Most microloan companies operating in Iceland are in the ownership of a single company headquartered in Denmark, RÚV reports. This allows them to offer loans with conditions which are illegal according to Icelandic law, but not Danish. The Icelandic government and Consumer Agency of Iceland are hoping to shut down such activities, which are causing higher rates of debt, particularly among young people.
According to Icelandic law, interest and other incidental costs associated with a loan may not surpass 50% of the loan amount. Examples show some microlenders charging Icelandic consumers as much as 35,000% of the original loan amount. Two microloan companies were even declared bankrupt, yet continued lending to Icelanders through a Danish website. Since the companies are registered in Denmark, it’s more difficult for the Consumer Agency of Iceland to assist consumers who find themselves unable to pay up.
Young people affected
The number of young people in Iceland who sought professional help due to financial problems grew around 6.5% in 2018 compared to the previous year. In 2012, only 5% of individuals who sought out such services were aged 18-29. In 2018, the same age group represented 27.3% of those who sought financial help, and most stated that microloans were the main cause. Debtor Representative Ásta Sigrún Helgadóttir told RÚV there are examples of young people owing as much as ISK 5 million ($41,000/€37,000). “This is ofen a vicious cycle,” Ásta Sigrún stated. “People start by taking a loan, then they take a loan to pay off a loan.” Ásta underlined how easy it is for consumers to obtain the loans, saying no credit approval is required for loans under ISK 2 million ($16,400/€14,700).
Government takes action
A government report submitted last January suggests that much remains to be done to protect consumers and ensure fair business practices in the microloan industry. One of the suggestions made by the reports’ authors was to better regulate advertising of microloans. Minister of Consumer Affairs Þórdís Kolbrún Reykfjörð Gylfadóttir says it is not enough to inform consumers about the dangers of microloans, as there will always be individuals who take such loans out of necessity. Þórdís plans to introduce a bill this fall banning microlenders from offering loans whose incidental costs are illegal according to Icelandic law. She hopes the bill will make business unfeasible for the microlenders, causing them to shut down.
Going to court
Hákón Stefánsson of Creditinfo Group says the easiest way to bring microlenders’ operations to a halt would be for debtors to take them to court. As of the present, no microloan debt cases have been put before Icelandic courts. Hákón believes the companies’ would not be able to defend their case before the courts.