Monday, August 31, 2009

Why Ah Long Problem Is Set to Stay

A few months ago the news media were full of reports on the issue of `Ah Long' or loan sharks. Every other day there will be stories of borrowers or their family members being victimized by the loan sharks with some of the wretched victims even ending up being chained like animals, horrifying the public. Predictably, politicians got onto the bandwagon. One minister announced that he was declaring total war against the loan sharks and will not stop hunting them down even if they try to hide in `lubang cacing' (worm-holes… whatever that means).
The funny thing is that now it seems the brouhaha over the Ah Long issue has disappeared almost completely as suddenly as it emerged. However, many will admit that by no means is that an indication that the loan sharks problem has been solved. The more likely explanation is that the news media feel that the public has become tired of the issue and therefore it is not newsworthy anymore.
Moreover we should also remind ourselves that the issue is in the first place not new at all. The practice of Ah Long victimizing clients who failed to pay up have been going on for decades. And it will continue for many more decades. And politicians will no doubt continue to make meaningless declarations of war against loan sharks as soon as the problem becomes a hot topic again, so as to appear to be dynamic and concerned about the plight of the rakyat.
Truth be known, the problem of loan sharking is actually more difficult to solve compared even to the H1N1 issue. However, the explanation for its continuous occurrence is in some ways quite simple. Basically it is an outcome of the law of demand and supply. The fact is there is now plentiful availability of people who are in need of the services of money lenders. This makes money-lending a lucrative business. So much so that there will be no shortage of people who would want to go into the business.
It has not always been the case before that lending for profit is viewed as a normal and perfectly legitimate practice. In fact prior to the 15th century, there was never any legal money-lending industry anywhere in the world. Loan sharks were therefore non-existent during that time. This was because all major religions and civilizations condemn the practice of charging interest on loans no matter how low the interest was. The practice was basically looked upon by all societies and civilizations – whether in medieval Europe or ancient India or ancient China or the Islamic Middle East - as completely abhorrent, bad and evil.
However, when in the 15th century John Calvin and John Eck, both European Christian priests, successfully argued and convinced Europeans that usury only referred to `excessive interest', Europe began to legalize the practice of lending money for profit. Since the Europeans later grew to be colonial powers, the practice was introduced and became acceptable around the world too. Over time, it also became a big and influential industry. It is now very rare to find individuals or corporations or even countries which are debt-free.
But not all borrowers are fortunate enough to profit from the utilization of their borrowings. Some ended up poorer or became bankrupts. Such people, due to their degraded creditworthiness, will find it extremely difficult to borrow from established or large lending institutions. The total number of these types of people is far from small. During economic or financial crises or after the occurrence of natural disasters, the number of such people may double or even triple. These people basically are broke, cash and asset-wise, and if they are to continue to live or do business, the only expeditious recourse for them is to borrow from people who are willing to take higher risks of default. These are the so-called Ah Longs. These Ah Longs see the presence of these large numbers of high-risk borrowers who are shunned by established lending institutions as `market opportunities'. However they have to be very careful when lending to these people because if too many default on their loans, the Ah Longs themselves may end up financially ruined as, unlike banks, they have no legal recourse. Therefore they must make sure that such borrowers, who have nothing to offer as collateral for their loans, know the price of default. The borrowers must be taught that not paying up is not an option at all. Hence, the very nasty treatment meted out to defaulting borrowers.
It may be difficult to imagine but the truth is in the past lending was seen as a benevolent act i.e. to help people in need or facing hardship. Since profiting from lending was not allowed, the scale of borrowings was also small. For the lender, because his objective was to help others rather than to profit, defaulting borrowers was not a serious concern. Since his livelihood does not depend on any interest income, he is not unduly worried about defaulting loans. And in some cases, as encouraged by his religion (such as Islam) he may even forgive the debt as an act of charity towards a fellow human being who is in need.
Since the advent of the lending-for-profit business, the above scenario is no longer with us. Lending has now become a business rather than a benevolent activity. Benevolent lenders are now as rare as opportunistic lenders are common. For bankers, money lenders and Ah Longs alike, debt forgiveness is a term that is simply not part of their vocabulary.
Moreover, trying to solve the Ah Long problem without first making the activity of lending for profit illegal is like trying to avoid flooding at the river mouth when the dam has been destroyed or like trying to eradicate drug addiction in society without making the selling of drug illegal in the first place. It is mission impossible in the classic sense.

Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accountancy, Universiti Malaya. His latest book is “The Globalization Debate”, published by University of Malaya Press.

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