�Neither a borrower nor a lender be�
Mbongeni Mguni | Friday December 19, 2014 10:33
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine ownself be true.
William Shakespeare’s immortal words are ringing in the ears of many of those involved in the cooperative societies’ arena, which experts suggest could just about be all of us, employed, unemployed, students, the elderly; everyone.
Within that ‘everyone’ some members are reaping the benefits of healthy interests earned from faithful contributions through the year, while some customers are simply grateful for the assistance granted by metshelo over the months.
However, within many financial metshelo – where contributions are loaned out for interest earnings – some members are reaping the illicit gains of extortionate rates and unethical collection policies, while their customers limp into the festive season, pockets threadbare and ever so deeper in the debt trap.
SCI Training, a Kgale-based company offering financial wellness and debt counselling, has seen an upsurge in metshelo customers hobbling in for assistance in recent months.
Most financial metshelo begin chasing their arrears from September, intensifying their methods towards the traditional close of business in November.
“They are under extreme pressure from the operators of these metshelo,” says SCI Training certified financial planner, James Fern.
“They are named and shamed and that’s a little unfair. You don’t get a bank or microlender telling all your friends and family or posting on Facebook that you owe them money or are not repaying.
“What we are hearing is that the issue is the harassment and this is driving people to again borrow elsewhere to pay that debt.”
Not only are some metshelo operators naming and shaming their debtors on social media, but others are hunting down their arrears through evening ‘raids’ at homes, constant badgering via calls and text messages and even visits to workplaces.
Of the several covert factors behind the predicament these types of borrowers find themselves in, two dwarf the others in importance and menace. The first concerns the interest rates charged and the method of their application, while the second – even more sinister – is the motivation behind the collections policy.
“Metshelo are often not good at collecting repayments and will let loans roll up through the year,” says Fern.
“Because they charge interest on interest, they let the loans roll on and suddenly they say ‘remember the P1,000 you borrowed? Well it’s now P10,000.’”
The interest on interest method involves applying the agreed interest rate to the outstanding balance every month, instead of only on the principal. Thus (as pictured), a P1,000 loan taken in January would accrue to P8,916 by December, instead of P3,400 or 162 percent more!
Experts say ‘interest on interest’ is a brazen violation of the in duplum rule which states that “the interest on a debt will cease to run where the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt”. The golden lending rule, which is both recognised and enforced among registered entities in Botswana, simply means that there can never be more interest accumulated than an amount equal to the unpaid capital amount. At a 20 percent per month rate, the interest on a P1,000 motshelo loan unpaid through to December would be about nine times the principal using the interest on interest method.
But far more than simply violating the in duplum rule, the exorbitant rates run contrary to the good faith governing the lender, borrower relationship in a motshelo. In most cases, metshelo customers are familiarly or at least casually known to members who often ‘underwrite’ the loans.
“In a motshelo, you are looking at colleagues or people in your social group and it needs to be fair on both sides. Both sides need to understand what’s going on,” says Fern.
However, SCI Training has found that in most cases, borrowers are in the dark until collectors come knocking.
The informality and familiarity anchoring the savings cooperative means most agreements are on a handshake basis with little paperwork read, understood and signed.
The Kgale-based company, which conducted training for at least 1,000 people last year, has found that many complainants are ignorant of the fine print of their agreements. In many cases, there is no fine print to speak of.
The result has been that over and above personal and mortgage loans, hire purchase and retail store credit, more and more Batswana are buckling under the strain of inflated metshelo loan commitments where the threat of public humiliation within the social group is used as a method of collection.
A situation, referred to as ‘Zero Nett Pay’ by financial planners, is increasingly common among the working class.
“We are seeing a problem where someone comes to us and they simply have so much debt that they will never be able to repay,” notes Fern.
“One government teacher earning P10,000 per month owes P1.6 million.” The ‘zero nett pay club’ a new sub-sect of the working class is growing, its debt-riddled and world weary members most recognisable on paydays by the furrowed brows, hunched shoulders and their panicked glances whenever their phones ring or when a stranger enters the work area.
For Fern, zero nett pay is equal to poverty.
“It is a form of poverty. If you are repaying out in interest, more than you can earn, you are in poverty.
“When you look at it in this light, you will see that we need to be compassionate with people that owe. No one is saying they should be let off the hook, but we should be compassionate.”
Members of the zero nett pay club have the added misfortune of having to pay interest rates higher than other motshelo debtors, due to their poorer credit rating. This situation is also worsened by the fact that laws in Botswana do not prescribe the maximum interest rates charged.
The laws largely expose borrowers and where they do exist, those most indebted fall within the cracks. “Every lawyer I have spoken to says personal bankruptcy legislation has not been touched in Botswana,” says Fern. “Companies can go bankrupt and people too, but no lawyer wants to touch that. “There’s no money in it because the person involved does not have any money. The Attorney General’s legal aid scheme cannot help either because it looks at gross salary and they are disqualified.”
Fern advises those deeply indebted with metshelo to negotiate with their creditors for the tapering down of the amount owed, especially in cases where the in duplum rule has been violated. In addition, debtors can dig around for ‘leverage’.
“Using interest on interest, if you owe P100 at 30 percent interest per month and do not pay, you owe P130, the first month, P169 the next and P219 the next. If you are said to be in arrears at P219, they cannot charge you more interest than P219.
“The next thing to negotiate is to say ‘what you are doing is illegal’. They cannot go to the court and say ‘this person owes me this money with excessive interest’.
“They are most likely also not registered with the Non-Bank Financial Institutions Regulatory Authority.
“You can say, I borrowed P100 and I am willing to pay back P200, but I’m not going to pay you what you want because you have been adding interest on interest.”
He adds: “Say ‘yes I owe you, but your interest is very exorbitant even if I signed a contract. I do not think you can legally enforce it, but I agree that I owe and I will pay you what is reasonable.’”
Next year, Fern says, one should make attempts to borrow from legitimate lenders ‘with legitimate interest rates’, such as banks and licensed microlenders. Banks for instance, are offering personal loans at under 20 percent per annum or 1.7 percent per month, compared to 25 percent per month at some metshelo.
“The bank will try and collect the debt but in a reasonable and efficient fashion. Banks may not be good at negotiating, but they are fair where unlicensed motshelo will not be.”
Many in 2015 will hope to gradually ease themselves from the burden of exorbitant motshelo interest rates and again qualify for formal lending.
The variables underpinning such success, which includes salary review, adoption of prudent borrowing practices and even credit protection, are but a mirage for many.