Consumers rush For illegal loans

Rising consumer prices and cost of living crisis are pushing low-end consumers to seek short-term financial relief from loan sharks, a situation analysts fear is worsening the financial burden for many.

The loan sharks, who offer loans at high interest rates and have strict terms of collection upon failure, are not regulated by financial services regulator Reserve Bank of Malawi (RBM).

Pressed with rising expenses for his lifestyle and household demands, Maxwell (not real name) turned to the loan sharks for a K100 000 loan at 50 percent interest, which he promised to repay in a month.

However, things didn’t go as planned as the company he was working for was also sailing in troubled waters, which delayed his salary.

He said: “To bail myself out, I went to another loan shark for a loan of K150 000 at the same 50 percent interest, so that I can settle my debt. But with a monthly salary of K300 000, getting another loan marked the beginning of my financial woes.

“It was easy to get the loans because people trusted me that by month end, I will settle the bills. Before I knew it, I was hopping from one loan shark to another to the point that I could not afford to repay the loans anymore.”

At this point, Maxwell said he thought the only way out was to commit suicide.

“Luckily, my wife was understanding, we sold almost all my property to settle the loans which had accumulated to about K900 000,” he said.

Speaking separately, one of the loan sharks said because bank processes are too long, coupled with the demand for collateral; more and more consumers flock to loan sharks for easy and simple loans, despite their high interest rates.

She says at the start of her business in 2020, she could earn a minimum of K2 million from a loan of between K100 000 and K1 million. But in recent years, her business has grown.

“I can lend a maximum of K10 million in a month and this attracts me interest of K5 million,” she said.

In an another interview, a former loan shark observed that because of the urgent need for a quick fix, more consumers disregard the high costs associated with street loans, which in the end leads to a worsened financial situation.

“Unlike loan sharks, financial institutions offer due diligence and may also have thresholds. For the loan shark, in some instances, they may ask for collateral, charge more interest or even apply pressure.”

He observes that most people who run to loan sharks for financial relief for consumption including school fees, food and other basics due to the rising cost of living.

National Statistical Office data shows that in one year, inflation rate has risen from 19.1 percent in May 2022 to 29.2 percent in May 2023. At the same time, cost of living has jumped  by 46 percent to K377 892 for a family of six, up from K257 028 during the same period last year, according to the Centre for Social Concern.

This is happening on the back of a 50 percent increase in water tariffs by the country’s water boards effective July 1 2023, rising cost of borrowing now at 32 percent following RBM’s hike of the policy rate to 22 percent as at the end of June 2023 from 14 percent in May 2022 and a pending electricity tariff hike.

In an interview on Tuesday, Consumers Association of Malawi executive director John Kapito said  formal banks have not created affordable and easy access to cheaper loan schemes, giving room to the growth of illegal loan schemes.

Malawi University of Business and Applied Science associate economics professor Betchani Tchereni  said although loan sharks are expensive, people are forced to seek their services because of strict bank requirements.

RBM data shows that only 46.1 percent of the adult population have access to formal financial services.

RBM spokesperson Mark Lungu was yet to respond to our questionnaire.