[Column] Bob Koigi: Turning the tide on unregulated lending in Africa
With an ever tightening lending landscape by financing institutions and bureaucratic processes in accessing credit, many borrowers in the continent are finding solace in informal lenders that are now charging them an arm and a leg, leaving ordinary citizens poorer and more miserable than before.
Indeed the promise of quick loans from such lenders is enticing at face value and has baited numerous unsuspecting borrowers who only need to fill a few papers and without background checks or sometimes no collateral, they are able to get a loan.
But therein lies the genesis of their journey to more poverty and more loans to cover previous ones. Still expert opinion is still varied on the legality and essence of such lending mechanisms.
While one school of thought posits that there should be a blanket ban on such institutions for sinking ordinary citizens to serious financial abyss and going against the book, another group argues that in a capitalistic market competition rules and it matters how players innovate.
In East and West Africa where such informal lenders, commonly dubbed shylocks, have flourished, ordinary citizens have been reduced to beggars for failing to repay their loans with others sinking to depression with a rise in reported cases of suicide.
The shylocks will display conspicuous and enticing offers on strategic places. Their target are business people and entrepreneurs who need a quick loan that they- the borrowers- are convinced they can repay within a short period. In some instances, to access the loan the valuation of the borrower’s security is usually at least double the amount to be lent.
Majority of them give out their personal belongings among them electronics and cars. What the borrowers don’t realize, and probably because of the desperate need for cash is that the interest is way above banking levels and the repayment period is punitive.
So for example a trader will request for a $10,000 loan with a repayment period of two months and agrees to a 30 per cent interest. He would then have to part with something that twice as expensive as that loan. The average interest rates on loans in Kenya is 14 per cent as is the case with West Africa’s largest economy Nigeria.
The regulation by the respective Central Banks has brought some sanity to mainstream lending. But the informal have become law unto themselves. These shylocks set their own lending regulations and the borrower has little say.
They will offer them cash against their domestic appliances such as TVs, VCR, HiFi, cookers, gas cylinders, microwaves, ovens and fridges. Other valuables that can help in securing a loan include office equipment such as computers, together with cars, share certificates, title deeds and other such assets.
The other requirement that must be met is that all goods presented as collateral be accompanied by original purchase receipts. With that transfer documents are signed and a contract is entered into. However, the agreement is invariably a farce aimed at fixing the borrower.
With a compound interest of 30 per cent, the shark can recover nearly the principal amount in accrued interest alone in case of a three-month default. They will, therefore, end up with the borrower's item and money if he is not able to repay in less than three months.
And although some of these loan sharks are affiliated to microfinance bodies, most are unlicensed moneylenders whose operations are not regulated by any government authority.
They operate like financial institutions, lending money to people and relying on the sanctity of contract law to keep them afloat. They almost always seem to have the amount of money that a borrower needs, giving mainstream financial institutions a run for their money.
Loan seekers need to exercise to due diligence on those offering credit facilities checking if they are licensed and what interest rate they demand. If they are offering a loan with an unreasonable interest rate, especially one with weekly payments, and if they can't prove any government accreditation, then that is the first red flag.
Multiple award winning Kenyan journalist Bob Koigi is the Chief Editor of East Africa at Africa Business Communities
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