A Breakdown on the Pawn Industry in Singapore Nabeela binte Habib Rahman University at Buffalo, State University of New York ECO 480: Econometrics 1 May 11, 2022 A Breakdown on the Pawn Industry in Singapore This paper examines the pawnbroking industry in Singapore and how it thrives in an highly developed free-market economy like Singapore. The pawn industry belongs to a category of financial institutions, specifically, non-traditional financial institutions. A non-traditional financial institutions, or rather non-bank financial institutions (NBFI) are those that do not possess a full banking license and are not permitted to collect deposit from members of the public. They can however offer supplementary financial services such as “risk pooling, financial consulting, brokering, money transmission and check cashing” (The World Bank, n.d.). NBFIs like pawn shops allow access to consumer credit, similar to licensed banks. They are subject to their own laws and serve their own segment of the market. How pawnshops in Singapore make money is by earning interest on the personal loans that they give to customers and buy selling retail items that had been previously sold to them (Maverick, 2022). As for personal loans, since pawnshops do not typically carry out rigorous investigation on the borrower such as their history of repayment of loans and their income, pawnshops are subjected to higher risks as they are less able to determine if the borrower will default on their personal loan. Hence, they tend to charge higher interest rates than their counterparts in traditional financial institutions. In addition, if the borrower defaults on their loan, they will lose the collateral they had to surrender when taking the loan and pawnshops are able to acquire the item and grow their cache of retail items. Literature Review The existing literature on pawnshops in Singapore are mostly outdated and lack in analysis relating to the current context of globalisation and even Covid. They do, however, raise some interesting details about pawnbroking in the past, such as the fact that clothes formed the majority of the items that were pledged as collateral in the early 1990s (Lam, 1992, as cited in Chan, 2001). Moreover, it highlighted that pawnbrokers strongly believe that pawnshops fare better in times of economic prosperity instead of its reverse as their earnings has high correlation with the volume of completed transactions (Chan, 2001). In addition, the success of the East Asian development, dubbed the “East Asian economic miracle” can be attributed to non-traditional financial institutions such the pawn industry (Waldron, 1995, as cited in Goenka & Henley, 2009). History of pawnshops Pawnbroking in Singapore can be traced back to the 19th century when . The pawnshops of today will be in stark contrast to those they had existed during the heyday. Historically, pawnbroking can be traced back to Chinese societies and there is evidence to prove that pawnshops themselves were established in China in . With the increased movement of people due to globalisation and immigration from countries such as India and China into the fishing village of Singapore, pawnshops managed to take root in Singapore. The first pawnshop known to be opened in Singapore was in the year 1872 and by 1886, there was 26 pawnshops on the little island (Chia, 2016). The Pawnbroking Act was introduced in 1898, succeeding the Pawnbrokers Ordinance, which was amended several times to keep in line with social and economic development. Later, the Pawnbrokers Act 2015 was passed to “repeal and re-enact” the 1994 Act of the same name. Consumer base People from many different backgrounds, from poor to the wealthy, from the young to the old utilise pawnshop services. Those from the lower income bracket may utilise the services when they are strapped for cash and desperately get a loan without being subjected to stringent credit checks by traditional banks. That does not mean that only needy individuals who require cash to help them make ends meet or those with urgent micro- nancing needs visit pawnshops. Those from the higher income bracket have also been known to utilise pawnshop services to pawn the occasional “gold bar” or luxury watch to raise money for business purposes in some instances (Grant, 2013). SWOT Analysis of the pawn industry in Singapore Strengths • Offering quick cash to customers Weaknesses • Risk of default Opportunities • Embracing technology and modernizing its systems Threats • Competitive environment Strengths Pawnshops are able to offer quick loans to their customers within a matter of ten to fifteen minutes, thus they serve as a means of acquiring cash especially when one is desperate and struggling. However, when taking out a loan from pawn shops, it is necessary for the borrower to surrender a valuable item of theirs as collateral. This is to ensure that, in the event that they default on their loans and fail to return the principal amount as well as the agreed upon interest, the pawnshops can seize the collateral item and keep it in their own possession. Weaknesses Customers may feel more comfortable engaging with pawnshops instead of traditional banks as they are not obliged to thoroughly investigate the borrower's background and more importantly, if they have the means to pay back the loan with interest. Banks have set stricter regulations on the eligibility of the borrower and micro-financing institutions become a very appealing second resort when one is declared as not being eligible for a personal loan from a bank. As such, with the high fi risk involved, pawn shops tend to charge higher interest rates than banks. Opportunities In the midst of the global pandemic that began at the end of 2019, some pawnbrokers have taken to the internet to carry out their functions as people were stuck in their homes or were more cautious of leaving their homes to keep themselves and their loved ones safe. This was seen as a welcome move by customers especially as the rates of digital adoption of consumers during the pandemic increased exponentially (La’Berge, O’Toole, Schneider & Smaje, 2020). It was not just valuable jewelry and gems like gold and rubies that were pledged online as collateral for personal loans but also precious bags and watches (Chern, 2021) .This shows great promise for a paradigm shift of the pawnbroking industry towards the digital space in the future. Threats One possible threat pawnbrokers may face in Singapore is heavy competition. There are a total of 236 licensed pawnshops in Singapore as of November 2020, spread across the island (Crawfort, 2020). As different pawnshops may offer different valuations for the collateral and varied interest rates based on the amount that is being borrowed, pawnshops will need to be transparent with their customers and at the same time offer good rates in order to retain customer satisfaction. Impact of Covid During the pandemic period in 2020, many firms were struggling to keep their doors open and endure the turbulence. Similarly, the pawnbroking industry also expected to face struggles and hence made some preemptive measures such as arranging for more cash to be available in case there was a surge in customers who came to pawn off their valuables as they needed money quickly (Chern, 2021). However, the converse took place, as more people came back to redeem the items that they had pawned off before. The reason for this can be attributed to individuals recognising the value of their assets and that it may come as more handy in the future when they might need money. Moreover, financial incentives given by the government to help individuals and households make ends meet during the peak of the pandemic also meant that individuals had less reasons to look to pawnshops to fulfil their short-term financing needs. They also took the constraints of the pandemic as an opportunity to establish an online presence. By providing more avenues for customers to find out more about their services and carry out several financial services online without leaving the safety and comfort of their homes, pawn shops are taking their business to the next level and making it more convenient and accessible for their customers especially in these precarious times. Data Analysis - Collateral Figure 1. Pie chart from survey results - “Do they accept other items as collateral?” As seen from figure 1, most respondents had answered that they do not accept other items as collateral and from the survey results, it is evident that they usually received gold jewellery, luxury items such as branded bags and watches as well as precious gems, with one shop even accepting antique artworks. There was also another shop that responded that they accept items made from silver as collateral even though many shops do not as the value for silver was “too low”. How then do pawnshops decide what and what not to accept as collateral? The general rule is that they accept items that can be monetised and commonly valued highly such as authentic gold jewellery, branded items like bags, watches and even fountain pens (Chan, 2001). This is so that if the individual does not repay their loan, the item can be sold off at a high resale price. Personal experience When i had gone down to several of the pawnshops to interview them, most of them were rather hesitant to respond to me while others downright disregarded me as soon as they learnt that I was not there to pawn, redeem or take out a personal loan but instead ask them a few questions about their business operations. I also noticed a difference between family-owned pawn shops and modern day pawn shops such as ValueMax and Moneymax. Family-owned pawn shops has rather Mandarin-sounding names and while its storekeepers were not otherwise occupied with any other customers or urgent work, some of them were rather apprehensive about answering the questions, perhaps because they perceived me to be a threat to their business. Given the opportunity to carry out this questionnaire again, I would go in pairs and perhaps be more straightforward and less nervous. As for the modern-day pawn shops, despite visiting several stores of the same chain, all of them replied in more or less the same manner, that I would have to contact their management or human resource team for any information. If there ever was a next time where I had to carry out surveys at pawn shops, I would pose as a potential customer so that they will be more willing to answer my questions. I also regret calling only a few of the pawn shops allocated to me before visiting the store in person as I felt that they were more inclined to respond over the phone rather than face-to-face. Nevertheless, it was a ful lling and eye opening experience to visit these pawn shops and carry out a questionnaire. Despite there being many pawn shops around, even right in my own neighbourhood, I had always overlooked their presence as they did not serve me any purpose fi before. In conclusion, the pawn industry serves a sizeable segment of the market in acquiring loans and offering pre-owned items at resale price. It plays a vital role in the local economy and can pose an additional indicator of the economic performance of the domestic economy based on the volume of customers and number of completed transactions. References Chan, S. C. (2001). Socio-Economic Significance of Pawnbroking Business in Singapore. Asian Journal of Social Science, 29(3), 551-565. http://gate.lib.buffalo.edu/login?url=https:// www.jstor.org/stable/23653964 Chern, K.W. (2021, October 18). Pawnshops here see record redemptions amid pandemic. The Straits Times. https://www.straitstimes.com/business/companies-markets/pawnshops-here-seerecord-redemptions-amid-pandemic Chia, J. Y. J. (2016). Pawnbroking in Singapore. Singapore Infopedia. https://eresources.nlb.gov.sg/ infopedia/articles/ SIP_1138_2008-12-01.html#:~:text=Pawnbroking%20in%20Singapore%20started%20in,increas ing%20number%20of%20younger%20customers. Crawfort. (2020). Licensed Money Lender vs A Pawn Shop in Singapore: What’s the difference? Crawfort. https://crawfort.com/sg/licensed-money-lender-vs-pawnshop-singapore/ Grant, J. (2013, November 1). Pawnbrokers shine in Singapore as middle class feel the pinch. https://www.ft.com/content/91845f3a-42c4-11e3-8350-00144feabdc0 Goenka, A. & Henley, D. (2009). Southeast Asia’s Credit Revolution: From Moneylenders to Microfinance. Taylor & Francis Group. Maverick, J.B. (2022). How Pawnshops Make Money. Investopedia. https://www.investopedia.com/ articles/personal-finance/112415/how-pawnshops-make-money.asp La’Berge, L., O’Toole, C., Schneider, J., & Smaje, K. (2020). How Covid-19 has pushed companies over the technology tipping point -- and transformed business forever. McKinsey & company. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/howcovid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-businessforever The World Bank. (n.d.). Non-banking financial institution. The World Bank. https:// www.worldbank.org/en/publication/gfdr/gfdr-2016/background/nonbank-financialinstitution#:~:text=Examples%20of%20nonbank%20financial%20institutions,specialize%20in% 20sectors%20or%20groups.
