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Money lenders in tight spot

MASERU — They have been called loan sharks, ruthless lenders or just shrewd business people but until last October when a group of civil servants finally sued them, no one had dared to take them on.
And when the High Court ordered the companies to cut their lending rates from 60 percent to 25 percent the industry was left in limbo, unable to lend more money or collect outstanding loans.
Now the sector, estimated to have been moving funds worth nearly M500 million every month, is in a quandary.
Nearly 60 firms that are licensed and were operating before last October have stopped business. 
Many are on the brink of collapse while others have cut jobs to stay afloat. The sector is now waiting for the Court of Appeal to make a ruling on their appeal against a judgment by the High Court which ordered them to slash their interest rates on current loans and future lending.
This week the Sunday Express (SE) spoke to Selikane Motseko (Motseko) the chairman of the Registered Moneylenders’ Association about the state of the sector and its future.
Below are excerpts from the interview.


SE: Most money lending companies have been closed since last year’s High Court ruling. Do you have an idea when the companies are likely to reopen?
Motseko: Well, that will depend on how soon the Appeal Court is going to sit and hear our appeal. Only after that hearing will the moneylenders be able to know how they will proceed. We will be able to know whether we can continue on the rates that we were using before the High Court ruling or not. The truth is that the cost structure of the sector is such that it cannot survive if it charges the interest rates that the High Court said it should charge.
SE: At what point did the situation reach such desperate levels for the sector?
Motseko: As soon as the High Court ruled that the rates that the sector was charging were not within the law. That is when we decided that we should stop and wait until we have an answer from the Appeal Court. The reality is that we cannot risk giving out more loans when we are still not clear what rate we should charge. It is not profitable for the kind of businesses we run, with the kind of overheads and risk, to charge interest rates of 25 percent and still remain in business.
SE: But a rate of 25 percent is quite a good lending rate especially if we look at what commercial banks are charging at the moment? 
Motseko: It is not profitable when you look at the real cost structure of the companies that are in the business. People should know that we get the money that we eventually loan out at very high interest rates. For example, companies get the money at prime plus five percent or as high as prime plus seven percent. And when we collect the money from the treasury the government charges us 2.5 percent for administration costs. On those figures you have to add the rentals and other overheads like salaries and other administrations costs.
SE: But surely the 60 percent that most of the companies were charging on loans is too high even when you consider the cost of the money for lenders and the related overheads.
Motseko:  People may think that it is too high but we have to consider that we lend this money to clients without collateral which makes our risk very high. We also borrow the money without collateral and that makes its cost very high. The risk is very high that is why it looks quite expensive.
SE: But the general perception is that you rip off people with your rates.
Motseko: We have been trying to explain these cost structures for a long time now. Those are the costs that we have to deal with as moneylenders. The problem is that when there are cases like these people normally want to believe what they want. It is always difficult to explain these facts to people.
SE: What will happen to the sector if the Appeal Court rules that the High Court was correct to say that moneylenders should only charge 25 percent and nothing more?
Motseko: Let us cross that bridge when we get to it. We are however hopeful that the decision will be favourable. But we can close businesses and go home if it’s not profitable. We can look at other products that we can introduce but at the moment it’s difficult to decide.  
SE: How many jobs are at risk in the sector.
Motseko: The sector employs about 250 people but many companies have already started sending people home because they cannot afford to keep them. We are not sure about the numbers yet but it is true that many have already retrenched.
SE: How big is this industry?
Matseko: We are talking about a sector that moves between M400 million and M500 million every month. As things stand right now that money might never be recovered.
SE: What else is at stake?
Motseko: Most of the money that we lend to people comes from financial institutions outside the country.  Most of the moneylenders owe millions to those foreign institutions. If we are not able to collect that money then Lesotho’s credit rating will take a severe knock.
SE: Have you talked to the regulator (the Central Bank of Lesotho) and the Ministry of Finance about the situation?
Motseko: The central bank is aware and so is the Ministry of Finance. They are also concerned about the situation and its broader effects.
SE: How many people rely on moneylenders for financial assistance?
Motseko: We are looking at about 30 000 people who get loans from the sector every month. The impact of the closures is very huge. Children are going back to school and many families are in need of financial assistance. Parents are broke. We are hoping that the Appeal Court will be kind enough to deal with this matter as an urgent one so that we know where we stand. Even if we lose we would have known where we stand. And we can decide. Uncertainty is not good for business.
SE: But how did you get to charge such figures that have now caused such huge problems for the sector and are threatening to sink it?
Motseko: We started this business nearly 10 years ago. When we started we sought legal opinion to ascertain whether it was allowable to structure our charges in the way we did. The legal opinion indicated that it was indeed within the law to structure the business in that way. So all along we had always thought that we were operating within the law. Even when the matter was taken to court we were confident that it would not get anywhere. But to our surprise the court ruled otherwise.

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