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Credit: the Easy Path to Debt Slavery

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Maybe it’s because I read too much Dickens and have subliminally absorbed visions of being hauled away to the workhouse if I can’t make a payment, or maybe I live a freakishly frugal lifestyle, but an article in Business Daily Africa on increasing consumer debt in Kenya terrified me.

Who are these people who are using credit cards and loans for living expenses? Are Kenyans really so obsessed with projecting an image of wealth and success that they’re willingly indebting themselves to keep up the impression? Have they really thought this through?

Credit, while it may seem like a lifeline and a convenient way to spend, is not on the side of consumers. If banks and moneylenders can’t make a profit, they won’t lend. Every loan they grant, if paid off, will generate revenue in excess of the initial amount loaned. There’s there incentive: the greater the number of loans, the more revenue generated. Provided all borrowers make their payments, of course.

While I’m not one of those militant survivalists convinced that the end of capitalism is nigh, living on a compound with stocks of food and a decade’s supply of batteries, I do think it is in the interests of all consumers to keep their debt to a minimum. Mortgage? No problem. Car loan? If you must. Credit card? By all means have one, but use it for emergencies only. Have a look at the interest rate on your credit card. Every time you fail to pay off your monthly balance in full, you are borrowing at that rate. Now, it may not seem like that much initially, but the interest will mount up, the balance will grow, and before you know it you’ll be wondering whether it would be better to sell your left or your right kidney on the black market.

This isn’t just a matter for consumers, either. While the credit crunch initially focussed on the difficulties faced by businesses seeking finance, something that was overlooked is the orgy of consumer spending that had been fuelled by low interest rates and easy finance. It’s only now, with the prospect of people losing their jobs and choosing to prioritise secured lending (ie. mortgages) that this unsecured debt has been flagged as a potential problem.

Consumers in the UK owed £231 billion at the end of February, and that is down 3.4% from the previous year. That credit card spending was done in shops, restaurants, travel agents, even plastic surgery clinics. Credit finance is what allowed such high levels of consumption in the boom years, and now that the good times are over, consumers have been cutting back, which has a direct impact on the economy. The UK’s recovery from recession is not going to come from a 70% off sale and Selfridges, and the government is scrabbling around for an alternative.

I truly hope that the same thing doesn’t happen in Kenya. While increased access to credit is commendable, it must be regulated. I’m not a credit refusenik, but I would like to see an emphasis on responsible lending. Just as consumers need to keep an eye on their finances to make sure they’re not taking on too much debt, lending institutions should also make sure they are lending only to those who can afford it.

[Image by Leah]

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