HomePersonal FinanceFinancial Sector Spotlight: When credit turns toxic

Financial Sector Spotlight: When credit turns toxic


Thursday marks 10 days since the passing on of Retired General Solomon Tapfumaneyi Mujuru, a remarkable man by any standards.

He has variously been described as a liberator, soldier, politician, strategist, advisor, businessman, man of the people and unifier all rolled into one.

Like all of us ordinary mortals Mujuru had his faults, but given the many areas of endeavour in which he distinguished himself, it is impossible for anyone not to find something to learn from him on our arduous journey of nation building. FSS pays both attention and homage.

We salute the General!

Back to more mundane things, in late April 2011, a worrying statistic emerged. Finance minister Tendai Biti revealed that 34% of bank loans were in default.

It is a statistic that no doubt undermines persistent calls for improved access to credit by local borrowers.

It also re-emphasises the duty of lenders to ensure that credit is granted only to those who can afford it; not everyone with a heartbeat.

Not everyone who says “Loans! Loans!” should enter the kingdom of debt! This is reinforced by recent reports of borrowers who lost various movable and immovable properties after entering into binding loan arrangements when it looked like they had neither the means nor – in some cases – the intention to repay the loans.

Nick Van Hoogstraten, who considered himself a financier as opposed to the role of “loan shark” which some gave him, once said that anyone who borrows money and fails to repay should be treated the same as a thief!

While banks would normally be quite circumspect about granting loans to those already overburdened by credit, the absence of a credit reference bureau currently makes it rather difficult to weed out those who would binge on debt with neither the ability nor the willingness to repay.

This infrastructural deficiency, together with financial institutions’ current competitive streak could result in individual borrowers raking up significant amounts of exposure to several lenders at the same time.

At a corporate level, a case in point is RioZim Limited, which reportedly owes several banks an awesome amount of money for which a debt restructuring exercise has had to be put in place.

Banks generally have robust credit criteria, which they are only too happy to deploy in order to keep potential abusers of debt at bay.

Some alternative providers of credit such as the smaller microfinance institutions (MFIs) however tend to be so aggressive in their lending activities that they sometimes compromise ethical considerations in pursuit of cool, calculated commercial logic.

The end justifies the means. The Reserve Bank takes a dim view of such practices and in the current monetary policy statement warns MFIs in particular to take reasonable steps to ensure that credit is extended only to borrowers who demonstrate an adequate ability to repay.

Loans should only be disbursed when they do not put borrowers at significant risk of over-indebtedness.

Lenders have a duty not to sell credit to people who are going to hurt themselves with it, counsels Berkshire Hathaway’s vice-chairman Charlie Munger.

Tillman Ehrbeck, chief executive of the US-based Consultative Group to Assist the Poor contends that in seeking to deepen financial services, it would be distressing if financial sector players helped expand access to formal financial services, but those services were no fairer or safer than the informal alternatives they seek to replace.

It’s not progress if a cannibal uses a folk and knife, in the same way that it is not progress if usury is institutionalised under the guise of some form of financial inclusion.

“We must not create, in the case of credit, unfettered access to financial services that carry harmful potential, else we risk the next subprime-type crisis,” said Ehrbeck.

As for the borrowers themselves, they must understand that credit is a privilege and not a right. If you do not pay your debts on time or do not pay at all, no one will want to lend to you in future, it is as simple as that.

Perhaps instead of relying on the good faith of lenders to look out for the interests of their borrowers in order to avoid accumulation of credit at all cost, the regulatory authorities should consider compelling lenders to provide credit counselling services as part of the credit application process.

Otherwise, wasn’t it Adam Smith, the father of modern economics himself who once said:

“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self interest.”

But then again, would credit counselling be effective? If people can still smoke cigarettes from a pack that clearly says “Smoking is harmful to health,” what would stop them from becoming over-indebted even after being counselled? Well, nothing is lost by trying.

Lenders should however not be dissuaded from aggressively seeking to develop appropriate loan products for the low end of the market all in the name of managing default risk or responsible lending.

There are such things as Ninja loans to aspire to. A Ninja loan is extended to a borrower with no income, no job (and) no assets and because the only thing an applicant has to show is his/her credit rating, this type of loan offers an incentive for borrowers aspire to build clean credit histories in order to qualify.

Ninja loans are also named in allusion to the fact that they are often defaulted on, with the borrower disappearing like a Ninja.

Weigh in with your insights on omen.muza@gmail.com.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.

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