Rise of shadow industries in Singapore

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One of the main worries over a slowing Chinese economy is the proliferation of its shadow banking industry, where non-bank lenders such as hedge funds and special investment vehicles grant loans to companies without regulatory oversight. It is feared that hidden debt levels and unrestrained risk taking may trigger a far-reaching crisis in a severe slowdown.

In Singapore, two forms of unregulated shadow industries are thriving as well, one also related to alternative lending and the other of a very different kind. And we saw these past two weeks how both government action and inaction could fuel their growth further.

In an attempt to rein in debt levels and prepare the country for a rising interest rates environment, the Monetary Authority of Singapore (MAS) announced last week a tightening of rules on credit card and unsecured debt lending. Borrowers will no longer be able to rely on new credit cards for additional financing as banks will have to assess their overall debt limit across lenders. Other rules include loans capped to salary levels and maximum due periods before restrictions on unsecured lending set in.

The MAS rules are well intentioned and serve as a timely reminder to individuals to keep a close watch on spending. For those already in difficulty, however, it won’t make existing problems suddenly disappear. When borrowers can’t get help from financial institutions, the next resort is to turn to moneylenders not under the purview of MAS. This recent phenomenon of moneylenders and pawnshops invading HDB heartlands has already been noted, and Reuters even reported on pawnshops hitting paydirt across Southeast Asia as living costs spiral out of control. They can expect a further boost in business once banks get their lending arms tied by MAS.

Recognising the potential problem with the 200 or so licensed moneylenders it currently oversees, the Ministry of Law is looking to align with MAS on such rules. All well and good then, except that this would only drive desperate individuals further toward our very own “shadow banking” industry that neither government body could control — loan sharks.

Try telling your not-so-friendly neighbourhood Ah Long that he really shouldn’t be lending any more money to the fellow who has busted all his credit limits.

In a week where we celebrate Lee Kuan Yew’s 90th birthday, we marvel at the safe and prosperous country he has built where serious crimes such as armed robberies, rioting, kidnapping and drug peddling have practically been wiped off the streets. Yet it must baffle every law-abiding citizen why our enforcement agencies just can’t seem to get a handle on illegal loan shark activities. News reports on amateur runners caught terrorising households on behalf of faceless lenders continue to be as prevalent and ubiquitous as the signature “O$P$” marks they leave behind on HDB flat corridors and lift landings. Are penalties not strong enough as deterrence?

Bad as it is, at least it is a problem the government recognises.

The other shadow industry may not cripple households or the economy when hard times befall, but is just as worrying — if only because the government doesn’t regard it a problem at all. Responding to a query in Parliament on the impact of the private tuition industry on social mobility, Senior Minister of State for Education Indranee Rajah insisted that Singapore’s education system is “run on the basis that tuition is not necessary”.

Such a statement comes across as plain denial in the face of a “shadow education” industry, as Nominated MP Janice Koh called it, that is estimated to be reaching the billion dollar mark. Are our schools are not doing a good enough job then to render tuition unnecessary, or is Ms Indranee out of touch with reality? Either way, it does not look good on the minister.

It is easy to suggest that parents have a choice in not sending kids to tuition, but much harder to have the conviction needed to believe that one’s child can get by without such help. Parents can hardly be faulted if they think it’s better to be safe than sorry. After all, the job landscape in Singapore is not known to be particularly forgiving to those who fall by the wayside. Making matters worse this week is the signal the government implicitly sent in how they view education; in explaining the compensation given to the family of a dead prisoner, the Ministry of Home Affairs implied that one’s life is less valuable in monetary terms if one does not complete the O-Levels.

When the vast majority of students take private tuition, we can choose to blame it on all Singaporean parents being irrational and kiasu, or take a hard look at systemic problems in schools that have created such an environment. The former is no doubt true to a large extent, but it really does nobody any favour if the government refuses to acknowledge the latter. The first step to fixing any problem is to accept that there is one.

If not, the problem will continue to grow happily in the shadows, out of sight and out of mind. Just don’t be too shocked should it burgeon out of control one day, and then tell us you didn’t see it coming.