Mr Daniel K. Kalinaki
Early in my working life many – and I mean many – years ago, I received a telephone call from a young lady whose every word, syllable and sigh was dipped in honey and then sent down the phone line on a floating cloud of copper wire. She was from my bank.
She had been looking over my recently opened account and calculated that I qualified for an unsecured loan of Shs30 million. Not much was required of me; just a signature here, a form there and voila, the money would be at my disposal. I hardly had two old fellas to rub together, but here were thirty oldies waiting for me on the other side of the application.
I said yes. Forms were signed, signatures appended, letters of comfort submitted et cetera, then I was informed that the loan had been approved. I had no idea why I was taking the loan, to be honest. No project, no plan; just boyish dreams of my mates surrounding me asking, “what in the world is in that bag? What you got in that bag?” The dream came crashing down fast. When I went to the bank (this was before ATMs and mobile phone notifications), I discovered that the bank had lent me only Shs28 million plus change.
I had not been told about charges – legal, and arrangement fees – that were charged upfront. From day zero I owed more than I had received, with interest to come. I accepted that class was in session, gave up all dreams of flossing to my mates – the bucked-naked cook fixing three-course meals in six-inch heels would have to wait – plumped it down on a piece of land, and spent the next two years humbly paying it off, at 24 percent per annum.
In later years, older but not much wiser, I dabbled in moneylending myself. The margins were ridiculously good and boyhood dreams of spinning 20-inch rims seemed even possible, but I didn’t want to spend the rest of my life breaking the kneecaps of recalcitrant borrowers. So, after one bad loan too many, I packed it in and veered to the slower lane. All of this is to say that I have been on both sides of the money-lending equation, and in both the formally regulated world and the one with faster rules and higher risks.
Some of the efforts by the state in recent years to regulate the money lending business are commendable. Asking smaller moneylenders to register, for instance, brings the usurious but important payday loan sector into some daylight. Ensuring spousal consent for liens against marital property restrains adventurous dream chasers, often men, from betting the house on the outcome of a football match. Removing penalties for early repayment was a commonsense idea that took too long to implement.
More reforms are needed on the process side. For instance, all lenders, regardless of size, must be required to be more transparent about the fees they charge, the interest, and the overall cost of the loan. Borrowers should also be allowed a cooling-off period in which they can walk away unscathed from the transaction. Digital lending apps, too, need to be regulated better. Robust national identification and physical address systems, together with credit tracking systems, should make borrowers (and their kneecaps) easier to find. The price side of money, on the other hand, cannot simply be legislated away. The elephant in the vault is government borrowing. If a bank can earn double-digit risk-free interest by lending to the government, why would they chase down slippery individual borrowers? They, of course, need to be seen to be lending, so they price their money at a premium and ask for a pile of paperwork.
Money lenders emerge within these cracks. Their financing can be instant, as with the digital lending apps, or available in very short order as soon as they confirm that you have at least one working kneecap in whose continued functionality you retain an interest. With a higher risk of loss of capital and relatively riskier methods of loan enforcement and recovery, their interest rates will always be astronomical.
A rate cap of 2.8 percent per month is still 33.6 percent per year. This is not cheap, even if you pay it back after a month or two. If the government were to cut its appetite for debt and wasteful expenditure, it could borrow at single-digit rates. Commercial bank lending rates would drop to the mid-teens and pull down the shylock rates with them. The market responds better to incentives than to legislation, however popular.
Borrowers, too, need to stop being taken in as easily as I was many years ago. Higher domestic savings and pooled capital, say in saving societies, provide alternative financing that is potentially cheaper and more patient. However, this too requires delayed gratification. From time and experience we eventually learn that capital accumulation, unfortunately, is often boring and takes time. It also abhors tempting voices on the telephone, however sweet they sound.
Mr Kalinaki is a journalist and poor man’s
freedom fighter.
[email protected]; @Kalinaki
