30 September 2020 | Wirtschaft

Consumers caught in debt trap

Consumers’ total debt at microlenders rose by 422% over the past decade compared to an increase of 192% in short-term debt at commercial banks.

Most quantitative studies into microfinance have provided little evidence to support the notion that microfinance has done much to significantly reduce poverty. – Suta Kavari, Economist

Jo-Maré Duddy – The average amount Namibians borrow at microlenders at a time have catapulted over the last decade, contributing to individuals’ over-indebtedness.

Statistics from the Namibia Financial Institutions Supervisory Authority (Namfisa) show that the average amount term-lenders borrowed at a time increased by 238% from 2010 to 2019. In 2010, the average term-loan was N$7 658. In 2019, it was N$25 865.

Payday-lenders display a similar worrying trend with the average amount borrowed at a time jumping by 137% from N$872 in 2010 to N$2 064 at the end of last year.

“The increase in household debt levels have raised fears that an increasing number of households are at risk of financial fragility and more prone to taking out more credit to service debt obligations when due,” Namibian economist Suta Kavari says.

Kavari, who recently finished his master’s degree in public policy at the University of Oxford in the United Kingdom, last month released a paper on Namibia’s experience with microlending and payroll deductions.

Microlending has played a “significant role” in increasing access to credit in Namibia, Kavari says. As such, it has contributed to the expansion in the provision of financial services, aiding the higher level of financial inclusion in the country. This is especially the case amongst the low-income segment, Kavari says.

However, access to credit is a “double-edged sword”, he adds. One the one hand it provides access to increased livelihood opportunities. On the other, it creates increased vulnerability.

‘Alarming rate’

Kavari told Business7 that borrowing from microlenders in Namibia is growing at an “alarming rate”, mostly to fund consumer spending. Consumers view it as a “lifeline for basic household finance, which otherwise wouldn’t be possible from commercial banks”.

Available data supports his opinion.

Consumers’ total debt at microlenders at the end of 2010 was N$1.12 billion. This increased by 422% to N$5.85 billion at the end of last year.

During the same period, short-term debt like overdrafts, personal loans and credit cards at commercial banks grew by 192% from N$4.1 billion to N$12 billion.

With a few exceptions, the annual growth in microloan debt has outpaced the annual growth in short-term debt at commercial banks by far in the decade under review.

Total microloan debt has also increased as a percentage of Namibia’s gross domestic product (GDP). In 2013, it was 2.2% of GDP. By 2018, the figure was 3.6%.

Although total microloan debt at the end of last year dipped to 3.2% of GDP and the total loan book of microlenders shrunk by 10.4% compared to 2018, Kavari doesn’t necessarily attribute the lower figures to consumers shying away from this type of finance.

It could rather be a case that consumers are so over-indebted that they can’t borrow from microlenders anymore, he says.

Financial inclusion

Kavari says it is widely accepted that financial sector development is crucial in ensuring economic development and that inclusive financial systems are central for inclusive development to take hold.

“Access to financial services is viewed as a broad step towards financial inclusion and the facilitation of poverty reduction,” he says.

Access to financial services has improved considerably over the last decade, with the proportion of the financially excluded falling to 22% in 2017 from 51% in 2007, according to the Namibia Statistics Agency (NSA).

However, the 2017 Financial Inclusion Survey found that access to finance remains relatively low due to poor financial literacy, the lack of collateral and limited effective demand for financial services due to low income as a result of high poverty and unemployment, Kavari points out.

“Although vastly improved, the challenges experienced in terms of expanding the levels of financial inclusion in Namibia can be partially understood in light of the country’s low population density,” he says.

“The sparse population poses challenges in terms of the provision of financial services in a cost-effective manner to marginal consumers outside of the main urban centres. Given the concentration of financial services in mostly urban centres, there was/is a marked gap in the delivery of those services to sparsely populated rural areas. The microfinance industry has been able to plug this gap and provide financial services in a cost-effective manner to both rural and urban centres.”

At the end of last year, there were 423 registered microlenders with Namfisa.

Indebtedness

According to Kavari, the increase in the availability of credit has been one of the contributing factors to the rise in in household indebtedness, in addition to the supply-side factors such as demographic shifts, increases in property prices, especially in urban areas, and risk factors.

“Another factor that contributed to the rise in household indebtedness is the deepening of credit markets to socioeconomic levels, meaning that credit became readily available to borrowers with ‘weaker financial profiles and repayment capacity’,” he says.

Between 2014 and 2018, household indebtedness levels in Namibia rose by 31% on the back of an increase in demand for short-term credit facilities, Kavari says.

“During this period, credit to households rose from N$45.4 billion in 2014 to N$ 63.7 billion. Much of the increase in demand for short-term credit can be attributed to a rise in the stock of loans extended by microlending institutions,” he adds.

The 2017 Namibia Financial Inclusion Survey found that the average Namibian household has difficulty meeting financial commitments, with 40.2% indicating that they “never” manage to make their income last until the next salary payment.

According to the latest Financial Stability Report, released by the Bank of Namibia (BoN) and Namfisa in April, household debt to disposable income increased to 97.7% in 2019 from 92.9% in 2018.

Friend or foe?

Microfinance has played a significant role in expanding access to credit and unlocking the productive capacity of people who had little access to financial services, Kavari says.

However, “it is important to note that microfinance is context dependent”.

“In other words, it may provide invaluable opportunities for low-income households in certain circumstances but create debt traps in others,” he explains.

Kavari elaborates: “Despite evidence on the usefulness of microfinance as a financial service easily accessible by poor people, according to (Cull & Morduch, 2017; Mossman, 2015) there is an overwhelming consensus arguing that the industry cannot be viewed as a transformative social and economic intervention.

“Most quantitative studies into microfinance have provided little evidence to support the notion that microfinance has done much to significantly reduce poverty. Others argue that the microfinance industry is increasingly exploiting consumers and over-indebting poor and financial illiterate consumers in their drive for profit,” he says.

Control

Increased access to credit in a discussion on financial inclusion cannot be understood in a vacuum, Kavari stresses.

“Credit as a financial instrument can be beneficial from a developmental perspective – i.e. as a means of starting a business or building an asset base – or it can also have a negative influence, such as the loaning money for gambling purposes or leveraging bad investments which can perform poorly,” he says.

“Therefore, it is of utmost importance that increased access to credit is accompanied by the implementation of controls aimed at mitigating potential deleterious impact on consumers,” he continues.

“The question then becomes how does one provide ‘good’ access to credit and mitigate instances of bad? One means of providing a higher degree of ‘credit-worthiness’ and thus increasing access to good credit is through secure payroll deductions – i.e. leveraging secure collateral through future earnings/salary,” Kavari says.

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