La Ley General del Equilibrio Ecológico y la Protección al Ambiente

In 1896 an inquiry took place into the ‘proceedings of all existing loan societies established in Ireland under the authority’ of the LFB.111 The commission of inquiry

107 _{Essentially IOUs, except the loan funds were required to use special promissory notes with an LFB}

stamp; an example is seen in plates 2.1 and 2.2.

108 _{The legal means for enforcing debts was outline in chapter 1. The main feature of the loan fund}

legislation was an exemption from stamp duty. This also included an exemption of stamps on promissory notes. But such an exemption effectively excluded loan funds suing for debts issued that contravened the 1843 loan fund act.

109

Fifty-ninth annual report of the Loan Fund Board of Ireland, p. 7 [C.8725], H.C. 1898, xx, 351.

110

The treasurer of the Enniskillen loan fund society v Green, [1898] 2 Ir. R. 103, pp 116-117.

was given a broad remit and the resulting report was based on inquiries ‘into the proceedings of the 104 loan societies’ registered with the LFB at the time.112

The 1897 report on loan fund activity is an interesting document regarding the performance of the loan funds. It is also a useful document in that it is arguably devoid of bias. The commission to investigate the loan funds was comprised of two independent civil servants and the inspector of the LFB. The inquiry was held in public, and as such there were reports in local newspapers. The inquiry was given a wide remit and the resulting report was an indictment of the LFB system as it was then constituted. It must be borne in mind that the system had not experienced any major reform since the 1843 Act, with the only significant change in legislation affecting loan funds being one that increased the price of stationery and documents purchased from the LFB.113

The 1897 report into the proceedings of the charitable loan societies in Ireland114 was the first such direct enquiry into loan fund activity since the establishment of the LFB in 1836. Although there was a committee investigating loan fund activity in the 1850s, its main aim was to inquire into the proceedings of the funds of the Reproductive Loan Funds (RLFs). Confusion surrounding the demarcation between the RLFs and loan funds associated with the LFB led to the activities of the LFB being included in the inquiry.115 In contrast, the 1897 inquiry was the first, and essentially the sole inquiry, that directly focused on the loan funds associated with the LFB. The 1897 report is a survey of what can happen to microfinance institutions that are under-regulated and where needy borrowers are exploited; in effect what can happen when predatory moneylenders are given rights and privileges for exacting repayments.

A question that was not satisfactorily answered by Hollis and Sweetman was how the loan funds continued to operate in the post-famine period. Given that the 1843 act reduced the rate of discount which loan funds could charge and that the interest payable on deposits was also reduced, it would be interesting to see how the loan funds were able to compete in the post-famine period under such legislative restraints. Were the surviving loan funds able to develop strategies to cope with the

112

Ibid, paragraph 2, p. 3.

113 _{Loan Societies (Ireland) Act, 1843, Amendment Act, 1872 (35 & 36 Vict.).} 114 _{Report on charitable loan societies, 1897.}

115 _{This inquiry was cited in chapter I: Report from the Select Committee on Loan Fund Societies}

(Ireland); with the proceedings of the committee, and minutes of evidence, H.C. 1854-55 (259), vii,

reduction in income, or did they have a comparative advantage in information creation?

From the 1897 report we see a number of ways in which the loan funds overcame such legislative restrictions. One of the main strategies was simply to ignore the legislative restrictions and to charge a higher rate of discount than what was permitted by the 1843 act. It must be noted that this was actually done with the consent of the LFB, as it gave misinformed advice to loan societies. As previously stated, the 1843 act reduced the rate of discount from 6 pence in the pound to 4 pence in the pound.116 But the LFB issued a circular to all societies in 1845 informing them that the 1843 act permitted them to issue monthly loans ‘at a rate of discount not exceeding 1 ½ d per pound per month, or 7 ½ d in the pound on the sum issued for a period of five months.’117

Given that the 1843 act aimed to reduce the discount from 6d in the pound to 4d in the pound, it does not seem to have been its intention to actually raise the rate of discount to 7 ½ d in the pound as was advised by the LFB.118 In terms of annualised discount rates,119 the 1897 report stated that:

We are confirmed in this opinion by a consideration of the fact that the rate of discount 6d in the pound, or £12 8s 3d per cent per annum, was made illegal after 31st March 1844, by section 29 of the Act of 1843, and that section 27 of that Act restricted the rate of discount to a sum not exceeding 4d in the pound for 20 weeks, or £8 5s 6d per cent. A rate of discount of 7 ½ d in the pound on a loan repayable by monthly instalments, for a period of five months, is £13 11s 7d per cent per annum.120

The 1897 report stated that the LFB had confused the terms interest and discount, as the 1843 act had stated that 1 ½ d in the pound per month was chargeable as interest, and 4d in the pound per week for 20 weeks was charged as discount. The LFB, however, misinterpreted 1 ½ d in the pound per month to be discount, and not interest, and thus allowed loan funds to charge higher rates of discount. The 1897 report also gave an insightful table showing what rates of discount were being charged by various societies and it is reproduced in table 2.6.

116

It reduced the rate of discount from 2.5% to 1.67%.

117 _{Report on charitable loan societies, 1897, paragraphs 84-85, p. 15.}

118 _{The rate of discount and the rate of interest are two distinct ways of charging for the use of money.}

Loans issued with a discount rate imply that the interest was discounted from the principal before the loan was issued, and the full amount of the principal would be repaid in the future, i.e. p-d is the loan, and p is repaid. Loans issued with an interest rate meant that the principal would be issued, and the principal would be repaid with interest, i.e. p is the loan, p+ i is then repaid.

Appendix B from the report outlined how the discount was calculated.

119

The methodology used in calculating these rates has been included in an appendix to this chapter.

Table 2.6: Rates of discount on monthly loans in 1895

Rate of discount Discount rate (%) Effective annualised interest rate (%) Number of societies 7 ½ d in the £ 3.13 1.35 55 7d in the £ 2.92 1.25 6 6 d in the £ 2.50 1.07 20 5d in the £ 2.08 0.89 2 4 d in the £ 1.67 0.71 4

Note: There are 240d in the £.

The annualised interest rate has been calculated by applying the following formula:121

i=(d/(1-d))*100, and annualised by multiplying i by 5 (number of months in the loan term) and dividing by 12 (number of months in the year).

The monthly interest of 1.5d in the £, was equal to 0.62%, annualised to 0.26% Source: Report on charitable loan societies, 1897, paragraphs 84-85, p. 15.

The 1897 report stated that there was an increase in the number of societies that availed themselves of the permission to charge the higher rate of discount on monthly loans, with only twenty loan funds using the ‘legal rate of 4d in the £.’122 The fact that loan funds were able to exploit the misinterpretation of the 1843 act meant that, contrary to the view held by Hollis and Sweetman, loan funds did not actually experience severe interest rate restrictions. Increases in discount may also explain the growth in the average loan sizes shown in section 2.2.123

In the LFB reports from 1860 to 1915 there is a breakdown of the amount of loans and the amount of monthly loans, so it is possible to see what percentage of loans were issued as monthly loans. This enables us to determine if the number of monthly loans increased over time and therefore to see if loan funds issued monthly loans to avail of the higher discount rates. The reports stated the amount issued in loans and the amount issued in monthly loans, but unfortunately there is no such distinction given in the information on the actual number of loans, so it is not possible to make a comparison between the average sizes of loans issued monthly and weekly loan terms.

121

Samuel A. Broverman, Mathematics of investment and credit (Toronto, 2004), p. 32.

122 _{Report on charitable loan societies, 1897, paragraph 88, p. 15.}

123 _{For example if someone needed £5, he/she would actually have to borrow more than £5. As most}

loan funds usually gave loans for integer sums, he/she would have to borrow £6 to actually get £5 because of the discount charge. Therefore higher discount rates could be an explanatory factor in the increase in the amount of loans issued.

Table 2.7: Number of loan fund societies issuing monthly loans, and the percentage of monthly loans, 1861-1911

Years Number of societies Number of societies where all loans were monthly a Number of societies where all loans were weekly a Mean percentage of loans issued monthly (Mean of all societies) Median percentage of loans issued monthly (median of all societies) 1861 105 11 42 42.58 45.30 1871 81 8 32 44.80 46.20 1880 78 10 25 50.46 55.62 1895 104 52 17 75.02 99.87 1896 104 55 17 83.16 100 1897 98 50 17 73.81 100 1898 82 31 15 67.50 91.27 1899 75 21 13 65.49 85.16 1901b _{52 15 12 65.03 84.13} 1911c _{50 19 7 74.94 95.28} Percentage change 1880-1895 33.33 400.00 -32 48.67 79.56 Percentage change 1895-1899 -28 -58 -23.52 -12.71 -15.76 Note :

a - loans issued weekly and loans issued monthly refer to the frequency of repayment. For monthly loans, loans were repaid in monthly instalments and for weekly loans the instalments were weekly. b – the number of loan funds have been adjusted to reflect the fact that a number of loan funds are inactive. In 1901 there were 96 loan funds in the reports, but only 52 were active.

c – the number of loan funds have been adjusted to reflect the fact that a number of loan funds were inactive. In 1911 there were 80 loan funds in the reports, but only 50 of them were active.

Sources: Loan Fund Board reports, various years

As is seen in table 2.7 roughly 50 per cent of all loan funds were issuing only monthly loans in 1895 and 1896, with a smaller proportion of societies not issuing monthly loans. The remaining societies issued a mixture of monthly and weekly loans. Given that a large number of societies were issuing monthly loans as shown in table 2.7, coupled with the fact that a large number of societies were charging discount over the rate legally permitted by the 1843 loan fund act, as shown in table 2.6, it is not surprising that the LFB system was decimated at the turn of the century when the law was enforced. Although advantageous for a borrower in terms of reducing the opportunity cost of weekly repayments, the switch to issuing monthly loans also

undermined some of the informational advantages of the loan funds. Weekly repayments would have enabled loan funds to monitor borrower performance more closely, but monthly loan repayment periods meant that loan funds lost three weeks’ monitoring. The 1897 report gives us another perspective of this switch to monthly loans which supports the argument that information advantages were eroded. The 1897 report stated that several loan fund clerks held several clerkships simultaneously in various loan funds, particularly in Ulster. The report stated that clerks took advantage of monthly loans so that they could perform their plural tasks.124 Figure 2.31 gives us a breakdown of the provincial distribution of monthly loans and from figure 2.31 it can be seen that the highest percentage of monthly loans were issued in Connaught and Ulster.

Figure 2.31

Average percentage of loans issued monthly in loan funds by province, 1895-99 0 20 40 60 80 100 120 1895 1896 1897 1898 1899 Year P e rc e n ta g e ( % ) Ulster Connaught Leinster Munster

Source: Loan Fund Board reports, various years.

In contrast figure 2.32 shows the provincial distribution of interest-free capital, and here it is seen that in 1895 Munster and Leinster had the highest proportion of interest-free capital.

124 _{Report of the committee appointed to inquire into the proceedings of charitable loan societies in}

Ireland, established under the Act 6 & 7, vic. Cap 91. paragraph 159-161, pp 23-24 [C.8381], H.C.

Figure 2.32

Average percentage of capital that loan funds held interest free by province, 1895-99 0 10 20 30 40 50 60 70 1895 1896 1897 1898 1899 Year P e rc e n ta g e (% ) Ulster Connaught Leinster Munster

Source: Loan Fund Board reports, various years.

If we examine figures 2.31 and 2.32 there seems to be an inverse relationship between the amount of monthly loans and the percentage of interest free-capital. Or to rephrase, that the number of monthly loans was determined by the percentage of interest paying capital.

Theoretically, loan funds ought to have had information advantages over any microcredit competitors. They were supposed to have confined areas of operation, thus increasing information on potential borrowers, and also a screening process which would provide information on borrowers. The loan fund screening process, as was outlined by Charles Piesse,125 involved the borrower applying for a loan and stating the purpose for which a loan was required. Following the application the committee was supposed to meet to discuss whether or not applications for loans should be sanctioned. But, from evidence from the 1897 report, this screening process does not seem to have been practised by many of the loan funds. The report stated that:

In very few instances indeed have we found that the committees conducted the affairs of the societies. Occasionally it occurred that one or two members attended on the office day, but no quorum of the committee was formed, and in some cases not even one member of the committee attended regularly on the office day, with the result that the whole management of the Society was left in the hands of the clerks, and loans were issued to borrowers without the necessary approval of the committee on the borrowers’ application forms.126

125 _{This was referred to in chapter 1: Charles Piesse, Sketch of loan fund system in Ireland (Dublin,}

1841).

This is an indication of management failure of the loan funds, but it is a failure which is not unexpected. The loan fund positions were voluntary, and as such there was not supposed to be any monetary reward given for time spent on loan fund activities. It would be easy to foresee manager apathy creeping in to an activity which was being performed monotonously over a number of years.127

The 1897 report was also critical of the management of loan funds. Managers were apathetic towards the day-to-day management of loan funds, although daily does not seem to be an appropriate term as loan funds were open weekly, and the management of the societies was left to clerks and treasurers. Clerks and treasurers in many instances were each other’s surety, and as such there was no check on the activities of either. The failure of management, and the power of clerks, meant that loan screening processes were undermined and loans were given indiscriminately and not based on either the borrower’s ability to repay or on an inquiry into the nature of the loan request.

A new development which also eroded the information advantages that loan funds ought to have possessed was the establishment of new loan fund societies within the boundaries of existing societies. The overlapping of loan fund boundaries meant that borrowers were able to access loans simultaneously from more than one society.128 Although arguably beneficial to borrowers who could productively utilise multiple loans, the practice undoubtedly increased the risk of lending from a loan society’s perspective and placed borrowers in debt. It was stated in the 1897 report that:

The district is usually defined by townlands and parishes within a certain radius from the office of the Society. In the majority of cases this radius is five miles, in others it varies from six to ten statute miles, but the districts in which the several Societies are authorised to operate are not at present separate from one another, their boundaries overlapping so frequently that there are only 17 districts in Ireland which do not overlap any other.129

Loan screening was undermined by the fact that there was evidence of cross- securitisation, whereby borrowers would simultaneously act as a surety for one another’s sureties. Although mutually beneficial to borrowers, again it increased the risk to loan funds, as guarantors for loans were already indebted to the society and there was no diversification of risk.

127 _{This was also the argument made in chapter I.} 128

Report on charitable loan societies, 189, paragraph 12, p. 7.

Two features of the LFB system that the 1897 report was critical of were the practice of renewals and the excessive use of fines. Both these features suggest that the loan fund system was in many instances an institutionalised example of debt peonage. Renewals of loans were repeatedly given to borrowers, which in effect meant that many borrowers were perpetually in debt. The 1897 report gave an example of the renewal system:

To illustrate the oppressive nature of the renewal system, it is necessary to show how the charges for renewals accumulated. In the first place, there is the discount at 7 ½ d or 6 d in the pound. The 7 ½d rate is 3s ½ d on a £5 loan for twenty weeks, but as the promissory note instead of being allowed to run for twenty weeks was renewed, say, at the twelfth week, the cost to the borrower is in such a case 3s 1 ½ d for twelve weeks, or 13s 7d for a year on £5 which is taken as the usual average amount of a loan. In addition the fine generally charged was 3d in the pound at each renewal – say, 1s 1d a year, or 5s 5d on £5 – making the total 19s a year. So far the charges are direct profit to the Loan Fund, but the borrower was also charged 5d for forms and default notices at each renewal, making the total 20s 10d on £5, or £20 16s 5d per cent per annum. In very many cases the borrower was, in addition, charged 2s for costs of a summons, which would