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Microloans, or "legalized" extortion. When will BSH intervene to stop this pyramid scheme?

2024-03-12 10:58:12Biznes SHKRUAR NGA GJERGJ EREBARA

Microloans, or "legalized" extortion. When will BSH intervene to stop

Some companies that claim to offer innovative financial products are giving some unsuspecting Albanians loans with an interest rate of over 100% per year. The Government and the Bank of Albania are obviously standing aside, not performing their basic functions: preventing the risk from speculative or fraudulent financial products.

A few years ago, some websites started offering online currency trading service. Under this business model, anyone with as little as $250 could create an account and start buying and selling currencies, from the more familiar ones like the euro or dollar to the more exotic like the South African rand or the New Zealand dollar. Not only that, but the platforms offered the possibility that with $250, you could buy $1,000, or $10,000. Profit and loss were therefore proportionately high. If you buy $10,000 and the dollar moves 1% up or down, your profits are $100, and if it moves down 1%, your losses are $100.

Such platforms became so popular that for a period of time they began to attract the world's attention through advertising even at the highest level sports events such as the European Championship. What was not said on these platforms was that every time traders exchanged an amount of dollars for some other currency, they paid a commission. The seemingly negligible commission meant that the player not only had to predict the direction of movement of a coin's value, no easy task, but the movement had to be large enough to cover the cost of the commission and gave him a profit.

It took several years for regulatory authorities in developed countries to name these platforms, which seemed to promise to democratize the financial world, allowing anyone, even someone with as little as $250 in their pocket, to play trading. coins, a world that usually belongs to those with staggering sums of money. Regulatory authorities in developed countries found that such a scheme was nothing more than a betting activity, similar to sports betting activities, in which the game organizers keep a commission on the bets placed by the players. When this was realized, the regulatory authorities forced the providers of such trading schemes to write in the advertisements with which they lured customers: “Eighty percent of people who have played on this platform have lost money. Do not risk on this platform amounts that you cannot afford to lose.”

The ruling, while not stopping the platforms from operating, helped enough for users to understand what they were doing. In fact, the job of regulatory authorities in the financial system and the reason why the world invented regulatory authorities in this sector is precisely this: to prevent abuse and protect the consumer.

In Albania, currently, a number of operators presented as "microcredit" have flourished thanks to the general ignorance of citizens about financial problems, but also the lack, we can say, to the level of irresponsibility, of warning and preventive actions on the part of the Supervisory Council of the Bank of Albania and more broadly, of the state authority.

These offices, which in Albania are introduced with the false term "microloans", are also known around the world with the names Next Day Loans (loans within the next day) or Shark Loans (loans with sharks), or usury rate loans (with an interest rate of moneylenders), due to their extortionate nature and targeting with aggressive marketing the most vulnerable citizens in the poorest and peripheral areas of a country. These offices give loans to naive Albanians or those in difficulty with an interest rate of over 100% per year. Anyone who understands even a little bit of finance knows that loans with such interest rates will inevitably default on a substantial portion of borrowers. And the Albanian legal network today, instead of protecting borrowers, seems to have been put at the disposal of loan sharks.

For anyone who has forgotten how basic economics works, the model is roughly this: the Albanian economy grows in nominal terms at an average of 6 percent per year. This means, all our physical, natural, financial and human capital experiences such an increase in value. In an ideal world, citizens who have excess money, put this money in deposits with an interest rate of, say, 2 percent. Banks give this money to citizens who need capital, with, by the way, 4 percent. Citizens who receive the loan, work with this money, realize a return of 6%, of which, 2% they keep for themselves and 4% they return to the bank. If the interest rate of the loan is, let's say, 8 percent or 10 percent, then this means that the citizen who borrowed, not only is not earning money from the capital he borrowed, but in fact, from work own is paying off an interest rate and is generally coming out loser from the scheme.

In practice, things are a bit more tolerant than that. Some businesses have above-average profit rates of over 6 percent and can afford to pay off a higher-interest loan. But in general, any loan with an interest rate that is double or more than the rate of economic growth is a loser and bankrupt for the borrower. While the interest rates above 100% of the "microcredit" companies, these are not loans, these are usury, they are pyramid schemes like those of 1997.

The theory of microcredit, which has justified normal interest, not 100 percent, but, the word comes, 10 or 15 percent, was born in Bangladesh and has been focused on the formula that, a poor person who does not have access to the banking system, can get, say, a $100 loan at a 20% interest rate to make some necessary expenses to work the land, say, buy the seed to plant, and therefore the land is able to repay the loan and the interest rate. Even so, debates abound as to whether these types of schemes actually help the poor or increase poverty. Because it is quite rightly argued that after a peasant has emerged from extreme poverty after the first harvest of production realized with the help of credit, he will no longer need $100. And consequently, a microcredit scheme will have to exit the market or evolve into conventional banking immediately after it has helped the poor for the first and last time.

The fact that these Albanian usury companies have received the nickname "microcredit" constitutes in itself a fraud with the image. And logic dictates that today no Albanian is so poor as to need $100 to buy corn seeds, the country is not that poor. And these microcredit companies do not seem to be targeting this segment of the population. According to the description given by an oligarch to the owner of one of these microcredit companies, the potential borrower is "a young man who has been thinking about buying a cell phone of the latest model." In a word, a young man who does not have, let's say, 1,000 euros to buy a mobile phone, gets a loan, for which he has to pay 2,000 euros. It is likely that many of these borrowers will go bankrupt. And the situation is expected to become very uncomfortable with the return of the gambling industry in the country. The gambler who loses at the zhub-zhub store will have the opportunity to get credit from the adjacent store.

The judicial system is obviously behaving in a not very legal way with this story. Successive news are emerging of such borrowers who, after failing to repay a loan, fall into the trap of an inhumane chain of extortionists, from bailiffs and lawyers to judges, who, they authorize, not only the recovery of the outstanding amount of of the loan, but also of a host of other extortionate fees and often, block the borrower's real estate, which undermines the essence of the loan without collateral. Because the microloan is supposed to have high interest for the sole reason that it is unsecured. If it was guaranteed, the word comes, with the collateral of the borrower's house, then there should not be such extortionate interest.

On the other hand, to say that the problem is closely related only to microcredit institutions would be incorrect. High interest rates, not so extortionate, but still significant, and aggressive marketing campaigns for such loans are also found in so-called, serious banks. Vacation loans, with an interest rate of 15 or 20 percent per year, are advertised without a quote by "serious" banks, only that the interest rate is never given in the advertisements.

Albania is not facing such a situation for the first time. And, speaking no more of the pyramid schemes of 1997, we must recall the speculative credit market of 2000-2008, when citizens were given loans at extortionate interest rates, while the interest was disguised, first as interest, then as commission , then as arrears. In 2008, the Supervisory Council of the Bank of Albania approved a package for consumer protection, established the concept of Effective Interest Rate and forced banks and other credit institutions to present the effective interest rate in their working environments. According to the regulation, the lender must be clear and honest with the borrower about the interest rate and the risks that the used product carries. The implementation of this regulation seems to leave much to be desired. This can be seen in the fact that many of the microcredit companies advertise on their interest pages "loans starting from 20" or "30" percent, while the rates are obviously higher than that.

Through such offers, microcredit in Albania has managed to develop itself to the point where it advertises on national television or in the most watched schedules. Banning such ads is a widespread media debate in normal countries. For example, here you can see how Google bans the advertising of loans with an interest rate above 36% while activist campaigns in different countries work to inform citizens that the advertising of such loans is extortionate to different social groups, namely the poor. or unemployed, it is immoral. Today in Albania you see these ads in the main broadcasts and the country has not yet begun to examine the morality of such a business.

The Bank of Albania currently allows loans with an interest rate of 100% if the loan is up to 200 thousand ALL and with an interest rate of 40% when the loan is up to 600 thousand ALL. In normal countries, the rules governing this segment are more detailed than this. In the United Kingdom, creditors are not allowed to charge higher bankruptcy fees than the total amount owed.

In the absence of effective education campaigns on what is too much in interest rates on loans, these restrictions are clearly insufficient to avoid the poor falling into a chain of debt. For this reason, the decision of the world's regulatory authorities to compel forex trading companies to warn users in the advertisement of how much they win and how much they lose in such speculative financial products, is the only reasonable solution. Microcredit companies do not add any value to the economy and cause too much trouble to be left free. Such products should be treated the same as gambling or tobacco. While it is not reasonable to ban them, any advertising should be accompanied by clear and understandable warnings and full transparency on the interest rate charged and the consequences for failure to repay on time, including bankruptcy and enforcement costs and risk. that the creditor's house or other immovable property be blocked for unpaid amounts. It is time for BSH and the government to take measures to prevent the spread of these activities.


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