The financial services sector is one of the largest service sectors in the world. By some accounts it is the world’s most lucrative business; but that’s irrelevant when it is obvious that the financial services sector is huge, how huge being a matter of detail.
But the aggressive tactics of the financial services industry are glaring internationally, and otherwise. Even so these issues are glossed over for various reasons, and the social sentinels so-called that are supposed to bring these matters to the fore, are mostly remiss in their vigilance these days.
This is why we hear of debt traps all over the world, internationally as well as nationally. We hear of countries falling into debt traps, and communities of poor people falling into domestic debt traps, with micro-finance lending being one example. Then there are the investment banks that overreach, and cause massive failures that upend entire economies and make them go topsy-turvy.
But for the ordinary reader, what matters would be how the financial services sector impacts their lives. Do banks adhere to ethical lending practices when land is used as collateral for giving out loans, for example?
The fact seems to be that there is compliance on the surface. That there is supposed to be compliance with regard to ethical practices is one fundamental tenet that executives in the financial services sector are taught in the preparation phase for the job. But most of the junior grade professionals that enter the trade soon find out that compliance, so-called, flies out of the window, the moment they step into the real world and start doing their work.
Bankers become loan-sharks and finance company executives regularly smell blood in the form of vulnerable victims, when it comes to leasing and lending-related financial service sector practices.
SETTINGS
Lax lending standards led to the collapse of the housing market in the US in 2008, causing what was called the sub-prime mortgage lending crisis. Banks had to be bailed out by the US Government, while just a few such as Lehman Brothers were allowed to file for bankruptcy. In Sri Lanka, we have seen random implosions of finance companies so-called, with Golden Key and Shakvithi being the examples that stood out.
Yet, collapses occur intermittently, even though, of course, the Central Bank now has strict regulations in place. But lending by regular banks is no better when it comes to lack of financial regulation and ethical practices, at least some of the time.
Bankers salivate at the thought of lending to those with a less than reliable credit-history, as long as the latter are able to provide lucrative collateral in the form of land or other real estate.
These are predatory lending practices. Predatory lending is prevalent in financial institutions the world over, ranging from those that deal in small community based micro-credit, to global financial institutions that lend to countries despite the fact that these nations can obviously ill-afford to repay.
The resultant debt-traps have caused impoverishment that has had untold consequences for millions of people. But are countries ‘fattened’ until there is sufficient economic growth that can then be channelled by unscrupulous parties into fresh lucrative loans, that again plunge these nations into fresh debt?
It can happen, and has happened, and that’s the first level of predatory lending. But there are several levels of predatory lending — only some spearheaded by countries and Governments — that have also plunged nations into poverty and crisis.
But none of these predatory lending practices is being internationally outlawed, or are coming under the focus of international oversight bodies such as the U.N. or regulatory institutions. Is it because the financial services sector enjoys powers that are rarely challenged because the lending game is helmed obviously, by those that are moneyed and powerful as a result of their financial clout?
What happens in this type of international financing is mimicked in the financial services sector in domestic contexts. Predatory-lending starts at home, you could say, on the one hand. It begins in domestic settings, where banks fleece borrowers and make sure they cannot pay, but have the collateral to enrich the lending institution once these debtors default.
Credit-card lending practices are often predatory, even though often not much is said about this aspect of the credit card business. Card holders, for instance, are never told that settling the minimum monthly payment only, would soon land them in trouble with their having to pay enormous interest payments as the unsettled debt and resultant interest piles up.
But withholding information is par for the course in credit card lending operations. Borrowers without sufficient information to consider any other outcome, are led to believe that the minimum payment on their cards monthly, would be fine and would keep their credit standing intact. But the minimum payment is never near enough, and paying that amount without knowing anything better is bound to get borrowers in trouble as the interest component will mount, and they will find it increasingly difficult to settle enormous monthly bills that follow.
aggressive
However, the banks will ensure that the borrowers fork out. Borrowers would go the extra length to pay because they understand that if they don’t, their credit standing would be jeopardised.
If this is not predatory lending, what is? The problem with these aggressive tactics in the financial sector is that they are couched in a veneer of polite — unctuous— corporate-speak. If you’d read the promotional material, you’d think these financial services sector folk can do no wrong.
But, it seems a large part of the industry thrives on thinly-veiled deceit. Industry actors lure people into borrowing and somehow either the borrowers pay the banks eventually in the form of forfeited collateral, or someone else is supposed to pay, as when Banks are bailed out. The tendency is to cast industry best practices out of the window, while making sure customers are fleeced with various predatory incentives, which are, of course, nothing more than stratagems to make people fall deeper into debt.
The financial services sector is not challenged on any of these predatory practices, as that would be tantamount to shaking the industry down to its very core. Large parts of the sector resort to these tactics, and therefore, taking the bottom out of the industry by pointing out flaws would not be tolerated.
Predatory financial service practices such as predatory-lending and similar behaviour thrive due to the fact that legitimate lenders do not offer proper competition to the bad actors. But predatory practices destabilise entire communities. Even financial institutions that engage in regulated and compliant behaviour are affected when communities are plagued by bad debt — and resultant creditworthiness issues — of folk who have been victim to predatory lending practices.
Most of all, however, the regularisation and adaptation of predatory lending practices by so-called respectable and mainstream institutions must stop. In the credit card industry as it is practised in Sri Lanka at least, even the reputed players that issue cards engage in tactics that are designed to drive people in good credit standing towards more debt.
The entire financial services sector needs something more than merely being held to account. People need to be educated about predatory practices and perhaps responsible civil society and the Government should start doing it.
Sometimes, it takes years to mend certain areas of business enterprise, and perhaps the financial services sector is one of them. But, if people are made aware, the predators would have no recourse but to correct themselves. However, the financial sector would probably fight against such awareness creation.
Nevertheless, there is good reason they should be made to support and finance such awareness initiatives. Best practices would help finance sector institutions that are above board and ethical — if there are any — become more profitable, because they would eventually come to be known for reliability and ethical practices.
People should not have to burn their fingers to learn that some reputable sounding institutions also have insidious ways of making money out of them unfairly. Across the board, all over the world, predatory financial sector institutions should be rooted out by people arming themselves with better knowledge about how they cannot be duped.
