Personal finance training for students to avoid loan shark traps

Nội dung text: Personal finance training for students to avoid loan shark traps

1. PERSONAL FINANCE TRAINING FOR STUDENTS TO AVOID LOAN SHARK TRAPS Khuc The Anh, PhD. 7- National Economics University, Le Dong Duy Trung, PhD. - Vietcombank Abstract This research focuses on assessing the issue of personal finance training for students with the aim of protecting this target group from loan shark traps. By focusing on in-depth interviews with lecturers and group interviews with students, we found that most universities do not have the personal finance subject, nor have they created environments for students to participate in many competitions. Meanwhile, although students already have a certain understanding of personal finance as well as the negative impact of loan shark, but they still intend to use it. After the discussion, the article gives some policy implications, mainly referring to the introduction of the subject into teaching as well as changing the content to fit the reality of Vietnam. Keywords: financial literacy, loan shark, personal finance. 1. Introduction During the 1980s and 1990s, a group of scholars from the Washington Concencus developed a perspective on accessing comprehensive financial and financial services, helping individuals to invest or better utilize financial services, thereby helping to promote the development of the free economy. This view offers a way to promote finance from both “supply” and “demand” sides. For the supply side, in addition to mainly developing financial institutions, there is also the process of developing financial services and self-training in the process of financial development for people (such as using a new service or introducing a training program into the school). This is to provide the human resources for these financial institutions – and it is also the way to protect consumers in the financial sector. However, in the process of providing financial services, some organizations do not "greening" but look for gaps in service provision for vulnerable groups in the "blackening" trend. For the demand side, to be able to operate in the financial market, increase exposure to information technology and increase understanding of financial services, promote access to financial services, thereby giving appropriate attitudes and behaviors towards finance and ultimately increasing personal income. The research is approached by the authors from the supply side of financial services - and specifically those who do not provide green credit but loan shark. Loan shark is mentioned in many perspectives of authors in the world, for example Nugent (1941), Shergold (1978), Booth (1990) said that this is an underground operation, with extremely high interest rates, and directly affect the economy. These views provide mass evidences of negative impacts on the demand side – who are using the service from the provider side. In particular, for the research group on microfinance – typically Ledgerwood et al. (2013) – this is one of the problems 7 Email: anhkt@neu.edu.vn; 0936322828 89
2. that hinder people from accessing financial services, because the vulnerable groups in society (including students) have difficulty accessing official capital sources. However, it is easy to see that these studies, and even some of the issues mentioned in Vietnam - considered a high underground economy - are approached mainly from the demand side. These studies only focus on (1) the poor or near-poor – by country standards; (2) rural areas. Urban areas have received little attention from researchers, because this is the most active area of credit institutions – and people's incomes are often higher. However, the reality shows that licensed credit institutions rarely give credit to students, because their income is low (55% less than 5 million/month – according to Dang (2020)), and it is difficult to prove their ability to repay the debt. Looking back at the problem of loan shark of students: the number of university students accounts for a large proportion of the population in big cities, but the ability to manage finances is moderate, and the income from the family accounts for a high proportion. This population is in a "transitional period", so spending demand change greatly – and often, family subsidies can hardly meet the needs. Therefore, it is understandable that a large number of students have used funds from loan shark to meet urgent needs. After having published studies on financial literacy, factors affecting students' intention to use loan shark, this study continues to evaluate measures to protect this group of “financial consumers” through personal finance training. 2. Literature review and theoretical basis 2.1. Loan shark The problem of loan shark (or predatory lending) has been studied in developed countries since the 1940s. However, there is no unified concept of loan shark in the world, due to the level of assessment and purposes of different researchers, regulatory agencies, and society. Nugent (1941) argues that predatory lending or loan sharks have appeared in cities since the American Civil War, and in Europe since the Middle Ages. According to him, loan shark is lending in small amounts, with short loan and repayment terms, with a total cost (including interest and fees) much higher than the law allowance. Loan shark has existed for a long time, when people who need to borrow but do not have access to formal credit, maybe because of the borrower's illegal needs (such as gambling, smuggling, etc.) or because borrowers cannot access formal financial institutions due to low income, unqualified collateral. Meanwhile, Shergold (1978) argues that loan shark is the lending of money at a rate higher than the limit prescribed by law or socially acceptable norm. This is the most important source of income for organized crime, besides gambling revenue. Booth (1990), Chin and Chin (1990) and later Morgan (2000) pointed out that loan sharking is also auctioned off by Chinese criminal organizations to select territories. This makes sense because organized crime often controls the gambling industry, and lending to gamblers or “thirsty gamblers” is an important part of these gamble places. Engel and McCoy (2001) propose a broad concept of loan shark as a type of credit that meets at least one of the following criteria: (i) the loan does not bring benefits to the borrower; (ii) the loan 90
3. is designed to generate huge returns; (iii) fraudulent and scam loans; (iii) the loan is misleading because it is unclear and illegal, the terms are not favorable to the borrower; (iv) the loan requires the borrower to waive legal rights; (v) very high interest or total interest and interest charges, high overdue fees or heavy overdue debt settlement terms; requires installment payment or payment at the end of the period with very high value; unnecessary loan coverage terms but mostly good collection rates. Customers are mainly referred through the social network, or intentionally find loan shark creditors, and many debtors borrow to gamble or carry out illegal activities, even in developed countries like the Netherlands. To summarize, in Vietnam, according to the Prime Minister's directive No. 12/CT-TTg, “loan shark is a form of lending, borrowing or mobilizing capital with an interest rate exceeding the legal interest rate prescribed by law, conducted by individuals, groups of people or financial service business, often associated with illegal acts of debt collection and appropriation of assets” (Prime Minister, 2019). The nature of the existence of loan shark is that the activities are carried out underground, making it difficult for ministries and agencies to manage and detect these individuals and organizations. 2.2. Personal finance training Personal finance training is a part of helping to form financial literacy. Lusardi et al. (2017) or Atkinson and Messy (2012) agree that personal finance training is the process of providing financial- related knowledge in order to increase the subject's understanding of concepts of financial terms (interest rates, bonds ) and operating methods of financial institutions (banks, credit institutions, ). Thus, personal finance training will be a prerequisite for the formation of financial knowledge, thereby affecting the financial behavior and attitudes of the subject. The role of personal finance training in consumer protection is demonstrated in many ways, including: • Protecting consumers from financial shortfalls that cause scams Lusardi and Mitchell (2014) argue that by increasing personal finance training through financial skills, attitudes and behaviors, it will contribute to increase financial protection of consumers – especially those with limited access to formal financial services (eg students – very easily tempted). Nowadays, growing financial technology requires more and more people's understanding of the operations and the way to use these technologies. Research by Servon and Kaestner (2008) shows that: People who have attended a personal finance training program continue to want more training than those who do not participate in the online page created to deal with content that doesn't meet these people's needs, and can calculate appropriate interest rates on loans and investments, thereby avoiding some of the informal credit in the market. The above studies also show that people who lack personal finance training will be able to make financial decisions such as investing, buying and selling inaccurately. People with lower financial literacy tend to buy on credit and cannot pay off the full balance each month and end up spending more interest. This group also doesn't invest, has trouble with debt, and has a poor understanding of the terms of their mortgages or loans. More worryingly, many consumers believe 91
4. they are far more financially literate than they really are. The reality of financial fraud appears a lot in rural Vietnam (such as tontine - in many localities), low-income areas and low access to modern financial information and products (Pham Van Tam, 2020). The orientation for smart financial consumption contributes to protect financial consumers from the consequences of ignorance, through which the Government will have more appropriate and effective measurement policies. . • Change the habit of keeping idle money Personal finance training (as part of financial literacy development) has a positive relationship with financial and economic development. The population with better financial literacy is more likely to use idle money as a domestic investment; as a result, reduce dependence on foreign capital and promote faster economic growth (Yoshino et al., 2015). The research group on microfinance also shows that when the poor or people in rural areas are trained in financial products, they will be better able to use their idle money through expansion of the savings rate, thereby aiming for reinvestment, loan reuse and poverty reduction (Ledgerwood et al., 2013). In addition, the increase in investment demand of the people will create development opportunities for the financial intermediary sector including banks, insurance, stock market, foreign exchange market, Expansion policies and re-targeting help intermediary financial sector companies to develop new and more efficient services such as e-banking, etc. Mobilize capital more effectively from the development of intermediary financial sector creates opportunities for businesses, especially startups and small and medium enterprises, to have the opportunity to access cheaper capital. Thereby contributing to the completion of the country's financial goals. • Reducing the gap between rich and poor in each country The impact of personal finance training (in financial literacy) on the economy is shown by Lusardi et al (2017) that: people without personal finance training are often located in impoverished area, and there is a significant income gap with those with training. This result is also supported in the study of Faboyede et al (2015): People with low financial literacy have less efficient investments and expenditures, thereby having a negative impact on their income. Additionally, for emerging economies, people with high financial literacy can ensure their own standard of living, thereby effectively contributing to real economic growth and poverty reduction. 3. Research Methods In this study, we focus on personal finance training for students to avoid the impact of loan shark, so the default approach is demand-side. We chose the research method as in-depth interviews with a group of lecturers from universities in the economic sector and group interviews with students. For in-depth interviews, because of the pandemic, we conduct online interviews on the following issues: (1) is there any financial training; (2) whether personal finance subjects are taught; (3) personal finance is required or elective, how many credits; (4) the content taught in personal finance; (5) applications in competitions on personal finance. In in-depth interviews, we usually interview for 25 to 40 minutes, after asking the interviewer's permission, the recording is saved. These recordings are un-recorded within 1 day. The total number of interviewees is 14 lecturers who are teaching at schools in economic sectors, including National Economics University, Foreign Trade University, 92
5. Academy of Finance, Banking Academy, Thuongmai University, University of Science and Technology, University of Civil Engineering, Hanoi University of Industry, University of Economics Ho Chi Minh City, DaNang University of Economics, Hue University of Economics, University of Science and Technology of Ho Chi Minh City and VNU University of Economic and Business. For the group interview, we select students from one of the 12 schools above, but not only include economics. Because we want to observe each person, we choose Microsoft teams software. During the in-depth interview, the interviewer will turn on the camera. Questions related to (1) has the interviewer heard of loan shark?; (2) ever used and the reason for using; (3) the way in which loan shark collects debt; (4) how to calculate the interest of loan shark; (5) whether the interviewee has studied personal finance or interest-related subjects, thereby seeing the adverse effects of loan shark. Unlike in-depth interviews, for group interviews, we paid fees for participants. As a result, 22/36 invited people agreed to participate. This entire process was not recorded due to the interviewer's request. We record the results in 1 hour after finishing. After in-depth interviews and group interviews, we completed the questionnaire and conducted student interviews. The interview results along with the data collected are shown in the following table. 4. Research result 4.1. Results from in-depth interviews The results of the interviews with the lecturers showed that most of the schools that teach the economic sector have a finance subject. For some schools like the University of Civil Engineering, although there is no Finance - Banking major, it also integrates financial management subjects in the teaching process. However, the results on subjects related to personal finance were quite surprising: Firstly, lecturers all agree with the importance of personal finance pillars (besides corporate finance, public finance and international finance), but most schools do not teach this subject. The number of schools teaching this subject is also limited (specifically, there are 2 schools in the North that teach this subject). We do not discuss why schools do not teach this subject in this article. The lecturers all said that some of the contents of personal finance such as calculating interest rates and general understanding of the market are added in different subjects, usually corporate finance. For some schools with in-depth training in the banking industry, it appears in a number of subjects such as commercial banking, credit operations, etc. Secondly, the interviewee said that when teaching, only the Banking major of the National Economics University chooses this subject as a compulsory subject. The rest of the majors choose it as an elective subject, with 3 credits. The content of the course is heavily related to saving, investing, borrowing, retirement funds, or investing in high value assets (i.e. foreign curriculum). The contents of the assessment of interest rates on loans from loan shark are not much, nor are they heavily weighted. This can be seen that, the assessment of the universities on the issue of personal finance training is insignificant and not focused - at least in terms of teaching. 93
6. Thirdly, on the issue of participating in competitions. The interviewees said that competitions on personal finance are not many (many schools do not even have, or are too few compared to other competitions for students of economics). Organized personal finance competitions also do not incorporate the ideas of loan shark restrictions, but focus on the problem of investing in the form of fiction. One of the in-depth interviewees said that there is a big difference between fantasy and reality, because it doesn't mention where individuals get money to invest! Thus, the results of the in-depth interviews show that: the lecturers think that the subject of personal finance is important, but the teaching is insignificant. The content pays little attention to the problem of loan shark, and to the issue of "defense" or protecting themselves when using financial products. 4.2. Results from the survey After in-depth interviews, group interviews, we adjusted the questionnaire. The questionnaired was sent through the Youth Union of Vietnamese universities, then the Youth Union would send it to the Associated Organs to conduct the survey. This entire survey is done on google form. We conducted the survey within 1 month (from late June to July 2021). The total number of observations analyzed was 563, of which 156 were male. The number of survey students studying in the South is 259, the North is 304. The age group of the respondents is mainly from 18 to 22 years old who are students of Vietnamese universities. The total number of students who have studied personal finance is only 13, and comes from the National Economics University. Some students replied that the school offered this subject as an elective but did not choose it. The survey results below show part of the results: According to the survey results out of 563 students, 376 people agree that loan shark is common among university students, accounting for 66.8% of the number of observation. The number of students think that loan shark are not common among students are only 187 people, accounting for 33.2% of the observations. Thus, from the survey, we partly see the situation of loan shark among students of Vietnamese universities. Table 1: Descriptive statistics from the opinions of loan shark among students Frequency Percentage Disagree 187 33,2 Agree 376 66,8 Tổng 563 100 (Source: Author's calculations) In addition, the survey results also obtained the opinion of the reason why loan shark is popular among 376 students who think that loan shark is common. It shows that more than 282 opinions saying that loan shark institutions carry out loans procedures very quickly, 321 comments that loan 94
7. shark helps to meet personal needs, 236 comments that this type of loan can be accessed by students, 82 comments that loan shark helps students to conduct businesses, 157 comments that the solicitation and invitation of loan shark institutions is a reason for students to borrow money, 99 comments that it is due to students' lack of financial understanding and the harmful effects of loan shark, and 216 said that students do not want their parents to know they have borrowed money. Thus, the reason for using loan shark is mainly because loan shark institutions can meet individual needs, the speed of loan procedures and the accessibility of students. Table 2: Reasons why loan shark is popular among students Reasons for using loan shark Frequency Quickly 282 Meet individual needs 321 Students can access 236 Serve for business purposes 82 The invitation of the loan shark institution 152 Lack of understanding 99 Do not want my parents to know 216 (Source: Author's compilation from survey) According to the survey results, only nearly 17% of people know about the harmful effects of loan shark while the number of students know about loan shark, know how to use it and have access to large loan shark institutions. Table 3: Reasons for not using loan shark of students Reasons for not using loan shark Frequency Students know loan shark is not beneficial 95 Students do not know about loan shark loans 44 Students do not have access to loan shark providers 78 95
8. Students do not know how to get a loan 13 (Source: Author's compilation from survey) Statistical results show that, among the students participating in the survey, the majority of them are financially literate with more than 77% of the students participating in the survey correctly answering questions about the Financial topics. For example, calculating interest rates on loans from loan shark, but not calculating flat interest. Students themselves have little opportunity to participate in competitions about finance in general and personal finance in particular. When asked about subjects related to personal finance, most students know a part of it, such as calculating cash flow, but are not taught how to save or spend. Through in-depth interviews, many students said that in some busy cities, with many universities such as Hanoi or Ho Chi Minh City, spending less than 5 million/month can hardly meet all personal needs, especially students who do not work part-time. Therefore, living dependent on family support has made it difficult for many students when incurring unexpected expenses and cannot find a way but to borrow money from friends and relatives. Among the students who participated in the survey, most of them did not need a loan but had a lot of information about loan shark. In addition, although the majority of students are assessed as financially literate, they are often unaware of the risk that loan shark can affect their lives – i.e lack of understanding of personal finance training. In short, it can be seen that most of the students of these schools are not allowed to study this subject. The content of the course is also focusing on the investment and use of capital, but does not mention how students can use it when facing the problem of short-term capital shortage. 5. Discuss some issues and conclusions From the results of in-depth interviews, group interviews and surveys, some conclusions can be given as follow: Firstly, the existence of informal credit in general and loan shark in particular is inevitable because there is not enough capital for everyone in society. Many students know the risk that loan shark can affect their lives, but still use them because they do not manage their finances effectively and consume excessively. Therefore, it is necessary to include modules related to personal finance or financial management into the curriculum (with economic sectors), and personal financial management into the clubs of the Union, the Student Union (with other schools) to help students better manage their personal finances, avoiding reckless consumption and then "cramming" into this type of risky financial service. Secondly, it is necessary to promote the training of financial literacy for high school students because these are the subjects who are preparing to go to college, enter a new environment, and leave the arms of their parents, so they will encounter many problems, including personal financial management. They are susceptible to many fraudsters who take advantage for appropriation of property. Many new college students use loan shark because they consume a lot, since they do not have parental control, leading to running out of money; inexperienced in borrowing and hesitate to 96
9. borrow from relatives; are approached by loan sharks through advertisements about loans with low interest rates, quickly and secure, so they used loan shark and thought they could use this loan effectively to meet the personal demand and repay the loan after receiving allowance or month-end income from part-time job. Therefore, it is necessary to train in basic financial knowledge about calculating interest rates on loans, calculating flat interest to normal interest, and managing personal finances. These contents only need to be included in the multiple-choice exam, which does not need to be complicated, but requires students to explore and self-study in order to improve their financial understanding and effectively manage personal finances. Thirdly, the content of the personal finance course also needs to be closer to the situation of Vietnamese students. These contents should be integrated in financial competitions to develop the subject and also help students have more perspectives on the financial market. References Atkinson, A. và F.-A. Messy (2012), Measuring Financial Literacy: Results of the OECD/ International Network on Financial Education (INFE) Pilot Study, OECD Publishing, Booth, M. (1990), '[BOOK REVIEW] The triads, the Chinese criminal fraternity', Far Eastern Economic Review, Số 149,Trang: 35-35. Chin, K.-l. và K.-L. Chin (1990), Chinese subculture and criminality: Non-traditional crime groups in America, Greenwood Press New York, Đặng Ngọc Đức (2020), Thực trạng và giải pháp hạn chế tín dụng đen, Đề tài nghiên cứu khoa học được ngân hàng LienVietPostbank tài trợ, Đại học Kinh tế Quốc Dân, Hà Nội. Engel, K. C. và P. A. McCoy (2001), 'A tale of three markets: The law and economics of predatory lending', Tex. L. Rev., Số 80,Trang: 1255-1275. Faboyede, O. S., E. Ben-Caleb, B. Oyewo và A. Faboyede (2015), 'Financial literacy education: key to poverty alleviation and national development in Nigeria', European Journal Accounting Auditing Finance Research, Số 3(1),Trang: 20-29. Ledgerwood, J., J. Earne và C. Nelson (2013), The new microfinance handbook: A financial market system perspective, The World Bank, Lusardi, A. và O. S. Mitchell (2014), 'The economic importance of financial literacy: Theory and evidence', Journal of economic literature, Số 52(1),Trang: 5-44. Lusardi, A., P.-C. Michaud và O. S. Mitchell (2017), 'Optimal financial knowledge and wealth inequality', Journal of Political Economy, Số 125(2),Trang: 431-477. Morgan, W. (2000), Triad Societies: Triad societies in Hong Kong, Taylor & Francis, Nugent, R. (1941), 'The Loan-Shark Problem', Law Contemporary Problems, Số 8(1),Trang: 3-13. 97
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