Urban and peri-urban households big-time borrowers

Elenoa Baselala By Elenoa Baselala

As the economy continues to plummet, stretching that dollar to meet the daily needs is becoming more and more difficult to the point where it cannot be stretched anymore. So where do you turn to?

Some turn to the banks and other credit institutions, while most turn to moneylenders. Though money-lending was introduced into the country by the Indo-Fijians, today, it is the indigenous people who thrive in this business and it is also them that utilise this "credit institution" more.

It has been estimated that 92 percent of registered moneylenders in Fiji are Fijians, who operate in a market estimated to be worth about $2 million. This would mean Fijian moneylenders raking in $1.84 million annually.

The Consumer Council of Fiji has revealed this positive and yet not so positive trend to FIJI BUSINESS after completing a study through the Fiji Institute of Applied Science on money-lending in Fiji.

It is positive in the sense that this is probably one of the few commercial activities that the Fijians have outshined the Indo-Fijians.

However, the downside is that the borrowers who are mostly Fijians, in most cases are unable to free themselves from the vicious cycle of debt.

The money lending industry

The study carried out by Doctor Ganesh Chand, now director of Fiji Institute of Technology, found there is a relatively significant demand for credit by urban and peri-urban households that commercial banks cannot satisfy for numerous reasons, which includes the lack of collateral.

They estimate the total informal market to be worth $8 million per year.

The survey interviewed 654 households in the provinces of Ba, Nadroga, Ra, Rewa, Naitasiri and Macuata of which 58 percent were Fijians, 41 percent were Indo-Fijians and the rest were of other ethnic groups.

More than half (56 percent) of the households admitted to borrowing money during the past five years, while 44 percent claimed to have never borrowed money during this period.

"Borrowing from moneylenders was not a significant factor in terms of financial decision-making in household.

"Of the 654 households studied, only 72 had borrowed from moneylenders sometime during the past five years. This represents 11 percent of the sample. We, thus, expect 11 percent of the households in Fiji to have borrowed from moneylenders in the country during the past five years. On an annual basis, we expect 2.2 percent of all households in the country to resort to moneylenders for some part of their total borrowing needs," the study said.

Money borrowed were between the vicinity of $10 to $1500, the study said, but our own investigations reveal that some moneylenders were lending to individuals up to $5000.

The average loan thus is approximately $152 over a period of between a week to four weeks.

The study observed that people were turning to moneylenders after failing to get a loan from the banks, relatives, friends or other sources.

While borrowing from the formal financial sectors decreased in the last three years, it increased in the informal sector particularly with moneylenders.

In 2005 and 2006, borrowing from moneylenders was estimated to be around $700,000 during each of these years, while in 2007 it was estimated to be $2.2 million.

The borrowers

The report tells of a raid on a Labasa businessman by the Fiji Independent Commission Against Corruption last year who was in possession of ATM cards owned by soldiers, nurses, teachers, police officers and civil servants.

He was operating without a licence for the last 30 years and had in his possession more than 500 cards.

Given the size of the small township of Labasa, this amounts to almost all the workers in the Friendly North town and highlights the dependence of civil servants on moneylenders.

According to moneylenders interviewed in the survey, their clients were largely civil servants who have high debts with commercial banks, thereby preventing them from taking further loans and also leaving them with small sums to run their family affairs.

"Repeat borrowing is a major feature of the money-lending industry in Fiji. This occurs largely for short-term borrowers who promise to pay at the next pay day whether this be weekly, fortnightly or monthly.

"In many such cases, the borrowers end up repaying a sum that is close to the net pay left after deductions by commercial banks for their loans," the report stated.

Reasons given for borrowing money were investment, daily family needs, bill payment, children's education purposes, special occasions, pocket expenses, drinking, socialising, fundraising for church activities, father's bus fare, visa arrangements, travel to village, rent, fundraising for mataqali and payment for gang cane cutting.

"Overall, borrowers expressed satisfaction that there were moneylenders who would lend them money when needed.

"Eighty nine percent of the borrowers were happy there were money-lending services in the country and 82 percent didn't feel cheated by the moneylenders despite the large interests charged on loans.

"Sixty nine percent of all borrowers stated that moneylenders took the time to explain the interests charged on the loans and other terms and conditions. Twenty eight percent however stated that this was not so," the study revealed.

At least 82 percent of the borrowers did not sign any contract as required under the law. Moneylenders interviewed showed slips of paper containing details of the borrowers and their loans, which would become the contract between the lender and the borrower. These slips, in most cases, were not carbonated nor duplicated for each party to have a copy.

"Other than for unexpected or emergency reasons like funerals, two underlying reasons for resorting to moneylenders are impulsive buying, drinking or socialising and lack of necessary budgeting skills and practices.

"Managing household finances has been a major challenge in Fiji especially within the indigenous Fijian society that is in a transition from a traditional foundation to a modern one.

"In this situation, cross cutting demands of balancing the needs of immediate family, extended family, larger communal groupings and religious bodies become a difficult task.

"Even those with adequate knowledge of budgeting and the virtues of savings find difficulties in managing this transition.

"Such a phenomenon is expected to continue in Fiji for years to come. Moneylenders do provide access to funds however the cost of funds from moneylenders is exorbitant," the study says.

Interest charged by moneylenders range from 12.5 percent to 25 percent per fortnight. Most are charging 20 percent for two weeks.

For one moneylender, the normal practice for many of his civil servant clients was for them to collect their pay from him after he has withdrawn their salaries from the bank.

"They work for the company but receive their wages from us," said a moneylender.

While the study found that moneylenders continue to breach the Moneylending Act by charging above the 12.5 percent per annum interest rate stipulated under the act, moneylenders argue they are providing society a service. Because they have turnovers of less than $50,000, these moneylenders argue their businesses won't survive.

Solutions?

The presence of moneylenders is seen as a "moral hazard" as it encourages people to engage in unplanned or unbudgeted financial transactions.

In the early 1930s, moneylenders were called 'Mahajans' and played a significant role in the agriculture sector. But since independence, their presence within the Indian society declined as commercial and retail banking came into the picture.

As moneylenders are an important source of credit for many households and a source of income for the lenders, the study recommended that the state creates a credit facility for the poorer households.

The study also recommended a feasibility study on establishing a chain of credit institutions throughout Fiji.

However, the Consumer Council has been urged to advocate awareness on the rights of consumers on borrowing money from moneylenders.

The council has been asked to educate consumers on budgeting and household management.