Moneylend­ing and other mis­con­cep­tions

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SMALL economies of­ten find them­selves in a Catch-22 sit­u­a­tion when it comes to fi­nan­cial in­clu­sion and fis­cal reg­u­la­tion. In Le­sotho’s case, this was ev­i­dent in the 2010 court case be­tween mi­cro money­len­ders and mem­bers of civil so­ci­ety.

At least five moneylend­ing com­pa­nies were taken to court on the ba­sis of mis­rep­re­sen­ta­tion of in­ter­est pay­ments among other charges, and the judge­ments dealt in­formed leg­is­la­tion for the Fi­nan­cial In­sti­tu­tions Act (2012).

As cru­cial as reg­u­la­tion is in pro­tect­ing agents from eco­nomic ex­ploita­tion, peo­ple’s fi­nan­cial de­ci­sions are not gov­erned solely by the law. Herein lies the dilemma.

Fi­nan­cial in­clu­sion, as the pri­mary goal of ini­tia­tives such as Mak­ing Ac­cess Pos­si­ble ( MAP) and Sup­port Fi­nan­cial In­clu­sion Le­sotho (SUFIL), is stip­u­lated as “(be­ing) achieved when con­sumers across the in­come spec­trum in a coun­try can ac­cess and sus­tain- ably use fi­nan­cial ser­vices that are af­ford­able and ap­pro­pri­ate to their needs”.

Sta­tis­tics show that 81 per­cent of Ba­sotho are fi­nan­cially in­cluded, and this is rel­a­tively high. Of that pop­u­la­tion, 36.2 per­cent ur­ban­ites have bank ac­counts while the fig­ure is only 14.5 per­cent among their ru­ral coun­ter­parts.

This is largely due to the bar­ri­ers sur­round­ing the for­mal bank­ing sys­tem. The first bar­rier is af­ford­abil­ity, bank charges are rel­a­tively high com­pared to what con­sumers are will­ing and able to pay.

The sec­ond is the mis­con­cep­tion that there is a spe­cific tar­get mar­ket that banks chan­nel. This is not aided by the tire­some fi­nan­cial jar­gon that of­ten iso­lates the bank­ing sys­tem from its pa­trons.

Lastly, and rather iron­i­cally, is the bar­rier of mis­trust. For­mal in­sti­tu­tions can be per­ceived as un­trust­wor­thy due to the lack of un­der­stand­ing re­gard­ing ser­vice charges.

In a re­port about fi­nan­cial su­per­vi­sion, the Cen­tral Bank of Le­sotho (CBL) ac­knowl­edged that ex­ist­ing com­mer­cial banks are tra­di­tion­ally un­able to of­fer the full range of needs to the non-for­mal sec­tor.

Hence the CBL — among many other stake­hold­ers — has a vested in­ter­est in the de­vel­op­ment of fi­nan­cial in­ter­me­di­aries as they pro­pel eco­nomic growth and broaden the fi­nan­cial sec­tor.

Cur­rently, the fi­nan­cial sec­tor con­sists of three com­mer­cial banks, all for­eign-owned. There is one, Post Bank, which is largely con­cen­trated in ru­ral ac­tiv­ity and 235 non-bank fi­nan­cial in­sti­tu­tions such as for- eign ex­changes, co-op­er­a­tion banks and money­len­ders.

In 2005, there were 22 li­censed money­len­ders. How­ever, there were a great deal of illegal mi­cro-lenders due to in­ad­e­quate mon­i­tor­ing within the third-tier fi­nan­cial sys­tem.

The last up­dated list of money­len­ders pub­lished by the CBL was in 2008 and it in­di­cated a to­tal of 51 cer­ti­fied money­len­ders. These money­len­ders charge roughly 25 per­cent in­ter­est and about 40 per­cent of house­hold in­come for the debtors is used to re­pay these in­for­mal money-lenders.

Un­for­tu­nately, there are many eco­nomic par­tic­i­pants who, by virtue of em­ploy­ment sta­tus and in­come source, are not el­i­gi­ble for tra­di­tional bank loans. The ma­jor­ity of credit comes from non-for­mal in­sti­tu­tions.

Ac­cord­ing to the World Bank, Le­sotho is ranked 154th out of 185 coun­tries for ac­ces­si­bil­ity to credit. An­nexed to that, con­sumers use credit mainly for con­sump­tion spend­ing rather than in­vest­ments in fixed as­sets. The Catch-22 sit­u­a­tion is ap­par­ent when there is not enough reg­u­la­tion of the in­ter­me­di­aries. On one hand, in­ter­me­di­aries are an ob­vi­ous ne­ces­sity.

On the other, they re­quire thor­ough reg­u­la­tion and mon­i­tor­ing oth­er­wise money­len­ders abuse their power, leav­ing those who need fi­nan­cial in­ter­me­di­aries worse off. It is this line that pol­icy-mak­ers, con­sumers and money­len­ders are con­stantly try­ing to ne­go­ti­ate.

Fi­nan­cial in­clu­sion is high on the agen­das of both the Min­istry of Fi­nance and the CBL; achiev­ing the goal will be im­pos­si­ble if these two agents do not make full use of all the tools avail­able.

Leg­is­la­ture has its merit, but the pol­icy-mak­ers must en­sure that bar­ri­ers to fi­nan­cial en­try are min­imised, di­a­logues around moneylend­ing are con­struc­tive and mis­con­cep­tions around fi­nan­cial lit­er­acy are dis­abled.

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