Moral and ethical issues in the micro-loan industry

- Is SMS-loans, as a phenomena, an example of unethical business practice?

Introduction

Through out the last decade a new and growing form of credit-loanes has emerged in several markets all over the world. This financial product has come to be known as SMS-loans and reached Scandinavian markets in early 2006. The phenomena is also present in countries such as Canada, USA, South Africa, UK and most European countries today. The existence of these services in each country are due to local legislation, still these services are legal in many countries in the world. The introduction of these kind of services has given rise to debates regarding ethical and moral issues as well as corporate social responsibility. The questions raised whether this kind of business practice is moral and ethical is based on several factors that is to be discussed further more in this blog.  

What are SMS-loans?
SMS-loans, also known as micro-loans or instant loans are short term loans given to borrowers from private credit institutions and lending firms. These loans are characterized by smaller amounts ranging from 50 to 500 euros and usually comes with a pay-back time of 15 or 30 days. In Great Britain there are lending firms offering up to 100 pounds. The applications for these loans are usually made trough instant messages or SMS via mobile-phones or the Internet. By typing in a social security number and bank account number, money arrives tho the bank account almost instantly or within half an hour.

How does it work?
By just a click away, it is easier than ever before to borrow money. The credit companies allows any person to borrow money without any security and check-up on the borrower in question. Due to certain lack of regulations regarding loans with amounts that are considered to be “small” there are less requirements for these companies to make a background-check on the borrower and the economic situation of that person. This enables the companies to give loans at very high total costs which are not highlighted in the marketing and advertising. The loans are often presented as free of interest rates instead there is a fee charged when taking the loan. When adding the fees and interest rate divided with the total credit term you get the effective interest rate that sometimes exceeds over 600 %.

The cases of unpaid SMS-loans in Sweden showed a decrease since the peak in 2007. Among young people there has been a 10 % decrease in 2011 compared with 2010 but in 2012 the amount of unpaid loands increased again with 18% according to authorities. The amount of unpaid loans are most common among younger borrowers between the age of 18 and 25. Unpaid SMS-loans are also more common among women then men.
 

Efforts has been made from authorities in Sweden through changes in legislation that regulates the credit market. Credit institutions are no longer allowed, in the same extent as before, to provide short term credit loans without proper background checkups. Information campaigns in the society has also made young people aware of the risks associated with taking these loans. These are thought to be the contributing factors to the 40% decrease in 2011. Unfortunately the increase during 2012 indicates that it is hard for the authorities to make an impact regarding this big problem in society.

Further more there has been extensive critic towards the credit institutions in their way of marketing these short term credit loans. In the advertising only the positive sides of the loans are emphasised like the rapidity, easiness, and “no questions asked” attitude, while the costs and disadvantages are often hidden.

The problematic and debate

SMS-loans has enabled people who usually were barred from receiving loans, like teenagers or other low and no-income groups to borrow, which in a way could sound positive, however there is reason to be seriously concerned about this development. Is this form of business really appropriate from an ethical standpoint?

A lot of the individual that finds themselves in these payment difficulties associated with taking these loans are often individuals in difficult economic situations. There has been many cases concerning people that don’t see other possibilities in providing for themselves and for there families like single mothers and unemployed. There has also been cases with gambler addicts  financing their on-line gambling through SMS-loans. A growing number of individuals trapped in debts and with no possibility to clear these debts will have consequences that creates a huge burden for society in the long run. Regarding that young people account for one out of five cases of unpaid SMS-loans, the worsening economic prospects for these individuals may lead to consequences in future life. Where lies the responsibility? Among individuals, corporations or authorities?

Business Ethics

Today it is often argued that businesses need to take responsibility in how they affect the society in an economical and environmental way, but also from a social perspective. Ethical implications can be seen in regards to whom these kind of companies choose to target and market themselves to, being mainly individuals in vulnerable and often desperate economic positions. Lending institutions have received strong critique by media and regulatory bodies in regards to the lack of clarity in the information presented to potential customers. It is often pointed out that the cost structure is hard to understand by the average customer and that numbers presented fail to present the actual cost of taking a loan from these lending institutions. In this way, loans are often presented as quick fixes, promising to alleviate the economic burden of individuals in the need of immediate funds.

However, few realize the possible implications of taking these kind of loans, resulting in great problems paying them back in due time. As a result, additional costs in the form of hugh effective interest rates due to additional fees are applied by the lending institutions. Furthermore, failing to meet the deadlines set up by the lending firms, the borrowing individuals face risk in getting permanent payment difficulties which can have far-reaching consequences. As such, lending individuals might find themselves in a “debt trap”.

It should be noted that organisations in cultures with different standards on ethical behaviour might  take different routes in their pursuit to excell in the marketplace. In addition, different nations implement various legal frameworks and thresholds to restrict the freedom on the market. This is partly to regulate the competition of the market, but also to protect the consumer from the greedy wolves that inhabit it. Is it morally responsible to simply use the threshold stated by the law in using credit checkups, lending funds to individuals who might not be able to bare the burden of these loans? Or ought these organisations go beyond these minimum obligations?

It could be said that these companies merely optimizes their positions in relation to existing laws and market rules, and are as such within their own right. On the other hand it could be argued that these practices breaks one of our society´s core human values: exploiting unfortunate and desperate people. The media and popular out roar has clearly illustrated that vulnerable individuals may take great harm from these practices. Who bares the final responsibility in these transactions? Is it society, the lending firm or the individual? No matter what position one takes, it remains that companies must take responsibility in distinguishing between practices that are merely differentiating and those that are wrong.

Corporate Social Responsibility

An increasing number of firms and business sectors have responded to increased pressure of socially responsible activities, allocating resources either to mend their tarnashed reputation, maintain their image or simply to act as good citizens. However, as illustrated by this case, these forms of Samaritan practices are far from universal.

has been said that “If you play by the rules you are finished”. (Article: “China real time report: Business in China”) This is a controversial standpoint because it in a way justifies companies right to do exactly what they think is necessary to succeed. By always playing by the rules you might be doing the “right” thing from a social perspective, but to what limit will a company do the “right” thing before putting their own gain in the first hand and  also, where is the line drawn? If the consequences of these companies actions lead to economic burden for society in the long run could these firms really be said to take social responsibility?

A cultural perspective

In sharp contrast with the liberal and individualistic values promoted in the Western markets and societies, one can look towards the East and perhaps notice a different reality. These markets, although having adapted to the logic of the western markets, are more collectivistic. Here, business practices which are widely used in the west might be perceived as strange and perhaps unethical.  

In contrast to the free market and liberal attitudes of the Western societies, Confucian philosophy, being influential in Eastern societies, takes a largely different approach. Here, the focus of the ethical debate is on promoting well-fare of the society as a whole, valuing collective wealth and stability. It recognises that the way we treat people and how we are treated by others will echo in and influence future decision making, largely shaping the way we perceive our reality and shape our society.

In this context, the practices discussed above will inevitably be regarded as controversial as they mean business taking advantage of marginalised individuals, using them as a means to reach their goal. These practices bare the risk of creating a harsh and hostile society, where might means right and the disadvantaged individuals of society are further diminished.

Taking this perspective, ethical and socially responsible business practices largely means acknowledging implications of all stakeholders involved, and recognising them as equals. By doing this, one can take equal weighing of participants involved in a transaction, making it possible to maximise  the total utility and well-being of the business relationship. As such, it is not enough simply to meet the standards outlined by current legislature, one must go beyond this, setting a standard of behaviour and ethical conduct. Without this, one can hardly achieve a harmonious and civilised society.

Conclusion and further discussion

Of course it’s fair to argue that every human being has an own responsibility for her actions.
As Milton Friedman once argued, social responsibility can not be placed on corporations since every individual is responsible for their own decisions. This point of view is contrary to the belief of corporate social responsibility. Moreover, a market that enhance exposed individuals in taking on debts they cannot handle has consequences for society in the future. Is this kind of business practice immoral or is it the way these corporations present and market these services that should be discussed? Should there be regulations in the market that prevent these kind of greedy wolfs from exploit these loopholes in society? Or is this a completely legit business practice since all individuals has a personal responsibility that should not be placed on society or corporations?

Following quote could be useful to bare in mind when thinking about these questions from a big perspective.

“A global marketplace has emerged and we are still struggling to develop some sort of world society ethos where the growing concentration of wealth does not come at the expense of the majority of world inhabitants who have no net wealth; and where the earth's natural resources are not being consumed by a minority at the expense of today's majority, or the natural inheritance of future generations.“  

Extension on blog

We are very glad you enjoyed our blog. As suggested by commentators, it  is important to remember that the businessmodel was initially introduced to   provide poor people with small credits, a small amount of money that could permit them to start up a small business successful enough to permit them to give back the money. This has been an international success, helping many people out of poverty.

We also agree with many of you in the fact that the moral issues of this business is very interesting, raising many aspects that should be considered by businesses and organisations, regardless of their industry. Here, organisations need to take responsibility and realise that what they do affect real people and society as a whole. These must realise their action have far reaching consequences. In this regard we feel there is a great need to highlight the importance of sustainable business models and CSR – raising the bar and expectations on organisations to act ethically correct.

Some readers suggest organizations simply acts within their right and in line with rules and regulations set up by regulatory bodies. However, we feel that the regulatory control and legislatory process is lagging, and as such not in line with what they actually ought to be in the modern society we live in today. In line with this, we again feel that businesses need to step up their game and perhaps use this as a differentiation strategy to excel over their rivals.

As some of you mentioned it is hard for goverments to regulate these lending institutions, but nowadays legal restraints in the freedom of doing proper background check-ups are applied in many markets which has turned out to be successful in many cases.

To conclude this discussion one can say that even though this kind of business models could be seen as  unethical it is impossible for govenments to prohibit these companies and their ways of doing business in order to have a free market economy. Even though some people are getting used and people in difficult ituations get even more trapped in the debttrap every single person still has an individual responcibility of his or her actions.

Sources

1.http://kronofogden.se/nyheterpressrum/presstjanst/pressmeddelanden/2011/pressmeddelanden/smslanenfortsatterattminska.5.70ac421612e2a997f858000102230.html

2. http://svt.se/2.22620/1.2680502/stor_okning_av_obetalda_sms-lan

3.http://kronofogden.se/nyheterpressrum/presstjanst/pressmeddelanden/2012/pressmeddelanden/okningavobetaldasmslan.5.71004e4c133e23bf6db800022971.html

4. Course literature, article: https://eportal.cityu.edu.hk/bbcswebdav/pid-1256756-dt-content-rid-6314191_2/courses/02MGT4221/Etlhics%20and%20Doing%20Business%20in%20China.htm 

5.http://www.textloanstoday.co.uk/sms-loans.html

6. Course literature, article: “When is different just different, and when is it wrong”


7. Course literature, article: “China real time report: Business in China”