By Philip TWUM and Christopher APUSIKA
The business of lending is where party A provides party B with an amount of money in expectation that party B will repay the amount of money with an additional amount known as interest.
By nature, this exchange enables party B to play in the market place other than which they could not. Lending stimulates economic activity and increases productivity. It is arguably the most rewarding aspect of banking making it a target for loan sharks.
Loan sharks
They are institutions or people who lend at extremely exploitative interest rates and use threats or actual violence to collect their debts. Loan sharks are unlicensed and typically lend irresponsibly, with little to no credit risk management in place.
Their actions reveal that their goal is not to build a sustainable lending business but rather to bait people with loans to exploit them. Today, they predominantly operate through digital mobile applications (apps), leveraging technology to preserve their anonymity while broadening their reach.
Modus Operandi
The process begins with a bait. They advertise sizable amounts of money for first time borrowers, long repayment durations and very low interest rates typically unusual for the industry, yet their interactions with prospective borrowers tend to carry a sense of urgency.
This deception seems like an opportunity to people in desperate need of financial support. Due to the circumstance, unsuspecting borrowers willingly grant these lending apps access to their media and data. While this may be required in the digital lending space to enable credit scoring models to function, granting such access to the wrong person could be very costly.
Oftentimes, the loan terms they communicate to prospective borrowers are just for show, as they do not abide by them. For example, they may demand for repayment before the first due date.
The first repayment demand could be as early as five days after disbursement and as high as double the loan amount. This happens to be a very troubling experience for borrowers since the terms of the loan are modified to their surprise. In some instances, a loan shark would disburse funds to a prospective borrower even before they have the opportunity to agree to the terms of a loan agreement. This is solely for the purpose of coercion.
With the digital access granted, they execute the final steps of threats and extortion. They obtain borrowers’ photos and contacts from their mobile devices and threaten these borrowers with distribution to their contacts.
If the threats fail, loan sharks begin to actually distribute this media to borrowers’ contacts, informing them about the outstanding debts. The shame and embarrassment, forces borrowers to make good their debts regardless.
In a typical instance, the borrower would take on another loan from friends and family to make the repayment but due to the ease with which they obtained the loan from the loan shark, they return for another loan in order to pay back their family and friends. This quickly becomes a vicious cycle of debt that eventually breaks because they are unable to keep up with the strenuous terms of the loan shark.
Due to the unruly nature of their business, loan sharks tend to not disclose their office location however, eventually savvy customers begin to identify their location at which point they change offices. A single loan shark could rename and rebrand their mobile app several times in an attempt to outsmart the general public and possibly the regulator.
Impact
Across the world, the impact of loan sharks is felt. They bring untold levels of stress and depression to their victims. This affects their relationships, social life, productivity at work among others. There have been several reported cases of suicide attempts among victims with some tragically taking their lives.
Again, successfully lending at the exploitative rates common to loan sharks creates a precedent for other players to replicate, eventually raising lending rates in the market especially in the informal sector. Licensed digital lenders are not spared the impact of loan sharks. They mimic the processes of licensed digital lenders, bringing disrepute to their business which results in lower patronage and loan recovery challenges.
Regulation
The business of lending is guided by regulations for example, in Ghana we have the Borrowers and Lenders Act, 2020 (Act 1052). The regulator also frequently shares an updated list of unlicensed lenders operating in the country to keep the general public informed to desist from doing business with them. Today, the Google Play Store has more stringent requirements for listing a lending application and they routinely take down such apps across the globe.
Conclusion
Under the guise of easy access to loans, loan sharks use various tactics to exploit unsuspecting borrowers. Their activities have wide reaching effects; from individual distress to disruption of financial ecosystems. While regulators aim to curb their influence, the fight is far from over because they continue to evolve their tactics. Borrowers must be educated to ask the right questions and avoid dealing with them altogether.
Despite these challenges, lending-when done responsibly-has the ability to empower individuals and fuel economic growth. It’s our collective responsibility to ensure that the people we interact with every day do not fall prey to loan sharks.
>>>The authors are employees of Fido Micro Credit, a digital lender licensed by the Bank of Ghana. Philip Twum serves as the Head of Business Development and Christopher Apusika as a Collections Representative.
