Bank of Uganda provides for it its latest Financial Consumer Protection Guidelines
Larry Ellison, CEO of Oracle Corporation one of the world's leading software companies once said, 'show me a billionaire who has never borrowed and I will show you a murderer who has never killed.' Borrowing money is a practice that cuts across society, gender, age and social class. It can be a life changing practice as it has made some people very rich. On the 9th of July 2012 an article was published in The Wall Street Journal titled, 'Borrowing Could Pay Big Dividends InThese Taxing Times.' The article made it very clear that when interest rates are right, borrowing to invest could yield generous returns.
On the other side of the coin, so-to-speak, there are just as many, if not more stories of the misfortunes that have befallen those who have not been able to repay their loans. The Investopedia , on the Fourth of February 2010 in its article' Millionaires With the Most Bankruptcies' listed three past US presidents on that list. So much for the supposedly most powerful position in the world! Closer to home, Mrs. Kaddu who owned a stall in St.Balikuddembe Market may not have filed for bankruptcy after the fire that gutted the market but she lost all that she owned. As she no longer had an income, she could not pay the monthly installments on her loan. The bank therefore took possession of the plot of land she had used as security for the loan. Therefore Mrs. Kaddu not only lost her only source of income but also a plot of land. As a result she could not afford to take her children to school anymore.
Reasons for borrowing are just as varied as the amounts borrowed. While some people borrow to startup businesses, some borrow to maintain a lifestyle. Whatever one's reasons, insuring your loan could make the difference between borrowing being beneficial or a detriment.
A type of insurance called Credit loan insurance pays out the outstanding loan in the event of loss of property due to fire, burglary, flood and storms. However, the property should have been declared as the source of financing the loan in the loan application. Credit loan insurance also provides for payment of the outstanding loan in case of the death of the borrower. This ensures that the borrower's family does not lose its valuable property, which was used as security for the loan. Credit loan insurance further provides for a negotiated payout on the death of a spouse or a child of the debtor. This is because insurance appreciates that the borrower might have a financial strain in paying for both the funeral expenses and the monthly loan installments.
Additionally, credit loan insurance usually includes a 'total and permanent disability' provision and a 'critical illness' provision. These provisions provide for the payment of the outstanding loan in case the borrower is completely and permanently disabled or if he or she is diagnosed with a life-threatening illness. The list and definitions of the life-threatening illnesses are always provided in the policy document. If the 'total and permanent disability' or the 'critical illness' provisions are not included in the credit loan insurance, they can be purchased separately at an additional fee. One should always ascertain by reading through their policies and inquiring from their insurer the exact provisions included in the insurance cover offered.
Banks and microfinance companies have often negotiated blanket insurance covers for all their loans. This more often than not caters for the lenders' risks, which may not necessarily be the borrowers' risks. However, section 7 (iv) of the Financial Consumer Protection Guidelines that were issued by Bank of Uganda on 10/01/2012, provides that financial services providers should offer customers a pool of at least four insurance companies or other service providers to select from. With this option, people should take time to study the different insurance policies offered by the insurance companies in order to choose the best cover for their needs. In making these choices prospective insurance clients should make use of the services of insurance brokers.
To borrow or not to borrow is an individual decision. However if you do decide to borrow insuring your loan should not be a choice but a must. The extent of the insurance should be clearly negotiated depending on your individual circumstances.
The author works for the Insurance Regulatory Authority of Uganda.