Researches have established that debt has been with mankind from the days of yore, even before money was introduced into the economy of nations. Normally, when debts arose from transactions between people, the creditors directly pursued the debtors to collect the debts owed them. But with time, creditors employed the services of third-parties to collect the debts on their behalf when they were unable to do so satisfactorily.
Third-parties are either persons or debt-recovery agencies which work for commissions based on the percentage of debts successfully collected from the debtors. They describe the terms of their commission payments as “no collection – no fee”.
In Ghana, debt-recovery agencies or persons are actively involved in business activities in different sectors of the economy. Their services include debt-collection, debt-purchasing, auctioning and estate management for individuals and institutions – especially banks and other lenders grappling with high non-performing loans.
Indeed, their roles have become more crucial than ever before seen in the banking sector. This is because the incidence of high non-performing loans was one of the principal reasons that led to revocation of some of the erstwhile banks’ licences. From the foregoing, we can establish that debt-recovery agencies or persons are stakeholders in the financial system.
Mode of Operation
To the best of my knowledge, there is no existing legal framework that defines the parameters and permissible activities of debt-recovery agencies in the country. Even if there is an existing piece of legislation (i.e. Debt-Recovery Agencies & Practices Act), I am more than convinced that it is outdated and does not reflect the changing dynamics of debt-recovery practices in the country. The gap or non-existence of enabling legislation therefore means that no regulatory body in the financial sector has explicit authority to supervise their operations.
At best, operators who want to be recognised by law as business entities register as such with the Registrar-General. Some operators are just leveraging on their experiences as ex-bankers or the relevant skills they acquired from working in other establishments to provide the services. On the face of it, a single or total debt of some borrowers under their management far exceed some regulated financial institutions’ minimum capital; yet, their operations are not being regulated.
More often, the low-tiered lenders (microfinance companies, money-lenders) that are unwilling to establish their own dedicated recovery desks due to reasons such as low level of expertise or direct staff costs resort to them.
Though we acknowledge that debt-recovery agencies or persons generally provide valuable services to many institutions and individuals, there are some with questionable conduct that calls for regulatory surveillance across the board. This brings to the fore the question of who qualifies to establish a debt-recovery agency or operate as such? My in-depth appreciation of their activities reveals very pertinent issues regarding proprietary (fit and proper test) or reputation, membership, confidentiality, ethics or accountability.
Since there is no laid-down procedure to consider prospective operators’ eligibility on the grounds of (1) qualifications and experience; (2) business and professional history; and (3) other such valid information normally required from applicants seeking regulatory licences to engage in financial services, the business is currently a free-for-all – easy to enter and exit at will.
Confidentiality is at the heart of contractual relationships, apart from the exceptional circumstances when it is waived. Rightly, debt-recovery agencies or persons acting as third-parties to recover debts need a power of attorney. Some operators act unprofessionally by pursuing debtors without the power of attorney. In those circumstances, the parties are either oblivious of the power of attorney as a necessary requirement or negligent in their duties. Banks and other financial institutions with legal departments use the power of attorney as required by law when they engage the third-party debt collectors.
However, the problem is prevalent among microfinance companies, money-lenders and other low-tiered lenders with no (in-house) attorneys. Managers of these companies are quick to refer customers’ debt information to their former colleagues who worked with the banks. As employees, they could recover loans directly from customers since no power of attorney was required. Little did they know that with a change in their status from bank employees to third-party debt collectors, they needed this special legal document to support their activities.
To my mind, tripartite meetings between the managers, debtors and recovery agencies to discuss the debt before agents begin the recovery exercise is not a strong defence to waiving the debtors’ right to confidentiality. Their consent is necessary, or a power of attorney must be sought. Clearly, the lenders usually arrange for those meetings without giving prior notice to the debtors that the third-party debt collectors will also be present. Some of their recovery strategies can best be described as ‘old-soldiers’ drills’ to unlock hardcore debts.
It is indeed a sweeping fact that some debt-recovery agencies or persons after successfully recovering the funds, divert them into short-term investments (fixed deposits) to earn some interests on them on the blind-side of the financial institutions they are representing. This situation arises when the financial institutions rely solely on the agencies (persons) for progress reports at the customers’ expense.
At times, when the managers conduct snap-checks to verify the extent of recoveries, disagreements regarding outstanding debt balances come up between debtors and the recovery agencies. The truth is sometimes difficult to ascertain when receipts do not properly cover repayments.
Those unethical conducts and other improper book-keeping (debtors’ credit information management) practices by some agencies or persons are the accountability issues in the business. These issues, by extension, create reputational downsides for the parties.
To my mind, the central bank would be the appropriate authority to streamline the agencies’ activities through legislative backing. My reasoning is premised on the fact that the regulator of the industry – by not establishing legislation to control the situation – is allowing many of the debt-recovery agencies use it as as a honeypot. What’s more, by the nature of their activities, they get access to an array of customers’ confidential information (credit history, family, residence, occupation etc.).
Based on these facts, it is only proper to initiate processes that regulate their activities within the realm of ongoing reforms to strengthen the financial sector. Before then, it is time for operators themselves to start discussions by identifying their members and adopting the necessary mechanisms to sanitise their activities. I am always grateful to you for your feedback. God bless!
This script was written by a Chartered Banker with a flair for feature writing. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside. Email: [email protected]