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Pawnshops Seen in New Light

Typically associated with desperation and exploitation, pawning is also a useful method of microlending

By Graham Dwyer (gdwyer@adb.org)
External Relations Specialist

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Pawning is probably the oldest method of lending, dating from the days of Babylon, the Bible, and ancient China. But today it is an activity associated with desperation and exploitation that many policymakers and funding agencies would like to see curtailed.

Yet the prejudices against pawning are usually based on unrealistic or incorrect assumptions, according to Nimal Fernando, ADB’s Lead Rural Finance Specialist.

In an article in ADB’s quarterly newsletter on microfinance, Finance for the Poor, Mr. Fernando argues that pawnshops are, in fact, an important source of microcredit in many developing countries, especially in Asia.

He says a fresh look is needed at the activity and cites recent experiences in Indonesia and Sri Lanka.

“Pawnshops provide an important financial service to poor and low-income households by offering credit at rates that are better than those of informal commercial moneylenders,” he writes.

“The clients are able to convert their nonfinancial assets quickly into cash for short periods, whenever needed.”

He points out that far from being exploitative, pawning gives poor and low-income households in Asia a chance to take unproductive holdings, such as gold and jewelry, and convert them for productive purposes by pledging them for loans.

Both the clients and lenders benefit from minimal transaction costs. Also, there is no need for the latter to collect and analyze information on creditworthiness, apart from appraising the asset reasonably and carefully. Pawnshops’ record keeping and accounting are also simple and low cost.

“Although pawning has its limitations, pawnshops add to the institutional diversity of the microfinance landscape and provide a useful service as microcredit institutions to poor and low-income households in countries where there are no severe legal restrictions on their operations,” Mr. Fernando concludes.

Visit ADB's Microfinance site.

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