'Loan sharks' need tougher regulation and controls

Recent research from the University of Otago, Wellington shows that loan sharks charging interest rates of up to 400% per annum are exploiting Maori, Pacific and low income New Zealanders and need to be better regulated.

“Loan sharks target and thrive in low income communities because consumers are borrowing for everyday needs,” says lead researcher Associate Professor Louise Signal.

“The consequences of borrowing from these unscrupulous loan sharks can be extremely costly and generate, or prolong, financial hardship for these people.”

“The legal interventions identified in this study will increase the protection of the most vulnerable, leave them less indebted and with more money to spend on food, shelter and other essentials of life”.

The study by the Health Promotion and Policy Research Unit says the impact of loan sharks in low income suburbs of South Auckland and other cities is affecting the health and well-being of New Zealanders through usurious levels of interest rates.

“This is an extremely serious problem for people on low incomes and benefits. It is negatively affecting their lives and those of their children, trapping them in a vicious cycle of debt to unscrupulous fringe lenders,” says co-author Tolotea Lanumata.

The research, recently published in the Health Promotion Journal of Australia, suggests a series of recommendations to reduce the negative impacts of loan sharks.

This is at the same time as the Minister of Consumer Affairs, Simon Bridges, is looking at amendments to the Credit Contracts and Consumer Finance Act which would further control the activities of loan sharks by introducing responsible lending requirements.

The authors have reviewed national and international research regarding the impacts of loan sharks, and interventions to reduce the harm they cause, including regulations applying in Australia. They also carried out in-depth interviews with key informants familiar with the impact of loan sharks in Maori, Pacific and low income communities.

The study recommends several key changes such as tighter regulation including a cap on interest rates at 48% per annum, and introduction of responsible lending requirements.

A critical and complementary factor supported by other research and informants is ensuring an adequate supply of affordable micro-finance through mainstream banks, credit unions and other community lenders.

“These changes are badly needed to reduce the cycle of debt that is trapping many families in poverty, and to free up money to spend on food, shelter and other essentials of life,” says Associate Professor Signal.

The study also says more work needs to be done to inform vulnerable communities about financial literacy and the risks involved with loan sharks and borrowing.

However it notes this will have little or no impact without some kind of regulation of loan sharking, plus the implementation of an interest rate cap under the law.

This study is part of a larger ENHANCE study undertaken in collaboration with Auckland and Canterbury Universities and Te Hotu Manawa Māori and funded by the Health Research Council and the Ministry of Health