Irish Loan Funds

= considered here as historical antecedents for P2P Microfinance

Description

From Sander Van Damme's Master Thesis on Peer to Peer Microfinance:

"Irish Loan Funds

A century after the friendly societies, across the Irish Sea, another early innovation reminds us of today's microfinance institutions (Everett, 2010). In those days the poor also lacked access to finance and it was Jonathan Swift, an Irish nationalist and author of Gulliver's travels, who in the early 1800s founded a £500 fund to lend to “poor industrious tradesmen” (Sheridan, 1787). Small sums of 5 to 10 pounds were loaned out and repaid in weekly installments of 2 to 4 shillings, without interest. To overcome the problem of possible non-repayment, borrowers were required to have two neighbors guarantee the loan, both of whom would be notified in case of late-payments. On top of that Swift took all three of them to court in case repayment was not made. Apparently this strategy worked very well since Swift is said not to have suffered any losses from this enterprise (Hollis & Sweetman, 2001).

Soon after, other wealthy individuals and institutions followed and founded their own microloan funds, of which the Dublin Musical Society is a prime example, having by its 20th birthday made loans to over 5000 different borrowers (Hollis & Sweetman, 2001). This increase incited the state's attention; when after a famine in 1822, funds were left from charitable donations, these were entrusted to the Irish Reproductive Loan Fund Institution. To ensure the funds were well managed and used for their charitable purpose, managers were not allowed to receive any salary or allowance. Legislation was further passed that (1) permitted the funds to charge interest on the loans and (2) did not require the funds to pay stamp tax.

These two measures considerably expanded the market for loans to the poor. It allowed charities to also accept deposits, pay interest on them and re-loan them at a profit, thus turning them into quasi-banks. Although some legislation that was passed in 1824 also liberalized the banking system, these still did not come to serve the poor because of the latter's lack of collateral and the English bank managers' absence of acquaintance with the local situation. The loan funds' ability to charge interest, combined with the large demand for credit from the population allowed them to make substantial profits. In turn this induced the government to pass laws to create the Loan Fund Board that oversaw their operations. This did not stop their expansion which led them to serve almost 20% of the Irish population by the 1840s (Hollis & Sweetman, 1998). Although started as reproductive loans, by now they also had a poverty.

relief function, helping destitute borrowers to smooth their cash flows and thus overcome the uncertainty caused by poverty. A borrower was obliged to have two co-signatories and was required to follow quite stringent terms on his loan (20-week loan, weekly repayments, etc.) We can notice how the system had not evolved very much since the time Swift started it a century earlier, the only difference being that borrowers now paid interest on their loans. Nevertheless, also the Irish Loan Funds eventually went into decline. Hollis and Sweetman (2001) hypothesize three reasons for this: (1) an unfavorable change in legislation reducing the allowed interest rate funds could charge and thus impacting their margin; (2) the Great Famine, primarily affecting the funds' target market of the poor and (3) competition from banks. Especially this last one is of interest to us since we can imagine a similar evolution in microfinance. What actually happened was that the loan funds offered the poor a way to apply for bank loans: they developed a credit history. This took away the informational advantage the funds had over the banks and thus exposed them to far more effective competition. At the same time the funds still had considerable higher tier problems. Corrupt management and clerks, rather than defaulting borrowers, were mainly responsible for most of the funds' losses.

As a government inquiry in 1896 noted: “in the majority of societies, the management […] has passed into the hands of men who are merely moneylenders.” As a result of this inquiry, the renewal of loans was prohibited, which put the funds at a further disadvantage vis-à-vis banks.

Hence, although the Irish loan funds were very capable of tackling the prospect of defaulting borrowers, it was faulty management and increased competition from banks that eventually led to their demise." (https://www.zidisha.org/editables/news_docs/Louvain.pdf)

More Information

• Social Lending
• Hollis, A., Sweetman, A. (1998) “Microcredit in Pre-Famine Ireland”, Explorations in Economic History, 35-4, 347-380.
• Hollis, A., Sweetman, A. (2001) “The Life-Cycle of a Microfinance Institution: the Irish Loan Funds”, Journal of Economic Behavior & Organization, 46, 291-311.