In some cases, due to delayed remittance of loan deductions effected through payrolls by employers on behalf of employees to lending institutions, the same lending institutions have sometimes asked borrowers to effect DDACC instructions for the same deductions effected through payroll, resulting in duplicated loan deductions!
This is contrary to loan agreements and regulatory requirements.
Because of these duplicated loan deductions, many borrowers have ended up with inadequate and/or negative salaries insufficient to cover even basic needs and forcing them to borrow from all sorts of sources, including from the same lending institutions at exorbitant rates of interest and the resultant debt trap.
Debt-to-asset ratios are also used: over-indebtedness starts when a borrower’s total debt exceeds Y per cent of the borrower’s assets.
According to the Fin Scope Survey of 2009, 16 per cent of adults reported using more than half of their incomes to service debt, while 18 per cent said they had missed a loan repayment in the previous 12 months.
Multiple borrowing or cross-borrowing is often seen as an early warning signal for over-indebtedness.
Borrowers accumulate more debt than they can handle because lenders have no way of knowing how much other debt the borrower is carrying, and borrowers may postpone and deepen their problem by taking out new loans to pay off old ones even though they may never be able to retire all their debt.
This is associated with higher risk of default.
According to PlaNet Finance, 2015, although official figures are not available, it is estimated that about half of all payroll borrowers have more than one loan outstanding, with the highest incidence of multiple borrowing found among Government employees.
A self-completed questionnaire based on the EU framework was administered to a sample of 90 employees.
The majority of the respondents (over 50 per cent) can be said to be over-indebted on four of the five indicators, but not on one indicator.
The majority of the respondents disagreed to being in default and/or in arrears.
The EU framework used requires that for someone to be considered to be over-indebted, he or she would have to meet the all the five indicators.
Therefore, on this basis, the surveyed employees cannot be said to be over-indebted.
However it should be noted that in payroll based lending, which is now prevalent amongst formal sector employees in Zambia, under which the surveyed employees fall, the issue of default and/or arrears on debt repayments may not necessarily arise as the employer gives an implicit guarantee to the lender by undertaking to deduct the repayments at source.
In the few responses where default and/or arrears arose, this could have arisen in a situation where the employee ends up with a negative payslip because of excessive repayments and the employer thus ends up making the repayment on behalf of the employee.
These findings also give an indication that the EU framework for measurement of over-indebtedness may not be appropriate in the case of formal sector employees in Zambia.
The problem of over-indebtedness was further brought to the fore on a recent visit I undertook to the farming town of Mkushi in Central Province over the month-end.
When I went to draw money from an ATM at one of the banks in town, in front was a young man who had a handful of ATM/Debit cards and a piece of paper in his hands.
He took close to an hour drawing money with the different cards he had.
Then I wondered how he could be withdrawing with so many cards at the same time!
On enquiry, I came to learn that he was a credit officer at one of the micro-finance institutions in town and that he was drawing money from borrowers’ accounts to cover monthly loan repayments.
I also learnt that they lend out money on production of three latest months’ pay-slips, proof of employment and residence in Mkushi.
The other conditions are that borrowers surrender their salary account ATM card and Personal Identification Number (PIN) for access to the account.
I was left wondering whether the sector regulator – Bank of Zambia (BOZ) – and indeed the individual ATM/Debit card issuer banks were aware of such unconventional lending practices.
Generally, there are terms and conditions attached to the use of such cards and it is doubtful whether such use would be allowed.
There are also practical risks to which these lenders subject themselves.
There is a possibility that the lender’s employee drawing these funds could lose the funds either intentionally or inadvertently.
The borrower might also defraud the lender by simply leaving town and reporting loss of the card to both the police and the issuing bank in which case the card could be stopped and possibly the lender’s employee could be implicated in the theft of the card.
The borrower might also lose employment or change employment immediately after getting the loan.
All these scenarios present potential for loss to the lender.
But the main question is: is this sort of unconventional lending practices as a result of too many players in the field?
Added to this is borrowing in form of getting goods and services on credit, which are not captured in the sort of research referred to in this article and official credit statistics presented.
A very good example today is that of airtime credit extended by mobile phone companies; one may get up to a maximum of K50 for a period of 48 hours at 10 per cent interest (which, if annualised runs into a very high borrowing rate).
Spread over a year, this extends to over K9,000 in air-time credit , which together with other items like foodstuffs, clothing and so on, adds on to an individual’s or a household’s debt burden.
Assuming a subscriber base of 5 million nationally and with everyone borrowing air-time of K50 every after 48 hours, you would be talking of air-time revolving debt of K45 billion! There is also currently the additional source of debt from micro-lending accessed through mobile money platforms where subscribers could borrow for periods ranging from seven, 14 and up to 21 days at a time, which is adding on to debt levels.
Going forward after debt swap arrangement, one would suggest that before financial service providers are allowed to market their products to public service workers (who are mainly targeted because of their large numbers), departmental and unit heads, like District Education Board Secretaries (DEBS) and head teachers, request for the presence of employee labour representatives with some financial knowledge to guide members before they commit themselves to some financial agreements that may not be in their best interest in the long run. This may sound demeaning and patronising but the sad reality is that financial literacy has for a long time not been part of our school curricula.
This implies that if I am a science specialisation teacher as in the example given here, I would not have had any chance to know through my educational and professional journey how a bank loan or insurance policy is effected in practice.
If you wish to, you may kindly contact me on mpembelesc@gmail.com.
0966 598726/0978 411004.
(The author, a holder of a B.Acc (CBU), CBA (Bangor), M.Acc and MBA-Finance (BGSU), and Doctor of Philosophy in Finance from the University of Kwazulu-Natal in South Africa, is a lecturer in the School of Business at the Copperbelt University)