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Monday, Oct. 23, 2006

JAPANESE PERSPECTIVES

Room for microcredit in the notorious 'gray zone'?


For sci-fi lovers, the twilight zone is a scary place, the stuff of bad dreams. But for borrowers of consumer loans in Japan, it is the "gray zone" that constitutes the nightmare.

Japan's financial gray zone exists between two loan rates chargeable under two different laws. The first is the Interest Rate Restriction Law, under which consumer loan companies can charge from 15 to 20 percent interest depending on loan size. The second is the Investment Deposit and Interest Rate Law, which allows them to charge up to 29.2 percent, provided borrowers agree in writing.

Once borrowers wander into the interest-rate no man's land between these two laws, it is difficult to get out. It becomes a case of borrowing from Peter to pay Paul. This juggling act draws people into multiple debts, exposing them to aggressive loan collection tactics. Some are even driven to suicide.

Plans are afoot to abolish the gray zone. LDP legislators are looking to push through reforms in the current Diet session that would bring the ceiling on loan rates down to 20 percent with a phase-in period of five years.

Not surprisingly, this plan is meeting stiff resistance from the money-lending community. Their claim is that high risk calls for high return as a matter of economics. They also say that without their willingness to take on those risks, borrowers in dire need will be compelled to accept even more usurious rates charged by real extortionists. From the gray zone into the black market, in fact.

There is some credence behind these assertions. High risk and high return should indeed go together with efficiently functioning financial markets. It is certainly not acceptable that people should be driven into the mouths of loan sharks waiting to tear them apart.

Yet there is more than a whiff of blackmail in these claims to legitimacy. There is little comfort for the borrower in being told that if they don't come to you, the alternative is guaranteed to be much worse. The devil you know is still the devil after all.

To be sure, many types of people use consumer loans. Not all of them are in desperate straits, but for those in such circumstances it is a cruel world that demands sky-high interest payments, precisely because you are very far from having the means to honor such liabilities. Indeed this has been the paradox that has thwarted, baffled and tormented many a borrower in the Japanese financial markets. Not just individuals, but small businesses and entrepreneurs as well.

The less money you have, the more you are expected to pay to get access to credit. Would-be startup companies who by definition have no business track record are turned down by lenders because they cannot produce a track record. Small businesses that have little in the way of assets are asked to put up collateral to cover nearly a hundred percent of the amount they want to borrow.

In a superb twist of fate, people who go in for high-risk, low-return financing drew media attention just as the debate over gray zone loans got going. They are Nobel Peace Prize Winners Grameen Bank and its creator, Muhammad Yunus.

Microcredit, which is what Grameen bank engages in, provides financing to the poorest of the poor in Bangladesh. These people need finance because they are poor. They have no access to finance because they are poor. Microcredit was designed by Yunus to fill this strange and contradictory gap. Maybe it is time to think about making room for microcredit in the gray zone.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.


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