Tight economic situation affecting property owners

The increase in interest rates and the high cost of living is hitting hard on property owners with banks seizing property of the customers who have failed to service their loans.

In recent days, the media has been awash with adverts by some banks disposing off property belonging to its customers for various reasons.

For example ,The Nation of April 3 2012 carried an advert where about 16 properties, including houses were put up for sale by YMW Properties Investment Company with the authority from one of the biggest banks in the country.

The houses are located in the cities of Lilongwe, Blantyre, Mzuzu and Ntcheu District.

This comes at a time when cost of living is increasing with monthly fuel price adjustments, pushing headline inflation to a record 37.9 per cent.

The kwacha now stands at K420 to a dollar from K167 in April last year.

Bankers Association of Malawi (BAM) executive director Lyness Nkungula says the adverse economic situation is definitely contributing to peoples inability repay loans.

“If you borrow at say 20 percent and the interest rate increases sharply [doubles] to the levels prevailing at the moment, that would subject the borrower to financial stress leading to inability to service the loans. However, this does not hold the customer to go to his bank to negotiate on the terms of the loan,” says Nkungula.

She says as long as the inflation rate keep increasing resulting in lower disposable income and consequently higher lending rates, the situation is likely to increase.

“The trend will only decrease when inflation and lending rates get lower,” she said.

She advised that before one gets a loan from any bank, borrowers should understand the loan terms fully before committing themselves because banks are always willing to take customers through the contract before it is signed.

“The borrowers should engage the banks to explore best ways of dealing with the situation, including rescheduling the payment terms which may entail extending the payment period. The banks will always write the borrower before taking any drastic measures. Selling of property by banks is usually the bank’s last resort,” said Nkungula.

In an interview, on Wednesday YMR Property Investment Company managing director Yeremia Chihana, who is registered and certified property valuer, said most Malawians are finding the going hard because they get loans from banks to invest in property business but end up spending the money on other businesses.

According to Chihana, unlike what other commentators are saying that property business is floundering, the opposite is the truth because property management is a hedge against inflation.

He said this is the reason when people want to borrow money, they put a property as collateral because even the banks know the property will help them get their money back because the property does not easily lose value.

“When people borrow money, property is the real collateral because without national identity cards, the banks know that they are secure with their money when one has got a house or any other property. The only problem is that some people borrow money as if they are investing in infrastructure development and yet they channel the money towards other businesses,” said Chihana.

However, Nkungula said that as BAM, they do not know whether that is true because when customers are borrowing money, they indicate the purpose of the loan and the approval of the loan is based on the assessment of the information that is given to the bank. Banks trust that the customers are honest.

Chihana said in many instances even when the banks have put the property on sale they make losses because the property takes long to be bought or buyers want the property at a discount.

An economics professor at Chancellor College Ben Kalua said Malawians will continue to suffer and lose property because we are depending on the same banks for everything.

“There is need to have a development bank because once the sector is segmented, then you can have other banks sorely to stimulate growth. In order to stimulate the supply side, the country should have a development bank to help farmers and other businessmen to develop,” said Kalua.

Nkungula concluded:

“Customers should always engage their banks for advice. They must know putting the houses or property as collateral is a risk they attach to those assets. That risk is not zero, it is very real, and therefore they must think seriously before deciding to put houses as collateral.”