Government as Payday Lender?

Last November, Manitoba began it’s crackdown on payday loan companies by forcing them to license. The business model is pretty simple: those that live paycheque to paycheque are short some weeks and need to borrow money. The companies in this market, which include MoneyMart, provide the service… for a heavy price. While Federal law defines criminal interest rates as 60% and above, many payday lenders get around the limits by charging administration or other fixed fees that make the effective interest rates much higher.

Manitoba is going the regulatory route, which is an important first step. But ultimately poor people need better access to credit — true in the developing world and the developed. Microcredit has been the focus of about 25,000 development economics papers (estimation by author) in the last 20 years. Microfinance operations were originally initiated by locally-led NGOs, who found that, to the surprise of many, dirt poor borrowers had repayment rates upwards of 99%. The private sector has learned from these findings to make money in the developing world lending small amounts of money at relatively low interest rates. For example, Scotiabank has microfinance operations in the Caribbean.

So why has the credit market failed the poor in Canada? I’m not exactly sure, but it likely has something to do with (a) lenders’ inability to be perfectly informed about the borrower’s repayment characteristics; and (b) lack of regulation, effectively letting lender’s get away with it.

Governments, through tax collection, administration of social programs, etc., have an informational advantage and, I suggest, would be able to run a fair and efficient lending program that relies upon the principles learned from the developing world experience. (Privacy concerns would of course have to be addressed.) Relative to other programs aimed at helping the poor, the program would be extremely cheap if not self sustaining (after an initial capital outlay), especially given governments cheap access to credit. The initiative could also involve borrowers working to organize and administer the program, ultimately a way to close the gap between designers and users of social programs. So Manitoba, what are you waiting for?

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5 thoughts on “Government as Payday Lender?

  1. Why not just increase wages, social spending? It strikes me that so many of the posts on RPPE point out the fact that labour has suffered massive defeats over the last 25 years, in no small part through the effective leverage of debt and fiscal austerity. And this, is precisely why one can now buy a pair of Nikes on an installment plan in so many Third World countries, why the World Bank absolutely LOVES micro-credit.

    Of course a poor-persons state-owned bank isn’t in and of itself a bad idea. Although one should ask exactly how much life blood is left in the NDP in Manitoba, for when such a bank falls into the wrong hands…

    And then we have to consider whether what the “NINJA” market needs is debt. There are regulatory options available in terms of bank service charges and cheque cashing that could just as easily be put in place. In our contemporary context, this idea just wreaks of neo-liberalism.

  2. Certainly this initiative should not be viewed as a replacement for changes to minimum wages and social spending. But these changes assist those in the formal labour market, and will not eliminate the need for so-called payday loans.

    Yes, the idea “wreaks of neo-liberalism” in its focus on debt as an answer. But certainly government involvement in the credit market to this degree is not a neo-liberal dream. My basic points are (1) radical structural change that would eliminate this need is unlikely; and (2) the initiative is not costly, politically or economically, to implement.

  3. There’s a fairly wide berth between a peoples bank that makes sizeable investment decisions and one that provides consumer debt. No? This is a peoples money mart designed to provide a basis for debt sustainability, not facilitate any kind of redistribution of wealth. Which isn’t to say that I hate the idea – I don’t. It just ain’t much within the bulwark of our oh so neo-liberal state. But hey Travis, didn’t the guy from the Grameen Bank just win a big prize??? With so many in the mainstream rushing to champion the idea of a “people’s bank”, including the father of ‘efficiency wages’, at least you’re keeping good company. I know, I know, no need for spice. Sorry. And I know too that the Revolution ain’t coming any time soon. But if our reform agenda is to be even potentially transformative, we at least need to keep our critical knives sharp. And this idea is closer to Third Way alternatives than it is to anything really meaningful. I mean just imagine, with a little state intervention to shore up the low-end of this market, think of the additional credit opportunities available in the NINJA market. Read the last paragraph of Loney’s initial post – if that ain’t a heads-up for so many rich peoples banks to get their groove on, I don’t know what is.

  4. its our control that matters. we shld not blaim payday loans. the debt is the reason ,we shld plan our budget and avoid overspending . paydya loans are here for ur convenience –thiough they have a huge fees

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