Loan Sharks - the root cause

By: Teo Lee Ken

The common question being asked these days must surely be ‘Why do people turn to loan sharks for financial help?'

And the most apparent answer would be the lack of finance.

Focusing on the lack of financing in the first place, proposals for viable solutions to reduce the re-occurrence and impact of this phenomenon requires an examination of the big picture encompassing the economy, the legal and social perspectives.

As there is a lack of financial income in the first place, an important approach is to reform and refine the economy by providing people with the opportunity to earn a higher and better income that will improve their standard of living.

While it is almost impossible to tell people how to use their money and for what they should use their money for, we can at least ensure that for whatever reasons the money is to be used, they should be able to accumulate more and earn more if they choose to or are deserving to do so.

There is also a lack of available and accessible loans and credit.

Banks and financial institutions are the core lenders and are the normal avenues where people turn to obtain loans. However, these entities, before issuing such loans, have certain conditions that have to be satisfied and require strict fulfilment and compliance by the borrower.

This aside, there are also those who are unable to find jobs or are unemployed but unfortunately require financial assistance in the form of loans.

The federal government could provide loans and financial assistance in the form of a micro-credit scheme. To ensure the effective implementation of this micro-credit scheme, it would need to be based on two basic fundamentals, which are non-bureaucratic and non-profitable.

Hence there has to be a decentralization of decision making and granting of approval. In this sense, the federal government would bear the responsibility of providing the funds whereas the control, decision making and approval of disbursement should be delegated to the relevant government agencies.

Nowhere to go

Again the method of issuance and repayment and guarantee to facilitate such a loan would require vigilant consideration and views from competent and interested parties. There also has to be a target group that would be the focus of attention of this particular policy.

For example petty traders, hawkers and those who are in grave financial distress.

Financial institutions can also provide these micro-credit schemes to assist petty traders and hawkers as part of their corporate social responsibility.

Any effort to notify the people of this phenomenon in its complete nature must first and foremost involve participation from the grassroots, or consist of public involvement.

Awareness campaigns merely carried out by organising official ceremonies and advertisements in the media are inadequate and ineffective.

More programmes or initiatives that are community based and which sprout from public participation are more incisive.

Such programmes or initiatives might be able to cover a variety of themes related to education, businesses, family, lifestyle and spiritual encouragement. These themes may include reading, financial planning, health routines and moral values.

At present, there are certain laws that can be invoked to penalise those involved in the business of illegal money lending. They consist of the Money Lenders Act 1951, and the Anti-Money Laundering Act 2001.

This allows for the regulation of legal and registered money lending entities as the relevant authorities are able to track down and issue them warnings that may result in closure should there be any non-compliance with the governing rules and laws.

They would be inclined to conform rather than risk tarnishing the reputation of their company.

For those who trade in illegal money lending, if the money lent is sourced from unlawful activities and compounded with the element of violence in their treatment of borrowers who default, other existing laws would then apply, for instance the Dangerous Drugs Act 1952, the Common Gaming Houses Act 1953 and the Penal Code.

While it is most common for people to cry out for laws that impose severe punishment, the legal avenue is not necessarily the primary solution to purge unlawful money lenders. In this context, the object of law to regulate and impose severe punishments is only for the purpose of punishing a person for a crime or crimes that has been committed.

Crime and punishment

In other words, it is only for the point of punishment and retribution. It is not for the purpose of deterrence and here the use of the law as a deterrent is mediocre at best and useless at the very least.

Severe punishment does not deter lenders from getting involved in this trade. It merely acts to deter them from wanting to get caught.

In this regard, the law is the last recourse and can be depended upon only when all
else fails.

To effectively address this phenomenon, other unlawful activities such as gambling, drug trafficking, prostitution, and smuggling must be drastically controlled and regulated,if not eradicated.
And it seems that the main source of income for the money lenders is these other illegal activities which is used to loan out to the suspecting victims.

The running of enforcement agencies also deserves mention.

If the very entity that is tasked with the responsibility of solving crime are the ones providing refuge to those responsible, then the whole exercise is nothing but an academic exercise in futility.

Lastly, it should be known that this phenomenon is a manifestation and consequence arising out of institutional and systemic flaws inherent the policies and the decisions we make.

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KHAW VEON SZU and TEO LEE KEN are executive director and intern respectively at the think-tank Sedar Institute.

Read form the original blog site here.