High cost of credit push consumers away
Household indebtedness was P58.5 billion as at December 2021
Consumers have expressed mixed feelings regarding taking up more credit in the future. According to a Consumer Pulse Study conducted by TransUnion for third Quarter 2022, one in three consumers plan to apply for new or refinance existing credit in the next year. Of all respondents, 40 percent have an interest in applying for personal loans, 22 percent for new mortgages, home loans or bond payments, while 20 percent for private student loans. However, of consumers who considered applying for new or refinancing existing credit, 45 percent ultimately decided not to. According to Weihan Sun, Director of Research and Consulting at TransUnion Africa, the primary reason for not taking action is that the cost of new credit is too high. Some later decided that they did not need new credit, while others believed their application would be rejected due to their income and employment status.
Notwithstanding, household debt is still very high, with the Bank of Botswana’s 2021/ 22 Household Indebtedness Survey Report indicating that it amounted to P58.5 billion as at December 2021. Further, combined with arrears, household debt reached up to P59.2 billion, translating into 30.3 percent of GDP.
The debt comprised of bank loans at 88.5 percent, micro- lender loans at 11 percent and hire purchase credit was at 0.5 percent.
Most consumers in the Consumer Pulse Study, that is 79 percent, believe that monitoring their credit is very or extremely important, and 60 percent monitor their credit at least once a month. More than two in five consumers believe that their credit scores will increase if businesses leverage alternative data sets not included on a standard credit report, like rental payments, gym membership payments, short- term loan history and buy now, pay later ( BNPL) products.
While nearly all, that is, 95 percent of consumers considered access to credit and lending products important to achieving their financial goals, only 33 percent of all consumers believed they had sufficient access to credit.
This week, President Mokgweetsi Masisi acknowledged in the State of the Nation Address that many households continue to face hardships. He said the high cost of living is likely to persist for some time with inflation above the Bank of Botswana’s monetary policy range of three to six percent, now at 13.1 percent.
Masisi reiterated his government’s efforts in cushioning households against the rising costs.
“We temporarily reduced the general rate of VAT from 14 percent to 12 percent for six months. Another intervention was the increase of the allowances by 18.5 percent for students in local tertiary institutions,” he said, adding that the recent decrease in global fuel prices enabled the Government to also reduce national fuel prices.
According to the Consumer Pulse Study, consumers continue to shrug off macroeconomic headwinds to remain optimistic about their financial prospects in the future. Three in four, about 77 percent expect their incomes to increase in the next year, while seven in 10, about 70 percent said they would be able to pay their current bills and loans in full.
Sun of TransUnion, a recognised leader in the African credit, risk and fraud markets, foresees inflationary pressures causing consumers to keep on cutting back on discretionary spending.
“With the cost of transportation, food and non- alcoholic beverages and housing and utilities rising, this will have an impact on consumer spend in the coming months,” Sun said.
Of all respondents, 38 percent said they cut back on discretionary spending including on dining out, travel and entertainment in the past three months, and 58 percent expect to further cut their discretionary spending in the next three months.
“We’ve seen inflationary pressure curbing discretionary spending among Botswana’s households over the past three months, and we expect this trend will continue. However, the fact that households are still able to service their bills and loan obligations is a sign of resilience, especially during uncertain macroeconomic conditions at a global level,” Sun observed.
Nearly four in 10, about 38 percent said they had cancelled subscriptions or membership services over the past few months. About 24 percent of those unable to pay will borrow money from a friend or family member, and 22 percent are likely to tap into their savings.
Regarding bills and debt management, 32 percent of all survey respondents who said they would not be able to pay a current bill or loan in full said they intended to cover a partial amount affordable to them, but not the entire outstanding balance.
Four in 10 consumers say they conduct more than a quarter of their transactions, finances, retail and business transactions online. However, for Gen X consumers, those between baby boomers and millennials from mid- 1960 and early 1980s, that rises to 50 percent.
The Central Bank’s 2021/ 22 Household Indebtedness Survey Report states that men incur more debt than women and that the population group 30 to 49 years old has proportionately more debt than other age segments of the population.
Furthermore, households earning between P3 001 and P19 999 per month actively participate in credit markets compared to those outside this income range. A vast majority of Batswana are borrowing money to pay for day- to- day expenses.
Generally, according to Bank of Botswana, banks both commercial banks and statutory banks, micro lenders and hire purchase stores view the outlook for demand for credit as moderate in 2022.
The survey indicates that the rising cost of living and the lingering effects of COVID- 19 on households’ loan affordability informed the outlook for demand of credit. As such, most banks indicated that they were reluctant to supply credit in 2021.