Zim consumers over-borrowed

via Zim consumers over-borrowed – The Zimbabwe Independent 12 September  2014 by Collins Rudzuna

Zimbabwe’s decade-long hyperinflation nightmare which set in at the turn of the century rendered many financial services untenable.

Lending for example was greatly curtailed by the prospect of debt repayments being worth just a small fraction of the original loan in real terms. Unable to borrow, most Zimbabweans learnt to live within their means by default.

The advent of a ‘dollarised’ monetary system under which a handful of foreign currencies are acceptable as legal tender once again made lending viable.

Perhaps because they had been starved for such a long time, consumers grabbed the opportunity with both hands, gorging on whatever debt they could get their hands on.

Banks were equally keen to earn a return on the newly available but expensive capital that they now had at their disposal. In the midst of all this excitement, reason seemed to be set aside and mistakes were made.

Borrowers took on loans they could hardly afford. Banks overlooked what should have been basic considerations in determining who deserved to get credit and who did not.

Without a functional credit reference bureau there was no way to keep track of each consumer’s creditworthiness. Indeed many people took advantage and covered their dues with even more borrowings from other banks.

Consumer lending soon became the single biggest category of loans in the economy, accounting for 24% of the US$3,7 billion banking industry loans in July 2014. Soon the banks caught on, insisting on stricter credit checks, but the damage had already been done.

Many banks now stand burdened with non-performing loans, a problem which the Reserve Bank of Zimbabwe (RBZ) readily admitted in its latest Monetary Policy Statement.

According to the RBZ about 18,5% of all bank loans are classified as ‘non-performing’ as at June 2014.

By their admission even this figure is an understatement of the true position as banks have resorted to creative accounting which allows for ‘ever-greening’ of bad loans.

Under an ambitious new plan, the RBZ now intends to establish an asset management company, which will take over banking industry bad loans to improve the financial health of struggling banks. Banks wishing to participate in the scheme will have to have recoverable collateral equivalent in value to the loans.

Although similar efforts were put in place in Nigeria with relative success there are no guarantees that the plan will work here as well.

Moreover, the availability of acceptable collateral is doubtful. Most banks have illiquid assets such as industrial properties which are hard to liquidate.

Despite all these problems with consumer lending, borrowers seem to still have appetite for loans. Be it for paying school fees to elite schools they can ill afford or purchasing used Japanese vehicles, people still exhibit a penchant for borrowing.

Unable to borrow from a now wiser banking sector, they are increasingly turning to lenders with less stringent qualification criteria, but much higher charges. Micro-finance lenders have been happily picking up where banks left off, advancing money to borrowers who just cannot afford to borrow.

There is some method to their madness. Exorbitant interest rates of up to 40% per annum make up for their unusual risk appetite. Added to that, some micro finance lenders are rumoured to be willing to resort to strong arm tactics to collect their dues. Some have referred to them as glorified loan sharks.

Requiring just US$5,000 in capital, there are 146 registered micro-finance institutions in the country. In addition there are several other ‘fly-by-night’ unlicensed operators.

Despite the wide-spread prevalence of under-reporting of non-performing loans by banks, estimations are that they are in a better position than micro-finance institutions.

Unable to legally take deposits under current banking rules, micro-finance institutions rely solely on their own capital for lending. This puts them at greater risk of failure in the event of customer defaults.

Ironically their average customer is one who does not qualify for a loan at a bank, meaning they typically lend to higher default risk borrowers.

Many have decried the absence of a savings culture in Zimbabwe. People seem to live for the day without putting away much for the future. In their defence, many people have pointed out that their incomes are barely sufficient to sustain their day to day needs let alone savings.

Many scoff at the ‘live within your means’ mantra, pointing out that it is usually sung by those that are well off and do not understand the strain of living hand-to-mouth. Whatever the truth, it is perhaps a fair assessment to say that the country is sitting on a credit time-bomb which threatens the viability of the financial services sector.

Already RBZ has expressed concern over the financial health of banks. By extension, it is likely that many micro-finance institutions are under strain. Some borrowers are probably neck-deep in expensive loans that they have no means to service adequately.

Zimbabwe’s long hiatus from the world of normal financial services left many consumers credit-hungry and over-eager to borrow. Both lenders and borrowers seem to have indulged way over what was prudent.

To top it all off, without a functional credit reference bureau there is no-way for lenders and regulators to keep track of who owes what to whom.

This all leaves room for errant borrowers and irresponsible lenders to keep indulging. Hopefully, it will not take an implosion of the whole system for reason to set in.