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Video #2 - High Interest Loans To Small Businesses

Friday, January 06, 2006

sources | lesson plan


BACKGROUND INFORMATION

Because small companies are often considered bad credit risks, Japanese banks have routinely stayed away from lending to such firms. This has created a booming market for a few companies that specialize in high-interest, short-term loans to small businesses. In fact, small and medium-sized Japanese businesses need to raise some $132 billion from sources other than banks. Some 5,000 companies that specialize in unsecured cash loans generate much of these funds.

The two largest players among these companies are Nichiei Co. and Shohkoh Fund and Co. They were recently accused of engaging in strong-arm tactics to collect on their loans. (See Lucy Craft's report about this on the video). However, Phred Dvorak, staff reporter for The Wall Street Journal, writes that these firms are likely to survive and continue to thrive because they fill a real need for companies which need quick, easy loans. Japan's cautious and capital-strapped banks are not equipped to meet their needs.

Dvorak adds that Nichiei and Shohkoh have been highly profitable, operating in a market where lending interest sometimes rise as high as 40 percent, and their shares have been popular among foreign investors. Nichiei, which listed in the Frankfurt Stock Exchange earlier this year, says foreigners own about 30 percent of the company.

The plot thickened when local media revealed a law suit charging that a former loan collector employed by Nichiei used strong arm tactics to force a customer to raise money to repay a loan. Government officials are said to be investigating business practices at Nichiei, and Japan's chief financial regulator is looking into the possibility of suspending the company's operations if the investigation shows it dealt improperly.

As a result, some of the largest sources of funding for Nichiei and Shohkoh Fund are refusing to grant new loans to the companies, at least for now. Legislators are discussing ways to regulate the industry, including capping interest rates. Nichiei said it is conducting its own investigation of the charges, but otherwise declined to comment, according to The Wall Street Journal.

Despite the controversy, the consensus of opinion seems to be that these companies are providing a service that Japanese banks are not equipped to fulfill-and that banks have actually been referring businesses to these companies for years. Also, the general attitude is that these companies tend to make fast decisions and are more willing to take risks than Japan's smallest banks or neighborhood cooperatives, which serve the same markets. "There's a definite hole here that Nichiei and Shohkoh Fund have been filling," says an executive at one of the many foreign firms in Tokyo that lend the companies money. He adds, "If you close them, who's going to fill it?"

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SOURCES:

Dvorak, Phred, "Japan's Capital Industry Faces Lending Scandal." The Wall Street Journal, startup.wsj.com, 2000.

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LESSON PLAN

GRADE LEVEL/SUBJECT: 10-12/Economics, International Relations, World History, International Baccalaureate Programs(IB), Current Events.

PURPOSE: to present activities to be used at a variety of classroom situations in order to enhance student understanding of Japanese economy and its significance globally.

OBJECTIVES: Students will be able to:

  1. Describe the lending system of Japan.
  2. Describe the lending system of the United States.
  3. Compare and contrast the two systems.
  4. Speculate on how both systems may be improved in the future.
  5. Evaluate how each system affects the economy of their country.

MATERIALS:

  1. Background information provided.
  2. Resources on lending institutions available at your school's Media Center and the Public Library System in your area.
  3. Background information available through Internet "search engines".
  4. Nando.net
  5. startup.wsj.com

ACTIVITIES: May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.

  1. Create a Venn diagram to illustrate the differences and similarities between the lending system of the U.S. and that of Japan.
  2. Write an editorial about Japanese lending practices from the point of view of the CEO of a small Japanese company; the CEO of a major Japanese banking institution; a foreign investor; a government regulator; a niche lender.
  3. Organize a class debate exposing the pros and cons of Japan's lending practices.
  4. Create a scenario for Japan's lending institutions in the next 20 years.

EVALUATION: Individual assignments should be graded by the teacher using established criteria. Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:

Content 1= Superior (A) Creativity 2= Excellent (B) Clarity 3= Good (C) 4= Fair (D) 5= Poor (F)

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