Thursday 28 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 6 - June 12, 2016.

 

No industry has wreaked more havoc on the world than the financial industry. Michael Milken and his “junk” bonds; the failure of hedge fund management firm Long-Term Capital Management; the collapse of Barings Bank due to an errant trader; the fall of Lehman Brothers, followed closely by the near collapse of AIG; and the mother of all Ponzi schemes — the Bernie Madoff investment scandal — come to mind.

For me, nothing hit closer to home than the subprime mortgage crisis, which saw financial misadventure spill over into the economy and cost many Americans their homes. In the early noughties, US banks lent billions of dollars to home buyers who were unable to pay off their loans when the adjustable-rate mortgages crept up.

As we hop onto the treadmill of hindsight, the villains, we discover, were not the borrowers who took out loans that were way above their means, but the money lenders who enabled them to do so in the first place. They should have known better. Never mind that the loans were made by mutual consent and for mutual advantage. As a result, following the subprime crisis, regulators clamped down like never before on such borrowing practices to prevent similar problems from recurring.  

Things are not that different here. As Malaysians’ indebtedness grows, the government and central bank have been vigilant to ensure that the populace does not get into deeper debt. Regulatory measures have been introduced over the years to protect borrowers from banks that promise to fulfil their dream wedding or help them step up in life with that “much needed” further education. 

As if banks were not a force to be reckoned with, other types of loan services have emerged in some parts of the world. In Taiwan, for instance, Taoist temples have begun offering “spiritual” loans to worshippers. At Tzinan Temple in Nantou county, worshippers can borrow small amounts that are expected to be repaid within a year. 

Applicants for this loan must pray to the Earth God and explain why they need the money. Then, they throw two crescent-shaped blocks into the air. If the blocks fall to the ground on the same side, it means the request for the loan is approved. Those who are lucky enough to enjoy the favour of the gods can use the money as they see fit. 

Based on a dated source, in 2011, Tzinan Temple lent out NT$300 million (RM37 million) to 550,000 individuals. The amount recouped exceeded NT$500 million — that is a mind-blowing return of 67% without credit underwriting, payment channels or any collection function. It appears that these cosmic financiers don’t have to worry about worshippers defaulting as the prospect of divine retribution is enough to keep defaults at a modest 3% to 5%. 

Are loans tools to help us achieve our financial dreams or are they instruments that cause us to fall into financial disrepair? Remember, guns don’t kill people, people do. Ultimately, a loan is a financial tool whose purpose depends on the borrower. Loans have the power to change lives — for better or worse. 

A very successful debt programme that has been touted to lift people out of poverty is microfinance. It has become popular all over the world, with organisations such as online lending platform Kiva encouraging people to consider donating to microfinance programmes for the poor in emerging markets instead of charitable organisations. Fundamentally, the proponents of microfinance believe that the poor need a helping hand, not a handout. Loans allow individuals to preserve their dignity as opposed to being a charitable cause. 

The pioneer of microfinance, Muhammad Yunus, founded Grameen Bank in Bangladesh in the mid-1970s. His story is well known and nothing short of amazing. He had chanced upon 42 women making bamboo stools. Because they lacked the funds to purchase raw materials, they borrowed from local traders who lent them money on condition that they sell their stools at prices only slightly higher than the raw materials. 

Muhammad Yunus was shocked to discover that their entire borrowings amounted to only US$27. As an experiment, he lent the women money out of his own pocket at zero interest, enabling them to break free from the predatory lending practices of local traders and break out of the cycle of debt. 

He went on to found Grameen Bank, which today lends US$1 billion to seven million poor people. Almost all are women from Bangladesh’s 78,000 villages. Like the Tzinan Temple, the bank seeks no guarantee, binding contract or collateral. The repayment rate is 99%! 

In the banking industry today, loans are increasingly difficult to obtain. Borrowers are subjected to a long and arduous process of justifying their income to obtain financing, only to be told they probably won’t be able to get the amount they need. Despite the tightening credit measures, loss rates have continued to climb and invariably given rise to demands for more controls. 

I can’t help but wonder if borrowers are doing enough to understand the risk of being overleveraged. When you borrow money, you are obviously required to repay the original and, in all cases, more than just that amount, owing to interest. Taking money from a lender requires one to sign an agreement and commit to paying a certain amount each month. And we are not talking short-term payments. Borrowers owe it to themselves to ensure that they can handle the life of the loan before signing on the dotted line. 

If the money is going towards a purpose that is not going to grow in line with the interest rate you are being charged, you have to ask yourself if you are delaying the inevitable self-combustion from all that high interest debt. Before you compound the problem, would it not make sense to take the hard decision to curb spending and gain control of your life now, rather than kick the can down the road?

Do we need further regulations, contracts and agreements to ensure we become a nation of better debt managers? Or do we need to learn, in no uncertain terms, that debt needs to be repaid. Does debt improve our lives or drag us into decline? Ultimately, we have a choice — either to be indebted to our lenders or to be in debt with them. 


Ong Shi Jie (CJ) is head of integrated marketing and analytics at OCBC Bank (M) Bhd

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