Asymmetries In Consumer Credit Markets - Cash Converters Scandal Analysis

Payday Lenders and Cash Converters

Discuss about the Asymmetries in Consumer Credit Markets.

Financial management is the process of managing money in effective and efficient manner (Brigham and Ehrhardt 2013). It can be seen that there are different kinds of financial organization. One of the popular financial institutions is the payday lenders. Payday lenders are the companies that lend customers small amount of loan with a higher rate of interest. The borrowers will repay the loan after getting their salaries or wages (Dobbie and Skiba 2013). In Australia, Cash Converters is such payday lender. It has been seen that Cash Converters has exploited and trapped many customers with high interest debt cycle. This report attempts to analyze and evaluate the various aspects of Cash Converters scandal.

The main operation of Cash Converters is to lend money on online basis; in addition, the company also has its web shop (cashconverters.com.au 2017). In the annual report of Cash Converters, this process of cash lending of this company has been presented in a responsible and ethical manner. It has been shown in the financial report the operations of Cash Converters is well complied with all the laws and regulations. Apart from this, the business operations have also followed the regulations of consumer protection act of the country (Ali, McRae and Ramsay 2015). As per the financial report of the organization, Cash Converters is committed to provide responsible lending to meet the ever-growing demand of the people. Many uncertainties can be seen regarding the legislation of short-term lending. Cash Converters has well responded to this legislative uncertainty and has introduced new business model in order to get access to the credit. A broker was appointed forcefully in Borrowers of Queensland in order to pay huge substantial brokerage fee (Banks et al. 2015). The amount of the required brokerage fee was under the laws of consumer credit and this was used in order to calculate the real rate of interest. In example, it can be shown that as per the proposed business model, a loan of $ 1200 would charge brokerage fees of $ 420. However, 160% was the real rate of interest. The various financial factors documented and portrayed in the financial statement of Cash Converters were different from the reality. In reality, many customers were charged with higher interest rate and huge credit fees (BANKS, DE SILVA and RUSSELL 2015).

Different kinds of justice ethical theories state that the decision makers of the organizations should focus on the fair treatment with the people involved in the business. From the various business operations of Cash Converters, it can be understood that the business operations of Cash Converters were not ethical at all. Cash Converters uses to take advantage of the large customer base of the organization that does not have the repay capacity of the loan amount. According to the deontological class of ethical theories, the process of decision-making needs to be done properly (Broad 2014). In case of Cash Converters, the organization did not take into consideration the responsible lending practice under the threat of legal penalty. In addition, Cash Converters did not comply with all the rules and legislations. Cash Converters deceives a large number of people to take loans in a high interest rate and high fees that is against the ethics of business.

Unethical Business Practices

The above discussion sheds light on the unethical business practices of Cash Converters. These unethical business operations of Cash Converters have major financial impact including in the share prices. As a result, a fall from $ 119448669 in the year 2015 to $ 113036461 in the year 2016 in personal book loan can be seen. Loan advances increased on online basis and the total amount of loan increased by 34 percent of the value. There are some key indicators for in Australia for cash advances; they are the average amount of loan, total amount of advances in principals and total number of customers who want to take loans. Various financial matters of Cash Converters have enough flexibility and the company has sufficient provision for cash flow. The provision for cash flow for the year 2016 was $ 55 million. Cash Converters hold material cash on its balance sheet on 31 December 2015. It can be seen that Cash Converters has introduced a deferred establishment fee that was not in the interest cap rate of 49 percent. This deferred establishment fee has a major impact on the cash advance loan of seven month and ten month. The rate of annual interest rates in case of one month and seven months cash advance loan are 633 percent and 145 percent respectively. It can be seen that there were a loss of $ 21.5 million in the year of 2015 as compared with the profit of 2014 that was 24.2 million. This is a major drop in the profit (cashconverters.com 2017).

Due to this massive loss in the year of 2015, Cash Converters was not able to declare dividend for the shareholders in that year. At the same time, an impairment charge of $ 7.6 million was discovered as major economic and legislative factors. In the year of 2015, the value of personal loan dropped to $ 104.5 million. The company incurred a legal fee of $ 3 million in order to settle the class action against them. Due to this class settlement, Cash Converters required to pay an amount of $ 20 million into a specific fund from its existing resources. This total amount is deductable for the purpose of tax and expenses in the current financial year. However, the bottom line of Cash Converters did not hit with this $ 23 million. A jump in the prices can be seen in the price of the shares after the class action against Cash Converters was over. All the imposed charges on Cash Converters was booked against the profit of the year of 2016. This will have a large impact on the cash flow of the organization. In the year of 2016, the shares of Cash Converters were trading at 7.6 percent higher price.

Financial Impacts of Cash Converters Scandal

There are some major social responsibilities of the financial institutions. It is the utmost responsibility of the financial organizations to promote sustainable business practices. Sustainable development in the context of finance can be established by using the capital of the organizations in such a way that they can contribute to the well-being of the people (Brammer, Jackson and Matten 2012). The efficient management of risk is another way of sustainable development for the financial organizations. Some of the best practices of sustainable development in financial organizations are to make the people aware about sustainability, to make the people aware about the importance of resources of the nature and many others. Sustainable and social responsibilities help the financial organizations to set up financial goals for the long-term development of the organization along with the society. There are many principles by which an organization can involve in the process of social development. The adoption of proper corporate social responsibility strategies can helps to increase the reputation of the financial organization in the society (Bravo, Matute and Pina 2012).

Implementation of effective corporate governance and the implementation of the use of sustainable energy along with the process of clean production are being taken into consideration as good business opportunities. There are many ways by which sustainability can be implemented in the financial organizations. Some of these processes are the process of effective decision-making, the process of effective risk management strategy, the establishment of clean technologies and others. Most of the financial institutions all over the world have taken the initiatives of environmental conservatism for the betterment of the environment along with the people of the community. It is desired that the mission and vision of the financial organizations are based on environmental sustainability (Hilson 2012).

Secured money lending can be seen as a part of financial services. In order to embed corporate social responsibility in the business operations, many financial organizations all over the world are adopting the strategy of establishment of the management and governance system. It is desired that the financial organizations like Cash Converters needs need to include corporate social responsibility in their various business operations like risk management system, screening of investments and many others. One of the major way out to establish sustainability for the financial organizations are the inclusion of the stakeholders of the company in the sustainability campaigns. With the help the stakeholders of the business, the financial organizations can overcome the robust challenge of sustainability. In this era, sustainability brings business opportunities for the financial organizations (Cheng, Ioannou and Serafeim 2014).

Conclusion

The aim of the report was to analyze and evaluate various aspects of the business model of Cash Converters. From the above discussion, it can be seen that the various business operations of Cash Converters are not ethical. Different kinds of ethical business theories state that the customers should not be deprived due to business. However, it can be seen that business operations of Cash Converters have exploited and deprived the customers. The result of this has affected the financial condition along with the share prices of Cash Converters in a negative way. Lastly, it is suggested that the financial organizations should implement the strategy of sustainably in their business processes.

References

About Us. (2017). cashconverters.com.au. Retrieved 12 April 2017, from https://www.cashconverters.com.au/about-us

Ali, P., McRae, C.H. and Ramsay, I., 2015. Payday lending regulation and borrower vulnerability in the United Kingdom and Australia.

BANKS, M., DE SILVA, A.S.H.T.O.N. and RUSSELL, R., 2015. TRENDS IN THE AUSTRALIAN SMALL LOAN MARKET.

Banks, M., Marston, G., Russell, R. and Karger, H., 2015. ‘In a perfect world it would be great if they didn't exist’: How Australians experience payday loans. International Journal of Social Welfare, 24(1), pp.37-47.

Brammer, S., Jackson, G. and Matten, D., 2012. Corporate social responsibility and institutional theory: New perspectives on private governance. Socio-economic review, 10(1), pp.3-28.

Bravo, R., Matute, J. and Pina, J.M., 2012. Corporate social responsibility as a vehicle to reveal the corporate identity: A study focused on the websites of Spanish financial entities. Journal of Business Ethics, 107(2), pp.129-146.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Broad, C.D., 2014. Five types of ethical theory (Vol. 2). Routledge.

Cash Converters. (2017). Cashconverters.com. Retrieved 12 April 2017, from https://www.cashconverters.com/

Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23.

Dobbie, W. and Skiba, P.M., 2013. Information asymmetries in consumer credit markets: Evidence from payday lending. American Economic Journal: Applied Economics, 5(4), pp.256-282.

Hilson, G., 2012. Corporate Social Responsibility in the extractive industries: Experiences from developing countries. Resources Policy, 37(2), pp.131-137.