Goldilocks and the “Just Right” Credit Market

> Posted by Sushmita Meka, Bankable Frontier Associates

Goldilocks never took a bank loan, never had a credit card, and never got into debt. But if she had, her exposure to the fairy tale credit market would have been “just right.” She’s the lucky one. Across Africa, people living on the “cusp” of poverty – getting by on $2 to $5 dollars a day – are experiencing credit markets that are often either “too cold” or “too hot.”

In Ghana, Loretta works as a cook at a hotel in Kumasi. Her life is no fairy tale. Loretta says her job is OK, but the best time of her life was when she was running her own restaurant. For three years, she and her sister ran the business together. But when her father became sick, her sister went to care for him and the business went to the wall.

Loretta wants to start again. But a lack of available and affordable credit in Ghana prevents her from doing so. She’s lost the freedom that came with having her own disposable income. She can’t rebuild her business without a loan and she can’t afford a loan in Ghana’s frozen credit market.

In South Africa, Kenneth tells a very different story. Kenneth, was raised in a township and when he got his first job he was keen to transform his lifestyle. He worked for several years as a branch manager at a microfinance institution and recounted how he saw many of his customers in debt: “Every time I would go through someone’s statement, I would say ‘I don’t want to be in this position.’”

But what he feared happened all too soon. It started with a store card that he paid off every month. But once he received a credit rating, the credit offers started coming. “The more you are a good payer in South Africa, that’s where you get a lot of pre-approvals. And the credit limit as well, they increase the credit limit for you.” Before he knew it, Kenneth was in too deep, in South Africa’s “too hot” credit market.

These are the stories of just two of the 90 “cuspers” we interviewed in urban Ghana, South Africa and Kenya as part of our Credit on the Cusp project, which studied the credit experiences of those living on the cusp of poverty in the three countries. They represent the one in five Africans living on between $2 to $5 dollars a day. In Ghana, we found small businesses and entrepreneurs unable to borrow because of a lack of affordable credit and too little credit information sharing. Yet in South Africa, we found that full credit information sharing is not always beneficial to consumers on the cusp of poverty and the middle class.

Listen to respondents’ stories in this 9-minute audio piece.

As lending increases in more African markets, driven by digital innovations, how can credit be steered in a direction which supports and invigorates, leading to real value creation for lenders and borrowers?

In South Africa, there is much to learn about what not to do. In Johannesburg, we met countless “cuspers” that sought the markers of a middle class lifestyle by means of easy credit. For many, this first taste of credit came in the form of installment plans from furniture outlets or retail cards from ubiquitous retail stores.

But the true entry into the world of credit comes with a pay slip, which is accompanied by swift offers not only for retail credit, but for unsecured loans from commercial banks. The pay slip guarantees steady payments for private lenders who can tap salary payments immediately, leaving little risk to themselves.

Encouraged by African Bank, the first lender to successfully reach low income salaried employees with unsecured loans, other banks competed aggressively for the same segment. This clientele soon became an easy target for credit offers and automatic top-ups. But by 2013, this model had led to the collapse of African Bank, and a harsh wake-up call for other unsecured lenders which had begun competing on longer-term, larger loans too quickly and too soon. In effect, the credit market (by most measures the most sophisticated in sub-Saharan Africa) was scorching hot.

In Ghana, macroeconomic volatility has kept interest rates high (the Treasury Bill rate sits close to 25 percent), and lenders are wary of extending long-term credit. All but the luckiest (salaried employees or those that can provide hefty collateral guarantees) are relegated to traditional group-based micro-credit. Loans are hard to come by, and when it is on offer, amounts are small, short-term, and expensive. We heard of rates as high as 80 percent annually. The lack of an effective credit bureau means that borrowers must stick with one lender and slowly grow credit over time, limiting their ability to invest meaningful sums into enterprise.

Economists theorise that high levels of private credit—exceeding 90-110 percent of GDP—can have a negative impact on growth. The U.S. and South Africa have exceeded these levels, and indeed, their steep credit crashes are a sharp warning of the dangers of unhealthy credit market development. But much of sub-Saharan Africa, including Ghana, is well below this level. Credit is desperately needed to fuel growth, by giving new businesses opportunities to enter the market, innovate, and create jobs, as well as to act as an all important cushion to help households smooth income.

Experts argue that talk of “a Goldilocks market” in terms of larger economic trends, signals transience: a temporary state between unavoidable bubbles and falls. But we can’t afford to ignore the lessons from previous credit bubbles at a time when lenders are starting to reach new segments in sub-Saharan Africa at a speed unheard of before. If we get it right, we may see the rise of a true middle class—but if we get it wrong, millions risk being drawn back into poverty or into debt traps, as in South Africa and elsewhere.

Sushmita Meka is an Associate with Bankable Frontier Associates, a niche consulting firm dedicated to financial inclusion.

Credit on the Cusp is a project of FSD Africa that studied the credit market experiences of urban cuspers in Ghana, Kenya, and South Africa, using insights from their stories to help build a new vision for healthy credit market development in sub-Saharan Africa.  The full report will be published 8 September 2016. More information is available here:

Photo credit: FSD Africa

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