11/12/2008
Another French Paradox: Microcredit and usury
Arvind Ashta, Laurence Attuel-Mendes & Jean-Guillaume Ditter
Burgundy School of Business (ESC Dijon), CEREN
Paradox of French usury legislation
Table 1: Density and entrepreneurial creation rate compared between France and its immediate European partners Source: Report Hurel (2000)
Number of Number of Rate of Entrepreneurial
firms new creation (for density (number of
enterprises 10,000 firms for 1 million
created inhabitants) inhabitants)
Spain 2 650 000 350 000 88 0.067
France 2 400 000 177 000 44 0.041
Italy 4 650 000 370 000 64 0.081
UK 3 500 000 393 000 66 0.059
Paradox of French usury legislation
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The growth of credit may not materialise if credit rates remain Interest capped by usury laws rates Supply
E r*
r u Usury Unsatisfied ceiling demand
Demand
Loan b a c Amount
Paradox of French usury legislation
Table3: Comparative usury legislation Source: Information extracted from Hurel (2003).
Countries with no Countries having usury usury laws laws US Germany Canada Spain UK Italy Austria France
Note, the US has no usury limits at the federal level, but individual States may still have limits from time to time.
Paradox of French usury legislation
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France removed usury ceilings
• For loans to enterprises : 2003
• For business loans to individuals : 2005
• Therefore – Microcredit should have boomed – Interest rates on business loans should have increased
Paradox of French usury legislation
ADIE: Growth in Microcredit Activity
Number of Growth in Year loans number Growth % 1990 34 1991 91 57 168% 1992 159 68 75% 1993 278 119 75% 1994 388 110 40% 1995 698 310 80% 1996 852 154 22% 1997 1276 424 50% 1998 1492 216 17% 1999 1929 437 29% 2000 2844 915 47% 2001 3563 719 25% 2002 4618 1055 30% 2003 5349 731 16% Not 2004 5587 238 4% exceptionally 2005 6740 1153 21% high growth 2006 7570 830 12% 2007 9853 2283 30% rates Source: ADIE (2008): Rapport d’Activité 2007
Paradox of French usury legislation
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Figure 2: Interest Rates and Usury Celings in France (2002-2007) Housing loans to individuals
9,00 usury ceilings 8,00 Fixed rate loans (average rate) 7,00 6,00 Fixed rate loans (usury ceiling) 5,00 Variable rate loans (average 4,00 rate) 3,00 average rates Variable rate loans (usury
Interest rates (%) rates Interest ceiling) 2,00 Bridge loans (average rate) 1,00 0,00 Bridge loans (usury ceiling) 2002 2003 2004 2005 2006 2007 Time (year centred on first quarter)
Other loans to individuals Small loans of less than 1524 25,00 Euros (average rate) usury ceilings Small loans of less than 1524 Interest rates 20,00 Euros (usury ceiling) don't seem to 15,00 Overdraft, hire purchase and term loans of more than 1524 Euros (average rate) have gone up 10,00 Overdraft, dererred credit and
Interestrates (%) term loans of more than 1524 exceptionally. Euros (usury ceiling) 5,00 average rates Personal loans of more than 1524 euros (average rate) 0,00 2002 2003 2004 2005 2006 2007 Personal loans of more than If they went up, Time (year centred on first quarter) 1524 euros (usury ceiling)
Suppliers credit and Hire this may be Loans to enterprises purchase (average rate) Suppliers credit and Hire 16,00 purchase (usury ceiling) global interest usury ceilings Variable rate Term loans (> 14,00 2yrs) (average rate) rate rise 12,00 Variable rate Term loans (> 2yrs) (usury ceiling) 10,00 Fixed rate term loans (> 2 yrs) 8,00 (average rate)
6,00 Fixed rate term loans (> 2 yrs)
(usury ceiling) Interestrates (%) 4,00 Overdraft (average rate) 2,00 average rates Overdraft (usury ceiling) 0,00 2002 2003 2004 2005 2006 2007 Other short term loans (< 2 Time (year centred on first quarter) yrs) (average rate) Other short term loans (< 2 yrs) (usury ceiling) Paradox of French usury legislation Source: Bank of France data
Figure 3: Interest spreads and maximum usury spreads in France (2002-2007)
Housing loans to individuals
6,00 usury ceilings 5,00 Fixed rate loans (average rate) 4,00 Fixed rate loans (usury ceiling) Variable rate loans (average rate) 3,00 Variable rate loans (usury ceiling) 2,00 Bridge loans (average rate)
Interest rates (%) rates Interest Bridge loans (usury ceiling) 1,00 average rates
0,00 2002 2003 2004 2005 2006 2007 Time (year centred on first quarter)
Other loans to individuals
Small loans of less than 1524 25,00 Euros (average rate) usury ceilings
20,00 Small loans of less than 1524 Euros (usury ceiling)
15,00 Overdraft, hire purchase and term loans of more than 1524 Euros (average rate) 10,00 Overdraft, dererred credit and
Interest rates (%) rates Interest term loans of more than 1524 5,00 Euros (usury ceiling) average rates Personal loans of more than 1524 euros (average rate) 0,00 2002 2003 2004 2005 2006 2007 Personal loans of more than 1524 Time (year centred on first quarter) euros (usury ceiling)
Suppliers credit and Hire purchase Loans to entreprises (average rate) Suppliers credit and Hire purchase 12,00 (usury ceiling) Spreads seem to usury ceilings Variable rate Term loans (> 2yrs) 10,00 (average rate) Variable rate Term loans (> 2yrs) be reducing !!! 8,00 (usury ceiling) Fixed rate term loans (> 2 yrs) 6,00 (average rate) Fixed rate term loans (> 2 yrs) 4,00 (usury ceiling)
Interest rates (%) rates Interest Overdraft (average rate) 2,00 average rates Overdraft (usury ceiling) 0,00 2002 2003 2004 2005 2006 2007 Other short term loans (< 2 yrs) (average rate) Time (year centred on first quarter) Other short term loans (< 2 yrs) (usury ceiling)
Paradox of French usuryDerivedlegislation from bank of France data
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The Paradox
• Why didn't interest rates increase ?
• The paper discusses possible explanations
Paradox of French usury legislation
A. Classical explanations
1. Global interest rates decreased – Not borne by reality 2. Expansion in Money supply 3. Increased competition
Paradox of French usury legislation
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Figure 4: The impact of an increase in supply of microcredit
Interest rates Supply
S1
E r*
ru r**
Demand
Loan b a c’ Amount
Paradox of French usury legislation
B. Behavioral and Formal Institutional Explanations
1. Behavioral explanations linked to OSEO guarantees
2. Effect of Basel 2: Bankers take less risk
3. The doctrine of "abusive support" deters bankers
4. Protection of Over-indebtedness
5. Information Asymmetry and Limited Liability of Borrower
Paradox of French usury legislation
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Step 1 in establishing OSEO guarantee effect
Interest rates Supply
E r*
ru G F OSEO ro determined rate (supply curve flattens) Demand rf Loan b a c d Amount
Paradox of French usury legislation
Figure 5: The effects of OSEO guarantees, transaction costs and reference dependence on supply and interest rates
ReferenceS3 Dependence
S2 Transaction costs Interest rates S0 E’’
E’
E r*
ru F OSEO ro S1 determined rate (supply curve flattens) Demand rf Loan b a c d Amount
Paradox of French usury legislation
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Reasons for rotation Interest 1. Basle 2 2. Concept to abusive support Supply rates 3. Protection of over-indebted
H
G’ E r*
ru G F OSEO ro determined rate (supply curve flattens) Demand
Loan b a c Amount
Paradox of French usury legislation
Problem
• Interest rates should have increased to G, but this did not happen
• See Cofinoga, Sofinco etc for diversion of consumtion loans to business and the fungibility problem
Paradox of French usury legislation
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Figure 7: High interest rates increase default risk: supply curve becomes steeper and later vertical
Interest rates Supply H’
G’ E r*
ru F OSEO ro determined rate (supply curve flattens) Demand
Loan b a c Amount
Paradox of French usury legislation
Problem
• There is no equilibrium ?
• Multiple equilibriums
Paradox of French usury legislation
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C. Softer institutional reasons
1. Religious factors lead to informal usury ceilings
2. The French bankers (like other French entrepreneurs) are low on risk taking 1. Therefore prefer not to lend
3. The French social security system encourages low risk taking and therefore the demand curve may be more elastic
Paradox of French usury legislation
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Paradox of French usury legislation
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