Risky Business: Unlikely Lessons from the Obscure Empires of Loan Sharks and the Mafia

The financial business involves a lot of risks, but risks are also where it thrives. Risk is commoditized through regulated schemes and services such as underwriting, wherein an individual or institution takes on financial risk in exchange for a fee. Through asset history and other systems, underwriters can profit while protecting themselves.

Underwriting is a process that powers banks, home loan lenders, credit unions, and other legitimate financial institutions. Underwriters and borrowers build their relationships through mutual benefits, and thus, underwriting has remained a legitimate practice in the industry.

Then there are the underwriters of last resort, the ones to whom people with bad credit turn: the loan sharks and the mafia. Through organized crime, syndicates corrupt the practice of underwriting to profit off pestilence. It’s a parasitic business model that is rightfully illegal; nonetheless, we may learn a thing or two from them.

The Mafia: Separating the Fact from the Fiction

Scorsese or Coppola does not direct real life. There are no choreographed action sequences or heroes to save the day. At best, some ex-criminals got out of the system and lived to tell the tale.

According to their accounts, mafias are far more inconspicuous than movies let on. The kill count is low, as bodies trigger investigations and infiltration.

Mobs don’t aim to kill clients but get them close to it if they don’t fulfill their end of the bargain.

When the pandemic caused anxieties and turmoil for many, it became even easier for the mobs to use their dictatorial strategy.

The Circulation of Mafia Money During the Pandemic

The Covid-19 pandemic affected everyone, every home, and every business. When the conventional currency ran short, mafia money increased in worth.

Preying on the desperate, mafia cartels turn to one of their most profitable practices: loan sharking. Mafia loan sharks offered financial favors for Italian businesses on the brink of bankruptcy and families running out of food to put on the table.

Left unregulated, interest rates doom the borrower into defaulting, which has painful consequences.

Capitalization has always banked on a need, but mafias transformed this principle into a dark art.

What Businesses Can Learn from the Mafia

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Lessons can be found anywhere. There can be no excuse nor condonation for running your business under corrupted ideals. Nonetheless, in general, mafia business models are based on legitimate ones, just put to the extreme.

It sees business from an opposite perspective, which is another way to gain new insights.

1. Creating Your Niche Is Important to Remain Relevant. Transactions under giant mafia cartels run outside the economy, and thus, there’s little literature about them. But the borrowers make for accessible respondents in a study.

Economists Lang, et al. were able to find 1.100 borrowers who took 11,000 loans from illegal lenders in Singapore. Their study, titled “Lending to the Unbanked,” provides a visual of how the illegal sector works.

Their power lies in filling a market niche: people with bad credit.

These people are considered “unbanked” and comprise more than two million adults in the world. As banks and legal means turn their backs against them, the unbanked resort to unregulated lenders.

Lang, et al. found that the typical borrower knows what he’s getting into and transacts with the lender frequently. Agreements often require “six payments, each equal to 20 percent of the nominal loan.”

Borrowers are aware that the odds are not in their favor. “Strikingly, borrowers report relatively few incidents of significant harassment when they repay on time, suggesting that lenders, for the most part, abide by the agreement,” the authors noted.

2. Maintain a Strong Company Culture with Relational Contracts. Lang et al. further posit that loan sharking agreements are an extreme form of “relational contracts,” which operate under a relationship of trust between parties. The contract in writing is merely an outline, but the implicit understandings of these guidelines—the unspoken rules—ultimately determine the behavior of the parties.

For example, loan sharks cannot legally pursue borrowers in default, nor can borrowers seek protection from the law.

But relational contracts can find legitimate use in positive reinforcement. Companies can use it to instill deeply rooted understandings among their people, achieving a level of trust that would encourage them to preserve trade secrets.

This is how companies like Google work: hierarchy is merely subtle, employees are valued for their uniqueness, and they can work on what interests them.

3. Stop Encroaching Competition. It has become common practice for businesses to be on an obsessive lookout for competitor’s prices, so they can mark their prices just a tad bit lower and thereby become the brand of choice. But this can be an endless hunt, with nothing much to gain and more profit margins to lose.

Instead, businesses can learn from the mafia’s delineation of turfs. By clearly establishing markets, conflicts are avoided, competitors can coexist, and petty strategies do not harm the industry.

4. Futuristic Thinking. Mafia cartels built an empire on obscurity after long-time schemes. They have silently built connections among legitimate businesses. For years, they have planned and have invested in various companies and industries, from funeral homes to cleaning, which became relevant during the pandemic.

Companies can likewise adopt a futuristic vision when crafting their business models and guidelines.

Learning from Bad Examples: An Entrepreneurial Perspective

Companies often turn to best practices for guidance. But sometimes, wisdom can also be found by studying bad examples, dissecting what went wrong and what they did right.

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