Credit inclusion and the home credit market in post-communist member states of the European Union

Abstract

Credit inclusion has emerged as an important policy issue in post-communist member states of the European Union because of reductions in state welfare. Sub-prime lenders have emerged to fill the gap left by welfare cuts for low-income consumers who do not qualify for mainstream credit. Home collected credit has become established in post-communist member states but high interest and administrative costs make this an expensive option resulting in vulnerable people becoming involved in a cycle of indebtedness. Some of the important consequences for social policy are addressed.

Keywords

Central and Eastern Europe financial inclusion home credit post-communism

Introduction

The varieties of capitalism approach to international political economy draws attention to the development of different national and institutional strategies designed to enable countries to optimally reap the benefits of global capitalism (Hall and Soskice, 2001). The decline of communism brought into sharper focus the ability of post-communist countries to integrate into the global economy, design policy regimes to reconcile the uncertainties and instabilities of a capitalist economy, with the need for stability for citizens, and created a mass of confident consumers necessary for economic growth (Crouch, 2009). Particularly significant were the legacies or inherited conditions of communism which influenced both the context of reform and the institutions it was necessary to reform (Hancke et al., 2007). Bohle and Greskovits (2012) have identified three distinct capitalist varieties of post-communist member states (PMS) of the European Union (EU). The first include the Baltic countries (Latvia, Lithuania and Estonia) that adopted radical market policies with little in the way of compensation for citizens during or after the transition process. Leaders of the Visegrad states (the Czech Republic, Slovakia, Hungary, Poland, Bulgaria, Romania and Croatia) sought compromises between market transformation and social cohesion in a more inclusive way, and were keen to use their industrial legacies and qualified workforces in their efforts to actively compete in the global economy but were often hampered by the inefficient system of democratic government. Romania, Bulgaria and Croatia comprised a distinctive sub-group of these countries which was less clear about how the legacy of the past and future developments could be bridged. Slovenia is an outlier among PMS and distinctive because the country embarked on the least radical strategy of marketisation, which it combined with the most generous arrangements to compensate the least fortunate in society, largely because leaders were compelled to co-operate with powerful labour organisers who needed to be pacified in order to retain power.

Considerable effort has been invested in exploring the impact of different capitalist varieties on the development of welfare states in PMS, and whether they comprise a distinct welfare regime or correspond to one of the European ideal types identified by Esping-Andersen (1996). Recent comparative welfare research describes PMS welfare regimes as ‘hybrid’ and they include elements of all Western European regimes. Moreover, there are considerable differences between the welfare regimes adopted by PMS but those variations are smaller than those that exist between them and Western European countries (Cook, 2007; Fenger, 2007; Kuitto, 2016). The post-communist period has been dominated by a global economy that emphasizes competitive labour costs, which has not been conducive to supporting the establishment of large welfare states or welfare subsidies (Esping-Andersen, 1996), and certainly not on the scale that existed under the communist regime (Deacon 1993). The collapse of communism resulted in considerable economic hardship, which was compounded by the global recession following the 2007–08 financial crisis. High levels of unemployment have become a persistent problem in many PMS because of ongoing privatisation and low levels of economic growth, which have resulted in lower tax revenues. Moreover, the difference between social need and financial resources is deepening because of the ‘informalisation’ of employment, as employers and workers exit the formal employment relationship in order to avoid taxation and employment regulation (Esping-Andersen, 1996).

Unlike non-transition developing countries, the speed and magnitude of the onset of poverty and the emergence of large numbers of poor people is a defining feature of PMS which in some instances have resulted in the introduction of make-shift policies to deal with immediate issues, rather than long-term sustainable interventions (Kuitto, 2016). Romano (2014) has referred to the political and social construction of poverty in drawing attention to the difficult choices policymakers have been forced to make resulting from the fiscal crisis of the state. In many countries competition for scarce resources has resulted in a discourse focusing on poor people that are ‘deserving’ and ‘undeserving’ of welfare, where the former refers to the working middle classes who benefit from state support, and actively campaign in their own interests, and the latter comprising poor people who are made to feel responsible for their own situation (Romano, 2014). The outcome has been what Standing (1996: 223) refers to as a ‘residual welfare state’, comprising a combination of social insurance, social assistance and a partial privatization of social policy.

Crouch (2009) has used the term privatized Keynesianism and others debtfarism (Soederberg, 2014) to draw attention to the process whereby declining public revenues have resulted in government debt being replaced by the private debt of citizens. A re-regulation of social security has often been accompanied by declining levels of benefits and has provided new lending opportunities for financial institutions. Individuals that are particularly adversely affected include those on low incomes who need to fill the space left by declining levels of welfare and it is within this context that credit inclusion has become an important policy issue. Credit inclusion is one aspect of financial inclusion and can be defined as the ability of citizens to access mainstream credit, or credit at a price that low income consumers can afford to enable them to meet the financial needs of daily life. Sub-prime lenders including moneylenders, pawnbrokers, payday lenders and high interest home collected credit are specialist institutions that provide credit for low income groups (Burton, 2008; Burton et al., 2004; Leyshon et al., 2004). Sub-prime lenders fill the space left by mainstream lenders that focus on more affluent consumers in the absence of government-funded grants or subsidised credit (Grover, 2011) or systems and modes of finance that are sustainable and based on fairness (Mellor, 2010). This article extends the existing literature on credit inclusion by assessing to what extent and why home credit is being adopted by consumers in low-income groups in PMS, and what it reveals about credit inclusion in those countries. The focus on home credit is timely because policymakers have identified home-collected credit loans as the greatest source of financial difficulties in low-income households since they can account for considerable proportion of household income on a regular, weekly basis (Alleweldt et al. 2013).

The article is organised into five sections. The first provides an assessment of PMS as a distinctive cultural context for sub-prime lending. The second section provides the methodological context for the case study. The third section focuses on the characteristics of individuals that use home credit. The fourth section provides a comparative analysis of product design, interest rates and charges across the countries in the sample. The fifth section addresses the issues of consumer discipline, default and the repayment of loans. The final section contains the conclusions.

PMS as a distinctive context for sub-prime lending

There are a number of factors that make the financial systems of PMS distinctive environments for sub-prime lending including: their recent economic growth, the internationalisation of their financial systems, significant increases in consumer credit over a relatively short period of time and the lack of an established microfinance sector. On their independence PMS societies possessed the basic elements of a financial system, which included savings banks and organisations used by the centrally planned economy government to distribute money, but in practice they were unsuitable for developing decentralised, modern European economies (Pistor, 2010). In the absence of strong financial institutions and periods of bank failure, governments had little option but to allow an influx of foreign banks and other non-bank lenders (Epstein, 2014). Credit has been a major driver of economic growth and development in PMS, but it is also a significant factor in their vulnerability. Between 1995 and 2008, real GDP in PMS grew by 125 per cent (measured in Purchase Power Parity-terms) (Bakker and Gulde, 2010), and during the period 2000–05, the proportion of credit to GDP doubled or tripled in several countries (Enoch, 2007). The extent of consumer credit growth closely relates to the different levels of resourcing of welfare regimes. For example, credit growth in Bulgaria and the three Baltic states (Estonia, Latvia and Lithuania) was particularly rapid, increasing by 20 per cent in 2000–04 (24–36 per cent for mortgage lending at its peak). These countries had implemented welfare regimes that provided limited benefits for citizens. By contrast, credit growth was only a little over 10 per cent in Hungary, Romania, and Croatia, and below 5 per cent in Poland, the Czech Republic and Slovakia (Arcalean et al., 2007). The lower levels of credit in these countries reflect their more highly resourced welfare provision. The Baltic States along with Romania and Hungry are also distinctive because of the proportion of household loans taken out in foreign currencies (overwhelmingly Swiss francs). In Estonia and Latvia well over 80 per cent of household borrowing was held foreign currency loans, and in Hungary the percentage was 70 per cent (Bohle and Greskovits, 2012). Foreign loans were popular when the interest rates of other countries were lower than domestic rates but when domestic currencies were devalued borrowers struggled to service their debts (Raviv, 2008). Following the 2007–08 global financial crisis there was not a large-scale exit of international banks from PMS (Epstein, 2014), but inward monetary flows dried up, banks tightened their lending standards and the level of non-performing loans soared as boom turned to bust (Pistor 2010). Moreover, PMS did not have sophisticated debt adjustment and insolvency systems to deal with significant levels of household debt, which were mostly initiated after the crisis (Latvia 2008, Czech Republic 2007, Slovakia 2005, Slovenia 2008 and Poland 2009) (Ramsay, 2012).

Western models of credit scoring have been imported by foreign banks that require an established credit history on which lending decisions are based, which foreground positive features including full-time, permanent employment, home-ownership and married status (Burton, 2012, 2014). These requirements have resulted in foreign banks providing loans to only the wealthiest consumers (Weller, 2000). Domestic banks draw their customer base from the middle classes who tend to have low, but stable incomes. Moreover, banks often require borrowers to purchase credit insurance to guard against unemployment and sickness, but it is prohibitively expensive for individuals that would derive the most benefit (Rona-Tas and Guseva, 2013). Low-income consumers have therefore largely been excluded from the outset from accessing credit from mainstream financial institutions, and they along with growing numbers of credit impaired consumers who defaulted on their loans have resulted in opening up a space for sub-prime lenders to become established.

One of the reported characteristics of communist states was ‘equality in poverty’, but this is no longer the case. Increasing levels of inequality and a greater number of the population at-risk-of-poverty has also resulted in fertile ground for sub-prime lenders. In 2014, 24.4 per cent of the citizens of the 28 EU member states (EU28) were defined as at-risk-of poverty after social transfers (income poverty), being severely materially deprived and living with very low work intensity. Some of the highest rates are in Bulgaria (41.1 per cent), Romania (40.2 per cent), Latvia (32.7 per cent) and Hungary (31.1 per cent). By contrast, the Czech Republic has the lowest proportion of citizens in poverty in the 28 EU28 at 14 per cent, but it is increasing while in most other countries it is declining. In most PMS the incidence of children living in poverty is higher than for working age people and pensioners, which reflects the labour market situation of parents, the composition of households and the effectiveness of government intervention. The exceptions are the Baltic countries of Latvia (39.3 per cent), Lithuania (31.9 per cent), and Estonia (35 per cent) where punitive pension policies have resulted in the elderly facing higher rates of poverty than the rest of the population. Of particular interest to the discussion of home credit is the proportion of individuals that could not afford to pay for unexpected expenses because home credit loans are often used for this purpose. Across EU28 countries, 39.9 per cent of households indicated that they would not be able to pay an unexpected bill but this increased to over 60 per cent in Hungary, Latvia and Croatia, over 50 per cent in Lithuania and Romania, and over 45 per cent in Poland, Slovenia and Bulgaria (Eurostat, 2015).

Some PMS countries also have large populations that are unbanked (40 per cent in Bulgaria and Romania and 30 per cent in Hungary) and are therefore not connected to the financial system (European Commission, 2014). The lack of a bank account is significant because it often operates as a way of connecting individuals to the financial system and other financial services (Devlin, 2005). Non-market, interpersonal loans including borrowing from family, kin or close neighbours, and local shops that are free of interest have been more prominent in PMS than borrowing from financial institutions. Informal exchanges and bartering were also widespread but the monetisation of post-communist economies has resulted in monetary exchanges taking the place of informal exchanges, resulting in the more widespread use of cash, especially for those who are without, or who have weak social networks (Smith and Stenning, 2006). A cultural shift is occurring whereby informal credit relations and trust based on social relationships and reputation within communities are being replaced by the formal systems of the marketplace and its institutions alongside the disciplinary effects that accompany the transition (Muldrew, 1998).

Credit unions (often referred to as savings and loan co-operatives) are the primary vehicle for microfinance in PMS and they have a long history, especially in Romania. Credit unions played a valuable role in providing credit for people in small towns and rural areas that did not have access to an established financial infrastructure. However, during the communist period credit unions along with charities were liquidated in all countries apart from Romania where credit unions became part of the communist welfare regime (Barna and Vanesu, 2015). The post-communist period witnessed their rapid reinstatement, often with financial support from aid agencies and other international organisations (especially in the Baltic countries), but the ability of credit unions in PMS to reach the poor remains very shallow compared to other regions of the world (Forster et al., 2003). Moreover, in some countries the reputation of credit unions has been damaged by poor management, lack of regulation, financial instability and not conforming to EU standards resulting in the insolvency of several large credit unions in Hungary, the Czech Republic and Poland. In the case of Poland credit union deposits have been underwritten by a general guarantee fund to which the banks are the largest contributors (Foy, 2015). Recent developments therefore raise a question mark over the ability of some credit unions in their current form to meet the borrowing needs of poor people.

The lack of a strong regulatory framework and an environment in which consumer organisations and money advice services are of variable quality has allowed sub-prime lenders to flourish. Many countries also lack formal or informal statistical data relating to consumer borrowing, a basic working definition of over-indebtedness or an understanding of the characteristics of households that are most at risk (Micklitz and Domurath, 2015). Consumer advice services are particularly poor in Bulgaria, Estonia, Latvia and Romania (European Commission, 2014). There is growing recognition that financial literacy has become a key life skill given the new complex financial products being developed by established financial services providers and new players. Yet in the relatively young credit markets of PMS consumer education and financial capability initiatives are of recent origin or are in the process of being established (OECD, 2016).

The current credit environment in PMS is very different from that which operated under the communist regime, which was deeply rooted in a culture of people living within their means, debt-free, exercising restraint in spending and saving for purchases (Rona-Tas, 2009). The neglect of lower-income consumers by mainstream lenders has opened the space for SMS loans, payday loans, home collected credit and unregulated lending to flourish. Home credit and payday loans are more prevalent in PMS where their use is double the EU average. The highest usage rates of sub-prime credit are in Latvia and Lithuania where levels are four or five times the EU average, mostly due to the increase in payday loans. By contrast, the most extensive use of home-collected credit is in Slovakia, Romania and the Czech Republic, where consumers reported its use to be nearly ten times higher than the UK and four times the EU average (European Commission, 2013).

Methodology

This article is based on a case study of International Personal Finance (IPF). IPF was chosen as a case study for the very specific reason that it is the only specialised door-to-door lender that provides unsecured cash loans for individuals without a credit history, or with an impaired credit history in a range of PMS. It is important to note that IPF is not a payday lender since some scholars have confused home credit and payday lending (see for example Rona-Tas, 2009). Other cross-border lenders do compete for customers without an established credit history in PMS but they do so using a different business model, and provide credit at the point of sale, which is secured lending as opposed to unsecured lending. For example, Home Credit BV based in the Netherlands is a point of sale lender that provides credit for individuals without a credit history in collaboration with retailers and operates in Russia, Czech Republic, Slovakia, Ukraine, Belarus and Kazakhstan in addition to other countries in Asia. Other competition comes from ‘local’ moneylenders and payday lenders whose activities are rarely fully documented by the authorities in their respective countries, which makes an estimation of the total value of the sub-prime credit market and discussions of the market share of individual lenders across PMS extremely difficult, if not impossible.

The article is based on secondary data because IPF twice refused to participate in the research and this is not an uncommon response from door-to-door lenders that are aware of the negative criticisms of their industry, especially the high cost of the credit they provide to economically vulnerable people. Secondary data is drawn from company documents and information posted on the company’s websites over a period of seven years which allow for an assessment of the company’s activities over time. A content analysis and critical reading of company documents, websites, annual reports, consumer surveys, online publicity, infomercials and press releases are all included. The company’s websites have also begun to include loan calculators to enable consumers to work out the cost of loans, weekly repayments, APR (Annual Percentage Rate), and charges which were used to make a comparative assessment of interest rates and costs in different countries. Secondary analysis in this instance is not an easy option since the company rarely maintains online records on its website over long periods, and regularly changes the format of reporting, making year-on-year comparisons difficult.

The history of IPF is closely associated with the Provident, which was established in the North of England in 1880 to provide credit for low income families. It initially emerged as a subsidiary of the company, but by 1997 IPF was established as an independent business. By the end of 2012, the company had acquired 2.4 million customers. It has six principal offices in the capital cities of PMS countries, 205 branches, 6,100 direct employees and 28,500 agents. The total credit issued across the business is £882.1 million. IPF developed its business in Poland and the Czech Republic in 1997, Hungary and Slovakia in 2001, Mexico, 2003, followed by Romania. The most recent countries include Bulgaria and Lithuania in 2013 (IPF, 2013a, 2013b); countries currently being considered are Latvia and Spain (IPF, 2012a).

Social stratification and home collected credit consumers

Home-credit customers tend to be employed in insecure casual, temporary and part-time work; they are drawn from the lowest socio-economic groups. Other groups of customers include the self-employed and full-time mothers who, because of their lack of a regular income, find it difficult to source mainstream credit. Many of these groups are economically vulnerable and the first to lose their jobs, or have their incomes reduced during a recession. Home-collected credit is also highly gendered with women comprising two thirds (65 per cent) of IPF’s customers, the majority of whom are 35–45 years of age, and at the stage in the life-cycle when they have dependent children and finances are stretched. One half of IPF’s customers have dependent children and one third of those are single parents, and in this respect they comprise some of the poorest families in most PMS. This is especially the case in Poland where the majority of IPF’s customers live (Romano, 2014). Although there is insufficient evidence to claim that the post-communist era has resulted in the ‘feminisation of poverty’, the case study demonstrates that the responsibility for household financial management in PMS falls to women in low-income households where the activity is a burden rather than a source of power (Goode, 2010).

In 2012, two thirds of IPF’s customers had a bank account, which suggests credit exclusion, rather than a problem with financial exclusion per se (IPF, 2012b), but by 2013 only 54 per cent had a bank account (IPF, 2013c). This data suggests that the company was more effective at reaching those who were previously unconnected to the financial system. Most of IPF’s customers have no credit history rather than an impaired credit history. The necessity of poor consumers to resort to using high-cost credit when they have not proven themselves untrustworthy in the repayment of debt reflects the extent to which lenders are able to exploit vulnerable groups, since the high cost of credit does not necessarily reflect the higher degree of risk. The sad reality is that citizens are often left with few other options. A recent IPF survey indicated that 55 per cent of customers thought it had become more difficult to access mainstream credit in recent years, and 60 per cent thought that obtaining credit from a mainstream bank or lender would be problematic. In Hungary, 71 per cent of customers thought it would be impossible, or difficult to do so, which reflects the very poor state of the lending environment. Only 14 percent of IPF customers have a mortgage, but one third have a credit card and a further 12 per cent indicated that they would like to obtain one (IPF, 2013c). The vast majority of IPF’s customers live in urban areas despite the company’s insistence that it had 100 percent coverage of the countries in which it operates. Yet some of the poorest individuals who are most likely to be financially excluded live in the rural areas of new member states (European Commission, 2008), which raises issues about the integrity of IPF’s inclusive credentials.

IPF’s publicity harnessed the acquisition of loans to positive consumer outcomes associated with empowerment and overcoming disadvantage. For example, promotional campaigns featured children attaining the same equipment as a school colleague or classmate, or relatives visiting a new addition to the family (Quick, 2013). Yet these images are somewhat distanced from the realities facing low-income consumers, who are increasingly resorting to high-interest credit to support their basic needs and everyday living expenses (Alleweldt et al., 2013). Indeed IPF’s own research revealed that the majority (87 per cent) of its customers would find it very difficult to source money for an emergency payment, or to save money for a major purchase (88 per cent). The exception was Slovenia where only 22 per cent of customers thought that they would be unable to pay an unexpected bill (IPF, 2012b). The proportion of materially disadvantaged customers in the IPF sample was therefore 25–40 per cent higher than those reported in national surveys (Eurostat, 2015).

Product design, interest rates, and charges

There are considerable variations in the attitudes of PMS towards the regulation and pricing of consumer credit. Several countries have introduced interest rate caps in order to prevent citizens from high-cost credit (Estonia, Poland, Slovakia, Bulgaria, Slovenia (non-bank credit) and Hungary (foreign currency mortgages) although they all use different formulae to do so (IFF/ZEW, 2010). Despite the existence of interest rate caps, interest rates are higher in PMS than most other European countries, which raise issues about the effectiveness of this aspect of monetary policy. The average APR for consumer lending calculated by the European Central Bank in 2013 demonstrated that the highest rate was in Estonia (35 per cent), followed by Hungary (32 per cent), Latvia (23 per cent), Poland (21 per cent), Slovakia (16 per cent), Lithuania (16 per cent), Czech Republic (16 per cent), Romania (16 per cent) and Bulgaria (13 per cent). Moreover, PMS have some of the greatest differences in the EU between their country’s central bank rate, and the rate at which money is loaned to consumers. The observed variance reflects a combination of factors: the greater risks of lending in those countries; the level of competition in the market; the consumer demand for credit; the inability of central banks to enforce low interest rates; and their perceived lack of organised consumer action (European Commission, 2014).

The interest rates on IPF loans are high but the company justifies its charges in two ways. First, the fixed costs of administering a loan are the same for small and large loans, but administration charges comprise a higher proportion of the amount borrowed for small loans and contribute to their proportionately higher cost. Second, the cost of the loan is the maximum that customers are asked to repay, whereas mainstream lenders make separate charges for late payment or missed payments in the form of penalty fees, and extra costs for payment protection insurance. The only country in which IPF deviates from this policy is in Hungary where a small charge is made for missed payments to comply with legislation. The company maintains that it lends to high-risk consumers and the greater risk of default is therefore factored into the cost of credit. Most IPF loans in PMS are for the equivalent of £200 borrowed over six months to two years. New customers are offered smaller value loans over short timescales; typically in the region of £75 to £225 repayable over 26 to 52 weeks. Once a good repayment history has been generated customers can access higher value loans (£100–£700), for longer terms of 60 weeks (104 weeks in the case of Poland).

Table 1 demonstrates the relative costs of IPF loans, comprising charges and interest, for each country (excluding Slovakia for which data was not retrievable). The first thing to note is that IPF’s interest rates are significantly higher than the average APR for consumer loans. The cost of credit is most expensive in Lithuania and Romania where the APRs are 152 per cent and 104.63 per cent respectively. The high cost of credit in Romania is largely due to bank lending policies which require the borrower to provide guarantees in excess of 150 per cent of the loan value, which effectively excludes low- and middle-income households from mainstream credit (Nicolae, 2012). In Lithuania there is a significant problem with payday lenders which has not been effectively tackled by the central bank. Payday lenders have set a high benchmark for interest rates, which IPF has been able to shadow, and there is considerable demand for credit especially among young people.

Table 1.

Comparison of the costs door-to-door lending in Central and Eastern Europe.

Country	Amount of loan	No. of weeks	Weekly payment	Fee for home loan collection	Total cost of loan	IPF APR	Country Annual APRMarch 2013 *	Exchange rate to £20 February 2015
Bulgaria	200 lev £76.54	45	£3.01	£44.56	£135.29	49%	13%	0.38
Czech Republic	40,000 Koruna £107.78	45	£4.15	£50.63	£185	70.96%	16%	0.029
Hungary	30,000 Forint £72.42	35	£3.37	£36.75	£117.86	41.02%	32%	0.0024
Lithuania	100 Euro £74.93	45	£4.18	£28.89	£187.75	152%	16%	0.75
Poland**	1000 Zloty £177.57	60	£5.72	£16.80 interest £20.61 fee	£243.59	12% annual (76.5%) actual	21%	0.177
Romania	500 lei £88	40	£3.54	£31.17	£140.82	104.63%	16%	0.17

Average APR for consumer lending calculated by the European Central Bank as of March 2013.

Compulsory 160 zl (£28.43) insurance to cover repayments is also required in addition to other charges if one is not already in place.

Source: author’s analysis from IPF websites; European Commission, 2013, p. 78.

The regulation of consumer credit markets is being given a higher profile in some PMS and this is recognised in IPF’s 2015 Annual Report, which states ‘Regulators have become increasingly active in consumer finance, conducting more reviews and introducing new legislation and regulations, some of which have been adopted with limited levels of consultation at the last stage of the parliamentary process’ (IPF, 2016: 16). It is noteworthy that IPF’s lowest interest rate in PMS is in Poland and reflects the more active role of the central bank and consumer organisations in regulating the consumer credit market. Provident Polska (IPF’s Polish brand) was recently fined by the Office of Competition and Consumer Protection for its lack of transparency on costs, not providing information about fees for the home collection, the upfront administration fee or the annual percentage rate, and for misleading advertising (Office of Competition and Consumer Protection, 2014). News of the fine (equivalent to £2.4 million), had an immediate impact on the company’s stock market valuation, which decreased by 22 per cent. Poland has a cap on interest rates that is equivalent to four times the Central Bank rate, but IPF engaged in avoidance activity to get around rate caps by charging separately for each element of the home credit service: the agent’s home collection is charged as a separate option; and compulsory payment protection payment insurance charges are made which take into account payment flexibility due to customer default. However, this loophole has also been closed with a new cap on non-interest costs from 2016. A similar situation has arisen in Slovakia where amendments to the Civil Code have prohibited separate contracts for ancillary services linked to the provision of consumer loans. After a review of the financial consequences of the new legislation, IPF decided to exit the market and stopped issuing new loans in Slovakia in December 2015 resulting in losses of £18.6 million (IPF, 2016). The company’s response to changes in Slovakian regulation is important to note; although home credit is expensive it nevertheless provides a lifeline to some consumers who have no other options.

A selling point of IPF loans is that the cost of the loan is fixed at the beginning of the contract and no extra charges are levied for late or missing payments. However, in practice, this system rewards bad payers at the expense good ones, since customers who repay their loan early have not been rewarded for doing so. The introduction of the Consumer Credit (EU Directive) 2010 (European Union, 2010), enables consumers to make partial, or early repayments and, in doing so, qualify for a reduction in interest. Poland, the Czech Republic and Slovakia were among the first PMS to fully implement the directive, and it was younger, and more financially literate consumers that were among the first to take advantage. As a consequence, IPF’s profitability was substantially reduced in those markets shortly afterwards (IPF, 2012a). Other countries were slower in implementing the Directive reflecting national variations in expertise and their ability to resource the new regulation and consumers did not initially benefit to the same extent.

Consumers, discipline and the repayment of loans

The social basis of the credit–debt relationship in the context of home credit is very distinctive. The provision of credit relies on lenders having trust in borrowers and that they will fulfil their obligation, co-operate and repay their debts (Muldrew, 1998). Customers of banks that are fortunate to access mainstream credit have essentially proven themselves trustworthy and this is documented in credit reporting data. The disciplinary effect of the non-payment of debt for this group of consumers is having an impaired credit rating, which is to be avoided. Financial institutions have a high level of trust in these groups of consumers which is based on their self-discipline and because of this they are allowed to repay their debts ‘at a distance’. By contrast, home credit customers have not proven their willingness or ability to repay their debts unless they first generate a track record. Their lack of trustworthiness necessitates the personal relationship between borrower and lender and the weekly home visit to instil and reinforce the discipline to repay what is owed. The disciplinary function of the home collection is somewhat concealed by a friendly relationship between lender and borrower that the company wishes to cultivate (Rowlingson, 1994).

Each agent is responsible for servicing between 70–100 customers. All agents are self-employed (with the exception of Hungary and more recently Romania where legislation requires agents to be employees), and are remunerated on the basis of 80–90 per cent from commission on collections, and 10–20 per cent from new business. In theory, this method of remuneration ensures that agents sell loans to individuals that can afford them. IPF provides credit to less than half of applicants; for example in 2009, 44 per cent of loans were approved, and in 2010 it was a little higher at 47.9 per cent (IPF, 2009, 2010). Agents are recruited for their skills and experience but two thirds of the company’s agents joined the company through referrals from other agents, and many are previous or existing customers (Bradbury, 2013). IPF uses local people with a similar social, cultural and economic profile to customers as agents in the likelihood that they would have an immediate rapport, but also in expectation that they have an existing network of friends, family and acquaintances that could be mined to generate new business. In theory, locally recruited agents are also more likely to have knowledge of individuals and/or areas to be avoided. IPF’s agents are predominantly female, comprising 81 per cent of the workforce, reflecting the role of women as primary carers who seek flexible employment that is partly attributable to the reduced levels of childcare support in many countries for working women. The hiring of women also reflects the belief among home credit companies that women are more effective communicators than men (Rowlingson, 1994).

Agents play a central role in new application scoring using basic personal and situational factors including employment status, outgoings, and an evaluation of the applicant’s character and home circumstance. This method of evaluation has traditionally been a significant point of departure from mainstream lenders that, in addition to the above, also use credit scoring and reporting procedures to assess the risk of default. However, recently IPF has introduced formal behavioural scorecards that are updated on a weekly basis. Customers with similar scores are placed in consumer segments which agents use to inform repeat marketing approaches to encourage good quality customers to take out new loans. However, in some PMS, notably Hungary, new payment-to-income regulations were introduced in 2015 that more closely regulate consumer credit markets. This action resulted in a significant contraction of credit issued by the company in order to comply with this new legislation (IPF, 2016).

Operational definitions of default vary between different financial institutions, which is an impediment to obtaining a comprehensive assessment of the sub-prime credit market in the EU (European Commission, 2014). IPF (2012a: 25) classified default as ‘the failure to make any weekly payments in full with the exception of the first four weeks for a new customer, in order to allow repayment patterns to be established’. The company calculated what it considers to be acceptable levels of impairment, acknowledging that it is dealing with high-risk consumers not all of whom will be willing or able to service their debts. Impairment was expressed as a percentage of revenue. IPF maintained that country default rates in excess of 30 per cent were too high, and rates below 25 per cent were too low resulting in many profitable customers being rejected. The optimum balance between risk and revenue had been calculated on the basis of default rates of between 25–30 per cent (IPF, 2010). Impairments remain well within the company’s range of tolerance (28.3 per cent Romania and Bulgaria, 18.9 per cent Hungary, 28.5 per cent Poland and Lithuania, and 23.7 per cent Czech Republic and Slovakia). Credit standards have been relaxed in PMS with the aim of attracting new business. In an attempt to attract a larger pool of customers the company has launched longer-term, higher value products to meet the needs of some of the poorest citizens in order to reduce the weekly cost of credit. In 2013, these longer term products represented 15 per cent of all new credit issued in Poland, and 19 per cent in the Czech Republic and Slovakia (IPF, 2016). These changes are being rolled out in other countries and will ultimately result in increasing the already high cost of credit for poor families.

Conclusion

The social costs of sub-prime credit in PMS have not been fully addressed, yet access to affordable credit is an important aspect of social inclusion. The policy responses to deal with some of the negative consequences of home credit are patchy and differ between countries. Poland has been the most active in the regulation of home credit providers by limiting their interest rates and non-interest charges but Poland is also IPF’s largest market, which reflects a lack of policies that provide alternative sources of credit for those of small means. Slovakia has taken a harder line and rather than more closely regulate lenders and keep them in the market, it has effectively regulated them out of existence. Interest rate caps and restrictions on the level non-interest fees have resulted in IPF closing its business. Hungary has learned from its experience of foreign currency mortgages but rather than specifically regulating high-cost lenders, it has focused on regulating the amount that individuals can borrow by reducing the level of the loan-to-income ratio. In the other PMS there have been few attempts to directly regulate home credit.

There are at least six areas that are ripe for policy reform in connection with home credit in PMS. The first is to ensure that countries have poverty reduction strategies so that the existing welfare regimes can be strengthened and citizens have the resources and adequate income to live without having to resort to using high-cost credit. Reforming economic management and redistribution policies requires considerable cultural change including tackling corruption, creating more effective tax systems, reducing the extent and scope of the informal economy and increasing the levels of corporation taxation. A second important policy area concerns the creation of an effective and sustainable microfinance sector and other charitable institutions that can provide assistance to poor people and avoid the problems of failing credit unions. The majority of institutions that directly target credit at low-income consumers in PMS are high-cost lenders. Rather than using bank insurance funding to bailout failing credit unions as a crisis management strategy, a better approach is to use mainstream funding to support credit unions from the outset in a planned and orderly way. One way forward maybe for credit unions to develop partnerships with mainstream financial institutions who may agree to underwrite a proportion of consumer borrowing, a strategy that has been effectively used in the UK (Leyshon et al., 2004).

Third, there is a need for more active regulation of mainstream financial institutions from the bottom-up, as too often it is left to financial institutions to determine the extent and scope of their own regulation, which usually results in minimal action. A solution may be a range of low-cost credit products provided by banks, if necessary funded by a proportion of bank levies that are already being collected in Hungary and Poland. Fourth, financial education and financial capability have been closely aligned with those of credit inclusion, which infers that educated consumers are less likely to enter financial agreements that they do not fully understand, or duped into loans with excessive interest if they are financially literate. The failure of consumers to fully understand the implications of purchasing foreign currency mortgages and technical clauses in contracts was clearly due to a lack of financial knowledge. Consumer education programmes in PMS need to have a broad remit beyond those in Western Europe and include a wider appreciation of the way in which credit systems in advanced Western societies operate and, in particular, the punitive culture that accompanies the non-payment of debt. Fifth, polices should be designed that ensure the fair and equitable allocation of the risks of consumer credit between consumers and lenders that allow the former a reasonable standard of living, especially in times of difficulty and more closely reflect the risk of lending to customers without a previous credit history.

Finally, there is a need for policies that promote the more effective management of consumer debt that focus on affordability, debt counselling that takes a more realistic view of debt obligations, debt management and rehabilitation (including bankruptcy), alongside providing good guidance for lenders and creditors on issues such as arrears management, debt collection and dealing with vulnerable people. In the UK more lenient bankruptcy laws have been introduced which discharge bankrupts over a much shorter period of time and have resulted in bankruptcy becoming more culturally acceptable and less of a taboo. Initiatives to avoid bankruptcy have also been adopted including debt management programmes that reschedule loans by making a structured arrangement to repay unsecured debts, and individual voluntary arrangements that involve writing off a proportion of the debt due to financial difficulties and repaying the rest. However, there have been concerns in the UK about the large fees that some debt management companies charge, which can result in vulnerable consumers being exploited. The advantage of avoiding bankruptcy is that the damage to an individual’s credit rating is not as extensive, which may help them avoid being relegated to the sub-prime credit market.

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Author biography

Dawn Burton has researched and written in the area of consumer financial services over many years. She is the author of Financial Services and the Consumer; Credit and Consumer Society; Cross-cultural Marketing: Theory, Practice, and Relevance. She is editor of Research Training for Social Scientists, in addition to publishing many journal articles in these areas. Recently completed projects include an assessment of the relationship between citizenship and social policy in Gulf Co-operation countries in the aftermath of the Arab Spring, and the governance of consumer credit and over-indebtedness in GCC states. She is currently completing a book focusing on the relationship between culture and consumer financial services. Recent publications include: Citizenship, Super-inclusion, and Consumer Credit in Kuwait, Journal of Social Policy (forthcoming); ‘Credit Scoring, Risk and Consumer Lendingscapes in Emerging Markets’, Environment and Planning A 44 (1) (2012).

References

Alleweldt

Kara

Graham

Kempson

Collard

Stamp

Nahtigal

(2013) ‘The over-indebtedness of European households: Updated mapping of the situation, nature and causes, effects and initiatives for alleviating its impact – Part 1: Synthesis of Findings’. Paper prepared for DG Health and Consumers of the European Commission. Available at: www.civic-consulting.de (accessed 26 September 2016).

Arcalean

Calvo-Gonzales

van Rixtel

Winkler

Zumer

(2007) ‘The causes and nature of the rapid growth of bank credit in the central, eastern and south-eastern European countries’, in Enoch

Ötker-Robe

(eds) Rapid Credit Growth in Central and Eastern Europe: Endless Boom or Early Warning? New York: Palgrave McMillan, 13–46

Bakker

B.B.

Gulde

(2010) The Credit Boom in the new EU Member States: Bad Luck or Bad Policies? International Monetary Fund Working Paper, WP/10/30, Washington.

Barna

Vanesu

(2015) Credit Unions in Romania: A Strong Social Enterprise Model to Combat Financial Exclusion and Over-indebtedness. CIRIEC Working Paper 2015/11. Liège: CIRIEC.

Bohle

Greskovits

(2012) Capitalist Diversity on Europe’s Periphery. Ithaca, NY: Cornell University Press.

Bradbury

(2013) Agent recruitment and Retention. IPF video. Available at: www.ipfin.co.uk/aboutus/our-business-model.aspx (accessed 17 April 2013).

Burton

(2008) Credit and Consumer Society. London: Routledge.

Burton

(2012) ‘Credit scoring, risk and consumer lendingscapes in emerging markets’, Environment and Planning A 44(1): 111–124.

Burton

(2014) ‘Citizenship, super-inclusion, and consumer credit in Kuwait’, Journal of Social Policy 44(1): 25–42.

10.

Burton

Knights

Leyshon

Alferoff

Signoretta

(2004) ‘Making a market: The UK retail financial services industry and the rise of the complex sub-prime credit market’, Competition and Change 8(1): 3–26.

11.

Cook

L.J.

(2007) Postcommunist Welfare States: Reform Politics in Russia and Eastern Europe. Ithaca, NY: Cornell University Press

12.

Crouch

(2009) ‘Privatized Keynesianism: An unacknowledged policy regime’, British Journal of Politics and International Relations 11(3): 382–399.

13.

Deacon

(1993) ‘Developments in Eastern European social policy’, in Jones

(ed.) New Perspectives on the Welfare State in Europe. London: Routledge, 92–105.

14.

Devlin

J.F.

(2005) ‘A detailed study of financial exclusion in the UK’, Journal of Consumer Policy 28: 75–105.

15.

Enoch

(2007) ‘Credit growth in Central and Eastern Europe’, in Enoch

Ötker-Robe

(eds) The Causes and Nature of the Rapid Growth of Bank Credit in the Central, Eastern and South-Eastern European Countries. New York: Palgrave Macmillan, 3–12.

16.

Epstein

R.A.

(2014) ‘When do foreign banks ‘cut and run’? Evidence from West European bailouts and East European markets’, Review of International Political Economy 21(4): 847–877.

17.

Esping-Andersen

(1996) ‘After the Golden Age: Welfare state dilemmas in a global economy’, in Esping-Andersen

(ed.) Welfare States in Transition: National Adaptations in Global Economics. London: Sage. 1–31

18.

European Commission. (2008) Financial services provision and prevention of financial exclusion. Brussels: Directorate General for Employment, Social Affairs, Equal Opportunities, Inclusion, Social Policy, Aspects of Migration Streamlining and Social Policies.

19.

European Commission. (2013) Study on the functioning of the consumer credit market in Europe. Final Report, EAHC/FWC/2011 8603. Brussels: European Commission.

20.

European Commission. (2014) Report from the Commission to the European Parliament and the Council on the implementation of Directive 2008/48/Econ credit agreement for consumers. Com (2014) 259 final, 14 May. Brussels: European Commission.

21.

European Union. (2010) Consumer Credit (EU Directive) Regulations 2010.

22.

Eurostat. (2015) People at risk of poverty or social exclusion. Available at: http://ec.europa.eu/eurostat/statistics-explained/index.php/People_at_risk_of_poverty_or_social_exclusion (accessed 13th March 2016).

23.

Fenger

H.J.M.

(2007) ‘Welfare regimes in Central and Eastern Europe: Incorporating post-communist countries in a welfare regime typology’, Contemporary Issues and Ideas in Social Sciences 3(2). Available at: http://journal.ciiss.net/index.php/ciiss/article/view/45 (accessed 25 September 2016).

24.

Forster

Greene

Pytkowska

J.L.

(2003) The State of Microfinance in Central and Eastern Europe and the New Independent States. Washington, DC: CGAP.

25.

Foy

(2015) ‘Bankruptcy fears for Poland’s credit unions’, Financial Times, 5 January.

26.

Goode

(2010) ‘The role of gender dynamics in decisions on credit and debt in low income families’, Critical Social Policy 30(1): 99–119.

27.

Grover

(2011) The Social Fund 20 Years On: Historical and Policy Aspects of Loaning Social Security. Farnham: Ashgate.

28.

Hall

P.A.

Soskice

(2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press.

29.

Hancke

Rhodes

Thatcher

(2007) Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementaries in the European Economy. Oxford: Oxford University Press.

30.

IFF/ZEW (2010) Study on interest rate restrictions in the EU, Final Report for the EU Commission DG Internal Market and Services. Project No. ETD/2009/IM/H3/87. Brussels/Hamburg/Mannheim: iff/ZEW.

31.

IPF (2009) International Personal Finance Annual Report 2009. Leeds: IPF.

32.

IPF. (2010) International Personal Finance Annual Report 2010. Leeds: IPF.

33.

IPF. (2012a) International Personal Finance Annual Report 2012. Leeds: IPF.

34.

IPF. (2012b) Financial Inclusion and Wellbeing Report. November. Leeds: IPF. Available at: http://www.ipfin.co.uk/-/media/Files/I/IPF-Refresh/Attacchments/pdf/%Wellbeing%20and%20inclusion%20report%20v/%200%20FINAL.pdf (accessed 1 November 2013).

35.

IPF. (2013a) ‘International Finance opens in Lithuania’, press release, 16 July. Available at http://www.ipfin.co.uk/media/news-releases/2013/16–07–2013.aspx (accessed 8 October 2013).

36.

IPF. (2013b) ‘International Finance opens in Bulgaria’, press release, 11 September. Available at: http://www.ipfin.co.uk/media/news-releases/2013/11–09–2013.aspx (accessed 8 October 2013).

37.

IPF. (2013c) ‘Access to mainstream credit difficult for many’, press release, 8 July. Available at: http://www.ipfin.co.uk/media/news-releases/2013/08–07–2013.aspx (accessed 10 September 2015).

38.

IPF. (2016) Annual Report and Financial Statements 2015. Leeds: IPF.

39.

Kuitto

(2016) Post-communist Welfare States in European Context: Patterns of Welfare. Cheltenham: Edward Elgar Publishing.

40.

Leyshon

Burton

Knights

Alferoff

Signoretta

(2004) ‘Towards an ecology of retail financial services: Understanding the persistence of door-to-door credit and insurance providers’, Environment and Planning A 36: 625–645.

41.

Mellor

(2010) The Future of Money: From Financial Currency to Public Resource. London: Pluto Press.

42.

Micklitz

H-W.

Domurath

(2015) Consumer Debt and Social Exclusion in Europe. Farnham: Ashgate.

43.

Muldrew

(1998) The Economy of Obligation: The Culture of Credit and Social Relations in Early Modern England. Basingstoke: Palgrave Macmillan.

44.

Nicolae

(2012) ‘The impact of the economic crisis on consumer credit market in Romania’, Annals- Economic and Administrative Series 6(1): 57–72.

45.

OECD. (2016) Financial Education in Europe: Trends and Recent Developments. Paris: OECD.

46.

Office of Competition and Consumer Protection. (2014) ‘Provident Polska- UOKIK’s decisions’. Available at: www.uokik.gov.pl/news.php?news_id=10801&news_page=6 (accessed 24 February 2015).

47.

Pistor

(2010) Into the void: Governing finance in Central and Eastern Europe. Working Paper No. 2010/65. Helsinki: United Nations University-World Institute for Development Economics Research.

48.

Quick

(2013) Meeting Customers’ Needs (IPF video). Available at: www.ipfin.co.uk/aboutus/our-business-model.aspx (accessed 17 April 2013).

49.

Ramsay

(2012) ‘Between neo-liberalism and the social market: Approaches to debt adjustment and consumer insolvency in the EU’, Journal of Consumer Policy 35: 421–441.

50.

Raviv

O.R.

(2008) ‘Chasing the dragon east: Exploring the frontiers of Western European finance’, Contemporary Politics 14(1): 297–314.

51.

Romano

(2014) The Political and Social Construction of Credit. Bristol: Polity Press.

52.

Rona-Tas

(2009) ‘Consumer credit and society in transition countries’, in Perez-Diaz

(ed.) Markets and Civil Society: The European Experience in Comparative Perspective. New York: Berghahn Books, 151–178.

53.

Rona-Tas

Guseva

(2013) Information and Consumer Credit in Central and Eastern Europe. Available at: http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&ved=0ahUKEwjpx8y6-arPAhXEIMAKHeZXCxwQFgg0MAU&url=http%3A%2F%2Fblogs.law.columbia.edu%2Fglawfin%2Ffiles%2F2013%2F10%2F11-Information-and-Consumer-Credit-in-Central-and-Eastern-Europe-by-Akos-Rona-Tas-and-Alya-Guseva-Final_-INET-Paper-FINAL.pdf&usg=AFQjCNGgEy3YH_UIhYSJAWds-PIxDCLC4A (accessed 25 September 2016).

54.

Rowlingson

(1994) Moneylenders and their Customers. London: Policy Studies Institute.

55.

Smith

Stenning

(2006) ‘Beyond household economies: Articulations and spaces of economic practice in postsocialism’, Progress in Human Geography 30(2): 190–213.

56.

Soederberg

(2014) Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population. London; New York, NY: Routledge.

57.

Standing

(1996) Social protection in Central and Eastern Europe: A tale of slipping anchors and torn safety nets’, in Esping-Andersen

(ed.) Welfare States in Transition: National Adaptations in Global Economies. London: Sage, 225–255.

58.

Weller

C.E.

(2000) ‘Financial liberalization, multinational banks and credit supply: the case of Poland’, International Review of Applied Economics 14(2): 106–124.