Taking on the money lenders: Lessons from Japan

Taking on the money lenders: Lessons from Japan

Damon Gibbons
November 2012
Published by: 
Centre for Responsible Credit


'Taking on the money lenders: lessons from Japan' reveals that the pro-money lending lobby is wrong to argue that interest rate caps and tighter responsible lending rules inevitably lead to higher levels of illegal lending. In fact, there may be a causal relationship between high levels of legal money lending and the prevalence of loan sharks.

The report examines the Japanese experience of tightening money lending regulation between the late 1970s and the present day, including the package of measures introduced by their Money Lending Law in 2006. These measures included reductions in the cap on legal charges and the introduction of an 'Aggregate Debt Control'; a limit on the total volume of money lending to one third of the borrower's gross income.

Some UK commentators have argued that these measures created a 'credit vacuum' and led to an increase in illegal lending in Japan. However, the report has found no evidence of this. Illegal lending in Japan grew alongside an expansion of legal money lending until 2003, since which time both have reduced considerably.

Key Findings:

  • That the Office of Fair Trading review the affordability assessment requirements of lenders contained in its Irresponsible Lending Guidance, and consult on a proposal to establish a total borrowing limit based on a set ratio of the borrower’s income. In order to ensure that the borrowing limit is enforceable, all high-cost lenders should be required to register their loans on a national database.
  • That the government increase the criminal penalties for unlicensed lending to at least five years’ imprisonment and substantially increase the maximum fine that can be imposed for this offence.
  • That the Department for Business, Innovation and Skills commit to introducing a cap on the total cost of consumer credit agreements, and establish an independent commission to advise it on the structure and level of this cap and, on an ongoing basis, to monitor its impact.
  • That the Department for Business, Innovation and Skills commission further research to examine the potential links between legal money lending growth, over-indebtedness and illegal lending.
  • That the Financial Services Agency investigate and report on the extent to which banks and other financial institutions have been funding the expansion of money lending in the UK. Such an investigation should also consider whether the level of this investment outweighs the investments made by banks in financial inclusion initiatives to provide people on lower incomes with access to affordable credit options.