Macro finance lending institutions milk the poor |
However, Mhone's explanation differs from that of the institution's General Manager, Cornelius Majawa. He says that, from every loan that a client gets from Pride Malawi, the organization deducts two percent as processing and insurance fees. Interest rates, he said, differ depending on the amount of the individual loan. "Others may be charged 2.5 percent while others may be charged 3 percent per month,” Majawa said. Kwizombe's K8,500 fees are impossible, he said. “Pride Malawi cannot get K8, 000 as processing and insurance fees,” he said. “That person did not get the loan from Pride Malawi." However, Mhone said that, despite the organisation telling its customers that it deducts two percent for processing and insurance fees, there are fixed amounts of money that they deduct from different amounts of loans. "From K5, 000 to K9, 000, we deduct K3, 000 plus one percent insurance fee.” Mhone said. “K20, 000 to K30, 000 loans have a processing fee of K5, 000 plus one percent processing fee while K49, 000 to K60, 000 loans attract an K8, 000 processing fee and one percent insurance. "That's how we make money,” he said. “As you know, this is a profit making organization." Information sourced by The Observer show that Pride Malawi's customers are paying back the borrowed money at a rate of more than 27 percent. For instance, Evans Makawa of Blantyre District Assembly says he applied for a K30, 000 loan and got K24, 700. The difference, he said, was a loan processing and insurance fees. He must pay back K3, 183.50 per month for a year, Makawa said. Lameck Killi, applied for K90, 000 loan and received K8, 900 less. The monthly payments are K9, 562.50. The processing and insurance fees deducted for the three people above were recorded and signed for on receipt number 94557 dated July 23, 2007. Albert Thindwa, Vice Chairman of Malawi Micro-finance Network (MAMN), says that micro-finance lending institutions charge high interests rates as compared to banks because it is expensive to serve the poor. "Their transactions costs are high,” he says. “We pay for reaching out to the poor. The risk involved in lending the poor is very high. "It looks very unfair. The poor have to pay our costs," he says. Katuya says many people applying for these loans do not understand the legal language that's written on the bill of sale documents - documents they have to sign before they can get a loan. "People sign loan documents ignorantly and many lawyers sign the documents without explaining the contents to the borrowers,” Katuya said. “They assume that they already know the legal implications of the document." He also says law firms charge between the ranges of K200 to K500 depending on the size of the document. On average, law firms receive 20 forms from people, which lawyers have to sign. This then becomes legally binding, which means failure to pay back the money would make property confistication legal, Katuya says. "If they borrowers don't have a copy, it could be manipulated because business people are unpredictable," he says. Executive Director of Bankers Association of Malawi, Faniel Kumdana, says these micro-finance lending institutions operate outside the Banking Act and, therefore, are not regulated. "At present there are no laws or regulations that control the micro finance lending institutions,” he said. “We are in a free economy whereby anybody could engage in any business which could help him earn a living. He says that most of the institutions are profit-making organizations that survive on the interests they get from customers. The Reserve Bank recently reduced its bank rate from 20% to 17.5% to encourage private sector investment and boost economic growth. Nevertheless, Thindwa says that the Bank of Malawi, the Malawi Micro-finance Network (MAMN) and the Ministry of Trade are working on a policy to regulate the sector. Kumdana admits the sector could be prone to corruption and fraud in the absence of the regulation policy. "Fraud takes place anywhere,” he says, “not only in financial lending institutions and banks but even in churches”. Thindwa is also Chairman of Southern Africa Micro-enterprise Capacity Advancement Facility (SAMCAF). He says he's optimistic that the proposed Finance Bill, which awaits cabinet approval, becomes law, there would be professionalism and transparency in the micro finance lending sector. But until that time, it's borrower beware. |
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High rates, hidden fees make repayment difficult |
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| By Kazembe Kayira, Rabecca Theu and Josephine Chinele |
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| Maria Lester says poverty spiced with unemployment and illiteracy is a terrible combination. It's that combination, she says, that has caused her five-member family struggle to obtain basic life necessities. It was her family's struggles that led the 37-year-old to the decision to take out a K10, 000-business loan. But when she couldn't repay the loan with four months - including the 50-percent interest charges - it nearly plunged her family into dire poverty. She had no an idea that the loan agreement form she signed authorised the lending institution to grab her property if she failed to pay back the debt. She first learned about the clause when her fellow debtors stormed her house one afternoon and threatened to take away everything the already needy family owned. There are thousands of illiterate Malawians who have fallen into similar traps. They ignorantly obtain loans from micro-finance lending institutions - institutions that employed hidden lending procedures and charged unreasonably high interest rates. The borrowers were unable to understand the terms because they were unable to read and understand the contracts they signed. Malawi Observer has investigated these practices and found that some lenders are victimising poor entrepreneurs by giving outrageous loans interest rates and hidden charges. And those who fail to pay back run the risk of losing everything – sometimes at the hands of their own neighbours. And until the law changes, it's not a crime. Banks peg their interest rates at between 17 and 22 percent. However, micro finance lending institution regularly charge interest rates of between 35 and 50 percent. In most cases, Malawi Observer reporters found, the institutions don't tell the borrowers the actual cost of the loan. The institutions also deduct some amounts of money from the loans granted to the customers in the name of processing or application fees. Lester says she was one of a group of her friends and neighbors who obtained a group loan from the Foundation for International Community Assistance (FINCA). She says every group member went home with K10, 000. The agreement was to settle the loan in four months. She would pay back K3, 750 every month. "The loan officer told me that I would be paying an interest of 5 percent per month. I thought it was little money but it wasn't," she says. Lester's second-hand clothes business failed to pick up. As a result, she says, she missed the first two months' payment deadline. "Hell broke loose,” Lester said. “The fourteen group members, with whom I obtained the loan, ambushed my house and demanded that I give up some property in my house. "My husband rescued me by borrowing money from his friends," she says. Malawi Observer reporters tracked down FINCA documents that show that loans go out to either individuals or groups of 15 people. Lenders offer up contracts that are written in English, which is the second language to many borrowers. The institutions don't allow borrowers to keep copies of loan agreement contracts. Andrews Katuya is a Blantyre-based legal practitioner. He says that, though there is no provision in law that says borrowers should have a contract agreement copy, borrowers should insist on leaving with a copy of the contract for their records. "If they don't have a copy it could be manipulated by micro-finance lending institutions,” Lester says, “They're in business to make profits." The documents also say the borrower must pay K1, 500 up front as loan processing fee as well as a 1.5 percent establishment fee and .5 percent insurance fee - all of which are non-refundable. The base loan for group loans is K20, 000 and repayment period is four months with an interest of 5 percent a month. Despite Lester's nasty experience with FINCA, she obtained another K15, 000 loan from the same institution last month. "I had to survive and another loan was the only option. It is pressurizing because I have to pay back about K1, 500 per week,” she said. "Sometimes I feel like I am doing the business for FINCA." She says that she has had to go back into the second hand clothes business. |
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