Sometimes we may need to borrow money to meet financial exigencies. In the modern world, we need not ask our friends or relatives to lend us money. We now have banks and other financial institutions. They are always offering loans with eye-catching advertisements. However, in addition to charging interests, they also ask for collaterals. Thus, to avail of these loans you have to be sufficiently wealthy.
In the good old days, there were Kabuliwalas who used to lend money without collaterals. Who were those generous people? According to an article published in the Business Standard in 2017, during the late 19th and early 20th centuries, many Afghans migrated to the then-British Bengal to sell dry fruits. These Afghans were popularly called Kabuliwalas relating them with the Afghan capital city Kabul.
Kabuliwalas subsequently started the money-lending business with the profits derived from their dry fruits trade. They provided collateral-free loans characterized by high rates of interest to both urban and rural communities. So, the reason behind their generosity was the gain they made from the high rate of interest that they charged on their loans. It’s said that the Kabuliwalas never asked for the repayment of the principal amount because that would terminate the loan and stop the cash flow from interest. Kabuliwalas are long gone but their business model persists internationally.
Countries with surplus foreign exchange reserves and organizations like the World Bank and IMF lend money to needy countries without collateral. According to Statista, Chinese reserves amounted to $3.46 trillion in 2022 being the highest in the world. Only two more countries – Japan and Switzerland – had reserves of over a trillion dollars in 2022. Such countries will be interested in providing loans to other countries from their excess reserves to gain from interest and other benefits according to the terms of the loan agreement. For example, a country may provide a loan to another country for building a power plant with the condition of buying all required machinery and employing the services of experts and engineers from it. Thus, the creditor country earns interest on the loan amount, profits from selling machinery, and benefits from the employment of its experts and engineers. Of course, the loan recipient country can also benefit by investing the loan in appropriate sectors that with good governance might lead to economic growth and poverty reduction.
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This article was published in the Daily Sun on January 6, 2024. Please read the full article here or here.