As workers across Latin America struggle to stay afloat amid economic strain caused by the COVID-19 pandemic, loan sharks offering abusive interest rates have cornered the market, forcing workers seeking financial assistance into untenable cycles of debt.
On January 13, authorities arrested members of a suspected network of loan sharks operating in Rosario, Argentina. The members stand accused of running a “gota a gota” or “drop by drop” usury lending operation, named after the way in which victims are bled dry of funds. Operating out of Rosario’s local Producers Market, the loan sharks were caught after being identified by a previous victim – a young man who, unable to keep up with his payments, had been shot by one of the lenders.
This problem has been a regional one. According to a recent interview in La Prensa Gráfica, a tortilla vendor in El Salvador, who secured a $500 loan prior to the pandemic, has had to take out two additional loans to repay the first, as months of quarantine caused the loan shark to demand back payments. To maintain three loans simultaneously, she dedicates $9 of her daily earnings of $11 to cover the loans, leaving her $2 to provide for her three children and one grandchild. And yet, referring to the loan sharks, she said, “I would not think of reporting them. In a certain way, they help people.”
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In Colombia, the economic consequences of protracted lockdowns and a lack of access to the banking system meant that up to 7 million people were identified as vulnerable to “gota a gota,” according to financial institutions last May. “Over 50 percent of Colombian homes … have used ‘gota a gota.’ This use is stronger in micro-enterprises and independent workers, without forgetting that many salaried workers also use it,” José Alejandro Guerrero, president of Banco W, told El Universal.
Loan sharks have certainly pounced on the desperation seen throughout the pandemic. A study by Central University (Universidad Central) in Colombia revealed that, since the imposition of quarantines, interest rates have climbed to 210 percent, as opposed to between 20 and 66 percent before the pandemic.
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Usury lending practices have long been prevalent in Latin America, with Colombian gangs mostly driving their expansion, but the COVID-19 pandemic has raised the stakes, as vendors and small businesses put out of work by protracted quarantines are desperate for financial relief. With many government assistance programs falling short, workers are forced to choose between financial ruin or abusively high interest loans.
Solutions have been few and far between. In November, a local government in Colombia began expanding small, low-interest loans to those struggling to make ends meet, building on previous successes achieved in this way.
In Mexico City, one lawmaker is seeking the creation of an economic recovery plan dedicated to those at risk from loan sharks. In November, Victor Hugo Lobo, president of the Political Coordination Committee in the Mexican capital’s assembly, stated that “the acute economic crisis has forced small shopkeepers … to resort to South American loan sharks and are now caught in a system of semi-slavery.”
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And in late December, Peru’s congress approved a bill allowing banks to offer zero-interest loans. However, the government rejected the law, stating that it would make it more difficult for the poorest Peruvians to access banking services.
“This is another lovely example of adding a lack of knowledge to good intentions. It’s an atomic bomb … this law will make it so the most modest (households) cannot get loans. Where will they do so? In the informal market,” said Economy Minister Waldo Mendoza in an interview with a local tv station.
Last July, a study by Peru’s central bank found that loan shark annual interest rates had reached as high as 792 percent.
While the new law in Peru is well-intentioned, the government criticisms are valid. With only 45 percent of Peruvian adults having bank accounts, such relief packages may have uncertain consequences such as banks only providing interest-free loans to clients with collateral, again excluding the most vulnerable.