Opening Up Access To Credit In Africa Will Be The Cornerstone For Its Development
When I moved to the United States, I got to learn of the borrowed money phenomenon and the workings of this kind of system — the credit system. About a month after arrival, a friend from Nigeria who stayed on the same apartment building told me to get a credit card and “start building credit”. What? What did that even mean, I thought. I had my debit bank card already, why did I need another card? He explained to me that credit is borrowed money from banks and credit card companies. I certainly did not want debt on top of the exhorbitant costs that come with being an international student. So of course I dismissed his recommendation. Besides, I wondered how they trusted people to pay off these cards. Needless to say, I was wrong and a couple of months in, I would sign up for a credit card from a company he had recommended. I vividly remember him telling me, “Get Discover, they help international students build credit history”.
The way I understand credit basically is “release money into the economy, mitigate some risk and have faith in the laws of demand and supply”. For the 5 years I have been living in America, I have committed myself to not only building credit, but also understanding how the credit system works. Most of us — immigrants from African countries, come from cash economies. This means that we have to save up 100% of the cost for anything and everything we want; be it a car, a house, school fees or even daily necessities like food and clothing. This can be very stressful and usually in times of shortage, people will rely on their social and family networks for cash handouts. With credit economies however, you can borrow money and pay it off at the end of the month. If you are unable to pay back the full amount that you used that month, you have to make a small minimum payment and pay an interest. This is something most Africans on the ‘continent’ do not get to experience. Access to credit remains limited as money is tightly controlled by the governments and financial institutions such as banks. According to world bank data on development indicators, the most recent value for the lending rate in Uganda was 19.85% in 2018. The rate for the United States that same year was 4.90%.
I recently stumbled upon a debate on Twitter about borrowing a mortgage from Ugandan banks. The author had the opinion that instead of paying UGX650,000 — UGX800,000 rent per month for an apartment in Najjera — one of Uganda’s suburban areas, it would be better to take a mortgage, pay UGX600,000 a month to the bank and eventually own the ~UGX200m apartment in 25 years. He probably was thinking of an interest-free mortgage but most financial institutions wouldn’t do that. How are they supposed to pay for their business expenses if you take away their money for 25 years without consequences? Another factor this individual should have considered was whether that mortgage would be at a variable or fixed rate. If we take the better scenario — the fixed rate mortgage, he would need to account for amortization over the years. Holding up an institution’s financial resources for 25 years means they are not able to invest in something else that would make them profit. Evidently, the risk has to be transfered to you. The longer you take to pay the money, the more you end up paying in interest. Take for instance a UGX10,000,000 loan rated at 15% per annum payable in 3 years with an annual amortization frequency. That loan would cost you approximately UGX3,000,000 in interest. That same amount of loan with the same interest rate would cost you UGX1,500,000 if you paid it off in a year. If the interest on a loan doubles every 3 years, what would that amount look like in 25 years? Do the math.
In my opinion, opening up these types of credit for African consumers will be the turning point for the continent’s development;
By accessing mortgages for homes at low interest rates, equity will be built. This is not only beneficial to the home owner but can be something the banks leverage to reduce risk as loans will be borrowed against these homes/assets.
Favourable rates and terms on business loans fosters innovation and in turn, creates jobs. When a population has jobs, they are able to pay back their loans and mortgages. Moreover, having more businesses creates competition which drives prices down and improves service-delivery.
Consumer lines of credit
With money flowing more freely in the economy, the immediate effect will be the reduction of the gap between the rich and the poor. Narrowing the inequality gap in a country helps to relieve the pressure on governments and social systems to dispense resources.
To open up access to credit, central banks will need to pass down lower interest rates to consumer banks, and consequently to consumers. Simultaneoulsy, African governments will be required to figure out how to build national databases for personal identification and pass appropriate regulations for both banks and consumers in order to realize this type of economic growth. To African leaders, I say let’s loosen the reigns — holding up money at the top does not do anyone any good.