DEBT : A blessing or a Curse.

[ghm]

Hi,

Is going into debt a good idea or a bad one?
Under what condition(s) can one go into debt?
What should be your considerations before going into debt?
What should you do when things go bad while in debt?
Are we disciplined/matured/organised enough to handle/manage debts in Nigeria? from the borrower and the lenders side.

These and other questions have been bothering me for quite some time now knowing fully well that the recapitalization in the financial sector of the Nigerian economy will give more people access to a reasonable capital which I have been seeing happening already in different Mortgage and funding products.

What do you think? Contributions please....

[Taipan]

[quote=ghm;559]Hi,

Is going into debt a good idea or a bad one?
Under what condition(s) can one go into debt?
What should be your considerations before going into debt?
What should you do when things go bad while in debt?
Are we disciplined/matured/organised enough to handle/manage debts in Nigeria? from the borrower and the lenders side.


-I believe you're talking about debt for business as opposed to debt for consumption which should be discouraged by all means no matter the circumstance. Remember, "The borrower is servant to the lender"!
-One can however go into debt for business and I'v done that a number of times without regret. I usually go into debt to finance projects that are too large for me to handle on my own i.e. when i can't raise the capital to start or I need quick cash to execute a contract.
-Before going into debt, I try to make sure that my deal is a done deal (e.g. maybe that the goods i'm delivering will be paid for) or that I'll be able to pay back the loan no matter the circumstance (e.g. maybe I'm expecting some money which can be used to payback incase things go wrong). However, one can never be completely sure of this, yet I can still go into debt if my conviction is strong enough. I however make sure the lender is aware of the exact situation of things.
-When things go bad, the first priority is the lender. make sure he/she understands the situation of things and strive to payback from wherever as soon as possible. believe me, there's no asset like trust and one must seek to protect it as much as possible.
-I think the issue of maturity is purely individual. please dont belittle Nigeria by asking if we're disciplined enough to manage debt. we're not 2nd rate humans!

[ghm]

Your contribution is invaluable. It's make so much sense for businessmen to borrow to finance projects as you rightly pointed out. That has always been on ground anyway.

I see many financial intitutions going into consumer product finance these days like : Mortgages (borrowing money to build a home/house)and Assets (cars, household items, overseas trips etc)like it's obtainable in developed countries.

What I had in mind about our maturity has to do with legal backings (adequate legislation to protect the borrower and lender), consumer protection rights etc.

[ghm]

curlled from Businessdayonline (9th March, 2007)

Do you know it is possible to borrow money to invest in shares? Consult your stock broker and confirm this.
KIRK LEIGH
This arrangement is called gearing and has proved extremely useful to investors.

It is an old but true saying that gearing increases the potential profits in your investment because you have more money to invest, but this also means it can increase your losses.

There are two advantages of gearing. One of it is that you can increase the potential profits. For instance, if you borrow N100, 000 to invest in shares, and they increase in value, then you get the benefit of that capital gain when you sell the shares. Equally, you get the benefit of any dividends and bonus share issues that may be made by the company while you own the shares.

Negative gearing is when your income from the investment, the dividends and bonus share issues, is less than the cost of the investment ( interest that you are paying to your lending institution on the loan). The difference between the two amounts is usually a deduction on your taxable income.

Here are some rules to keep in mind when thinking about gearing into the stock market.

Don’t ever fully gear into a stock market investment. Reputable advisers recommend you keep some money in reserve and avoid borrowing every last kobo you possibly could. Interest rates could rise, share markets could fall, and your personal circumstances can change suddenly.

Some people borrow money to invest by using ‘margin loans’ from a stock broking firm or some other lender. Lenders let you borrow up to a certain percentage of the current market value of the shares you may be interested in. in Nigeria, this is about 60 percent of the value.

You must ensure the lender is covered at all times for the amount of money you borrowed. If your shares drop in price you will receive a margin call. A margin call happens when the price of the shares falls below a level that would cover the lender’s loan to you.

Suppose you buy shares in XYZ Ltd at N10 per share using a margin loan. Your loan says that you may borrow up to a maximum of 60 percent of XYZ Ltd’s current market value. You borrow the maximum of N6 per share and put in N4 per share of your own money. Two days later, XYZ Ltd falls to N9. Since 60 percent of N9 is only N5.40, you must cover the lender for the 60 kobo per share difference between N6.30 and the N7 you owe.

This margin call ensures that the lender’s level of exposure in remains the same. If you fail to pay the margin call, your shares will be forfeited to the lender, who will sell them to recover their money. When you remember that the lender may be selling the shares into a falling market, you can understand why your personal loss can be significant. Negative gearing is not for everyone; gearing is a strategy best suited to you if you: have enough income from other sources, like a secure salary, or have a reserve of funds to meet possible margin calls if there is a significant drop in the market. And are in the highest income tax bracket, where the tax deductibility of the interest payments is maximised so the actual cost of the borrowed money is reduced as much as possible. Also if you are an experienced investor, having a practical appreciation of the volatility of your investments and the risks involved.

You should not negatively gear into shares unless you are fully satisfied you can meet the interest payments and possible margin calls if the investment turns sour for a couple of years.

But some people have successfully used money market loans to invest in the stock market. While this may be rewarding for some stocks, it could be a disaster for some back here in Nigeria.

A simple example would suffice from the current offers by Oceanic Bank and UBA. Borrowing money at the rate of 13 percent given the current prices of the two stocks, investors in Oceanic would make gains but those who put money market funds in UBA are sure to make significant losses (see table).

[bwalaman]

...we are already operating in a market environment with loads of information asymmetry- so there is a lot of speculation (as oppose to making investment decisions). Add that to the fact that the interest rates on loans in Nigeria are not favourable (margin is a loan), my advise is to stay away from margins.

Unless of course, you have some really reliable and realizable information with trigger agents to excuse – or you are an insider… then you should share …

...what do you think?

[ghm]

Very Good talk.

[Davy Dany]

Credit card debt is a major cause of bankruptcies each year. One reason is that you may get a credit card without realizing its consequences -- unaware of its financial risks. Another reason is bad things happened to you or your family and you don't have enough 'safety net'.

One of the following causes of credit card debt might mirror your financial situation:


Excessive medical expenses. If one of your family members suffers serious illness and your health insurance cannot cover the medical bills then you may use your credit cards to pay off the difference.


Gambling. Gambling is fun and entertaining but if it becomes addictive it'll be hard to stop. It may be not a problem if you spend your spare money for gambling. But borrowing money via your credit cards for gambling will surely lead you to a financial disaster.


Reduced or lost income. This can be because of divorce, death of spouse or unemployment. If a reduction in income is not in line with reduction in expenses, the easiest way fill in the gap is with credit card debt.

[jesusislord]

My view is that it is a blessing because:

1. It will reduce corruption. You do not need to take bribes to afford the basic thing of life immediately qualify and start working. E.g. a new car and a house of your own

2. It will stimulate economic activities leading to rapid growth of the overall economy. Imagine how much construction work is now going on around Lekki Peninsular in Lagos- Iwas amazed last December when I saw it for the first time. Most of the estates are financed by bank loans and the houses are being sold to persons taking loans and depositing 30%. If this spate of activities is replicated around in all nigerian state capitals, unemplyment will greatly reduce.

3. Finally, the credit system works well in more advanced economies of the worked. In the UK where I live, 99% of the population that have own houses and cars bought them on loan.

Like most things, there are two sides to the coin. It up to the lenders to carry out due diligence on their customers and set suitable credit limits to minimise the chance of default.

[RethinK2.0]

Interest rate in Nigeria is high but i think debt is still a cheaper source of finance than equity (cash) even in Nigeria.
The opportunity cost of your capital is higher than 25% if your yardstick is the NSE for instance.
However whatever business you are in, the terms of the loan are as important as the amount you are borrowing. 1 yr might be too much of a strain on your cashflow.
And if you a company is sure that business will bring profit, they will prefer to go for a loan rather than a public offer. (there's a case for nigerian public offer loving board of directors to answer there)
A longer horizon allows you to plan properly out of the debt and reduces the risk considerably.