Issue 4, 2015

SolodukhinaA. V. The Russian Payday Lending Market: Institutional Failures and the mega-Regulator Objectives.

The purpose of the work is to reveal reasons of inefficient performing of the Russian payday lending organizations from the viewpoint of institutional and behavioral approaches and to identify possible ways to manage the payday lending market, so to at least soften their negative effect. The reason to tackle the problem is two world spread phenomena: 1) the “mission drift” that means a shift of payday lending organizations’ mission from the noble one (to help poor people to recover from poverty) towards the commercial and even predatory one (to squeeze from people in need as much money as possible), and also 2) the “debt trap” that reveals that microloans do not increase welfare of their users, but rather devastate them, contrary to the original idea of microfinancing. This is an efficiency violation of great social importance that needs a research on its reasons to enable megaregulator to elaborate a complex solution. To achieve the purpose of the paper we use the meta-analysis of both qualitative and quantitative studies of microfinance markets of different countries. The paper identifies two groups of major reasons for microfinance markets failures: institutional (law, society norms, business model of microfinance organizations) and psychological (behavioral and cognitive biases). It shows that the law allows emerging of a vicious and predatory business model of microfinance organizations, that includes such typical elements as high price of a loan, irresponsible policy of giving loans to everyone, high fines, cooperation with debt collection agencies that compensate the loan default risk through their tough methods. This business model allows earning money on every customer. The effect is enhanced, on one hand, through aggressive marketing policy of microfinance organizations and social norms, particularly consumerism, that generate constant need in money without objective necessity. On the other hand, it is provided by universal psychological peculiarities of people, such behavioral and cognitive biases as hyperbolic discounting, loss aversion, mental accounting and some others. The paper focuses on institutional factors of “the mission drift” and “the debt trap”, typical for microfinance market, as the most controllable ones. It analyses the design of the relevant institutes in Russia, namely the law on microfinance activity and the current law on unsecured cash loans, availability of alternatives to microloans and others. We show the low efficiency of current institutes to transform microfinance market, to redeem its failures and to protect the customer. The paper concludes with some solutions that could be implemented by the mega-regulator in order to eliminate the failures. The paper addresses to a phenomenon of “mission drift” that was fixed for different national microfinance markets and goes further to present an original view on the reasons of such drift in Russia. The results can be useful for the relative regulatory departments and for experts who design laws on microfinance activity. Also the findings can be of interest to the countries that are considering pros and cons of establishing an institute of microfinancing. Keywords: microfinance market, microloans, institutional failures, the regulatory impact, mega-regulator, debt trap, behavioral biases.

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