“Gini Poliya” ........... annual interest rate of 720% !!! :

Loan sharking

Kith Udugama

A loan shark is a person or body that offers loans at extremely high interest rates. The term usually refers to illegal activity, but may also refer to predatory lending with extremely high interest rates such as payday or title loans. Loan sharks sometimes enforce repayment by blackmail or threats of violence. Historically, many moneylenders skirted between legal and extra-legal activity. In most jurisdictions Usury laws regulate the charging of interest rates. Usury Laws are regulations governing the amount of interest that can be charged on a loan. Usury laws specifically target the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied. These laws are designed to protect consumers. Loan sharking violates these laws. In the recent western world, loan sharks have been a feature of the criminal underworld.

Common in Sri Lanka

Loan sharking or you can call it “Gini Poliya” has also become common in Sri Lanka. This kind of lending has led to many criminal activities such as murders, abductions, intimidation by the lenders when the borrowers fail to pay on time. And also some borrowers commit suicide when they are harassed by the lenders and unable to settle the loans. Some borrowers commit suicide and also after killing the other members of the family. The other side is borrowers killing the lenders when they do not have an alternative to escape from harassment.

In late 19th century America, the low legal interest rates made small loans unprofitable, and small-time lending was frowned upon by society, as a borrower of small loans was seen as an irresponsible person who could not manage a budget. Banks and other major financial institutions thus stayed away from small-time lending. There were, however, plenty of small lenders offering loans at profitable but illegally high interest rates. They presented themselves as legitimate and operated openly out of offices. They only sought customers whom they felt were good risks: a steady and respectable job (a regular income and a reputation to protect), married (unlikely to flee town), and legitimate motives for borrowing. Gamblers, criminals and other disreputable, unreliable types were avoided. They made the borrower fill out and sign seemingly legitimate contracts. Though these contracts were not legally enforceable, they at least were proof of the loan, which the lender could use to blackmail a defaulter.

High interest

People resort to borrow from the loan sharks as they do not have any other source to borrow from. Most of these people are unable to balance their monthly budget due to extreme poverty. These people also have not got used to using banking facilities at early stages of their life.

Kamala lives in a shanty town in Kirulapona area. Most people who borrow at very high interest are living in shanty towns and they use the money for day to day living. They are not used to do any business with banks. Banks are also not interested in handling small loans. Kamala makes only fifteen thousand rupees a month and her husband is an alcoholic and has no regular job. Therefore Kamala has to borrow from these loan sharks at a very high interest to pay for the very basic needs. Her situation never improves and she gets in to more and more debt.

Recently she borrowed one thousand rupees and the lender a woman in her own neighbourhood charges six hundred rupees a month ( two hundred rupees every ten days ) This adds up to an annual interest rate of 720%!!!. If she misses the interest payment she will have to pay an additional interest payment next month. This is shocking and mind boggling. But this happens in every community with poor people.

Criminal activities

There are so many cases like this and they lead a miserable life as a result of this heavy burden of paying a high interest. If they fail to pay the lender he or she will resort to intimidation. In one case the woman lender was harassing the woman who borrowed. She lost her patience and when the lender walked in to the house and asked for interest the borrower threw Chili powder on her face. In some cases the borrowers have killed the lenders. So there are so many criminal activities relating to this type of loan sharking. In the 1920s and 1930s, American prosecutors began to notice the emergence of a new breed of illegal lender that used violence to enforce debts. The new small lender laws had made it almost impossible to intimidate customers with a veneer of legality, and many customers were less vulnerable to shaming because they were either self-employed or already disreputable. Thus, violence was an important tool, though not their only one. These loan sharks operated more informally than salary lenders, which meant more discretion for the lender and less paperwork and bureaucracy for the customer. They were also willing to serve high-risk borrowers that legal lenders would not touch.

Banking habits

Although the reform law was intended to starve the loan sharks into extinction, this species of predatory lender thrived and evolved. After high-rate salary lending was outlawed, some bootleg vendors recast the product as “salary buying.”

They claimed they were not making loans but were purchasing future wages at a discount. This form of loan sharking proliferated through the 1920s and into the 1930s until a new draft of the Uniform Small Loan Law closed the loophole through which the salary buyers had slipped. Salary-buying loan sharks continued to operate in some southern states after World War Two because the usury rate was set so low that licensed personal finance companies could not do business there.

There are finance companies who give loans at higher rate and taking almost everything the borrower has as security in Sri Lanka. When the borrower defaults they do not hesitate to seize the property and vehicles placed as security for the loan. They are more sophisticated and crooked and crafty loan sharks.

There are ways of avoiding this kind of high interest borrowing.

There are societies who help people in difficulty. It is important that banking habits should be learned at an early age by young people. The principle of banking is to give loans to people at a fair interest rate, who has the capability of repaying. That is how the banks make their money. So the bank and the client must establish some relationship and rapport.

It is important that societies and social service departments interview people in these shanty towns and offer counseling. The lesson that young people must learn is to plan their finances and cut their coat according to the cloth. When people say money is not everything it sounds very noble. But today you need money for almost everything!!!

[email protected]