When Davis Moyo* was retrenched from his job at a financial institution in the Zimbabwean capital Harare last year, he counted himself lucky when he found another job almost immediately, and even luckier when he secured a loan to start a chicken-rearing business that he hoped would supplement his salary.
His application for a US$4,000 loan to be repaid over 12 months was swiftly processed by one of the many banking institutions that had combed his workplace for new clients, and Moyo was soon presiding over his dream business. He envisaged providing employment to scores of the unemployed and, with a bit of luck and hard work, being able to quit his new job to run his business full-time within a few years.
But after only one and half years, Moyo lost his job with his new employer and his business venture also fell on hard times. He was soon behind on his loan repayments and accruing an even larger debt from the interest charges. The bank initiated legal action against him to recover their money and Moyo’s material goods - a refrigerator, a TV, a kitchen set and a wheelbarrow, went under the hammer at a public auction.
Zimbabwe's newspapers are filled with public notices for auctions as many other individuals and companies lose their property to banks and money-lenders after falling behind on loan repayments.
The country's financial sector has enjoyed three years of economic growth following the adoption of multiple currencies in early 2009 and an end to a tumultuous trading period characterized by record inflation, bank closures and failures.
Buoyed by phenomenal growth in deposits and a steady currency, many banks have introduced personal bank loans to attract new clients. The loans have been very popular even among low-income earners. Qualifying amounts range from as little as $500, while interest rates range between 18 and 20 percent per annum depending on the bank.
Many Zimbabwean workers, including the majority of civil servants, still take home salaries well below $500 a month - an amount considered inadequate to sustain a family of six based on the Consumer Council of Zimbabwe's estimate of $572 to meet a household's essential needs for one month.
Civil servants have repeatedly demanded salary increases but the government says it lacks the revenue to meet their demands. In an effort to supplement their poor salaries, many workers are taking out loans in order to start small, income-generating ventures.
Proliferation of personal loans
The Bankers Association of Zimbabwe (BAZ), a grouping of all registered banks in the country, says that personal loans now dominate the country’s credit/loan profile, accounting for more than 18 percent of the total $3.5 billion in loans taken out between January and November 2012. Reserve Bank of Zimbabwe governor Gideon Gono, in his mid-term monetary policy statement, predicted that by year-end, personal loans would account for 25 percent of all loans channelled through the banking sector.
Micro-finance loans have been widely lauded as a means for poor people in developing countries to escape the poverty trap by providing them with the means to start income-generating projects. But for the many whose businesses fail, such loans only serve to entrench poverty further.
“I have learnt the hard way that taking a loan from the bank is such a risky thing to do. The higher the loan, the more difficult it is to pay back," said Moyo. "If one is not careful things can go horribly wrong.”
The World Bank estimates that each year, the global economy adds an estimated 150 million new consumers of financial services, most of them from developing countries, where consumer protection and financial literacy are still in their infancy. According to the Bank, consumers in many of these emerging markets often fail to obtain sufficient information about sophisticated new financial products.
Former bank executive and economic consultant Moses Mhlanga said that financial illiteracy among the banking public and the absence of financial education programmes by Zimbabwean banks were playing a key role in the high levels of individual debt.
Many people rushed into taking loans using their personal property as surety or collateral, oblivious of the risk, he told IRIN.
“Before taking loans, consumers must read the fine print and be aware what they are entering into contractually,” he said.
*not his real name