Moneylenders

Those who lend money are unpopular. They are seen as the exploiters of the common man. They range from the most sophisticated international finance houses like UBS of Zurich or Goldman Sachs of New York or Barclays of London to the common or garden village moneylender, referred to colloquially as the ‘gini poli karaya’ in our villages.

An exception may be when the Bank of Ceylon is ‘ordered’ to lend money to the Cricket Board to settle debts to cricketers. But while the cricket loving public may cheer, depositors hope that the loan was secured by some collateral other than future earnings of the Board!

Hurling brickbats at moneylenders of whatever sophistication is an extremely popular past-time. These are the 1% of exploiters of the world economy, the 99% protested by occupying Wall Street, London’s Westminster and in other similar demonstrations in over a 100 other cities worldwide were taking issue with.

They have been accused of ‘ ripping off the state, as well as their customers’ by accusers ranging from members of bodies controlling monetary policy to smallholder cotton farmers in the Indian state of Andhra Pradesh, who committed suicide due to multiple borrowings from micro finance institutions, village moneylenders and state and private banks.

Hollywood and Bollywood films too have got into the act. Films such as Wall Street, ‘Wall Street,’ ‘Too Big to Fail’ and ‘Margin Call’ come to mind. Michael Douglas’ magnificent Oscar winning portrayal of the role of the ‘Gordon Gecko’ in ‘Wall Street’ is memorable. Indeed, at the request of the FBI, Douglas has recorded a public service announcement warning against white collar crime.

A long history

Such criticism of money lending has a long history. The Christian tradition has it that Jesus expelled the moneylenders from the Temple. Mohamed banned usury, resulting in a form of Islamic banking emerging which does not charge interest per se on financing provided to clients. Although the Jewish community generally are financiers and bankers, the word for interest in Jewish is ‘neshek,’ which translates as bite.

The Catholic Church banned money lending in 1311. Gautama the Buddha in the Sigalovada Sutra has indicated how a follower of the Dhamma should manage his earnings. Money earned should be divided into four portions. One portion expended for daily living expenses. Two portions should be invested in one’s enterprise or business. The fourth portion should be saved for an emergency.

The Buddha advises the householder against indebtedness; being satisfied with what you have legitimately earned and managing your earnings astutely is at the very core of the Buddhist way of life.

The Buddha also lays down four types trades an adherent of the Dhamma should not indulge in: the slave trade, the sale of armaments, the sale of intoxicants, and the sale of poisonous and harmful things.

The Buddha also, while prescribing the three qualities which a monk should have, also prescribes the virtues of a merchant for successful enterprise: the businessman possesses a keen insight into his profession – when he buys goods at a certain price; he instinctively knows what amounts are recovered as cost incurred and profit. The entrepreneur is clever – he has the innate knack of doing business for profit. The entrepreneur has a good business reputation, the community at large and his trading associates knows that he is credit worthy and that he will honour commitments for goods supplied and funds borrowed.

From this we see that the Buddha recognised that for business and commerce, credit was required, funds had to be borrowed and repaid at a price, which is the interest.

Eschew extremes

So money lending per se is not frowned upon. But remember that the Buddha preached on the need to follow the Middle Path, to eschew extremes. In this context charging excessive and unreasonable interest would be contrary to the Buddha’s teaching.

The merchant community during the Buddha’s time supported the propagation of the Dhamma; many prominent traders (Situwaru) were his benefactors, supporting the Sanga in their propagation of the Buddha’s teachings. They were a community who were subject to the exploitation by the Brahmin priest community, for various the expensive rituals connected at Hindu temples.

The reason that the Pali language, the language of the trading community in India at that time, became the lingua franca for communication of Buddhist teaching, it is believed, was due to Sanskrit being dominated by the Brahmins.

The propagation of Buddhist teachings along trade routes such as the Silk Route, and records of merchants’ caravans providing security, succour and support to monks who wished to travel to India from other parts of Asia in search of knowledge and enlightenment or to propagate the Dhamma, also provide clues that Buddhist teachings were not seen as anti business. The only limitation was that there should not be exploitation, which would be seen as a deviation from the Middle Path.

Reasonable, flexible and practical attitude

Prejudice against financiers has a downside. Without financing business and commerce cannot operate successfully. Societies which have had a more reasonable, flexible and practical attitude to financiers and money lending, have prospered compared to societies which have frowned upon such businesses.

India, under the Mughals, was driven by internal and international commerce and business. In northern Italy under the Medicis and other banking families found ways to avoid and bend the rules and get around the restrictions on money lending and there was an economic boom.

Protestant Europe took over the economic leadership of that continent when the Reformists Luther and Calvin made money lending acceptable, which had been frowned upon by the Catholic Church. The economy of Europe pulled ahead.

It has been estimated that in the year 1000, Europe’s share of global GDP was 11.1%, while West Asia’s (Middle East) was 8.6%. By 1700 Europe had 13.5% while West Asia had only 3.4%. Analysts attribute the reason for the decline to a reduction of commerce due to the unavailability of financing.

Full flowering of civilisation

The rise of the financing industry and the availability of cash for entrepreneurs to invest and expand in manufacturing, trade and business have, historically led to a full flowering of civilisation.

The creative arts, culture, great buildings have been financed by states using revenues raised by taxing merchants, but also by merchants themselves. The great monuments of ancient Rome, great Mughal era monuments of India, the Taj Mahal, Akbar the Great’s palace at Fathepu Sikri, etc., the development of Florence in the period of the Renaissance, Amsterdam in the 17th century, Cambodia’s Angkor Wat, Indonesia’s Boro Budur, Sigiriya, ancient Anuradhapura and Polonnaruwa, London and New York today, are all examples of the cultural boom which is fuelled by a booming financial service industry.

Without the surplus money available to finance great builders, architects, play wrights, artists and poets, would a full flowering of culture ever have taken place?

Persecuted throughout history

Notwithstanding the critical role financiers play in an economy, throughout history moneylenders have been persecuted. Ethnic minorities from alien culture, who travel to faraway lands to provide financial services to local people, such as Afghan and Chettiar moneylenders in Sri Lanka, Jewish bankers in Europe and Chinese moneylenders in East Asia, are always at the butt end of vituperation as exploiters of poor and naïve indigenous people.

Governments have reacted to this sentiment of hostility to moneylenders and those in the financial services sector, while recognising the important role the industry plays in the promotion of business, by resorting to regulation.

In Sri Lanka the Money Lending Ordinance was enacted in 1918, with subsequent amendments in 1954 and 1963. Its long title is ‘An Ordinance to provide for the better regulation of money lending transactions, and the prohibitions of the carrying on of the business of money lending by certain persons’. The opening sections of the Ordinance prohibit persons who are not citizens of Sri Lanka from carrying out the business of money lending. Foreign firms and companies are also prohibited but there are certain exceptions provided in the ordinance.

Afghan and Chettiar moneylenders

As stated above, the prohibition on foreigners indulging in the money lending business was aimed at eliminating the Afghan and Chettiar moneylenders. Those of us old enough to remember may recall seeing the Afghan money lending community meeting in the evening at the roundabout at Slave Island and on Galle Face Green, in their distinctive dress , their powerful motorcycles and the staves they carried for self protection.

The Afghans were considered as ruthless operators, showing no mercy to their debtors. An interesting anecdote reflects this ruthlessness. During the emergency in 1958, when a curfew was declared, an officer and soldiers from the Second Volunteer Sinha Regiment were deployed in Kandy town, enforcing the curfew.

They saw ahead of them a shadowy figure flitting from house to house, trying to keep out of their vision. The officer deployed his men and ambushed the curfew breaker, only to discover that it was an Afghan moneylender, well known to the micro, small and medium merchants in Kandy, who pleaded with the officer that he was not a mere curfew breaker, but was only trying to collect his debts as he was certain that the debtors would be definitely at home during the curfew!

Readers would also have heard of the Lady Lochore Loan Fund. The Fund was set with monies donated by ‘Lady Jean Lochore formerly of Ceylon’ (Act No. 38 of 1951) and with contributions from the public, with the object of ‘lending to such persons in debt... as the board of management may determine’.

Anecdote has it that while Lady Lochore was in Ceylon, she had been driving past the Secretariat building in the Fort when she saw an Afghan mercilessly assaulting a person who looked like a government clerk, who had come out of the Secretariat building. Lady Lochore stopped her vehicle and got her driver to intervene and stop the assault and on further inquiry found out that the Afghan was a moneylender and that the clerk was a defaulting debtor.

She was so upset that she immediately contacted the Rev. C.E.V. Nathanielsz and set in motion the process of setting up a Fund, by Act of Parliament, to provide debt relief to indigent debtors who were in the clutches of unscrupulous moneylenders like Afghans and Chettiar moneylenders.

The Rev. Nathanielsz was instrumental in forming the Fund, after Lady Lochore returned to England and was a member of the inaugural Board of Trustees. The law provides other trustees are appointed by the Minister of Finance; one should be an officer of the General Treasury.

The Chettiar moneylenders had an equally ruthless reputation; these two groups had had a stranglehold over the local business sector. There was a great deal of resentment to their usurious ways and ruthless exploitation.

The enactment of the Money Lending Ordinance in 1918 was an attempt by the Government to regulate and alleviate the negative aspects of money lending transactions which were recognised as a vital service for the development of business and commerce, a very necessary evil. The Ordinance read with its subsequent amendments provide a rigorous regulatory regime for money lending transactions.

Alternative financial systems

In time as the economy expanded and developed and the inevitable inequalities between those fully integrated with a mercantilist economic system and those marginalised and isolated from the mercantilist economy, fully emerged and other alternative financial systems developed to address the problem.

The cooperative movement expanded its savings and credit cooperatives, non-governmental organisations developed savings and credit schemes. Targeted programs for women like the Janashakthi Banku Sangamaya of the Women’s Development Federation of Hambantota and the Wilpotha Kantha Ithurum Parishramaya of Puttalam and a host of others developed.

The National Youth Services Council (NYSC) developed the National Youth Credit and Savings Cooperative (NYSCO) targeting young people. Professor Yunus of Grameen Bank in Bangladesh gave the process international recognition.

Micro finance and micro credit developed into a major tool for poverty alleviation and for integrating the poor and marginalised with the global economy. The State in Sri Lanka stepped in with the Janasaviya Trust Fund, the Janasaviya program and the Samurdhi Authority.

Spandana

The story of how Padmaja Reddy, CEO of Spandana, one of the largest Micro Finance Institutions (MFI) in India was inspired captures the logic of the process. She got the inspiration for starting Spandana after striking up a conversation with a rag picker in the city of Guntur, in Andhra Pradesh.

She realised that if only the rag picker could come up with the funds to buy one cart of vegetables for Rs. 1,000 in the morning, without having to pay the daily interest rate of 4.69% per day, when she had sold the vegetables at the end of the day, she would be able to develop a successful enterprise.

The need to borrow at usurious rates kept the rag picker in poverty because she could not make a sufficient margin on the vegetable sales to build a sustainable enterprise. The rag picker said she had no source of borrowing money other than the moneylenders at their usurious rates.

The banks would not lend to someone like the rag picker, who had no credit history, no identity documents, no collateral, no guarantors, etc. Padmaja decided to lend the rag picker the capital required at the standard bank lending rate.

The rag picker repaid the loan after repeated loan transactions with Padmaja, was able to buy her own cart and develop a sustainable enterprise. Soon thereafter rag pickers were knocking on Padmaja’s door. In 1997 Padmaja quit her job and started Spandana. Thirteen years later by 2010, Spandana had 4.2 million loan clients, with an outstanding portfolio of 42 billion rupees.

Addressing over-borrowing

However, as the experience of poor MFI clients over borrowing in Andhra Pradesh, has shown, unregulated micro finance, can lead to a crisis. Like money lending, micro finance has to be regulated.

The issue of over-borrowing can easily be addressed in Sri Lanka’s case, as everyone of us has a unique National Identity Card number, if a database of borrowers from MFI is built up, at a glance the level of liability of individual borrowers can be ascertained. Banks and finance companies have credit information bureaus which provide this service.

India is just in the process of giving every Indian a Unique Identity (UID) number. They are combining this with biometric fingerprint and eye iris records are being collected and will be put on a 24/7 accessible online database.

Any Indian who has the UID number, when the system is up and running, can place his finger on a finger print recognition machine or look at a camera which records the details of his eye iris, connected to the central data base, anywhere in India and establish his or her identity beyond doubt, in real time. Targeting for public services and for financial services will be fool proof. By the end of 2012, 400 million Indians will be on the data base.

Operators of Ponzi schemes like Maydorf of New York, Sakvithi, Danduwan Mudalali of Sri Lanka are quick to exploit and under-regulated, unregulated or an inefficient and corrupt system to exploit the poor and gullible. The state has a duty to legislate to set up a regulatory process, with good governance and due process built in.

Sri Lanka has in theory, an admirable regulatory framework for banks, finance companies, moneylenders, rotating savings and credit associations (RoSCAs-Cheetus), savings and credit cooperatives. The problem lies only in the inefficiencies and corrupt implementation of the law.

But for MFIs which do not fall into the above categories, there is no regulatory framework in existence. Draft legislation is floating around, but there is no certainty as to its enactment. This is not a good omen for the financial system.

The MFIs and their borrowers must be protected from fly-by-night types like Sakvithi and Danduwan Mudalali. It is an irresponsible state that does not honour its obligations towards the poor and the marginalised.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)