Consumers are shark bait

Jo-Maré Duddy – Broke consumers owed registered microlenders in Namibia nearly N$6.95 billion at the end of June this year – N$908.95 million more than they did at the end of June 2020.

Year-on-year (y/y), total debt owed to microlenders skyrocketed by 15.1%. In comparison, credit extended to the household sector by commercial banks rose by only 4% during the same period, the latest report by the Namibia Financial Institutions Supervisory Authority (Namfisa) shows.

At the end of the second quarter, term lenders owed microlenders nearly N$6.8 billion, an increase of about N$785 million or 13% y/y. Payday lenders’ total debt amount to nearly N$204.8 million, up some N$124 million or 153% y/y.

In the three months to the end of June 2021, in the midst of the third Covid-19 wave, Namibians borrowed in excess of N$1.08 billion from microlenders – nearly N$186.4 million or 20.8% more than the same period in 2020.

PAYDAY VS TERM

In total, 61 269 payday lenders had to rely on microlenders in the second quarter – 29 104 more than in the same three months in 2020. Payday lenders have to settle their debt in full within a month at interest rates of up to 30%. A total of 114 724 loans for payday lenders were approved – 41 405 or 57% more than the second quarter of 2020.

The average amount a payday lender borrowed in the second quarter was N$2 348, nearly 33% more than a year ago. A decade ago, payday lenders on average borrowed N$945 at a time.

Term lenders, who have at least three months to settle their debt, on average borrowed N$32 494 in the quarter under review, nearly 42% more y/y. In 2011, term lenders on average borrowed N$9 924.

The number of term lenders, however, declined y/y from 179 449 to 171 489. A total of 25 003 loans were granted to term lenders in the second quarter compared to 33 374 in the corresponding period in 2020.

‘ALARMING’

Namibian-born economist Suta Kavari said borrowing from microlenders in the country 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”, Kavari told Business7 previously.

Kavari, who finished his master’s degree in public policy at the University of Oxford in the United Kingdom, last year 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 said. 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 said.

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

CONTEXT

“It is important to note that microfinance is context dependent,” Kavari said.

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

Kavari elaborated: “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 said.