A payday loan or a salary loan is a small and short-term unsecured loan which a bank offers to its customers regardless of whether the loan is linked to the borrower’s earning. The individual bank or microfinance institutions offer the payday loan at different interest rates. An exporter also faces various foreign exchange risks in pursuing his business transactions. However, the exporter can use different ways to hedge the risks. This paper, therefore, explains my thought on the level of interest microcredit institutions charge on payday loans and how a Christian should offer loans to the poor people. It also explains reasons why an exporter faces foreign exchange risks and how he can hedge the risks.
The interests on payday loans vary from one state to the other. Most of the countries all over the world charge very high interest rates on such loans. The majority of the microfinance institutions connect these great interests to the costs of processing the loans. For instance, as Pappas and Hirschey (1990) note, providing a providing a loan of 100 dollars at a rate of 20% compounded weekly would only generate an interest of 38 cents within one-week, which would quite below the processing cost. The banks, therefore, tend to charge too high interest rates to accommodate the cost of processing the short loans. In countries like America, the citizens rarely use payday loans for emergencies like financing medical expenditures or replacing their car driving belts to maintain their safety and ensure they reach to work at the correct time (Pappas & Hirschey, 1990). The American the highly peaked interest rates on payday loans for everyday utilities. Most of the payday loans are marketed as two weeks credit products but with massive interest at the end of the period. Idaho, Nevada, and Utah are among the lenders in the US who charge the highest interest rates on the payday loan. Idaho payday lenders always charge an average of 582% as yearly interest rates. Nevada charges 521% while Utah charges 474 % (Buckland & Public Interest Law Centre, 2007). These are very high levels for a typical small earning citizen to accommodate.
Christians also offer loans to different people in the countries. The relationship between the Christians and poor should be distinct from that of the local banks with the citizens. The Christians, through their religion, do not have the permission to charge interest on loans to relatives and the poor. However, the doctrine is flexible on its culture and allows the Christians to charge interest on those who are in positions to pay back with interest. Moreover, if one lends money to the poor, he should not even consider it as a loan, and definitely, no interest should accumulate from it.
Answering the second question, exporters face foreign exchange risks for various reasons. The major risk comes from the fluctuation in foreign currency exchange rates. The foreign currency conversion rates vary from day to day and time to time. The currency variations have significant impacts on the survival of exporter’s business company since it causes a negative cash flow if one transacts his business at the time when the rates are low (Homaifar, 2004). This risk involving currencies also occurs when the external subsidiary of one company or the exporter maintains their financial statements in a different currency from that of the reporting partnering firm. In this case, the risk may be an adverse movement in the exchange rate of the denomination currency regarding the base currency before the two companies did their transactions.
An exporter who has a high exposure to foreign exchange risk may use some foreign exchange strategies to reduce such risks. The exporter can reduce the negative transaction exposure by using money market technique where the money becomes a commodity and the money market becomes a component of the financial markets for those assets where a company would involve short-term borrowing or lending (Homaifar, 2004). The exporter can also use the foreign exchange derivative techniques such as forward contracts and future contracts. The foreign exchange derivative is a financial derivative whose payoff depends on foreign exchange rates of two or more currencies. The exporter can also diversify his export markets across many countries to reduce excessive currency conversion when moving from one country to the other (Homaifar, 2004). The proper use of the techniques by the exporter may mitigate the problems and losses that arise due to changes to occur in currency exchange rate.
Buckland, J., & Public Interest Law Centre. (2007). Serving or exploiting people facing short-term credit crunch?: A study of consumer aspects of payday lending in Manitoba. Winnipeg, Man.: Public Interest Law Centre.
Homaifar, G. (2004). Managing global financial and foreign exchange rate risk. Hoboken, NJ: J. Wiley.
Pappas, J. L., & Hirschey, M. (1990). Managerial Economics. Chicago: Dryden Press.