Why do countries, especially African borrow money? There are various reasons but infrastructure development is certainly at the top of the list. They borrow to build roads, rehabilitate railway lines, expand ports, and improve internet connectivity.
We recently saw Zambia engage in debt restructuring talks with its creditors such as the International Monetary Fund and China. At Development Reimagined we have said time and time again that the final deal with the IMF was not favourable. Why? Zambia will now borrow more for recurring expenditure and less for development infrastructure such as roads which inevitably improve connectivity and propel growth.
It is to be noted that creditors sit together in “committees” or “clubs” to discuss their place especially during debt restructuring. This is all geared towards getting a favourable outcome for themselves as creditors whilst not considering the borrower. The international financial system is creditor centric.
We therefore ask, can African countries “club” to get better outcomes and deals from creditors? We have come up with the concept of a Borrower’s Club, borrowing the idea of microfinance from Muhammad Yunus.
So what is a Borrower’s Club and how does it work? African countries “club” together, take loans together and use each other’s growth prospects as collateral. The loan repayments will be small, and with low interest to allow easy payment – while also sufficient to build in a “cushion” for temporary collateral. Borrowers will appoint a representative on a rotational basis to interact with creditors on their behalf. In the event a project faces any challenges, delays on repayment issues then the borrower committee must agree for the cushion to be made available to support temporarily. Most importantly, borrowers in arrears do not get more loans.
Yunus identified a group of poor women villagers that took loans together and used each other as collateral. He started by lending US$ 27 in 1976 but had lent US$ 2.3 million by 1998 and eventually gave more groups such as women access to credit – something that was not easily available. The concept of microfinance is now replicated in many countries, Africa included.
Just as the women villagers had no access to credit, African countries face the same challenges. Credit is not easily available and when it is – it is too expensive creating the Africa Risk Premium where African countries pay more for loans. This is why the Borrower’s Club is an innovative idea that will have African countries access credit easily to build infrastructure necessary for economic growth.
At Development Reimagined, we innovate and have solutions that increase African agency because today’s problems need reimagined solutions.
Watch the full Borrower’s Club video below to learn more.