Online Reporter
THE Reserve Bank of Zimbabwe is justifiably concerned over microfinance businesses and banks dishing out loans to clients who are already over-borrowed and wallowing in unsustainable debt.
Part of the problem is, of course, clients who continue applying for loans they will probably find difficult to repay and then seeking further loans once most, or even all, their monthly income goes on interest and repayments and seeing the solution as further borrowing so they can at least buy food, pay rent and buy water and electricity.
But irresponsible lending simply to drive profits largely created the debt trap and then continued making it worse.
The high inflation in the past, along with low interest rates, might have created the conditions for continued borrowing.
Clients would arbitrage between official and black market exchange rates, burning money in popular parlance, and in any case knowing that a large debt would be converted by high inflation into very small debt.
But previous action by the Reserve Bank and the Government to have realistic interest rates plus the major effort to create and sustain the real value of the local currency rendered all these activities moot.
The problem is that the lenders did not then also move into normal banking practice by demanding clients and prospective borrowers put all their cards on the table.
For banks, lending against the salary of a client, was a simple way of making certain profits with exceptionally low costs and very little risk, and the temptation to just hand over the cash after looking at a simple application form proved difficult to resist. Borrowers were assumed to be rational people who had the background and experience to make rational decisions.
In any case, the bank first of all, on receipt of a salary payment, deducted what they were owed that month and then let the account holder have the change.
Properly done this is acceptable, but the change in the interest rate system almost certainly converted in several cases, a manageable debt into an unsustainable debt.
Microfinance businesses were in a worse position, not being the institutions where employers sent the salaries.
So we have some very heavy-handed tactics of those owed money seeing the borrower on pay day, which might just be legal, or actually grabbing debit cards and demanding PINs and then emptying the account at an ATM on pay day. That is not permitted by law.
What makes everything worse is that these embattled borrowers are allowed to borrow more, either from the same lender or from others who decline to make any serious checks before handing over the money as they push for profit.
The Reserve Bank wants everyone in the financial sector to know their customers and that includes their borrowing position.
In many cases there might well be need for an over-borrowed customer to receive some decent advice and even to organise a proper repayment schedule so they eventually get their money back. Simply adding to debt is not a solution.
Obviously owners of microfinance businesses and shareholders of banks want to see a flow of profit.
They are, after all, in business. But those profits cannot be generated by irresponsible lenders using unfair tactics or business methods with intimidation driving the repayment process. Loan approvals often need far more investigation than is common in some businesses and banks.
An irresponsible customer is not an excuse for an irresponsible lender.
For a start, before a potential customer makes a formal application for a loan, the bank or microfinance business needs to make sure the customer knows how much the loan will cost to set up and what the monthly payments will be, along with any other relevant information. Simply asking the customer to read a detailed set of terms and conditions written in technical legal language is not adequate.
So the Reserve Bank wants to see all lenders explaining the conditions in a language that the customer understands, even if this means that local languages besides English have to be used.
While loans do have to be repaid, there will be responsible borrowers who hit a bad patch, losing a job or something just as bad.
Stressing that such customers need to see the lender promptly will help, while everyone works out what can be done without adding punitive extra fees.
Breaking the law is not one of the options.
So everyone needs to learn and recognise that those who are in continuous debt from payday to payday are not a good risk and should not be taken advantage of, just to make a short-term profit.
