Cracking down on loan sharks

The banking business originated from jewelers who stored golden coins. A rich merchant used to deposit gold coins with a jeweler in return for a storage commission with a certificate called a “banking note," which was called a bill later. Moneylenders, not banks, charged interest for loans. The Bible banned the practice of loaning, which was often a subject of contempt among Christians and Muslims. Shakespeare depicted the Jewish moneylender Shylock as evil in his play "The Merchant of Venice." Dante created a hell for moneylenders in his epic poem "The Divine Comedy."

Today, finance is a value-added service industry offering decent jobs and preferred by young people. The sector is further divided into banking, stocks, insurance, trust, loans, venture capital, credit rating, credit guarantee and financial intermediation. The role of modern finance is not just confined to intermediating surplus capital. Financial intermediation allocates available sources to the most efficient sector, increasing the efficiency of the entire economy. In other words, it punishes a less productive industry or business with “high borrowing interest rate" and "low stock prices,” letting it fall behind and keeping the economic ecosystem healthy.

Amid the marvelous progress of finance, secret money-lending remains prevalent. An intellectually-challenged married couple failed to repay 3.5 million won (3,080 U.S. dollars) to a loan shark, who then forced the wife who was five months pregnant to get an abortion and work as a prostitute at a karaoke bar. Other loan sharks demanded interest of 3,000 percent per year. Such lenders are much worse than organized crime rings.

Opponents of limiting loans with high interest propose a free transaction principle. “Debt slavery,” which takes advantage of a borrower’s situation, stems from market failure, however. The government should crack down on loan sharks. The problem cannot be solved right away, however, by making private loans illegal and cracking down on loan sharks. This could instead make the problem bigger by encouraging the black financial market to go further underground. The financially marginalized should be informed of legal options and receive help in pursuing such opportunities. In addition, the government must send a message that threats and violence by loan sharks are illegal and that interest exceeding 39 percent per year need not be paid.

Editorial Writer Heo Seung-ho (tigera@donga.com)