Informal Moneylending and its Consequences in Pakistan
Poor people in Pakistan who need quick cash can become victims of loan sharks who take advantage of people’s desperation by granting them loans at exorbitant interest rates. The culture of borrowing from informal moneylenders who are known as Baniyas is prevalent in this impoverished country. Research indicates that about one-fifth of all households are indebted to moneylenders. Even more concerning is that 30% of over-indebted households are spending more than 100% of their income on loan repayments.
Borrowing from Baniyas – A Solution that’s a Bigger Problem
Poor people who have no other means of getting funds feel that they have no other option except to borrow from unscrupulous moneylenders. Interest repayments which never seem to come to an end imprison them in a cycle of ongoing debt, leaving them in a worse position than before they had taken the loan. Even after many years, the principal amount (the initial capital borrowed) is untouched and the loan which was meant to help them becomes a yoke around their necks.
This is yet another example of the exploitation of poor people. The most obvious impact is financial – many borrowers report that they actually become poorer, having to pay interest for years. But borrowing from Baniyas is detrimental on so many other levels too.
The Negative Implications of Borrowing from Moneylenders
Borrowing from loan sharks is often a fate worse than death for poor families, leading to forced labour and slavery. Here are some of the realities these families face:
- Using their limited resources/income to pay off loans may result in removing children from school. It negatively impacts the ability to pay for medical care and results in poor diets for the family, with breadwinners having to work extra hours or being forced to sell household items at a lower value.
- When borrowers cannot meet their commitments, the lenders seize their assets – either what has been offered in collateral (jewellery, equipment, vehicles), or anything else that the borrowers may own.
- When an interest payment cannot be paid, additional repayments are added – sometimes 2 or 3 more per payment missed.
- Borrowers are sometimes forced into unpaid labour to pay off their debts.
- They can be threatened and intimidated. Some even get beaten up and/or publicly shamed.
- Cases of moneylenders ‘taking’ children and forcing them to work to pay off debts are common. Sometimes young girls are married off to the moneylender to wipe out the debt.
- Some borrowers feel they have no other option to end this vicious cycle but to take their own lives. Suicide to escape the crippling and never-ending debt is a last resort for many who feel trapped and see no escape.
Liberation Loans – Fighting Moneylenders through Microlending
At Akhuwat, we fight loan sharks who prey on poor families through our Liberation Loans. With them, we wipe out the debt a family owes to the moneylenders. We pay off the total balance in one lump sum, including interest to settle the debt completely. The stress that the borrowers carry worrying about how they will pay off this loan is immediately relieved. The loan shark is removed from their lives and they are freed from the burden of never-ending interest payments. To date, we have helped thousands of people by granting them loans of between PKR10,000 to PKR100,000.
The monthly repayment amount is fixed and repaid within a fixed period (maximum 3 years), so borrowers know there is an end to the debt. This makes a huge difference as borrowers can plan and budget for the repayments, knowing that the loan will be repaid within a short period. Once the loan is repaid to Akhuwat, the monies that loan recipients were paying as instalments can be used for other household expenses or to invest in anything else their families may need. This gives them the freedom to start making a better life for themselves and a better future for their children. Most importantly, they are no longer at the mercy of unscrupulous moneylenders.