MASERU — The future of money lenders in Lesotho is hanging in the balance after the Court of Appeal on Friday upheld an earlier High Court ruling that ordered them to stop charging borrowers interest at any rate more than the stipulated 25 percent.
The Court of Appeal confirmed that any extra fee that the money lenders had charged the borrowers on top of the stipulated 25 percent interest rate was null, void and therefore not enforceable.
That means the “initiation”, “administration” and “insurance” fees that the companies were charging are illegal.
So are the “membership” and “collection” fees that some of the companies were charging.
“The initiation fees and the administration fees charged to the applicants by the first respondent and the charges made by it for insuring the loans of the applicants are declared illegal and unenforceable in terms of section 20 (1) of the Act,” Justice Ian Farlam said in his judgment.
“The interest charged to the applicants by the first respondent on (i) the initiation fees and (ii) the administration fees and (iii) the charges made for insuring the loans of the applicants was invalid and wrongly deducted from the applicants’ salaries.”
Three companies — Afrisure, B-Blue Financial Services and Select Management Services — had appealed against the High Court judgment which had come as a result of a group of more than 100 civil servants suing the companies for overcharging on interest.
The Court of Appeal’s ruling spells disaster for the local money lending companies.
First, it means that from now on they will not charge borrowers anything more than the stipulated 25 percent interest rate.
Yet it is those extra charges, declared as illegal by the court, that have been keeping most of them afloat.
Secondly, the ruling throws the sector’s whole business model into a quandary.
The sources of income that the companies had for years considered as guaranteed have been pruned by the Court of Appeal ruling.
Thirdly, the ruling means that the current and future earnings of the companies have been wiped because now the borrowers who still owe them will now have to settle their loans at an interest rate of 25 percent.
Experts in the industry are now warning of a severe crisis that is looming in the sector following the judgment.
A recalculation of the loans will show that a significant number of people who borrowed from the companies and are still paying have actually finished paying their debts and are now owed by the money lenders.
That means the money lenders might have to refund the borrowers every extra penny they paid.
Others say the ruling opens floodgates for more people to sue the money lenders for overcharging.
The people who borrowed money and were charged exorbitant interest before the ruling can now sue the money lenders.
There will be a deluge of litigation cases in the courts and the money lenders might drown, insiders say.
Already the money lenders have said they will not be able to remain open if they are forced to charge only the stipulated 25 percent interest.
Claims from current and former clients might speed their demise, insiders say.
“We are talking of an industry that has survived on overcharging for more than a dozen years,” said a lawyer close to the matter.
“Now they might be forced, by way of lawsuits, to refund all those clients that they have overcharged over the years.
“The tables have turned. In the past money lenders used to chase borrowers but from now onwards it will be the other way round. I foresee chaos.”
Justice Farlam’s ruling says as much.
“The amounts, if any, due by each of the applicants to the first respondent in respect of principal and interest or by the first respondent to each of the applicants in respect of amounts overpaid to it, as the case may be, must be recalculated and adjusted accordingly in the light of this judgment,” Justice Farlam said.
The trouble for the companies has already started, albeit on a different level.
The Sunday Express can reveal that the government has decided to stop facilitating stop-orders for civil servants who owe the money lending companies.
It is understood that the government informed the companies of the decision on Wednesday afternoon.
The companies will have to make arrangements with local banks at which their clients hold accounts.
Addressing the civil servants after the delivery of the judgment, the borrowers’ lawyer Advocate Kananelo Mosito said the judgment gave direction to proceed with other similar pending cases in the High Court against the money lenders.
Over 3 000 civil servants have filed similar cases in the High Court complaining about exorbitant charges by the money lenders.
“The Court of Appeal has now given a direction on how to define interest,” Mosito said.
“We are now going to proceed with the pending cases in the High Court.”