The similarities between credit card companies and loan sharks (or Ah longs) (06/10/1999) (Now listening to Chotto Matte by Sammi Cheng.  You can listen to this song in realaudio by clicking here)

    An interesting scene from the hit Singapore movie, Money no Enough, showed a group of loan-sharks (who are called 'ah-longs' in Hokkien) counter arguing Jack Neo, who said that they are a bunch of criminals who go around beating people up when these people fail to return the money that they borrowed from the loan sharks.  These loan sharks argued that they are doing a good deed by lending money to these poor people, otherwise these poor people could not get any other kind of finance.  These loan sharks thus feel that these accusations are unfair since banks only lend to rich people.  In the feudal age, the loan sharks believed that they would be regarded in the same light as Robin Hood.

    As I ponder about that argument, I can't help but feel that the loan sharks are reasonable in stating the above point.  I look at the VISA card in my wallet and I know that, they are only willing to extend an interest-free credit to me because I am currently earning S$30,000 a year.  For a Singaporean who earns less than that, he do not even get the privilege of such a limited interest-free loan.  If I pay up in full at the end of each month, just like if I were to borrow from a loan shark, everything would be peaceful.  If I do not, the credit card company will charge me an interest of about 24% per annum, quite close to how a loan shark would charge.  The main difference is that, while I will be beaten up by the loan sharks when I keep delaying my payments, the credit card company would have the right to possess my house and any of my other belongings, until I declare myself a bankrupt.  The credit card company thus have the advantage of legality on their side, unlike the loan sharks, but the stress seems similar to me.  Thus I understand and sympathize with the loan shark's explanation.

    All of us have learned from a course in Money and Banking that all lenders of money must take into consideration the twin problems of adverse selection and moral hazard.  The only reason why a loan shark is willing to lend money without subjecting the borrower to stringent monitoring, unlike banks, is because he feels that the ability of his gang to beat up any loan defaulters will solve these two problems.  Money no Enough has thus brought up this interesting analogy about how other money lenders, unlike bankers who may have gone thorough a formal economic course, solve the vexing problem of asymmetric information.  Surely we must think about all these before accusing any  'ah longs' of being unreasonable! :-)