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F.From his home in Nairobi, banker turned financial vlogger James Mumo contemplated the state of Kenya’s post-pandemic economy. “It’s useless for a normal businessman who’s just trying to make a living for his family,” he says.
The economic crisis caused by the pandemic and the ensuing blockages left many in trouble: 1.7 million Kenyans lost their jobs between April and June 2020, while 20.8 million borrowed funds using a program provided by the popular operator of Safaricom mobile phone, double the number of last year. A Nairobi-based financial services conglomerate bought a yard to store all the cars it had repossessed after customers couldn’t repay their loans.
Mumo, who uses his YouTube channel to share financial advice after years in the banking sector, is concerned. “People suffer because they can’t access cheaper financing from banks,” he says. Kenyan banks have allowed customers to apply for loan holidays as the country went into lockdown, but this did little to close the gap for many struggling to survive without a regular income, leaving them vulnerable to loan sharks. “Predatory funding is really taking root in this country right now,” he says.
Governments around the developing world are struggling to adjust to widespread financial losses due to Covid-19, compounded by debt repayment to private creditors. The grouping of the largest economies, the G20, is meeting this weekend in Saudi Arabia and will urge private lenders to suspend debt repayment, ideally to allow for more spending to fight the pandemic.
Big banks and wealth management companies hold billions of debt. Members of the Africa Private Creditor Working Group hold more than $ 9 trillion in assets in Africa, while wealth management firm BlackRock holds nearly $ 1 billion in bonds in Ghana, Kenya, Nigeria, Senegal and Zambia.
The International Monetary Fund and the World Bank provided a range of funds to countries in need of emergency funding earlier this year to stem the financial blow of the pandemic and aid in the response. The G20 has also decided to suspend government-to-government reimbursements under the Debt Suspension Service Initiative (DSSI) which 43 countries have joined.
But private creditors have so far resisted and the G20 has no mechanism to force them. “It is clear that a voluntary approach has not worked and will not work,” says a coalition of civil society groups including Oxfam, Global Justice Now and Christian Aid.
The refusal to refinance debt pushed the burden from governments to national banks and ultimately to the people.
According to Mumo, the average citizen in Kenya is stuck, forced to stay at home but lacking any financial support such as licensing programs. The result has been an increase in people seeking private credit, both from the growing number of digital lending platforms in the country linked to the microcredit industry, and from individual private credit institutions.
“If you can’t get a bank loan, it’s very likely 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 refused bank loans to their microfinance firms, charging high interest rates.
“These are the kind of people who are ready to give you money without a lot of conditions, as they make a lot more money from you,” he says. “If you borrow $ 1,000 from them at 15% a month, in six months they’ve practically doubled their money, so they’re willing and ready to give you money. Some just give you two hours to get the money, “he says.
Kenya refused to join the ISD, fearing, like a number of other eligible countries, that this would lead to a downgrade of the country’s credit rating, causing long-term damage.
Analysts say the lack of debt relief by banks and wealth management firms thwarts the benefits of the DSSI for joining countries. Almost a third of what is owed by ISD eligible countries is to private creditors.
“The G20 suspension initiative was actually saving private creditors,” said Dario Kenner, an analyst at the Catholic Overseas Development Agency. Kenner says money saved through bilateral debt relief under the DSSI is being redirected to foreign debt service. Sometimes that debt is held in foreign currency bonds known as Eurobonds whose repayment costs have increased due to currency fluctuations and high interest rates. “These countries are actually using the money released elsewhere to keep paying private creditors,” he says.
A joint IMF-World Bank statement in October said three countries participating in the ISD have unsuccessfully asked private creditors to join the initiative. “Most of the countries eligible for the ISD so far have estimated that the costs of requesting a debt service rescheduling from their private creditors outweigh the short-term benefits,” he said.
Anti-corruption supervisory bodies and the United Nations also emphasize the role of banks and private creditors in facilitating the flow of illicit money from the developing world to developed countries, the laundering of large sums earned from crime, corruption and tax avoidance, an amount that sometimes exceeds foreign aid inflows.
Kenner says pressure remains on governments to act on debt relief. “It would be virtually impossible for a bank or wealth manager to act alone,” he says. “Each creditor awaits the other. This is why we are saying that the governments of the G20 must intervene, the point is that the countries need this money right now to finance the health systems. “
HSBC, Goldman Sachs, UBS, Legal & General and JP Morgan were not available for comment on the issue of debt relief in developing countries, or they declined to comment. BlackRock declined to comment on the record.
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