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Debt and ForeclosuresBy Chibamba Kanyama on 15 Feb 2018
In the past year, newspapers were awash with advertisements about properties for sale by commercial banks. I was distressed when I noticed one of the properties offered for sale was farmland belonging to a bona fide entrepreneur.
A foreclosure by way of disposing of property that is under collateral is a standard phenomenon. What concerns me is the frequency of distress notices. Banks are not in the business of selling property. Auctioning assets is the last resort in the lending process. For this to happen, all allowances and stretched grace periods of loan redemptions may have yielded nothing. When a commercial bank finally pulls out the collateral trigger, the loan would have been classified ‘nonperforming’ and unsustainable.
The Catch 22 experience about bank loans is that once you default on your commitments for one month, the extra month will be an additional foot into the grave. The interest rates get compounded such that by the time the bank decides to sell, the value of the loan would have trebled. I will, therefore, focus on three issues you may want to focus on in your business:
Cost of Capital: Foreclosures usually signal fundamental market constraints. It implies many bank clients are facing similar problems. That may explain why some banks posted losses during the economic slump between 2014 and 2016. During that period, the Bankers Association of Zambia had hinted that there would likely be an increase in interest rates owing to the Central Bank decision to raise minimum reserve ratios.
In October last year, the Bank of Zambia reduced the policy rate as well as the statutory reserve ratios as a trigger for market liquidity. The interest rates only marginally dropped. The cost of capital is still too high for businesses with long maturity periods. When interest rates drop, commercial banks rarely pass on the difference to existing borrowers.
Alert entrepreneurs will take one of the two options: either adjust prices of their goods and services to respond to the changes in cost of capital or refinance their loans by looking for cheaper loans elsewhere. It would be suicidal in Zambia to commit your business to any kind of financing with being thoroughly sure of your cash flows to support repayments. The economy is still as fragile as it was yesterday. One bank director whispered to me how the bank has been affected by defaulting road contractors,
‘We were absolutely sure there was no problem financing these contractors because Government was the offtaker,’ he said. ‘We rolled out the loans in millions but to date, three years on, most contractors have not been paid.’
Low Demand: The construction of malls at every corner of the country is not an indication that demand in this country has increased. The level of market cannibalization where the same consumers are now faced with four malls instead of one, is very high. The liquidity situation has not fully improved for consumers since 2014. The civil servants who generally boast demand to support your business have not had a meaningful increase in incomes for a while.
On the other hand, subsidies on energy have affected the spending power for households. In many shops, we have napping till attendants. Some other sectors of the economy, such as insurance, are facing intense competition. This goes for the transport sector where many transporters are facing reducing cash flows arising from steep competition. These are some of the circumstances that make your loan unsustainable unless you find a niche, a value proposition that sets you apart from the rest. Many transporters who leased buses are struggling to service their loans. Under these circumstances, employ new market penetration tactics to keep your business afloat.
You will also do well to face reality if the arrears keep building. It is advisable for entrepreneurs to elicit self-liquidation if the future does not offer any hope. You are better off salvaging something from your business than losing it all to the bank that may even have additional claims after selling your property.
Erratic Cashflows: There is one area that Zambian entrepreneurs must improve. Poor cashflow management is a reality for most enterprises in the country. We usually sell on debt without fixed debt limits and thresholds. Understandably, business is tough and the ability to exercise flexibility on payment terms is one of the effective competitive tools. Almost every business is owed money and owes money at the same time.
In some companies, I have heard financial managers say the business survives on interest free capital. Instead of going to the bank for an overdraft for working capital, businesses find it profitable consuming goods and services without paying for them. What that does is chocking other businesses. Those that have borrowed will have transacted quite well in terms of book entries but there is no liquidity to service the loan. There is need for a cash flow revolution in Zambia otherwise we will all be liquidated.
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