FFrom his home in Nairobi, banker-turned-financial vlogger James Mumo surveyed the state of Kenya’s economy after the pandemic. “It is useless for a normal business person who is just trying to make a living for his family,” he says.
The economic crisis caused by the pandemic and the ensuing closures has left many struggling: 1.7 million Kenyans lost their jobs between April and June 2020, while 20.8 million funds borrowed using a program provided by popular mobile operator Safaricom, double the number from last year. A Nairobi-based financial services conglomerate bought a patio to store all the cars it had recovered after clients were unable to pay their loans.
Mumo, who uses his YouTube channel to share financial advice after years in banking, is concerned. “People are suffering because they cannot access cheaper financing from banks,” he says. Kenyan banks allowed clients to apply for loan holidays when the country closed, but this did little to fill the void of many struggling to survive without a regular income, leaving them vulnerable to loan sharks. “Predatory financing is really taking root in this country right now,” he says.
Governments across the developing world are struggling to adjust to widespread financial losses due to Covid-19, exacerbated by debt repayment to private creditors. The grouping of the largest economies, the G20, meets in Saudi Arabia this weekend, and will urge private lending institutions to suspend debt payments, ideally to allow for higher spending in the fight against the pandemic.
Big banks and asset management companies have trillions of debts. Members of the African Private Creditors Task Force maintain more than $ 9 trillion in assets in Africa, while asset management company BlackRock maintains almost a billion dollars in bonds in Ghana, Kenya, Nigeria, Senegal and Zambia.
The International Monetary Fund and the World Bank provided a large amount of funds to countries in need of emergency funding earlier this year, with the intention of mitigating the financial blow of the pandemic and assisting in the response. The G20 also agreed to suspend government-to-government reimbursements under the Debt suspension service initiative (DSSI) to which 43 countries have registered.
But private creditors have resisted so far, and the G20 lacks a mechanism to force them. “It is clear that a voluntary approach has not and will not work.” He says a coalition of civil society groups that includes Oxfam, Global Justice Now and Christian Aid.
The refusal to roll over the debt has taken the burden from governments to national banks and ultimately to individuals.
According to Mumo, in Kenya the average citizen is stuck, forced to stay home but without any financial support such as leave plans. The result has been an increase in people seeking private credit, either due to the growing number of digital loan platforms in the country attached to the microcredit industry, or from individual private lenders.
“If you can’t get a bank loan, it’s very possible that someone will say let me give you a contact,” says Mumo. This sometimes includes bank staff, he adds, who can refer clients who have been denied bank loans to their own microfinance companies, charging high interest rates.
“These are the type of people who are willing to give you money without many conditions, since they earn much more with you,” he says. “If you borrow $ 1,000 from them at 15% per month, in six months they have basically doubled their money, so they are willing and ready to give you money. Some offer only two hours to get you your money, ”he says.
Kenya rejected entering the DSSI, fearing, like other eligible countries, that doing so would lead to a downgrade of the country’s credit rating, causing long-term damage.
Analysts say the failure to suspend debt from banks and asset management companies outweighs the benefits of DSSI for countries that choose to participate. Almost a third of what DSSI-eligible countries owe is to private creditors.
“The G20 suspension initiative was in effect bailing out private creditors,” says Dario Kenner, an analyst with the Catholic Agency for Overseas Development. Kenner says that money saved through the suspension of bilateral debt under DSSI is redirected to servicing the external debt. Sometimes that debt is held in foreign currency bonds known as Eurobonds, whose repayment costs have risen due to currency fluctuations and high interest rates. “Effectively, these countries are using the money released elsewhere to keep paying private creditors,” he says.
A joint IMF-World Bank statement in october He said that three countries participating in the DSSI unsuccessfully asked private creditors to join the initiative. “Most DSSI-eligible countries have so far assessed that the costs of requesting a debt service rescheduling from their private creditors outweigh the short-term benefits,” he said.
The anti-corruption watchdog and the UN also point out the role of banks and private creditors by facilitating the flow of illicit money from the developing to the developed world, laundering large sums earned from crime, corruption, and tax avoidance, an amount that sometimes exceeds foreign aid inflows.
Kenner says he continues to pressure governments to act on debt relief. “It would be virtually impossible for a bank or asset manager to act alone,” he says. “Each creditor waits for the other. That is why we say that the G20 governments should intervene, the point is that countries need this money right now to finance health systems.
HSBC, Goldman Sachs, UBS, Legal & General and JP Morgan were not available to comment on the issue of the debt suspension of developing countries or declined to comment. BlackRock declined to comment on the record.
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