The messy situation of debt

Ibrahim, the owner of a guesthouse in the local island of Maafushi was forced to rely on a MVR200,000 COVID-relief loan from the SME Development Finance Corporation (SDFC) in 2020 when his income completely dried up with the closing of the borders. When the Government allowed re-opening of guesthouses in October 2020, Ibrahim was quick to make the necessary arrangements as per the HPA guidelines, and approval from the Ministry of Tourism.

He soon had to start making repayments on his SDFC loan, MVR7,000 per month, on top of the additional costs of disinfecting, special uniforms for staff, and other adjustments required under the new guidelines related to COVID-19. Meanwhile, his room rates had plummeted to below USD40 per night, as offers and promotions were required in order to re-attract business. Ibrahim also has an existing retail loan from the Bank of Maldives (BML) taken a few years back, and has an outstanding of over MVR100,000 which required repayments of MVR 10,700 per month. 

Hashim, a self-employed entrepreneur living in Malé, has an outstanding credit card bill of about MVR70,000 owed to BML. He is paying about 2.6 percent interest per month — just over 30 percent per year. He also has an outstanding retail loan from BML that he borrowed for his business, which is a total outstanding of MVR280,000 which requires a monthly repayment of over MVR7,000. 

Hashim’s situation is no different to Ibrahim’s and undoubtedly others are facing similar predicaments across the country. 

While the total private sector loans and advances remain at MVR27.2 billion, 47 percent of GDP, as at April 2021, an estimated 11 percent, MVR3 billion, is personal loans, including credit card debt. The Bank of Maldives had an outstanding MVR 1.7 billion as ‘Lui Loans’, and MVR399 million in outstanding credit card re-payments as at end 2020.

Meanwhile, the bank received a total income of MVR2.7 billion from interest and fees, including  MVR536 million as income from card fees, and an additional MVR53 million as foreign exchange earnings from their cards operations in 2020 — this is during a period when the bank has severely limited US dollar transactions on their credit, and debit, cards which were not reflected on their annual fees; a practice which, at time of writing, still continues.

In addition, there are other credit facilities that are unrecorded in the official financial sector statistics, especially consumer credit issued by motorcycle shops, the State Trading Organization’s (STO) credit scheme, and schemes run by other major retailers. 

Being in debt or unable to get out of debt can be a very difficult and stressful situation. Debt concerns can trigger emotional stress, and as a result reduce resilience against other health problems, including mental health. Studies show that with mental health issues, financial judgment is compromised, and there may be tendencies to incur more debt and spend more.

One might end up in ‘debt denial’; unable to answer phone calls from the bank or other debt collectors, leaving bills unopened, underestimating how much you owe, applying for new credit cards or increasing existing credit limits, or telling one’s self that everyone is in the same situation. A study published by “Ageing & Mental Health," about 40 percent of consumers in America who had credit card debt said it affected their general happiness. One third said it negatively affected their standard of living, and 20 percent said it harmed their health. 

Today, almost every adult incurs some form of debt at some point in time, with the exception of a very privileged few. Either to finance construction of their house, buy a flat, pay for higher education, cover a medical emergency, start a new business, or finance an expansion. Sometimes one gets into desperate situations and fail to carefully consider and evaluate the terms and costs of such debt.

Sometimes borrowers are unfamiliar with how the loan interest rates are determined and calculated. In order to avoid unnecessary stress relating to debt, it is important to have a basic understanding of interest rates, compound interest, payment periods, penalties, and most of all how the debt or the loan is structured. 

Both at a personal level and in managing own businesses, the right balance is required when it comes to proper management of finances. This will allow to better allocate incomes in a manner that provides better financial security and prosperity. The most fundamental first step is to create a realistic budget, that determines the amount of spending, investments, and savings. Under normal circumstances, the budget should be prepared incorporating repayment of existing debt, while also setting aside some amount as savings so that sound investments can be made that can provide returns in the future. 

In order to avoid distress in the future from financial matters, the best way is to avoid financial products that have terms and conditions that one is unsure of or which are ambiguous. When entering into contracts or making use of credit facilities, there is a need to be cautious towards predatory tactics used by some lenders.

At a national level, policy makers need to consider that consumer protection laws are required to address such issues and protect borrowers from any predatory lenders. The state should also undertake better measures to ensure that the financially marginalised are not taken advantage of. They should ensure that the people maintain robust mental health through policies and initiatives focused on alleviating and, most importantly managing, their financial ‘health’ throughout this unforeseen difficulty — if not, the nation might not have the proper human resource capacity to move forward in this difficult time and in its immediate aftermath.