Safe credit to the poor: The role of anti‐usury policies

Abstract

Usury regulations focus both on explicit recommendations, such as disclosure statements in lending acts or interest rate caps, and on incentives for the formal banking sector to reach the poor. Considerable attention is also devoted to adequate sanctions for the practice of usury. We propose a theoretical model to investigate where to direct reforms to curb usury. Our primary policy implication is the convenience of polarizing the allocation of public resources in either legal safeguards for formal lenders or sanction enforcement against usurers. Furthermore, we demonstrate that in developing countries such policy interventions may backfire when borrowers' higher wealth implies increasing inequality in its distribution. Therefore, countries undertaking reforms against predatory lending should be aware of their growth path during transition.

Regulation of Usury: Justification, Consequences, and Some Lessons from Polish Experience

“…However, assuming the hypothesis that the efficacy of usury regulations is conditioned by the effectiveness of the judicial system [Crosato, Dalla Pellegrina, 2019], their growing restrictiveness could be interpreted as an obvious manifestation of the government's impotence in increasing the efficacy of courts, enforcing sanctions, and improving the quality of the institutional framework. The severe tightening of regulations of the kind that also took place in Slovakia [Bouyon, Oliinyk, 2019] is likely to lead to an expansion rather than curtailing of illegal lending.…”

“…For these reasons, short-term bank loans and those offered by payday lenders are their weak substitutes. Moreover, it can be assumed that their theoretically possible substitution in the case of very rich individuals excludes the use of usurious interest rates [Crosato, Dalla Pellegrina, 2019].…”