Botswana has been advised to regulate lending as household debt threatens to tear families apart.
Although small in population, household debt and leaving beyond means have made Botswana into a sorry state and lack of regulations on limits to credit has made matters even worse.
Debt to commercial banks and micro lenders run into billions of Pula, according to available data.
“At a minimum, Botswana needs regulations requiring that all loans, whether from banks, non-bank lenders, microlenders, furniture stores etc. are recorded on a central database, so that information on all the loans that an individual has is recorded in one place,” Managing Director of Econsult Dr Keith Jefferis told Sunday Standard.
Currently, there are no regulations regulating the amount of lending by commercial banks, whether in total or to specific individuals.
What the banks can only do is to assess whether individuals have sufficient income to service their loans, however, individuals may decide not to disclose all of the loans that they have.
“The problem is not with lack of regulations on lending, it is lack of information on lending. There is also a problem with individuals acting irresponsibly by taking on too much debt,” the former Deputy Governor of Central Bank stated.
His comments follow revelations that household spending accounts to 60 percent of bank lending while households have also been indebted by micro lenders that were only regulated Non Bank Financial Institutions Regulatory Authority (NBFIRA).
The Botswana situation is made worse by the fact that there is no comprehensive credit database in Botswana at present that could put the debt details of Batswana in one centre.
Jefferis said all lenders should then have access to the proposed database, so that if an individual applies for a loan the lender can check how many loans that person already has. If they are over-indebted, the loan would be refused.
“This means that individuals will not be able to mislead lenders and take out more loans than they can afford, and also that lenders will be able to behave responsibly by not encouraging excessive indebtedness. In due course, the database could be extended to include information on payment records, defaults etc to give an overall picture of creditworthiness,” advised the economist.
He added that regulations are also required to ensure the consistent calculation of effective interest rates on loans and the proper display of the costs of loans so that individuals can compare the true cost of credit from different sources.
Jefferis pointed out that some lenders such as microlenders display monthly interest rates, while banks display annual interest rates adding that displaying monthly interest rates only is misleading and that the cost of credit must also include all associated charges.
The calculation and display of credit costs by banks is regulated by the Bank of Botswana, and new regulations by NBFIRA will do the same for non-bank lenders.
“This now needs to be extended to retail stores,” he said.
The equivalent that Botswana could follow is the South Africa’s National Credit Act, which, although new, is performing its mandate of keeping indebtness in check.
The SA Act includes provision for such a database and requires that lenders exercise responsibility by checking the level of indebtedness of potential borrowers, so that is a good example for Botswana.
“There are other provisions in the SA Act that might be relevant for Botswana, so it is a good starting point, but we need to devise our own regulations,” stated the economist.