Loans are not freebies

In December, Mibawa Television interviewed Mike Chilewe on his riches-to-rags story.

The one-time business magnate blamed nobody for his fate, but encouraged people not to resort to suicide in difficult times such as loss of money, a beloved one and assets.

It was touching and Uncle Mike, as he is fondly called by those who once dined with him, received praise and sympathy for his tenacity.

Alas, Times Group’s Brian Banda opted to dig deeper into the decline of Chilewe, who once enjoyed a lavish lifestyle and mingled with world leaders, but now lives rough in the village in Mulanje.

In the interview, the deposed owner of Mike’s Trading Group went to town blaming banks for crippling his businesses through exorbitant interest rates, unfair penalties and property grabbing.

He also accused the banks of being influenced by politics and corruption while shunning local industries.

Blaming the banks for one’s fate is piteous, but banks have processes that are provided to prospective customers.

It is incumbent upon the customer to read the terms and conditions before signing or declining the loan contract.

These contracts clearly outline the price the customer ought to pay. This includes interest rates, penalties for skipping the agreed repayment date, loan security or collateral.

The longer the loan tenure, the lower the monthly instalments, but the higher the total interest paid over the loan span.

It is therefore inappropriate to allege on national television that total payments of K100 million will be K900 million unless the borrower defaults or has not made the scheduled payments for a specified period, usually 90 days or more.

Non-performing loans are classified according to the degree of impairment.

They include substandard loans, which have a high probability of default despite some prospects of recovery; doubtful loans with a low probability of recovery that may require legal action or restructuring; and loss loans that are considered uncollectible and have no value as collateral or source of income.

These loans reduce the bank’s income from interest and fees, increase expenses for debt collection, erode the bank’s capital and reserves and expose the bank to higher credit and liquidity risks.

In Malawi, critics blame financial institutions for not supporting entrepreneurs. They say interest rates are high, the grace period inadequate and collaterals prohibitive.

To appreciate this dilemma, understand where banks get money to lend out and whether the funds are freebies or for sale. 

Banks get money from various sources such as customers’ deposits, loans from other financial institutions, grants from international organisations, and equity or share capital from investors.

The banks use these funds to create loans and other assets that generate more income. They also keep a certain percentage as reserves with the central bank to meet the demand for withdrawals and comply with regulatory requirements.

To balance the sources, risks and returns, the banks have to assess the borrower’s creditworthiness and repayment capacity, including the value and liquidity of the collateral, before granting loans.

They further have to monitor the performance and quality of their loans and assets for possible losses or write-offs.

The banks have to manage their liquidity, solvency, profitability, efficiency and compliance with the laws and regulations.

These are part of security and risk assessment to sustain their operations.

In essence, banks and microfinance institutions are selling money, mostly from customers’ deposits, so they cannot afford to be reckless.

To borrow funds from other banks to lend out to their customers, a bank has to demonstrate that it has less than five percent of the money it can lose from its overall loan portfolio. n

To be continued tomorrow.