Households in debt trap

Malawi’s households are struggling to cope with the ever rising cost of living occasioned by galloping inflation and high interest rates, forcing them to be caught up in a debt trap.

A Reserve Bank of Malawi (RBM) Banking Lending Survey (BLS), covering the period April 2015 to March 2016, has put the situation into context.

It indicates that 60 percent of the commercial banks reported that non-performing loans (NPLs) in households increased compared to the same percentage of respondents that reported a drop in NPLs in the previous survey.

A high debt level, therefore, implies a higher debt service burden and restricts the ability of households to gain access to additional external funds and adequately meet their families’ basic needs.

With the minimum wage at K21 297 ($30), and the cost of living as of August at K159 276 ($218), according to the Centre for Social Concern (CfSC) and inflation rate at 22.8 percent, many households are struggling to service their debts.

Besides households accumulating huge debt in commercial banks, they are also failing to service loans they get from loan shacks (atakapila).

A case in point is a Blantyre resident, Maxwell Banda, who for the past six months has been struggling to repay the K40 000 loan he took from a loan shark as his income could not sustain him and his family of four.

Banda holds a diploma in management and is also a research consultant.

While his monthly income is at roughly K70 000, surviving has become difficult as he cannot manage to pay for school fees, house rentals and food.

He says: “I really wanted some fast cash to avoid the embarrassment of being chased out of our rented house since we had delayed payment for two weeks. I had no option, but to borrow money from a loan shark.

“At that time, it was only K40 000 which I was supposed to pay back in two weeks at an interest of 50 percent.

“By the time the two weeks had elapsed, I had not been able to secure enough money to service my debt; hence, I was forced to be paying the little I had to service my interest.”

Banda says the K40 000 was still intact until he cut ties with the lender and does not know what would happen if they meet.

One of the loan sharks plying his business in Blantyre said it is common nowadays to have clients who end up defaulting mainly due to the economic challenges.

He said clients are given an average of 30 days to service their loans at a rate of 50 percent interest, but for those who borrow above K500 000, the interest is reduced to around 30 percent interest.

“Our loans are fast and easy to get as we are always straight forward in dealing with our clients. For those we know personally, we do not demand any surety whereas for those who are new to us, we demand some form of surety in line with their financial needs.

“Of late, we have been facing challenges because some clients are going away with our money to the extent that it sometimes takes up to four years to recover. But if it is for a genuine reason, we cooperate otherwise, we just send our men to take the surety and we sell it and in that way, get back our money,” said the loan shark.

Because of the NPLs, the RBM survey found that credit supply conditions for approval of loans by commercial banks have continued to tighten, but are harsher for small and medium enterprises (SMEs) compared to large businesses.

“The outturn was largely attributed to creditworthiness of borrowers, as the survey revealed that SMEs were associated with high risk of default. As regard to demand for loans, results generally indicate that demand by large enterprises, small and medium enterprises, increased during the review period.

“However, contrary to the findings of the previous survey, recent findings show that most banks experienced an increase in non-performing loans in all the three sectors of the economy namely; SMEs, large enterprises and households,” reads the report in part.

And because of the NPLs for households, the survey found that 50 percent of the banks compared to 30 percent in the previous survey reported approval of loans to households continued to tighten.

The poor economic performance characterised by high inflation and interest rates are the main factors leading to tightened credit supply conditions and has weighed heavily on default rates in the banking system, with high inflation eroding customers’ loan repayment ability and high interest rates increasing loan repayment costs.