Lenders of first resort

THEY would call a borrower's workplace a dozen times in an hour demanding repayment. Or send debt collectors to his home in the middle of the night. If the fellow said he could not pay, the representative might recommend he sell a kidney or an eye to raise the cash (and perhaps offer to remove it for him). Some of Japan's moneylenders were an ugly lot.

Yet that never stopped them from being a cornerstone of Japanese consumer finance. Around 14m people, or 10% of the population, have borrowed from a moneylender, or sarakin. There are about 10,000 firms (down from 30,000 a decade ago). The value of outstanding loans totals $100 billion. The biggest ones are publicly traded and often allied with big banks; the top seven make up 70% of the market. But in pockets of the industry, organised-crime groups, or Yakuza, are never far away, notes Jake Adelstein, an expert on Japan's tattooed mobsters.

The business fills an important niche in Japanese society. Where borrowing from the bank is considered shameful and often requires a guarantor, sarakin loans can be as little as $100, borrowers need identification but not collateral, and transactions at kiosks akin to ATM machines take just a few minutes. Loan rates used to be as high as 29.2%—in a country with near-zero official rates. After an outcry at the high levels of debt and the repayment tactics, a law in 2006 capped interest rates at 20% by 2010, and regulated collection methods. Loans were not allowed to exceed one-third of an annual salary. Sarakin were even forbidden from buying suicide insurance on borrowers, since it could lead to, ahem, “moral hazard.”

The new rules clobbered the share prices of the listed moneylenders and the volume of loans of the industry as a whole (see chart). Many firms went bankrupt. Some are for sale. GE is selling Lake, its consumer-finance division. Citibank is considering disposals, too. But regulation may bring respectability. As the worst practices are proscribed, mainstream banks are moving in.

The result is that the biggest moneylenders are adjusting their business models to provide back-office credit-checking services to the banks. That makes sense: after all, quickly assessing a borrower's ability to repay is at least as central to their business as providing the money. What is more, Japan does not have the same credit-bureau culture as the West. Each financial institutions does its own scoring, and information on a borrower's creditworthiness is not widely dispersed.

So while the banks can now act as the shop-front for consumer loans, the sarakin can toil away in the background giving the thumbs up or down on the borrowers. They can also collect the debts (so long as the muscle plays by the new rules). They may also act as a guarantor on a bank loan.

This change is happening just as lending to companies becomes less lucrative and Japan's big banks are focusing on consumer finance. Sumitomo Mitsui, which owns 20% of Promise, one of the biggest sarakin, and Mitsubishi UFJ, with a 13% stake in Acom, another lender, are each unifying their disparate consumer-finance and credit-card operations.

These are tentative steps. Critics of the 2006 law have argued that it has dampened lending—and hence consumption—just when the fragile economy needs it most. Still, Taku Otsuka, a parliamentarian who championed the law, believes that better practices may ultimately bring in more reliable borrowers who would have felt ashamed to use a sarakin. If it helps to improve the credit-scoring culture in Japan to boot, so much the better.