Loan sharks are created by our inefficient banking system

The crackdown on loan sharks popularly referred to as “Banque Lambert” has attracted much debate with, definitely, a great deal of public support in favour of government’s move to banish this “illicit act”. The government action has earned the much-deserved applause because many individuals and to an extent small organisations or businesses have lost millions of francs through unsecured loans at high interest rates. These loans are usually backed by threats of violence or blackmail. “This illegal money lending has high side effects because it affects property and individuals’ security, as well as crippling the nation’s economy. There is one incident at Gisozi where someone threw a grenade at somebody’s home damaging two cars in the compound...when we investigated, we discovered the cause of the crime was this illegal ‘Banque Lambert’,” Commissioner General of Police, Emmanuel Gasana, is said to have told the press this week. Definitely, this is predatory lending where the lender’s intention is to exploit the prey (client) through exorbitant interest rates. But it is very important for government authorities involved, especially the National Bank of Rwanda (NBR) to examine the causes of this vice if it is to be minimised. To direct the discussion, one must understand that in the recent past there has been high demand for credit by the private sector but it has also been extremely difficult to satisfy this demand by formal lending practices, because of the liquidity crunch in the local banking system. Our financial institutions were once forthcoming at doling out loans, especially in 2007 when the Central Bank’s biggest challenge was to mop-out the excess liquidity in banks. But the incompetence in the sector ensured that insufficient liquidity levels were maintained at the end of 2008 and throughout 2009, hence a swell of bad loans on the banks’ balance sheets. Secondly, our banking system prevents certain people, especially those with weak incomes and no collateral from taking loans. This coupled with the fast loan approval and the hassle free or flexibility that usually accompanies loans provided by loan sharks, illicit lending becomes inevitable. Since demand for loans was on the rise, this meant that where banks failed to serve the public, an opening was afforded for private persons to perform some of their functions. Some individuals who have managed to secure loans from main stream standard sources have been blacklisted because they have failed to settle their debts and as a result they are shy to ask for more loans. This is basically an indication that loan officers from lending institutions are not close to their clients to constantly monitor how the funds disbursed by their respective institutions are being utilised. There are also other causes like weak enforcement of the laws where the authorities were not serious or did not have a well planed operation to curb loan sharks. “We have discovered that bank employees, including the Central Bank, have been assisting these people. So, that would mean that some officials in government institutions in charge of funds could also easily help them since it involves pocketing their own interests,” François Kanimba, the Governor of the NBR was quoted as saying. This portrays how government officials are trying to extort the private sector by taking advantage of the loopholes in the banking industry. It is also a powerful and illegal way of channelling state resources or tax payers’ money into personal business. So, for the relevant institutions to minimise this activity, which is a serious threat to the national economy, a mechanism of meeting the absorption capacity of the growing private sector must be developed. However, this can be attained through establishment of an efficient financial system with competent and skilled people. The writer is a Journalist gahamanyi1@gmail.com