Abstract
Chapter 3 presents an analysis of commercial-based finance and credit schemes most notably payday lending and mobile banking. The chapter begins with an analysis of the motives, politics, and ethical considerations of commercial engagement, via credit and finance schemes, with vulnerable people. Commercial motivations for providing credit and finance are, by definition commercial, to generate profit, revenue, and/or market share. These motivations create challenges, from an ethical perspective, when asymmetric power (of banks as compared with vulnerable people) enables the bank to take advantage of the consumer. The chapter digs deeply, through results from research undertaken by the author and colleagues into payday lending and mobile banking. It finds that payday lending in the Global North, particularly Canada and the United States, can harm vulnerable people if the payday lenders rely on repeat borrowers. Mobile banking, particularly in Kenya and Bangladesh, has focused on money transfers, and the evidence is that, in this limited form, it can marginally assist vulnerable people. If mobile banking is linked with small loan schemes, then the outcome might change.
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Notes
- 1.
An annual interest rate is a tool to present the full cost of a credit product for a one-year period. Providing the interest rate in this form allows the person to compare different credit products. In some cases loans are for one year so that the interest rate presented by the creditor is an annual rate. In other cases the loan is for longer than one year, for instance, a large loan or a mortgage, and once again, it is helpful to provide the borrower with the annual interest rate. In many cases of credit for vulnerable people, the credit term is for less than one year, for instance, pawn loan or payday loan. Again, to enable comparing prices across products, an annual interest rate is helpful.
- 2.
Annual percentage rate, APR , is a formula that enables the conversion of an interest rate for a short term into an interest rate for an annual term. This allows the prospective borrower to compare credit products of different durations such as a payday loan and a credit card. APR is a linear and non-compounding method using a formula akin to the following: APR = (loan fees/loan principal) (365/12). Effective annual rate, EAR, is another formula to convert term interest rates into annual interest rates and involves compounding. It involves a formula akin to the following: EAR = [((loan principal + loan fees)/loan principal)(365/T)—1][100%].
- 3.
Economic thinking and policy are partly responsible for this confusion. Neoclassical economics is the dominant or orthodox theory in the economics discipline today. This school of thought focuses on increasing efficiency or boosting economic growth and encompasses many central assumptions, and it regards markets as the most effective means to organize much of the economic realm, with the role of the state and civil society as being secondary. Neoclassical economic theory informs economic policy, that is, the rules, regulations, and laws that govern economic interaction. The dominant economic policy today is neoliberalism, dominating most of the world. (North Korea is an exception, and China embraces some but not all aspects.) The orthodox approach applies limited thought to the relationship between economic and human goals, Amartya Sen being an important exception. Sandel notes that the scope of the economics discipline has expanded in the last 30 to 40 years, and this is an important indicator of financialization. He notes that a key textbook in economics in the 1960s was Paul Samuelson’s Economics and that in the 1958 edition it defined economics, relative to today, narrowly, with a focus on “prices, wages, interest rates, stocks and bonds, banks and credit, taxes and expenditure” (Sandel 2012, p. 84). Sandel notes that the scope of economics has dramatically expanded today as evidenced in Greg Mankiw’s, a prominent economist today, expansive definition, “An economy is just a group of people interacting with one another as they go about their lives” (Sandel 2012, p. 85). Further evidence is the rise of the use of the word incentive that was rarely used in economics in the past but is now common fashion in economics and popular culture. According to Sandel the use of the term increased by over 400% between the 1940s and the 1990s (Sandel 2012, p. 86).
- 4.
The microcredit literature has tended to downplay ethical issues. However, there is a small body of literature that examines ethical issues, including high interest rates, damaged social relations within borrowing circles, and stressed intra-family gender relations. These points will be dealt with in Chap. 4.
- 5.
A finance professor colleague with expertise in consumer finance and payday lending was presented with a payday loan contract and reported being “baffled’” by it. I certainly could not understand the contract. If that was our experience, imagine how a typical low-income consumer feels.
- 6.
There is an interesting circle of ethical critique. Critics of poverty finance might themselves be critiqued for “blaming the business”, that is, blaming the creditor even though he/she may simply be operating a business. For instance, in interviewing a pawnbroker, I shared with him the critique that pawnshops were charging excessive fees for loans to very poor people. His response was that he was simply running a business and that in comparison, mainstream banks were earning much higher profits and were therefore more exploitative. There is also the counter-critique of fringe bank consumers that says they are making unwise decisions and that their use of fringe banks is their own fault. Interestingly, I have heard mainstream bankers voice this notion when asked about the existence of payday lending. This is sometimes referred to as blaming the victim. A more general ethical critique is that it is not the borrower or the lender but the system that is exploitative. In this case, the borrower may be doing her best, and the lender may be doing his best, but because of structural inequalities the borrower is harmed or helped much less than the lender.
- 7.
In Canada the automation of banking accelerated in the 1980s (Brennan et al. 2011). Automation was one trend, and, second, banks reduced and consolidated their branch networks. There is evidence in some cities in Canada that this branch network rollback process led to a particular decline of branches in low-income neighborhoods.
- 8.
International remittances are a growing feature of the global economy, and it is estimated that they were valued at $401 billion in 2012 and intra-country remittances (from urban to rural, etc.) were valued at “several times more than that” (World Bank 2014, p. 55). The use of remittances, according to the World Bank, holds the potential to foster financial inclusion.
- 9.
In interviews that I have done with low-income people in Canada, I find it significant that often respondents will not distinguish between what I refer to as mainstream, fringe, or informal financial service providers. For these respondents, there is little difference between the types of banks, and the issue is simply the different types of services they provide.
- 10.
An excellent source of material on informal financial services in the Global South is the book Portfolios of the Poor by Daryl Collins et al. (2009). It is a book that distills key insights from an intensive panel research methodology called the financial diaries. This methodology carefully tracks participants’ income, spending, saving, and dissaving over the course of an entire year and was undertaken with poor people in Bangladesh, India, and South Africa.
- 11.
Islam and historical Judaism share prohibitions on interest charges. Within the Jewish tradition there is even a resolution to debt-led impoverishment: the year of jubilee takes place every 49 to 50 years and involves returning land that had been lost—for example, sold off to pay off debt—to its original owner.
- 12.
Where did the market for fringe financial services come from? One theory is that fringe banks have expanded into the market previously controlled by informal financial service providers such corner stores offering check-cashing services and bars offering credit services. A second theory is that the fringe bank market opened up when mainstream banks consolidated their branch networks and services and pulled out of many low-income neighborhoods. The truth probably encompasses elements of both of these points, recognizing that payday lenders offer services to modest middle-income customers who are credit constrained. So consumerism is a factor that should be kept in mind.
- 13.
The rent-to-own model is a little different in that it is associated with directly linking consumer purchase with a loan option.
- 14.
For instance, National Money Mart Inc. and Western Union Canada and Western Union Canada, Scotiabank, and BMO/Interac
- 15.
“Developmental” services include savings, investments, mortgages, credit repair, and credit building.
- 16.
Cash America claims to be one of the largest pawnbrokers in the United States, offering services through a number of names and has grown by 260 outlets in the last five years, for a total of 943 outlets in 2014 (Cash America 2015, pp. 2–3). Its main service is pawnbroking, but it also offers second-hand sales, payday loans, check cashing, money wiring, and so on. It recently sold off its pawn locations in Mexico and formed a new company, Enova, to run its online payday lending services. In 2014 Cash America’s pawn loans were over six times the amount as its consumer loans (p. 36). The company operates 7% of pawnshop outlets in the United States, with a total of 14,000 pawn outlets in the country. In its latest 10-K report, it noted that it continues to “de-emphasize” non-pawn “consumer lending” in order to focus on pawn loans (p. 39).
- 17.
Until 2013 DFC Global and its forerunners were publicly traded US corporations that regularly reported to the US Securities and Exchange Commission. Since Lone Star Funds purchased it, these data are no longer available.
- 18.
This section is based on research completed by Jerry Buckland and Iqbal Ahmed Chowdhury (2015).
- 19.
Alternatives to bKash include other mobile bankers like Dutch-Bangla Bank, but these respondents have no experience with that bank.
- 20.
Clients were charged Tk 20 to send Tk 1000, but some of them understood that this charge was rounded up from the official charge of Tk 18.50 per Tk 1000. Clients understood that if they were to send their funds via their mobile phone to the recipient’s mobile phone, the fee would increase by Tk 5, for a total of Tk 23.50.
- 21.
Other options for wiring money include the post office money order which, according to some respondents is cheaper, at Tk 12 to send Tk 1000, but slower as it takes up to one week for the money to reach its destination. Money courier is another option which is fast but costly at Tk 63 to send Tk 1000. The clients have also used an informal system to send money. This system requires more elaborate planning, or a coincidence of interests, and is particularly useful if several neighbors or family members are sending money from the same location to the same home destination. The arrangement is that one community member takes the money home for the group.
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Buckland, J. (2018). New Areas of Commercial Banking Directed at Vulnerable People: Payday Lending and Mobile Banking. In: Building Financial Resilience. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-72419-5_3
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