Pawnshop loans need specific regulations to improve service

Vietnam's pawnshop loan market holds huge potential, but there are too many legal grey areas, including rules on fees, lending rates, and debt collection, according to experts.

Born about 3,000 years ago, pawnshops are regarded as the earliest lenders in history. Today, this microfinance service can be found all over the world. Its advantages include a quick process and multiple types of collateral for loans ranging in size.

Pawnshop loans are popular in Asia and the U.S. According to data released this March by Coherent Market Insights Pvt. Ltd, in the U.S. there are more than 12,000 pawnshops, with 1,731 in Texas, 847 in Florida, and 825 in Georgia.

In India, according to Gnanasekar Thiagarajan, director of Commtrendz Risk Management Services, a Mumbai-based independent consulting firm, pawnshops can be found on almost every street.

In Thailand, the three major pawnshop networks are Ngern Tid Lor, Srisawad, and Muang Thai Capital (MTC), and they operate almost 10,000 transaction offices. Ngern Tid Lor has more than 1,000; Srisawad more than 2,500; and MTC over 6,000.

In Vietnam, according to the Ministry of Public Security, there were about 27,000 pawn shops operating at the end of 2022. There are no official figures on the size of the market. However, some large businesses have total outstanding loans reaching from several hundred billion Vietnam dong to VND1.6 trillion each (VND100 billion = $4.26 million).

Domestic consumer finance firm F88 operates the country’s largest chain of pawnshops with about 830 nationwide. As of the end of 2022, its total outstanding loans were VND1.68 trillion ($71.72 million).

According to BIDV Research and Development Institute statistics, as of the end of June 2022, financial institutions outside the banking system and banks’ consumer finance firms in the country accounted for about 11.7% of all consumer loans. The total figure was about VND2,500 trillion ($106.54 billion), and these financial institutions provided nearly VND300 trillion ($12.78 billion).

In terms of growth, Coherent Market Insights estimates the U.S. pawnshop loan market will be worth $4.12 billion by 2028 with a compound annual growth rate of 6.8%. The sector employs over 70,000 people, and big chains like FirstCash, Big Pawn, EZCorp, PAWNGO, and UltraPawn have millions of regular customers.

In Thailand in 2021, Muang Thai Capital’s total revenue was more than 16 billion baht (nearly $500 million), up 8.8% compared to 2020. Over there, pawnshops tend to serve as financial convenience stores offering integrated services such as collection and payment, bill payments, money deposits and withdrawals, and money transfers.

Ngern Tid Lor in Thailand was listed in May 2021 with a market capitalization of THB84,643 million (nearly $2.4 billion). Before becoming a financial convenience store, it was a chain of pawnshops providing loans based on motorbikes and cars as collateral.

Vietnam's pawnshop loan market is similar to that in Thailand, and has large potential for development. According to official statistics, up to 69% of Vietnamese people do not have a bank account or have access to financial and banking services, and more than 33.4 million people are in unofficial employment. They are the targets for pawnshops and microfinance service firms.

According to FiinGroup, a Vietnamese provider of financial data and information, the ratio of consumer loans to GDP in the country is still very low compared to its regional peers. Currently, the ratio in Hong Kong is 90.54%; in South Korea, Malaysia, Japan, Singapore, mainland China, and Taiwan are all over 50%, whereas it is only 27.17% in Vietnam.

Vietnam still has legal grey areas in this sector. The 2015 Civil Code sets a maximum lending rate at 20% per annum, but there are no rules for appraisal fees or mortgage management fees. This means borrowers have to pay high fees and lenders can bend the law.

The 2020 Investment Law does not govern debt collection services, so lenders in need of debt collection can only file a lawsuit to courts or file petitions to authorities, which are both ineffective.

According to pawnshops, they have faced waves of debt repayment refusals and are therefore suffering losses after police detected illegal debt collection activities involving threatening borrowers.

How to solve grey areas

Regional markets already have specific regulations on lending interest rates and fees for pawn services. Singapore stipulates a ceiling interest rate of 1.5% per month and has specific regulations on loans: a $2 fee for procedures to change non-important information; a $10 fee for taking back mortgaged assets when the lender no longer holds the pawn certificate; and a $10 fee for cases in which the asset's owner tries to retrieve assets mortgaged by someone else. There are no other fees.

Thailand, Malaysia, and Hong Kong also have regulations on ceiling lending rates of 2-3.5% per month, and detail applicable fees and charges.

These markets have very specific regulations for debt collection. For example, the first thing lenders must do is verify the borrower's status. After that, a notice of debt collection is sent to the borrower. If the borrower does not respond, a third party will be hired to collect the debt or the lender will file a lawsuit.

Debt collection services must observe a code of conduct. They must not harass or send more than five men at the same time to a borrower’s address. Harassment constitutes a crime and comes with a heavy fine or prison sentence.

Lawyer Truong Thanh Duc, director of ANVI law firm, said that consumer finance firms and pawn services in Vietnam are facing grey areas. Therefore, regulators need to draw up an appropriate legal framework so the sector can grow legally and under control.

"There should be specific regulations on the highest interest rates. It is advisable to study international practices, which stipulate interest rates of 1.5-3 times higher than banks.

“Or there should be a more reasonable rate than the 20% set by the 2015 Civil Code. It could be up to 50%, or just let lenders and borrowers set the rates themselves,” he added.

The lawyer also said debt collection services must be professional, and there should be a law governing them.

Like Duc, Le Xuan Dong, managing director of market research and consulting services at FiinGroup, said regulators should work on specific regulations on lending interest rates and service fees for consumer credit firms and pawnshops.

Dong also noted regulators should consider making debt collection services legal again as a conditional business. This would help the market grow with regulators to control it.

He suggested a full legal framework for debt collection in formal and informal consumer finance firms, debt trading firms, and debt collection services. This should include publicizing legal and illegal forms of debt collection and strict sanctions against infringements.

Last but not least, Dong said there should be communication about consumer finance products, the borrower’s rights and debt repayment obligations, and risks from failure to observe the repayment schedule. This would help people to get into the habit of making repayments on time.