Saturday, 26 January 2013

Micro lending or loan sharks?

First printed in The Namibian - 24 Jan 2013

Micro lending is a fast-growing sector and the Namibia Financial Institutions Supervisory Authority (Namfisa) has invited the public to comment on the industry.

Micro-lending refers to loans under N$50 000 which must be repaid over a maximum period of 60 months to the micro-lender, usually in instalments. According to Namfisa, micro-lenders are often unkindly referred to as ‘loan sharks’, but they consider it to be unfair to say the micro-lenders are always in the wrong when it comes to misunderstandings with their customers. They further point out that “while it’s true that micro-lenders’ interest rates are higher than bank rates, this is because they provide funds over a shorter period, and at greater risk of ‘bad debts’ if their customers fail to pay.”
The industry has grown rapidly and there are now almost 400 registered micro-lenders across the country supplying close to N$2 billion. Around half of this is supplied via pay-day lenders who provide loans with a repayment period of up to 30 days.

To understand the business model, let us first look at why interest is charged. In the beginning of banking, interest was used to offset the risk of providing the credit to the borrower. There are four risks (hazards):
  • The costs incurred by the bank while providing the loan had to be repaid;
  • Inflation means the lender will be able to buy less for the money as time passes;
  • Scarcity – in other words once it is lent to a borrower at a specific rate, it cannot be used for another loan;
  • That the borrower cannot pay back the loan
(Of these four, the only real difference the government can make is in reducing the risk of borrower’s inability to repay.)

The Ministry of Finance has determined that the annual finance charge rate may not be greater than 1.6 times the average prime rate in respect of a credit transaction. The prime rate is presently 9.25 percent and thus the highest a micro-lender should be allowed to charge would be 14.8 percent per year or 1.24 percent per month. From my limited research this week, I have determined that the rates of micro-lenders are 19.50 percent for loans longer than six months or 30 percent for short term loans that last up to 30 days.

There is some proposed self-regulation occurring with regards to clients with “over-indebtedness” – however this would mean sharing clients’ data across all micro-lenders. This would include sharing data on good clients - and this the micro-lenders are wary of. One possible answer is a national credit register where all credits of each person are recorded and thus ensuring no “predatory” marketing and less over-lending occurs. This would mean within your data there would be a “big brother” indicating when you have reached your debt level as determined by the legislation. I think you can see how this could mean less self-governance and a certain loss of self-determination and responsibility. At the same time, the organisation or corporate body that has the rights to hold your information must be well managed and regulated.

The suggestion of a national credit register was submitted to the Parliamentary Committee on Economics, Natural Resources and Public Administration in 2006 and has been part of discussions held with Namfisa in the creation of the Financial Institutions and Markets (FIM) Bill but I am not sure what is the status of such legislation since the Consumer Credit Chapter has been removed from the FIM Bill in March 2012.

My question to you, the reader, is: Do you want government to do something about the possible exploitation and would you accept the consequences of having a company keep all credit data about you and your family?
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Printed in The Namibian on 26 Jan 2013 

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