By Tšepiso Secker
SMALL economies often find themselves in a Catch-22 situation when it comes to financial inclusion and fiscal regulation. In Lesotho’s case, this was evident in the 2010 court case between micro moneylenders and members of civil society. At least five moneylending companies were taken to court on the basis of misrepresentation of interest payments among other charges, and the judgements dealt informed legislation for the Financial Institutions Act (2012). As crucial as regulation is in protecting agents from economic exploitation, people’s financial decisions are not governed solely by the law. Herein lies the dilemma.
Financial inclusion, as the primary goal of initiatives such as Making Access Possible (MAP) and Support Financial Inclusion Lesotho (SUFIL), is stipulated as “[being]achieved when consumers across the income spectrum in a country can access and sustainably use financial services that are affordable and appropriate to their needs”. Statistics show that 81 percent of Basotho are financially included, and this is relatively high. Of that population, 36.2 percent urbanites have bank accounts while the figure is only 14.5 percent among their rural counterparts.
This is largely due to the barriers surrounding the formal banking system. The first barrier is affordability, bank charges are relatively high compared to what consumers are willing and able to pay. The second is the misconception that there is a specific target market that banks channel. This is not aided by the tiresome financial jargon that often isolates the banking system from its patrons. Lastly, and rather ironically, is the barrier of mistrust. Formal institutions can be perceived as untrustworthy due to the lack of understanding regarding service charges.
In a report about financial supervision, the Central Bank of Lesotho (CBL) acknowledged that existing commercial banks are traditionally unable to offer the full range of needs to the non-formal sector. Hence the CBL – among many other stakeholders – has a vested interest in the development of financial intermediaries as they propel economic growth and broaden the financial sector. Currently, the financial sector consists of three commercial banks, all foreign-owned. There is one, Post Bank, which is largely concentrated in rural activity and 235 non-bank financial institutions such as foreign exchanges, co-operation banks and moneylenders.
In 2005, there were 22 licensed moneylenders. However, there were a great deal of illegal micro-lenders due to inadequate monitoring within the third-tier financial system. The last updated list of moneylenders published by the CBL was in 2008 and it indicated a total of 51 certified moneylenders. These moneylenders charge roughly 25 percent interest and about 40 percent of household income for the debtors is used to repay these informal money-lenders.
Unfortunately, there are many economic participants who, by virtue of employment status and income source, are not eligible for traditional bank loans. The majority of credit comes from non-formal institutions. According to the World Bank, Lesotho is ranked 154th out of 185 countries for accessibility to credit. Annexed to that, consumers use credit mainly for consumption spending rather than investments in fixed assets.
The Catch-22 situation is apparent when there is not enough regulation of the intermediaries. On one hand, intermediaries are an obvious necessity. On the other, they require thorough regulation and monitoring otherwise moneylenders abuse their power, leaving those who need financial intermediaries worse off. It is this line that policy-makers, consumers and moneylenders are constantly trying to negotiate.
Financial inclusion is high on the agendas of both the Ministry of Finance and the CBL; achieving the goal will be impossible if these two agents do not make full use of all the tools available. Legislature has its merit, but the policy-makers must ensure that barriers to financial entry are minimised, dialogues around moneylending are constructive and misconceptions around financial literacy are disabled.