[Initial Insight] What Happens When You Confuse Finance and Welfare

"Because they are the most pitiable." This was what a person, who is now a director at the Financial Supervisory Service, heard when he went on-site to inspect the Microfinance Foundation in the past. He said this statement was shocking. When he visited the site, he found that almost none of the loans given by the foundation were being repaid. How could the loans have been given out to end up in such a state? Frustrated, he asked the person in charge about the screening criteria. "We lent money to those who looked the most pitiable among those who came." He was left speechless by the answer.

"Do you know why Gyeonggi-do's ultra-low credit loans ended?" This was a question he recently received from a senior official at the financial authorities. It was a product created by Lee Jae-myung, the leader of the Democratic Party of Korea, during his time as governor of Gyeonggi-do, offering loans up to 3 million won at 1% interest. However, the number of people not even repaying the 1% interest has been increasing. Because the interest was so low, it may have been perceived as 'free,' and this atmosphere might have encouraged delinquencies. The ultra-low credit loans, which disbursed nearly 100 billion won over two years, have now been shut down.

This is what happens when finance and welfare are confused. The Korean dictionary defines finance as "lending or borrowing funds with interest." The basic principle of finance is to evaluate the borrower's creditworthiness and charge appropriate interest to facilitate lending. This idea is also found in economist Dr. Cha Hyun-jin's 'Financial Odyssey.' "Interest is the difference between two points in time (inter) that have changed (est). This difference is not created by banks. It is created by nature, that is, time. This is why Calvin, the 16th-century Reformation figure, legalized moneylending."

Reflecting on Calvin's thoughts at the time, welfare and finance are more clearly distinguished. "Those who are pitiable and unable to repay should be helped without compensation (welfare), but if that is impossible, they should be allowed to borrow with interest (finance)."

Although the fierce political scolding seems to leave no room for maneuver on the surface, the financial authorities' concerns lie here. Politicians who mistake banks for the Ministry of Health and Welfare and confuse microfinance with welfare policy have already crossed the line. After seeing the president's approval rating rise due to the statement "banks are public goods," the opposition leader even coined the term 'unfair interest' and proposed a social responsibility law for banks.

In the National Assembly, there was also a bill proposing that "a certain portion of the profits banks earn from the interest rate spread between deposits and loans be used for the budget of the Microfinance Promotion Agency." The reality is that politicians call the Financial Services Commission "loan sharks" for charging 6,000 won monthly interest on a 500,000 won small living expense loan to confirm repayment willingness.

Can lowering interest rates and lending money to those who cannot afford to repay make them happy? It may actually be the fastest way to turn them into credit delinquents. Such people should be absorbed into the welfare sector. Otherwise, microfinance, which is prepared with limited resources, cannot reach those who truly need it because it flows to those who are "a little less pitiable."

Microfinance exists to support groups that can use normal financial services, groups receiving welfare benefits, and those who fall between the two and cannot fit in either. With one year left until the crucial general election where lives are at stake, it is obvious what kind of microfinance policies will emerge from Yongsan and Yeouido going forward.