hopefully leads to better profits. Farming cooperatives can also be formed by small businesses to pool their savings and gain access to capital, acquire supplies and services, or market their products and services.
Members could contribute to the cooperative’s operations and growth by:
- Membership fees that are paid once or on an annual basis;
- Service fees, for example, are member contributions with no individual ownership attached;
- Capital contributed by members;
- Individual members make deposits with the cooperative that can be used for business purposes; and
- Members can receive deferred payment for a portion or all of their produce delivered to the cooperative.
Cooperatives also frequently use external sources of funds to run their operations or finance investments, in addition to institutional and member capital. Non-member sources of funds could include other cooperatives or commercial banks, suppliers, government or donor agencies, and so on. External funding can be provided in a variety of ways, including grants, short-term loans, long-term loans or trade credit provided by a supplier. In fact, forming a cooperative and then using the pooled money to buy some assets, can improve its gearing ratio. This means that the cooperative might be able to borrow money at a lower interest than if one were to borrow directly from a bank.
Once the cooperative is set up, they are in the best position to lend money because they understand the issues within the farming community. The members who are better at farming, could help to share best practices and also determine if a farming idea is viable for financing. Surely one would listen to those who have had more experience or performed better than oneself right?
Right?
On the technology front, I am not suggesting for even more advanced technology. On the contrary, I wished that technology companies could take a step back and cater to the rest who may not be able to catch up. I had the good fortune to visit a rural farming community in India before the pandemic started. From this experience, I learnt that the people who are living in the rural areas need simple 3G enabled phones, 3G internet network, software or online marketplaces that can be supported by 3G internet and a logistic ecosystem that would work with all these components. They need these systems in place so that they could communicate with the potential buyers who may be located out of town and receive payments for the service rendered. The technologies could be introduced through the cooperatives.
Once they are able to receive money from new sources of buyers, they could again pool the money into the cooperatives. Cooperatives are also good training places to nurture the local people into administrative positions such as investment, finance, corporate development, marketing, and encourage the community to work together. All these work together to make the community a better supplier for most buyers. Also, buyers can also nurture new sources of supply through cooperative arrangements and mitigate any supply-side risks.
With these options in place, people from the lower-income groups will have financing alternatives other than turning to loan sharks. To be honest, cooperatives are not new and have been used to extract lower-income communities and even public officials from the grasp of loan sharks in some societies. Together with technology, it could even uplift the lives of the vulnerable and help them to secure better livelihoods.
References
Malay Mail. (2020, November 15). ‘Strangled by debt’: Coronavirus deepens Cambodia’s loan crisis: Malay Mail. Retrieved from https://www.malaymail.com/news/money/2020/11/15/strangled-by-debt-coronavirus-deepens-cambodias-loan-crisis/1922817
Naheed Ataulla & Anand J / TNN / Updated: Jul 27, 2. (n.d.). How loan sharks pull poor farmers into a debt trap: India News – Times of India. Retrieved from https://timesofindia.indiatimes.com/india/How-loan-sharks-pull-poor-farmers-into-a-debt-trap/articleshow/48230786.cms
Yasmina Hatem, L. D. (2021, January 07). India has a farmer suicide epidemic – and farmers are protesting new laws they fear will make things worse. Retrieved from https://www.businessinsider.com/india-farmers-protest-law-suicide-epidemic-2021-1?op=1
