Steer clear of loan sharks

Piggy’s Trading & Investing Tips:Batanai Matsika

 

“Sir, if those assets just decrease by 25% and they remain on our books, that loss will be greater than the entire market capitalisation of this company,” said a young risk analyst named Peter Sullivan (Zachary Quinto) in a 2011 American drama film called Margin Call, written and directed by JC Chandor.

The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the financial crisis of 2007–08. In the film, an unnamed investment bank begins a mass layoff on the trading floor during a normal business day. Among those let go is Eric Dale (Stanley Tucci), head of risk management.

Dale tries to speak about his current, unfinished project, first with human resources staff and then with desk head Will Emerson (Paul Bettany), but is told that this is no longer his concern. While being escorted out of the building he meets one of his risk analysts, Peter Sullivan, and gives him a USB stick to look at with a vague instruction to “be careful”.

The film explores capitalism, greed and investment fraud. At the same time, it demonstrates the catastrophic effects of excessive leverage. When Sullivan works late night to finish Dale’s project, he discovers that current volatility in the firm’s portfolio of mortgage-backed securities had exceeded the historical volatility levels of the positions.

Because of excessive leverage, if the firm’s assets decrease by 25%, the loss will be greater than the value of the firm, implying that the firm will go bankrupt.

While the film focuses on leverage at firm-level, there are lessons to take away when evaluating excessive debt at household or individual level. Piggy has noted with concern that the variability of income levels in Zimbabwe has forced certain individuals and households that engage “loan sharks”.

As a result, many are finding themselves in a debt trap or financial black-hole whereby they remain in a vicious borrowing cycle.

Who are the loan sharks?

There has indeed been a proliferation of Micro Finance Institutions (MFIs) in Zimbabwe over the past years. The mainstream banking sector, which is dominated by the commercial banks such as CBZ, FBC, ZB Bank, NMB and First Capital Bank has also been pushing out micro-loan products to tap into small and medium sized businesses (SMEs). The increase in the number of MFIs in Zimbabwe has generally been viewed as a drive to promote financial inclusion. However, the subject of micro-financing is quite complex, particularly when looking at the Zimbabwean context.

Globally, we have seen how impact-investing and micro-financing has captured the world’s attention. In fact, microfinance has emerged from the periphery of finance, offering hope for financial inclusion and poverty alleviation in most emerging nations.

However, there has been a level of criticism on “whether micro-lending really helps the poor”. It should be highlighted that microfinance is a business. Many of those who lend money borrow it as well.

In some cases, loans offered may be expensive and short-term. The impact thereof could just be on basic household units and covering household expenses such as groceries or just for consumptive purposes.

Piggy notes that some neighborhood moneylenders (mostly unregulated) typically charge exorbitant monthly interest of as high as 100%.

As a result, individuals and households that engage “loan sharks” may find themselves in a debt trap or financial black-hole whereby they remain in a vicious borrowing-cycle.

The question that always remains is: could microfinance be another capitalist tool used to peddle unaffordable debt services just for the financiers to increase their wealth?

That said, the government has come with policies that are aimed at improving policing mechanisms. In conclusion, it is important for individuals and households to steer clear of the unregulated “loan sharks” and always work within their credit limits whenever they need to access loans.

Matsika is the head of research at Morgan & Co and founder of piggybankadvisor.com. — batanai@morganzim.com/ batanai@piggybankadvisor.com or +263 783 584 745.