A Learners’ License, To Master the Rules of the Credit Road

> Posted by Kim Wilson

Many privileges require a license: driving a car, flying a plane, even scuba diving. Licenses ensure that you understand the consequence of driving too fast, flying too low, or diving too deep. All of these activities have systems to regulate how a service is supplied and how it is used. But when it comes to borrowing money, regulators usually regulate lenders (how the service is supplied), but rarely borrowers (how it is demanded).

Why add barriers, burdens, and bureaucracy to the credit market? Hasn’t credit famously been declared a right versus a privilege? Especially in sub-Saharan Africa, where in most countries the financial chokepoint is a lack of credit rather than an abundance?

Participating in Credit on the Cusp, a project that studied the credit experiences of those living on the “cusp” of poverty (between $2 and $5 a day) in urban Ghana, Kenya, and South Africa gave me a chance to think about these questions in depth. As it turns out, South Africa is ground zero – an African market that provided easy credit to millions of new customers in a very short time. In fact, South Africa struggles with an extensive debt problem.

Imagine that you have just turned 28. You grew up in a squatter’s settlement in Johannesburg, but your grit, charm, and luck landed you a job at a prestigious casino. Your income is small but steady enough for you to set aside some savings and put your child into school. You look around and wonder how your friends are able to purchase such nice clothes and household furnishings. In time you learn their secret: credit. A monthly pay slip makes you the perfect candidate for credit of all kinds: bank overdrafts, consumer loans, and store cards. But one small loan can gradually hook you into an endless cycle of debt. You find yourself stressed, sick, and in despair. This is Lindiwe’s story, a story she sums up as “swipe, swipe, and the money is gone.”

She’s not the only one. While moneylenders and overdrafts provide a cash buffer in an emergency, emergencies are not the primary loan use for South Africans living on the “cusp” of poverty. The first generation in their family to have this opportunity, “cuspers” often borrow for better clothes and the latest household goods. Availability of credit, has not served as a shield against set-backs but as a kick into consumerism.

South Africa’s consumer loan industry focuses on just one thing: the pay slip. Borrowers with pay slips who are listed in the credit bureau are fair game for any lender. Lenders can deduct payments from borrower accounts the moment the employer disburses wages.

Yet don’t we all agree that credit bureaus and formal sector employment are positive for all the right macro-economic reasons, and don’t we applaud policy makers across Sub-Saharan Africa who are promoting them? Yes, but like so many advances, they bring unintended consequences…

There are some sensible supply-side solutions, like capping the amount lenders are allowed to lose, rather than the current practice of pricing for losses through interest rates. And a “Last In, Last Out Rule,” would give lenders claims on a defaulting borrower based on where they stood in the lending sequence. If they lent late in the game, tipping the borrower into default, they would get nothing, but the first lender might recoup their loan in full. Like all financial regulation, these solutions would require political will and a confrontation with vested interests.

But on the demand-side, the idea of a “learners’ license”, where borrowing novices would need to master the rules of the road before they had full access to all credit options, could also help.

A learners’ license might have helped someone like Thabo. Thabo once had a steady job at a call centre, where he actually served as a debt collector. Though immersed daily in efforts to wring payments from tardy borrowers, Thabo felt their problems “were the problems of other people.” The combination of his pay slip, an ID, and proof of residency made him an attractive target for store cards and bank credit of all kinds. “I was still paying back two loans, when my bank called and offered me an additional loan of 15,000 (ZAR),” he told us. “You can’t just say no to money.”

Thabo’s father had grown up tending a neighbor’s goats in exchange for food. Thabo felt enormous pride in making the lives of his parents more comfortable. But one day Thabo lost his job. It happens a lot to people in that segment of the labor market where downsizing is commonplace. He could no longer support his indebtedness.

In the eyes of the law, his unsalaried status meant he could cancel his loans. But that did not translate into a fresh start. Finding work has been difficult. He lacks the capital to start a new business and he is no longer an attractive candidate for credit, thanks to his loan cancellations. Instead of birthing a business, he is washing cars.

For Thabo, a few years with a credit learner license might have done the trick, allowing him to experience credit, while slowly mastering the art of managing multiple loans for well-considered purposes. A learner license might have helped Lindiwe too. A few years of driving in the credit slow lane could have steered Thabo away from the blacklist and Lindiwe away from crippling indebtedness.

Today, South Africa has a problem. But tomorrow this same problem could appear in many other countries in sub-Saharan Africa. As digital technology makes lending, borrowing, and credit information sharing easier and easier, regulators need to think about ways to manage credit markets better. Limits on lenders are an obvious place to start but limits on borrowers could ultimately be better, and ultimately, in their best interests.

Kim Wilson is a research consultant who works independently and with Bankable Frontier Associates.  She is also a Lecturer of International Business and Human Security at Tufts University’s Fletcher School of Law and Diplomacy. 

Credit on the Cusp, a project of FSD Africa, will publish its full report on September 8, 2016. More information is available at http://www.fsdafrica.org/credit-on-the-cusp/.

Image credit: FSD Kenya

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