There are ways to avoid loan sharks in the UAE

Legal enterprises can help reduce the damage illegal lenders do to the poor and vulnerable

A man hands a ring to a jeweller at a pawn shop in Moscow. Andrei Smirnov / AFP

Everyone knows what loan sharks are and what they do, which is why it is hard to understand why anyone would borrow money from them. After all, the sums they lend are not large, their collection methods are dangerous and crude, their interest rates outrageous – as much as 120 per cent per year – and their default fees worse.

One obvious risk of borrowing from these people is that a small loan can quickly turn into a burden that is impossible to repay. Consider some of the consequences: in 2010, a borrower in Dubai was allegedly beaten by three men seeking to collect on a Dh500 debt that had accrued Dh6,000 in interest. A year before, a Filipino engineer was stabbed to death inside a suspected loan shark’s flat in Abu Dhabi.

Yet loan sharks thrive in the UAE and elsewhere in the world because they are seen as a last resort by many people who are in desperate need of money.

Ramesh, a salesman, is a case in point. As The National reported, he had to turn to illegal lenders for cash to pay off the banks when a travel ban was issued against him in 2010 for credit-card default. "I had to clear that loan and show the bank clearance to my manager," he said. "Then I had to clear other loans because my job is my strength. What can I do if I lose my job?" This is a typical situation.

One answer to this problem is pawn shops, where people who don’t satisfy a bank’s lending criteria can use their modest possessions as collateral for small loans. These shops issue cash for myriad goods, including jewellery, electrical appliances and even bicycles. There are many advantages. Those who fail to make their payments will not be threatened with physical harm, as is the case with some loans sharks, nor will their default be reported to the authorities; they simply surrender the goods they have put up as collateral.

As licensed businesses with their own premises, pawn shops can also be more easily regulated than the elusive loan sharks.