Why Illegal Moneylenders Persist - by Taejun Shin
When I started Gojo a decade ago, I saw illegal moneylenders as purely evil. No surprise there—their annualized interest rates often exceed 200%.
During my recent visit to Sri Lanka, I met a couple who run a small vegetable stand from a hut on a main road, selling vegetables they grow n their garden. They subsist on little income, LKR 500 ($1.50) a day.
When urgent cash needs arise, they turn to a daily collection moneylender. Recently, they borrowed LKR 5,000 from him. Each day, the lender arrives like any other customer at their shop. When he comes, the couple retrieves LKR 100 from a plastic jar (see the one in front of the woman) and hands it to him, much like an old-fashioned newspaper subscription fee collector.
In total, they repay LKR 9,000 over three months for the LKR 5,000 loan—a staggering annual interest rate of over 300%. Shylock interest rate.
I asked why they don’t borrow from microfinance institutions (MFIs), whose interest rates are much lower—around 40% (it is still high by many countries’ standards, but it is the market rate in the country with high inflation and cost of capital). Their response was enlightening:
