When is a ‘loan shark’ merely a ‘subprime lender’?

There is room for legitimate disagreement on what interest rates are “exorbitant” and what kinds of sanctions are “draconian.”

A famous Israeli singer has been arrested on suspicion of exhorting underworld figures to extort money from her former manager. It is far too early to make any comment on her specific case, which will work its way through the criminal justice system. But the incident throws light on an important and little-understood corner of the financial system: the “gray market” and loan sharks.
The traditional image of the loan shark is someone who offers a loan at high interest and enforces repayment with the threat of violence. The reality is rather more nuanced, but from an ethical point of view this stereotype is itself worthy of consideration.
Assuming all the conditions are transparent, is this an ethical business? Was Shylock at fault for offering Antonio a loan and stipulating in a transparent written contract that he was entitled to a pound of flesh upon default? What about a loan shark who makes clear that the price of a missed payment is a beating? Contemporary ethical thinking finds fault with loan sharking, and certainly Jewish tradition frowns on punitive sanctions on borrowers. From an ethical point of view we can find two approaches to this censure: active and passive.
The “active” approach sees a sin of commission in such a contract. While generally we respect freedom of contract, this line of thinking states that some agreements prima facie lack true “informed consent.”
By definition, such a borrower is subject to duress, and the agreement should be void.
The “passive” approach sees a sin of omission. A person who freely agrees to such harsh conditions must be in such great need that society has an obligation to help him unconditionally, or at least with much less strict conditions. The lender is thus exploiting the borrowers misfortune when in fact he has an ethical obligation to alleviate it.
At some level the explanations are complementary: Either the need is frivolous and therefore the agreement lacks truly informed consent (is it really worth risking your life for a date with Portia?), or the need is truly grave and therefore the agreement involves exploitation of basic needs that society has the obligation to provide.
The gray-market lenders in Israel – and other modern advanced economies – are not at this extreme but in some kind of gray area. Many are totally legal operations that charge legal amounts of interest and fees and profit by lending to high-risk borrowers who are locked out of the regular financial system. In many cases the downside is not violence but rather repossession.
Others do rely on the threat of violence.
But these threats are not classic extortion; they are enforcement that sidesteps the legal system and its monopoly on legitimate use of force.
In the case being investigated now, the technical charge being investigated is extortion. But practically speaking the accusation is that underworld figures were brought in to collect on an existing debt, and these figures even conducted their own hearing and “trial” before concluding that the money was truly owed and that the threat of force was justified.
Despite the differences, the ethical considerations are fundamentally the same.
To the extent that the interest charged is exorbitant and the downside is the total collapse of a family’s way of life, the same basic ethical dichotomy presents itself.
If families and business who turn to loan sharks are not truly in need of the money, we as a society are not willing to legitimate the borrower’s assumption of the risk of extreme sanctions. We are not willing to grant such an agreement the status of informed consent. Your business may be failing, but maybe the solution is to simply let it fail or find a legitimate investor.
Conversely, if people truly are in need, then we want to close off the route of the loan shark and bring all these people onto the radar of the various institutions – public and private – of the welfare state.
There is room for legitimate disagreement on what interest rates are “exorbitant” and what kinds of sanctions are “draconian.”
It could be argued that the interest rates legally permitted in Israel (and other jurisdictions) are too low, unnecessarily driving people to true loan sharks.
But the fundamental ethical argument for restricting loan sharking is well developed, and the voters of virtually every advanced country have found them persuasive.
[email protected] Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).