The Dangers of Drop-by-Drop Loans for Arequipa’s Informal Merchants

Cesar Ventura Pizarro

In Arequipa, seven out of ten merchants who work in the city’s traditional markets resort to drop-by-drop loans, according to Heber Peñaloza, representative of the Chamber of Associations of Shopping Centers (Cadac).

With this, not only are they exposed to paying exorbitant interests and well above what the formal financial market offers, but they also put their lives at risk by being susceptible to threats and extortion, if they do not comply with the payment of the established quotas.

According to Peñaloza, many micro and small entrepreneurs choose to go to these informal lenders due to the immediacy in which the money is delivered and the difficult access to credit within the financial system.

Loans at the touch

This parallel market does not have an entity that regulates it, so its collection mechanisms can cross the legal border. “The payment guarantee is the life of the person who requested the loan,” warned Peñaloza.

The leader also confirmed that there are cases of merchants who are threatened for not paying these debts.

Loans under this modality do not require a financial evaluation, nor papers that prove economic solvency, they are granted immediately. In this way, they can start with S/ 100 and go up to S/ 20,000.

Modality

Unlike financial institutions regulated by the Superintendency of Banking, Insurance and AFP (SBS), where it is usual for interest and part of the financed amount to be paid month by month, informal lenders usually charge interest on a daily basis.

Regarding the cost of credit, according to the SBS, in Arequipa the highest interest rate for loans for working capital is 43.83% per year; while in drop-by-drop loans this rate can reach 20% daily.

“If they lend you 100 soles, each day you pay 20 soles for interest. If you stop paying one day, the financed amount increases to 120 soles and the daily interest becomes 24 soles,” explained Peñaloza.

The alarming thing about this mechanism is that the amount lent —100 soles or 120 soles in the case of the previous example— is not included in the payment of the daily fee, so the merchant chooses when to cancel the money received and until then. , you will continue to pay interest.

Finance system

For Antonio Escobar, a professor at the San Pablo Catholic University and a specialist in microfinance, the reason why merchants resort to this type of loan is a lack of knowledge of how the formal financial system works. He then clarified that microfinance institutions and municipal savings banks serve formal and informal merchants.

Among the requirements that microfinance institutions demand to grant loans to anyone, are a copy of a current ID (owner and spouse), a copy of a utility bill (electricity or water) or another document that proves current residence, and documents that prove income; In some cases, a person is required to participate as a guarantee of the client.

Regarding immediacy, this is not a problem for formal financial companies, since credits of amounts ranging between 500 soles and 10 thousand soles can be acquired very quickly. “A person can access immediate credit from the application of a bank,” explained Escobar. Now, if you prefer to use the traditional means and go to a window, the credit can take an hour to be approved if it is the case of a person who is already a customer or 24 hours if it is not.

On the other hand, Escobar highlighted that the interest rates charged by the alternate market are outside the range established by law in the country. “They are dangerous modalities. Extortion practices and very high interest rates have been seen, ”he indicated.

Likewise, he recommended that micro and small entrepreneurs find out about the credit facilities offered by regular financial entities and not expose their security and family tranquility by resorting to this alternative market.