Beware the debt trap: property is at risk.

Herald Tagama's article regarding the formalisation of property rights in Tanzania ('Title deeds could unlock trapped wealth,' African Business December 2004 issue) makes interesting reading, but I am afraid misses a crucial point with regard to giving poor landowners--who invariably do not understand the workings of financial institutions--the ability to raise capital using their own property as collateral. I would argue that this course of action could spell disaster for some of the most vulnerable in Tanzanian society.

[ILLUSTRATION OMITTED]

The problem is an old one. It is that bankers, who may be more than ready to extend credit when valuable land deeds are put up as surety, hold no particular brief for development. Rather, they are solely concerned with receiving the highest return possible on the capital that they lend.

Now let us take a hypothetical scenario. Let us consider the case of a poor landowner who has managed to jump all the bureaucratic hurdles and finally obtained the deeds to the land that his family have owned since time immemorial. He or she then learns that with those deeds they are now credit worthy and can obtain a bank loan.

Our landowner then goes to one of the many commercial banks that operate in the big cities, signs on the dotted line and walks away with a sizable loan. Perhaps he (or she) uses that loan in a perfectly responsible way--say purchasing agricultural inputs and machinery to boost his or her land's productive capacity.

It may well look fine on paper that the increase in agricultural productivity can earn enough to service that loan, but what about contingency planning? What happens if the price of a cash crop plummets? How does a borrower cope with a drought year, or illness in the family that depletes manpower? In the worst case scenario, the landowner may see their land and/or the family home being seized by the commercial bank when they cannot meet repayments.

Furthermore, can we be sure that all borrowers will be aware of the cost of their loans in terms of the interest that will be payable, and the consequences if repayment terms are not met?

I do not argue against the economic logic of what President Mkapa and his government are proposing, but I just want to point out that the potential beneficiaries of this scheme, poor landowners, must fully understand the process, and be afforded some form of protection if they fall into difficulties through no fault of their own.

Joseph Samuel Orojo

Kasama

Zambia