Why borrowing may cause stress instead of joy


IN ancient Greek, people had to sell their children into slavery to work the loan off, history tells us. How it got started? Didn’t they love their families? They really loved their families as we do.

But the problem started with people taking loan and failing to pay it back due to obvious reasons such as poor harvest. Often they would start with land used as collateral; if they defaulted the lender took it over.

If they borrowed again and failed to clear the debt then they had to give up their movable products or movable possessions to the lender.

Finally, the only collateral left was their children, so they gave the children to work the loan off and if loan was not met then the children became property of the lender. I can now see why in German, “debt is the same word as guilt.”

By the time King Solon of Athens came to power which was about 600BC, land was mortgaged virtually everywhere in Athens shown by the stones that had the mortgage inscribed on them and placed on the soil.

Have you ever had a walk in the cemetery? If the answer is yes, I guess you get the concept. That’s how debt got eating into poor people’s most valuable asset, ‘land’ in ancient times.

There were also potential revolts from the poor citizens in Athens because their children were increasingly enslaved by debt. Salon abolished debt slavery and 400 years later he is remembered as Nyerere of Athens because he successfully fixed the crisis without letting the financial system go to hell.

We need to fix problems in micro-finance before Tanzania’s financial system gets doomed. The reason is that finance is good for society. Finance teaches us to value things.

It motivates people to do great things, to take risks, to innovate and eventually to prosper if they are lucky enough. Thus, we can’t afford to lose credibility of financial system or to let it fail because of bad and greed-ridden microfinance.

The idea that microfinance is the efficient way of extending good life to the poor is a hoax. “The best estimate of the average im pact of microcredit on the poverty of clients is zero” wrote David Roodman in his book “Due Diligence” published in 2012.

Thus, the obsession with microcredit solution to poverty as reported in the media and sponsored by donors and investors is built on ‘foundation of sand’. The funny way to visualise microfinance’s mission is: think about the vampire in the room determined to suck blood of the lazy guy and lame man indiscriminately because they both have got the smell of cheap money and they have financial needs or greed to start with.

That’s the microfinance guy who is ready to turn remaining cents in your salary slip, your sofa sets, house wares, home electronics, struggling small business into collateral for finally sucking you dry in the case of default.

In February 2011, Bloomberg Markets reported how micro-lending enterprises had changed the original intent of microfinance which is poverty reduction through extension of financial services to the poor into for-profit businesses that seek windfalls through selling unrestrained cheap loans.

Bloomberg unveiled miseries of microlending including: people committing suicides, fleeing their homes and being forced to slavery because of the failure to clear multiple debts owed to different micro-lenders and the harassment from loan officers.

When I told this story to a friend of mine who is the manager at the local microfinance institution, he replied by saying that the miseries have to be caused by stressful home situation or poor macroeconomic environment but not the loan.

That’s unreasonable. If someone was shot and the gunshot caused loss of blood, it’s disingenuous for a lawyer to stand and tell the jury that the victim died because of bleeding and not the bullet.

In other words never rush to blame the last thing you ate for your stomach bugs because it probably may be the thing before the last thing you ate, doctors remind us.

It’s not the recent government policy changes or the venture you have just started or current relationship you are in, that causes your bad luck, miseries and pain but the junk or ninja, and high-interest loan you took long time ago from a microfinance institution worse still on vague or misunderstood terms.

The problem started with the loan huckster, the guy with superficial charm who persuaded you to get the loan while knowing that you were already having debt fatigue and you couldn’t afford to pay it back.

Worse even if he did not want you to fully understand terms of the loan by playing ‘priming psychology’; insisting little monthly payment you would be making and underemphasizing the number of years you will be required to pay the loan.

In fact, the business mantra in microcredit is ‘sell loan aggressively and recover the debt aggressively.’ Microfinance institutions often employ aggressive strategies to recruit customers such as encouraging them to provide false information in order to get the loan.

They also use notorious debt recovery techniques including: harassment and threats. That’s how poor people; vendors, hawkers and low cadre workers get trapped in debt cycle through microfinance’s small and express loans.

In microfinance world, everything (mostly consumption) can be financed via loan including: school fees, funeral services, treatment, weddings et cetera.

In return you have to receive quarter of your business profits or salary while the rest goes to multiple lenders including: microfinance institutions, local loan agency and VICOBA that financed your consumption and not investment.

This has got not just economic implications but also negative psychological effects on people. Living on quarter of your basic salary or business profit is cognitively taxing.

If you are the teacher in the village; to live on 70,000/= or less a month you have to make a lot of sacrifices including: deciding whether to skip a couple of meals or not buy a pair of shoes for your school kid.

There are also a lot of uncertainties to take into consideration prior to the next salary including the possibility of somebody getting sick in the family. This is the reason why teachers are forced to top up their loans regardless of the interest rates.

The result is: they end up not breaking out of the vicious cycle of poverty. It gets even worse if all your eggs are in one basket whereby the salary is the only source of income.

You are forced to shift your focus from formal employment to alternative livelihood activities in order to survive as the result you lose interest in your job and give up career development prospects altogether.

Eventually, your job becomes a nightmare; sort of having poor paying watchman job in crime-ridden neighbourhoods. The only question that comes into your mind is how you are going to make it through night.

*Johaness Siong’o is a social and economic commentator based in Mara

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