Posted by: Martin | July 25, 2010

Credit

Consumer credit

In the Features of the Real Estate Market post I wrote that mortgages are rare in the Ivory Coast. But why are they rare?

I think the underlying issue is a lack of trust and a weak legal system making it hard to enforce contracts. What’s the point for a bank of having a house as collateral for a mortgage, if it’s very difficult to legally take possession of it?

This applies not only mortgages, but to consumer and personal credit in general which is rare all over the Ivorian, and indeed West African economy. There are practically no cell phone subscriptions, and calling is done using pre-paid cards. Credit cards are rare, but debit cards are getting more and more common.  I recall visiting Senegal in the late 90s, and noticing that most people who used the few existing ATMs were foreigners. However, today in both Senegal and the Ivory Coast the vast majority of ATM users are local residents and there are often long queues for ATMs.

Water and electricity are actually paid in arrears even in poor areas creating a de facto consumer credit, but here, if bills aren’t paid, the electricity and water companies can just turn off the service without having to take any legal action.

Bank lending

Other issues are a lack of national credit reporting, and that a big part of the economy is still informal and cash-based despite the rise in debit cards, making it hard for banks to know who is credit worthy or not, and making it easy to disappear.  I’m actually trying to build up a credit history with a local bank  in the Ivory Coast by depositing cash I get from rents regularly. They are saying that I can get a mortgage if I so wish after having shown that “l’argent rentre” [the cash comes in].

To overcome the difficulties cited above, Ivorian banks seem to offer credit  to their clients only, at pretty high interest rates, and only to those that have a regular income coming in to the account, though not necessarily income from a formal sector job.

I’d say the trend is clearly for more credit and more sophisticated financial services (starting with a bank account) being available to more and more people in the Ivory Coast.

Examples from Turkey and South Korea

More consumer credit is likely to push up real estate prices, but it’s not obviously a good thing for the Ivory Coast as a whole. I recently read a story in the New York Times about when easy consumer credit was rapidly introduced in  Turkey and South Korea which were countries with little previous experience or tradition of such credit.  It caused quite a few problems, both personal tragedies for those who borrowed too much, and big losses for some of the creditors.

Some excerpts:

In Turkey, where borrowing money was until very recently a family affair, being in debt carried a fearful stigma. […]

But in a cultural shift that has swept aside centuries of tradition, credit cards have become commonplace here. Only three decades ago, Turkey had fewer than 10,000 cards; today it has more than 38 million.

As the American blessing of credit cards became widespread, so did the American curse of debt. Outstanding card debt here ballooned to nearly $18 billion last year, six times the level five years earlier. Default rates spiked and consumer groups protested sky-high interest charges. Newspapers were filled with stories of desperate card holders killing themselves or others.

Turkey’s two biggest card issuers, Yapi Kredi and Garanti, have branches in the shopping mall, with agents busily processing applications. In the anything-goes era before the 2006 law, banks handed out applications to families as they shopped. Cards were issued with only cursory credit checks.

That is how Halim Uzel got his first taste of American-style credit. In 1999, two salesmen from a Turkish bank turned up on the floor of the textile factory where he worked, hawking cards. He showed them identification and his cellphone, filled out a one-page form, and in three weeks received a Visa and a MasterCard in the mail. […]

By 2001, Mr. Uzel was deep in debt. Earning the equivalent of $4,360 a year, he had nearly $6,000 in unpaid balances on five credit cards.

For Turkey or any fast-growing market, the chilling example of a credit culture run amok is South Korea. Frenzied competition in a deregulated market led to the issuance of 148 million credit cards in a country of 49 million people.

Korean banks and industrial conglomerates showered consumers, even high school students, with free, unsolicited cards. They put little effort into credit checks and competed to offer ever bigger cash advances.

As consumers took advances on new cards to pay old ones, debt ballooned. In 2003, with default rates soaring to 28 percent, the industry collapsed. The government had to intervene to rescue issuers; the largest was taken over by banks.

Ivory Coast to follow?

Now, I don’t think credit cards will be handed out in the shopping malls of Abidjan anytime soon. And if they were, the issuers would probably have much more trouble than the new card holders. Actually I think the difficulties with credit in the Ivory Coast has fostered a culture of restrained and pretty sensible lending, but with trends towards more credit it’s hard to predict what will happen.

Going back to the Marshmallows post, easy consumer credit should be fine with future oriented people, but more problematic with more present oriented types.  Prof Zimbardo controversially says that people on average tend to be more present oriented closer to the equator, but I have no idea if there are any numbers to back up this claim. If he is right it could mean that easy consumer credit will be tricky to implement in the Ivory Coast.

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Responses

  1. The main reason you see many more African collecting money at ATMs (DABs in French) is that the fiscal laws were changed that they could no longer be paid in cash, and had their money paid into a bank account. So payday sees them taking out all the money in their accopunt that their company, or for the Civil Service, the Tresor, had just paid in … you won’t see them at the ATM/DABs much after the fifth of the month !!

    The Ivoorians also inherited the French culture/system, and when I lived/worked in France in the 70s/80s, mortgages (hypoteques) were very rare, certainly for buying a house. If you had one already, you could borrow against ir, but it was difficult to borrow monet to buy one … and anyway, all children inherited equally from their parents when they died, so there was always some cash in the kitty coming their way … unlike the UK system where everything could/would go to the eldest (son)

  2. Yeah, it’s the same phenomenon in Sweden too actually. When the salary comes on the 25th people crowd the ATMs and spend much more than usual. Living paycheck to paycheck is probably pretty common all over the world, and I guess even more so in West Africa where one paycheck often supports a whole extended family.


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