Kristo Busch

Title: 'Social and Institutional Factors Behind Payday Loans in Estonia'

Supervisor: Dr. Egert Juuse

Opponent: Ralf-Martin Soe, MSc

Defense: 10 June 2016


Abstract: Focus of this master’s thesis is to explore what has been the main force driving people to consume above their capabilities by using the services of payday loan providers and what have been the factors supporting this situation to happen in Estonia. Theoretical part of this work is constructed around Minsky ́s financial instability theory, Duesenberry ́s relative income theory, the phenomenon of financialization (money-manager capitalism) with elaboration on the institutional factors behind market processes, i.e. regulations. Eleven interviews were conducted with different governmental institutions, debt counselors and payday loan companies. During the interviews several new reasons were brought out explaining the current market situation and suggestions how to alleviate the consequences. Problems have evolved because of speculative borrowers are unable to meet payments due to unexpected changes in welfare and lack of social security. Interviews showed that majority of payday loans are used for daily life expenditures, while poor social system does not support most of our problematic borrowers. Hence, payday loans are taken as a last resort. Associating with or consuming the same level as social target groups is not a priority for payday loan users. Also, the possibility that financial institutions are possessing excessive power over local governments is not an issue in Estonia. For market economies to function well, appropriate interventions and institutional structures are necessary. Here, problems begin at the school level, where financial illiteracy is an issue. An objective for the government would be to raise people’s awareness and offer better social security that could reduce the number of bad financial decisions people make.

Keywords: Payday loan, consumer credit loan, demonstration effect, financial instability theory, Estonia