Heavily indebted Humans Deserve Debt Relief (Just as Nations Do)

4 October by Jami Hubbard Solli


Photo credit : Prantojon

From Argentina to Zambia, the global news is filled with stories of irresponsible, unsustainable lending to low-income governments which ultimately results in suffering for their own people. Suffering takes the form of austerity measures imposed by lenders like the IMF, and resultant public spending cuts on social welfare programs for the people.



However, when heavily indebted nations predictably fall into debt distress, or default, their loans are usually restructured, and they may also get an economic fresh start (albeit with strings attached).

But, what happens to human beings in those same countries who may also be experiencing debt distress due to unsustainable household and personal debts?

No doubt billions of persons living in conditions of poverty, or hovering near the poverty line have also been hard hit by Covid-19, job losses, economic downturns, and inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. which has caused global food prices to skyrocket.

Surely, human beings, as well as states (and companies) are equally worthy of debt restructuring, or even debt write-offs when there are no foreseeable prospects for repayment? And, certainly, we should at least consider providing debt relief when the lending was predatory and irresponsible in the first place.

With the advent of the internet, there has been a huge global boom in easily available, yet rarely affordable, short-term credit products that have been thrust upon desperately poor persons in developing countries.

For example, annualized percentage rates for popular digital credit products range in Kenya from 108%-240%. [1] In Indonesia, the Code of Ethics of the Digital Lenders Association (AFPI) helpfully recommends that its members not exceed charges of .8% per day interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
(charged as a flat rate, which is more expensive than the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. charged on a declining balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. ). These ethical Indonesian digital lenders charge an equivalent of 292% APR (excluding other undisclosed charges such as late fees).

Also, with the advances in financial technology, digital lenders not only charge higher interest rates, but they seem to have dropped credit risk assessments entirely. Lenders are no longer concerned about whether their loans are affordable because they have a new weapon: the borrowers’ data. Many digital lenders scrape content, call, and chat/messaging data from mobile phones; so that in the instance of borrower default, the lender can ring up the borrower’s Mom, girlfriend and Grandpa; as well as the borrower’s employer inform on the shameful debtor who refuses to repay.

One Indonesian fintech lender CEO, also cheerfully admitted to the author that his company loads a virus onto the borrowers’ mobiles so that in the event of default, the lender can simply shut off a borrower’s phone. So what if that debtor’s phone is also used to run a business? The media in various countries has also reported that lenders have asked for compromising photos of debtors which are used as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. to be published on social networks in the event of default.

Are such usuriously priced loans, irresponsible lending practices, and data privacy abuses legal?

And, what relief is available to an over-indebted, insolvent consumer by law in these situations?

In 2021, the Global Alliance for Legal Aid (GALA) and its research partner, Advocates with International Development (A4ID) sought to answer these questions by reviewing legal frameworks in low-income countries and seeking to identify financial consumer protection policies, as well as whether any debt relief mechanisms were provided for debt distressed persons in 32 countries. We were assisted both by global law firms, as well as local counsel providing pro bono (free) legal assistance.

Essentially, GALA, A4ID and legal teams analyzed 1) whether the financial consumer protection legal framework adequately protected individuals from predatory lending and abusive debt collections practices, and 2) what debt relief mechanisms may be available to the individual as natural persons; as opposed to a formal company in insolvency or bankruptcy proceedings.

Unsurprisingly, the answer in most countries is a resounding ‘no,’ that the legal frameworks do not sufficiently protect consumers, and ‘no’ there isn’t any economic fresh start available to natural persons who are over-indebted or insolvent.

Worse, we also identified 20+ countries where active legislation allows for creditors to incarcerate debtors who are unable to repay their commercial loans.

And, in countries which essentially criminalize debt default, we also looked for data on inmate populations to see if the practice of incarcerating debtors is occurring. For example, in East Africa, we reviewed four countries (Burundi, Kenya, Tanzania & Uganda) and three of these countries have active legislation allowing for debtor incarceration (all but Burundi). In both Kenya and Uganda, we noted there were several hundred debtors incarcerated in each country according to the most recent year’s prison data available (2020). [2] We could not find such data on incarcerated debtors in Tanzania.

Actual prison inmate data is very hard to ascertain mostly because close to half of the inmate populations in developing countries are on remand. This means that people were arrested but have not been formally sentenced for a crime. Inmates may remain locked away for years and never actually have a trial. This is another means of criminalizing poverty. In Nigeria, for example, over 70% of the prison population is on remand. [3]

Serving a prison term for a default, which in some countries may be a term of years, does not absolve the underlying debt. Multiple debts may also mean multiple person terms. Presumably, a debtor would lose his or her job as a result of incarceration, so this highly punitive measure is not serving the public good in the long run, and it is wreaking havoc on human lives.

In many countries, we also note that the practice of incarceration of a debtor has a disparately negative impact on women. For example, in Sierra Leone, Jordan and Egypt, the vast majority of incarcerated debtors are female. You may recall the message of empowerment of women preached by microfinance lenders globally which targeted poor women borrowers as clients.

Further, if a defaulting debtor is also a mother, her young children may go to jail with her (usually because there is no one able to care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. for the child, or because the child is too young to be separated from her mother). In Kenya, there are several hundred children incarcerated with their mothers [4].

In the bulk of countries reviewed, there is no financial consumer protection legislation in place, no financial sector regulator monitoring market conduct (nor household over-indebtedness levels) [5], and no right to redress when a person is harassed or even killed by a debt collector, and no access to debt relief through insolvency, mediation or bankruptcy.

Unfortunately, domestic news in many of the countries reviewed is littered with tales of creditor-induced debtor suicides, and even murders by debt collectors. For example, last week in India, debt collectors working for Mahindra Finance brutally ran over a pregnant woman (twice) as they repossessed a tractor her father had failed to make payments on. Mahindra Finance has since apologized. [6] Whether the victims’ family receives compensation is another matter which remains to be seen. Mahindra, however, cannot miraculously bring the dead back to life.

Further unsettling, this is the same India where microfinance institutions (MFIs) caused an over-indebtedness debacle in Andhra Pradesh (AP) resulting in the suicide of hundreds of borrowers in 2010. [7] Following the AP debacle, the MFIs at issue became insolvent and their corporate restructurings were fast-tracked by the Indian Government. However, there was no fast-tracked debt restructuring for the MFI victims and their debts. Nor was compensation provided to the families of persons induced to commit suicide.

So, while GALA agrees that countries deserve a fair, economic fresh start; we also urge these same countries to prioritize debt relief for their own citizens, and to provide relief which respects the human rights of individuals and families who fall into debt distress.

This should also be a condition precedent for any responsible international lender providing debt relief and loan packages to Argentina through Zambia.


Footnotes

[3Nigeria: 70% of Nigerian Prisoners Held Without Trial, Prison Insider, April 24,2020 available online at https://www.prison-insider.com/en/articles/nigeria-70-of-nigerian-prisoners-held-without-trial

[4Hundreds of Children Live in Jail with their Mothers, The Nation, Feb.21, 2012, updated July 3, 2020 available online at https://nation.africa/kenya/news/hundreds-of-children-under-four-live-in-prison-with-their-mothers--801270

[5In fact, the only low income country that we have identified that is monitoring over indebtedness levels of consumers is South Africa’s National Credit Regulator. South Africa also has various mechanisms available to debt distressed consumers to avail themselves of debt relief (e.g. counseling and mediation). Its systems are far from perfect, but it is head and shoulders above the majority of the 32 countries reviewed by GALA/A4ID.

[6RBI Asks Mahindra Finance to Stop Loan Recovery via External Agents after Hazaribagh Incident, The Economic Times India, Sept. 22, 2022, available online at https://economictimes.indiatimes.com/industry/banking/finance/rbi-asks-mahindra-finance-to-stop-loan-recovery-via-external-agents-till-further-order/articleshow/94380089.cms

[7Anurag Priyadarshee & Asad K. Ghalib, “The Andhra Pradesh microfinance crisis in India: manifestation, causal analysis, and regulatory response,” Global Development Institute Working Paper Series 15711, GDI, The University of Manchester, 2011.

Jami Hubbard Solli

is founder, Global Alliance for Legal Aid.

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