The Loan Shark in ASEAN: Can Nanofinance With Qardhul Hassan Deal With It? Lesson Learned From Bank Wakaf Mikro in Indonesia

The Loan Shark in ASEAN: Can Nanofinance With Qardhul Hassan Deal With It? Lesson Learned From Bank Wakaf Mikro in Indonesia

Khairunnisa Musari (IAIN Jember, Indonesia)
DOI: 10.4018/978-1-7998-2257-8.ch012
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Loan shark is a humanitarian problem faced by many countries in the world, including in Asia, even in the Association of Southeast Asian Nations (ASEAN)'s countries. Loan shark activities are found not only in Myanmar and Cambodia, which has the lowest per capita income in ASEAN but also in Indonesia, Thailand, Malaysia, Brunei, and even Singapore, which are the five countries with the highest gross domestic product (GDP) per capita in ASEAN. How are loan shark practices in ASEAN countries? Can nanofinance overcome the microfinance gap to fight the loan shark? How the practice of Bank Wakaf Mikro (BWM) in Indonesia to nanofinance with qardhul hassan contract? Find the answers in this chapter.
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Loan shark evolves in almost every country. Investopedia defines a loan shark as “a person who – or an entity that – charges borrowers interest above an established legal rate. Often loan sharks are members of organized groups offering short-term loans who use threats of violence for debt collection”. Cambridge Dictionary underlines as “a person who charges very large amounts of money for lending money to someone”.Haller & Alviti (1977) highlight as “the lending of money at an illegal rate of interest and without holding claim to some physical possession of the borrower as collateral.”

Packman (2014), Mayer (2012, 2010) explain that loan shark originated from land sharks, a name for unscrupulous traders who hiding around ports in 19th-century America. It is estimated that the first mention of moneylenders was made in a copy of the Chicago Tribune in 1888 in an article about the condition of Minnesota farmers who were victims of moneylenders. This epithet is an Americanism popular discourse, one of a family of slang metaphors to the predatory behavior of the shark. Though any sharp lender may be described disparagingly as a loan shark, from the beginning this particular phrase was associated with a set of expensive small-loan products that had come into existence around the Civil War.

Leong, Li, & Xu (2018), Musari (2016d, 2017, 2019), Coy (2017), Mayer (2010), Haller & Alviti (1977) mention the practice of loan shark is categorized as social ill, illegal moneylending market, illegal lenders, informal financial institution, and racketeer lender. It serves an unmet need, unbanked people, low income and desperate families, who do not have enough financial resources or credit profile to access the formal banking system, even if often in a heartless and exploitative way. The loan shark is brave enough to provide cash in very fast service and flexible for them but with high interest. They could seem friendly at first but borrowing from them will bring consequences and many risks of high-interest lending.

As a humanitarian problem faced by many countries in the world, loan shark flourishes in both developed and developing countries. In England, loan shark in Glasgow who charged people interest rates of more than 719,000% faces having his assets seized under proceeds of crime legislation. In Leicester, Police hunt loan sharks riding Britain's rising tide of debt. In South America, a Colombian loan shark network is operating in more than three-quarters of Mexico’s states marking its growing presence throughout Latin America. Mexican authorities found a Colombian loan shark network of over 1,800 foreigners dispersed throughout Latin America. In Kentucky, a woman who was a victim of loan shark reminds, “You don't have to be poor to be a victim of payday loans… They were everywhere.”

Although there’s never been consensus on what’s a limit for interest rates by the loan shark, generally it is exorbitant. At least, refer to Mallick (2009, 2012), Hossain (2002), Hossain & Knight (2008), Irfan, Arif, Ali, & Nazli (1999), Tiwary (2017), Khandelwal (2010), Deshpande & Arora (Eds.) (2010), the loan shark’s interest rates in Bangladesh, Pakistan, and India charge very high than formal financial sector, particularly in rural areas. The victims in some areas even to suicide.

Key Terms in this Chapter

Ah Long: A Cantonese phrase; An informal term for illegal moneylenders in Malaysia and Singapore.

Social-Welfare Contracts: Contracts between individuals and the society to promote the well-being and welfare of the less privileged. Although facilitation of such contracts is beyond the scope of intermediation, an intermediary can certainly offer community services by institutionalizing social-welfare contracts.

Nondeposit Taking: Not managing public funds, in the form of deposits, savings, and similar products.

Chettiars: A Cantonese phrase; The main reputable moneylenders during the British era since the late 19 th century.

Self-Help Group (SHG): The initiative was developed by India several decades ago in order to alleviate poverty and improve women’s ability to achieve rights and well-being. It carries out all the same functions as those required by the Grameen system but they do this on their own behalf, since the SHG is effectively a micro-bank, carrying out all the familiar intermediation tasks of savings mobilisation and lending.

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