UCC academics warn that country's current moneylending system 'unfair'

University College Cork (UCC) academics have warned the Oireachtas’ Finance Committee that the country’s current moneylending system is “unfair, depletes the wealth of the most vulnerable communities, and keeps many trapped in persistent indebtedness”.

Dr Olive McCarthy and Dr Noreen Byrne of UCC’s Centre for Co-operative Studies have told TDs and Senators that interest rate restrictions are required to prevent moneylenders from hitting at-risk borrowers with unreasonably high costs, having conducted research in the area of credit for low-income borrowers.

They presented the findings of their study Interest Rate Restrictions on Credit for Low-income Borrowers to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform on Tuesday morning.

In their opening statement, they said that the recommendations in their report call on the Government “to prohibit the currently allowed usurious rates of interest which licensed moneylenders are permitted to charge”.

“To be effective, an interest rate restriction would have to be coupled with restrictions on other fees and charges and a limit on the total cost of credit. Our recommendations also advocate a redoubling of efforts to promote financial inclusion and education initiatives to support consumers in making better financial choices, especially where household resources are limited.” 

They said their research has found that there is “weak evidence” to support the claim that the imposition of an interest rate cap for licensed moneylenders would lead to a reduction in the availability of credit, which in turn would fuel illegal moneylending.

Recent research we have conducted with social housing residents, due to be launched later this year, demonstrates that those on low incomes employ a wide range of coping strategies when they run out of money.

The highest rate currently being charged by licensed moneylenders is 187% Annual Percentage Rate (APR). This doesn’t include collection charges which can raise the APR to 287%.

Both academics’ advise a phased approach to restricting interest rates towards a targeted level.

“We recommend that, following agreement on the ultimate target cap, an incremental introduction of interest rate restrictions takes place to allow for a phasing out of high interest rates over an agreed period of time.

“This will facilitate the adjustment of all parties, the implementation of other supportive policy/legislative measures and fine tuning in light of developments on the ground, until the final target is reached.

“It is important that the first move be the introduction of an interim rate, to develop momentum. Otherwise, the status quo remains. It is envisaged that this first interim rate restriction will prompt a re-examination of the moneylending business model,” they said.