The demand for personal and household loans in the country has increased in recent months on the back of a serious liquidity squeeze that has become the bane of the country’s multiple currency system.
Almost all formally employed Zimbabweans are in debt as most people’s salaries fail to satisfy their needs, forcing them to turn to their banks and loan sharks for bailouts. The turn of events has injected life into the local credit market.
Banks and financial institutions, listed among the greatest casualties of the transition to the multiple currency regime as people shunned the banking system, are accruing significant profits from the interest they charge on personal loans. Some banks are charging as much as 18% interest.
Several debtors who spoke to NewsDay said while they would not have wanted to be in debt, their needs forced them into taking advantage of the loans extended to them by their banks.
Alistair Mazenda of Chitungwiza said he would never have been able to buy a vehicle had he not turned to his bank for a loan.
“With the money that I earn at work, I would never have had secured the money to buy a car,” he said.
“Almost all my salary is used in meeting my family’s needs. While I feel that the interest rates are high, the fact that I now have a valuable asset gives me comfort.”
Solomon Muzuva of Southerton said he was forced to take a loan to purchase a housing stand and build his own house.
“The repayment is painful, but I had to do it,” he said. “If I have not taken the loan, then I could as well have died a lodger (tenant). The reality is that you hardly find companies that pay adequate amounts of money to allow you to invest in big projects like constructing your own house.”
Sociologist Robert Mhishi said it was important for people to be disciplined when accessing loans as they can create a vicious cycle whereby they are perpetually in debt.
He said a lot of times easy access loans ends up making people heavily rely on them and, in the process, they fail to appreciate the value of saving money “right to the last dollar”.
“It is advisable for people to borrow for capital investments rather than consumption, which can be a huge temptation,” he said. “It is important for banks to advise their clients in that regard because if someone gets a loan which they quickly dispose of in an irrational manner, they can sink into depression.
Every month money would be debited from their account while at the same time they have nothing to show for their loan.”
Innocent Mugwagwa, the operations director for Spectip Investments — which offers debt management products including credit consultancy and debt counselling — said money lending “can be a time bomb if not properly done”.
He said it was important for people to tread with caution when it comes to debt because without care, there could be far-reaching consequences.
“Indeed, if the solvency of borrowers is not taken into account, the credit offer becomes disconnected from real needs, leading to over-indebtedness among the poor. The entire sector can then collapse very quickly, thus effecting developing countries economically as well as socially.”
Mugwagwa said it was important for micro-finance institutions offering short-term loans to ensure that “default payment risks are low” and use reliable information concerning the customer’s credit history.
A regional manager with a local bank said before offering loans to their customers, they conducted an analysis on the borrower’s creditworthiness to guard against, or at least minimise, risk.
“We cannot just give anyone loans,” he said.
“These monies that we give out as loans belong to other people and for us, it’s investment. So if we give someone a loan that they will eventually fail to repay, then it would be a bad investment.”
He said as banks, they had personnel skilled in discerning different types of borrowers as well as their ability to honour their loans. He advised that it was wiser for people to get loans for capital investments rather than to fulfil simple personal needs.
According to Mhishi, Zimbabweans are traditionally known for using cash, but the new loan phenomenon was likely to create a nation of debtors.
“Most banks only ensure loans against death, which means that if you lose your job before fully repaying the loan, you will be in trouble,” he said.
Mugwagwa noted: “This phenomenon of credits has trapped a lot of people. Just check with the courts and deputy sheriff how many houses and properties, including households and cars, have been sold by credit granters trying to recover their debts. It’s very sad and its really a big issue.”
Financial institutions usually insure the loans to guard against the death of the debtor, but as long as the debtor is alive, demands would be made on them to pay, failure of which legal action can be taken against them. Such a provision is found on most loan agreements. Most loan repayments are done in six or 12 months.