Loan sharks (rentenir; tengkulak; lintah darat) are always portrayed as the enemy of the society. As the name portrays, they are fierce predators of the poor farmers or traders. In Indonesian they are called lintah darat (leeches) because they live by sucking other people's blood.
Are they really bad? As usual, we economists do not have the moral judgements. We are more interested in why they exist. Well, simply they exist because there is an excess demand of capital. There are poor village enterpreneurs with high needs of capital to start up or expand their small businesses. However, for many reasons, they can not borrow from the banks. Perhaps because they do not have anything to serve as collateral. Perhaps because the scale of their businesess is too small for the banks to make a significant margin out of it. Perhaps because there are no banks around.
Loan sharks fill this gap. They offer accessible loan with small or no collateral. In some ways, they contribue to making the local economic wheel rolling. True, when the debtors fail to pay, loan sharks turn into true sharks. But the fact that they do exist and continue to exist means the demand for their 'service' is still high. (Remember also that by lending their money, loan sharks are also subject to risk and opportunity cost of money.)
Moral of the story: what the poor enterpeneurs need is access to capital. Not that they don't know how to do business. They do - but they just don't have the necessary capital.
Not that they need to be helped in paying the interests. Remember, many of them are able to repay the loan sharks' exorbitant interests. A study by LPEM-FEUI (thanks to my colleague Syarif Syahrial) showed that microfinance activities in Kuningan, West Sumba and East Sumba had no problem with unpaid loans even though they charged higher interest rate compared to the market price.
This explains why Adi Sasono's initiative when he was the Minister of Cooperatives and Small-scaled Enterprises during the Habibie administration (1998-99) failed. Assuming that SMEs were hurt by high interest rate, the government offered a subsidized interest rate for SMEs, at 13% compared with then market interest rate of 40-50%.
But people responds to incentives. Many new SMEs were established. But the motive was to be able to borrow at 13%, put it in the bank, then got the 30%+ interest margin. Who wants to do real business at that time, when the economy and security was very uncertain?
So, developing financial market and institution that reaches the poor is one important way to alleviate poverty. Since financial market is the backbone of modern capitalism, we can conclude that capitalism is good for the poor. At least, we can't conclude it is bad for the poor.
Rural finance
Obviously loan sharks fill a gap in the credit market, but it's their methods of getting borrowers to pay up that is objectionable. However helpful they may be to poor entrepreneurs, physically threatening a borrower or his family is unacceptable.
ReplyDeleteHopefully microfinance orgs will go a long way to filling this gap. Who knows perhaps if they had the opportunity and the principles were robust enough, loan sharks would turn into upstanding microfinanciers!
on the fund source side, loan sharks raise funds from their own capital. when their excessive capital is captured by some sort of more profitable investment play, they may avoid to go for lending. they may shift to loan brokerage.
ReplyDeleteI understand that this title is meant to attract readers, but your musing today does not warrant such provocative title due to its reductionist understanding of capitalism. It is one thing to talk about access to factors of production for the poor(what you call 'capital'), and it is another to talk about capitalist mode of production (capitalism), which necessitates a thorough treatment of the particular social relations it promotes and is entrenched in. [Keyword: social relations ;)].
ReplyDeleteTo conclude that capitalism is good for the poor based on an anecdotal data on loan sharks is not particularly smart ;), I think, esp. for a thinker your calibre. But then again, perhaps this is blog is an outlet for such playful and carefree musings. Meaning, perhaps, I should not be so anal about them. Har har..... :D
Upik D
I totally agree with Upik D.
ReplyDeleteCapitalism, as I know, believe in competition. Due to lack of competition, the loan sharks monopolize the credit market for the poor. Clearly, this is not what it is meant by the poposal of capitalism. The monopolistic situation where the sellers get more rent that it is supposed to get.
To be so-called capitalism, this field need either more competitor or government regulation. Otherwise, it is just another case of monopolistic competition. Monopoly either done by government or the individual is violated the essence of capitalism.
Just my two cents.
Ares
someone ought to explain why economists are so insistent in ignoring moralities and how could they build assumptions on common behaviour not taking morality into account.
ReplyDeleteeven you have a 'moral of the story'!!
T/S,
ReplyDeleteEconomists like this idea that "morality describes how the world should work, while economics, how it does work." It sort of elevates economists' status from the "soft" sciences to the more "hard" sciences. By doing so, it seems that our analyses are "value-free" and ergo, "more objective".
Alas, "objectivity", not to mention "efficiency", are values. So clearly, economic analyses are not value-free.
Typically when we economists starts by saying "economists do not make moral judgments", you'll see that, by the end of the essay, we will end up making the moral judgment that those economists don't make.
This certainly makes us more human than "those economists" ;-)
"Assuming that SMEs were hurt by high interest rate, the government offered a subsidized interest rate for SMEs, at 13% compared with then market interest rate of 40-50%."
ReplyDeleteSo SME can borrow at 13% and then save it at 40%? No way. It's just odd.
You're kidding me, once entering a capitalism context there's no such
thing as an interest rate subsidy. Looks funny! Don't fit the play, man.
Even hedge funders like Soros and Roberston may laugh at this capitalism misfit.
I don't think Indo villagers are ready for this sort of things.
what a beautiful escape there! I'm proud that you guys haven't lost your touch even after the long hiatus.
ReplyDeletei still don't fully agree to the post tho, but now i can't remember which bit exactly.
capitalism misfit? no way, man. once indo people enter the pure capitalism system, supported by their economic jumble plus their forest of population, the nation might go faster than everybody thought. start educating people what the bloody free market, good return and risk premium are. and start charging people for your analyses, opinions and comments. :)
ReplyDeleteSMEs loans might be pooled by microfinanciers or village cooperative unit or any village group, and sold to banks.
To an anonymous:
ReplyDelete"So SME can borrow at 13% and then save it at 40%? No way. It's just odd."
Interest rates (not subsidized) reached 60+% during the crisis. So, yes, it was possible.
"You're kidding me, once entering a capitalism context there's no such
thing as an interest rate subsidy. Looks funny! Don't fit the play, man."
I think you misinterpret the author's point that interest rates should not be subsidized because subsidy distorts the financial markets and creates wrong incentives for the SME.
thanks "andersonite" for the corrective points. i just realised that the writer is actually in the same way of thought. the more people thinking about the good of capitalism/free market, the better hope the nation would face in the future.
ReplyDeletemy dream is having indonesia as big and powerful economy in the world via capitalism highway or tunnel, you name it.
sorry, i have to throw away my new laptop. it's too slow. chiao...
PS: don't go to capitalism with agriculture, it's suck. go with technology, it's faster.
Hey, what about Pegadaian?
ReplyDeletepawn shop is a good play too, i think so. where goods market meets money market, in which you actually pay in advance with your collateral goods with a huge haircut for your loan. could reach 50%. you wanna be a skin head too?
ReplyDeleteI really missed this one. Good God! Sorry for jump in at the very odd moment.
ReplyDeleteAP and Treespotter: i must really get you both the econ textbook by Lipsey et all. I vaguely remember parts where they discussed about normative and positive points of the economics. Basically, econ is a social studies therefore in applying that to the real world, we need to balance out between the econ analysis (aka: the positive parts of econ) with norms, political willingness etc. True that economic analysis often disregard morality and other things that some of you might have concerns. But when applying the economic policy, we do need the normative parts. like arya said, being objective means taking values in your judgement
Lots of anons there: true that you probably think that it is impossible for people to willingly accept loan sharks in their business. But tell me, what choice do they have? When people speak about poverty nowadays, it has a lot to do with access and empowerment; access to a better living, access to education and most important, access to financial support. Most of these so-called poor people do not have land or other form of wealth for a collateral. Despite that government has and had imposed so many policies to finance SME’s and poor people, banks continue to refuse creditors that don’t have collateral. Microfinance programs have been successful in several rural parts where they really know people there and they don’t move around so much. However, it has failed in the urban area where people don’t know each other very well and they moved around a lot.
So yeah, again I must say that loan sharks are not acceptable by us, the so called elitist who live in urban area and very much enjoying the service of financial industries. But to the poor people, it’s the best choice so far and we (or government or whoever feel like doing it) must do something about it. That’s I think the moral of the story
and stop being too serious people. this is a cafe for crying out loud!!