Overview of Cash Converters' Unethical Practices
Discuss about the Social Responsibility of Financial Institutions.
Cash Converters is an Australian Company which is engaged in the business of lending money and is a public company which is counted as the highest payday lenders in that country. However, a class action was launched against the company in November 2015 stating that the company has exploited and trapped many vulnerable and low income people in the vicious cycle of debt and has charged excessively high amount of interests which is up to 633% per annum along with high fees on short term loans. As per the law, an interest up to 48% per annum is the maximum interest that should be charged which should be inclusive of the charges and upfront fees. The company took undue advantage of people who has vulnerably low income. The customers were hence unable to repay the loans in time. The intention of the company was to earn profits for itself without considering the needs of the vulnerable people and also it was not acting as a responsible lender in lending money to its customers.
The company was mainly alleged of the charging high interest which is highly excess of the normal industrial norms and high charges and upfront fees.
The company Cash Converters records its interest income and other charges and upfront fees in its Financial Statements under Interest income from Short Term loans in the Statement of Profit and Loss. The other charges including brokerage fees and upfront charges might have been charged under the Income from services as it could not be seen separately. However the charge of brokerage was not against any legislation applicable at that time, charging interest of 633% simply an overstatement of financial workings as later the company had to admit a payout of $23million for the settlement of class action proceedings. The company was unethically engaging in the practice of taking undue advantage of the low income people who has either limited choice or no choice at all. Loans were providing without applying due diligence that the customer will be able to repay the loan on time or not and hence it can be clearly seen that the company was not carrying out its business responsibly. The only motive of the company was to earn as much as profits as it can without following ethics. Any business should earn profits by striving for long term sustainable growth. There were thousands of cases on pay day loans were lenders would find out ways to recover increased amount from borrowers. Thus to protect customers right without compromising justifiable return to lenders bill was drafted by Government which proposed 10% establishment fee and 2% per month cap on a SACC and a maximum rate of 48% on other loans. However it was argued that responsible lending could be a solution but the proposed bill will harm the business. Despite the regulations by the government suggesting responsible lending practice and a limit on interest and other charges to be recovered from borrowers, Cash Converters practice was unethical and unjustifiable.
Impact of Unethical Practices on Cash Converters' Financial Position
During the period from 2009-2013 that is post the practice of charging high interest Cash Converters business growth was regressive. Year 2009 records a record profit of $16.2 million followed by revenue growth of 27% driven by increase in Loan establishment fees of $5.2m, and also an increase in financial service commission of $600000. The company was making huge profits every quarter. The company has disclosed all time high profits for consecutive years in a row. 30 June 2010 was recorded as the most successful year in company’s history with a record net profit of $21.6m. The personal loan book in Australia saw a growth of 28% to $67.6 million in the financial year 2012. The growth of online personal loan business in Australia embarks a growth of 126.7% to $14.2 million as compared to $6.3 million in 2011. It was seen that that the company’s online strategy was a massive success and record loans were advanced online. Again in 2013 Cash Converters reported a growth of 20.8% to $134.9 million in its revenue followed by growth in Australian Personal Loan Book by 32.7% for the corresponding period. The Australian Loan book generated an EBITDA growth by 37.5% to $ 40.7 million for the period 30 June 2012 to 30 June 2013. During this period the Loan book also grown by 35.4% to $67.6 million. During this period a record growth of 16.4% to $272.7millio, in revenue was booked. However, the loan book saw growth in subsequent years also but revenue growth was not at same. In 2015 the Australian Loan Book saw a downtrend to $107.4 million after it peaked a record $115.7 in the previous year. However the Personal Loans and cash advances continued growing.
As far the share price was concerned, the share price of the company was growing steadily at the same rate during the period concerned. There was no massive impact of the practice was experienced in the share price during the period. From trading at $0.30 in the beginning of 2009 the share price increased slowly to $ 0.45 during June 2009 it steadily increased to $ 0.905 in March 2011, followed by a downward trend reaching low at $0.455 during December 2011, after which a slow recovery was seen in prices and the shares managed to reach a price of $1.02 during November 2012 (refer graph below). The shares kept trading between price range of $0.80 t0 $1.88 till 2014. However in 2015 a downside trend was developed and the shared price traded below half the price during 2015. This might be the impact of class action against the company. This was how the financial position as well as share price of the company reflected the impact of the practice that prompted class action.
The Social Responsibility of Financial Institutions
Financial institutions are socially responsible for the welfare of the economy. It is important for a financial institution to make sustainable competitive profit and to achieve lasting values for the investors. In recent years Corporate Social Responsibility has seen enormous increase in awareness and control globally. It is necessary for a financial institution to employ ethical strategies to conduct their business, which has societal benefits and is positive to development. A financial institution apart from their objective to earn profit and grow their business should show some interest in welfare of society as well as environment by taking into account the impact of their activities on shareholders, customers, suppliers, stake holders and the society. Considering the role that financial institutions plays in financing the developmental activities around the world its contribution to sustainability becomes incomparable. A Financial institution is responsible to protect the interest of its investors as well as customers, ensuring them satisfactory return. The activities of financial institution should reflect their concern for Human Rights. The financial responsibility of financial institution may include:
- Energy conservatism
- Emerging markets
- Donation and sponsorship
The best way to implement a sustainable CSR initiative is by aligning CSR with business strategy. This can be done through a well defined business strategy for instance contributing a percentage of the product price to CSR activities. This brings multiple benefits like Enhancement in brand value, building trust and confidence of customers and investors, improvement in financial position, and an increase in growth of the business.
Like any other financial institution the social responsibility of Cash Converter is same. It is the responsibility of cash converters to protect the interest of its customers, however unethical practices like charging interest over legal limits is a threat to CSR and welfare of society. The company should not indulge in practices like this which results in loss of its reputation affecting its financial position and overall business growth. The company should follow ethical strategies to maximize its profit which is the prime objective of any business organization but without causing any harm to the welfare of society and economy. However it is also the responsibility of the business organization to provide maximum profit to its shareholders and stakeholders that should not be at the cost of losing its customers.
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