How mobile micro-credit loan schemes can devastate our economy – Part 2

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Taxing the informal sector, like our government is preparing to do will only eat further into the already small incomes of informally employed members of our society, forcing them to rely more on micro-credit as a means of coping with poverty. This will likely result in a largely poor population that is stuck in debt. (In case you have no idea what this is about, please read part 1)

Another dangerous assumption that advocates of mobile micro-credit make, is that in our case, mobile micro-credit will stimulate demand by re-introducing money that is being hoarded by the informal sector back into the formal economy, this, they say, will increase disposable income and stimulate demand. This is only partly true. Since we have no local currency, this can also quickly dry out our foreign currency reserves and render our economy illiquid. Here is how. To make all this work, chances are mobile operators will leverage their mobile money operations to lend out and receive commissions on money that is lying in their users’ mobile wallets as it passes through their system.  By doing this, the mobile operators are effectively able to profit from money in their custody like banks do. In Econet’s case, for example, assuming that they handle $100million in transactions per month, they stand to earn as much as 5 million dollars at 5% “fee” for every 30days. This they will do by simply lending out as much of the money they have in their custody as possible before it is cashed out.

This means that Econet will collect up to $60million in charges from an already poor informal sector per year. Here in lies the second problem. For this exercise to be sustainable, Econet has to rely on a constant supply of foreign currency from the informal sector that will see the poor majority repaying their debt plus the 5% charge. Why is that a problem? Well here is why. Zimbabwe is losing foreign currency at an estimated rate of at least 2 billion dollars a year. Simple math dictates that at that rate we will run out of foreign currency, not gain more foreign currency over time.  Because the Zimbabwean economy uses only foreign currency within its own economy, it means that each year we lose foreign currency there is less money in circulation than the year before.

Because micro-credit relies on the informal sector and civil service, that generally have no capacity to introduce new foreign currency into our economy. How are these sectors expected to generate up to $60million in extra foreign currency revenue to pay the charges on their loans, let alone the hundreds of million in borrowings.

Here is a different way to put it; when the informal sector collectively borrows a billion dollars in foreign currency, at a time the economy is losing foreign currency, part of that 1 billion dollars in borrowings will be lost while in the hands of borrowers, the result is that they will simply be no foreign currency available to them to repay their debt, the currency will no longer be circulating within our economy, let alone the additional $60million dollars in charges. The result will likely be mass defaulting.  Already in Zimbabwe, loan defaulting is a major problem, of the 10 million dollars that was availed via the CABS youth empowerment loan facility, only 30% was repaid, 7million dollars essentially disappeared. If we were using our own local currency, however, then our government could simply use various mechanisms to introduce new currency into the economy to meet new demand. Chances are we wouldn’t be losing our own currency at that rate anyway.  However, even bringing back our own currency wouldn’t make the dangers go away. Today an estimated 40% of South Africa’s workforce uses the majority of their income to try and pay back debt; they are becoming poorer and poorer with each loan.

The biggest culprit for the loss of foreign currency is our taste for foreign commodities at the expense of our own more expensive or nonexistent alternatives. To satisfy our local demand for Chinese plastic-wear, Korean electronics, Japanese second-hand vehicles, Brazilian hair and South African peaches, the vast majority of local entrepreneurs have naturally stepped in to feel the gap by borrowing foreign currency and dumping it oversees in exchange for some shiny trinkets, not to be outdone, our own government has also stepped-in in a big way by relying exclusively on foreign vehicles, trips, equipment and solutions. This has resulted in an incredible import burden that continues to drain our forex reserves at an impressive rate. Thankfully, as foreign currency has become more scarce, we have seen the general shrinking of the economy and a fall in the demand of foreign commodities. While this has the effect of depressing the economy, it has slowed down the rate at which we are bleeding foreign currency, it has also forced prices to fall, and in a way it has bought us a bit more time.

A lot of the foreign currency we have left is locked-up in the informal sector (estimated at over $7 billion dollars), where it is carefully being re-cycled in exchange for basic commodities, services and simple luxuries safely away from the reach of the taxman, bogus banks, incompetent business moguls and a vulgar insatiable appetite for imports.  When mobile micro-credit institutions use their position to unlock this money from the informal sector and pour it back into the formal economy where it will be heavily taxed, it will create a false sense of excess and demand. Small informal retailers that rely on foreign commodities wil use mobile micro-credit loans to import more inventory so as to satisfy this “new” demand. Individuals will then rely on mobile micro-credit loans to buy these newly available foreign goods, invariably fueling the demand for more imports.  This will have the effect of draining our foreign currency reserves at a much quicker rate. When the forex reserves inevitably run low again, demand will fall and informal traders will default en masse.  Buy the time the ecstasy wares out, mobile micro-finance institutions will have lost, not just their money, but people’s mobile wallet savings.  It will be the year 2008 all over again.

So, is mobile micro-credit destined to doom us for eternity?  Perhaps not. But if it is rolled out irresponsibly and in a shortsighted manor, mobile micro-credit has the potential of delivering a meaty blow to what’s left of our economy.  Over the years the roll-out of micro-finance schemes across the developing world as a panacea is quickly gaining major scrutiny and revision. That said, there are still plenty of success stories where micro-credit, as a carefully utilized tool, has lifted entire societies out of poverty and dependency. In this carefully applied manor, micro-credit, particularly mobile micro-credit has the potential of turning around our economy in a very short period of time.  Locally, mobile micro-credit has huge potential if applied to our informal primary agricultural and manufacturing sectors. However, for this to happen, any such mobile micro-credit schemes must be rolled out as deliberate mechanisms for development not a capitalist instrument for profiteering.

In the next part, I will seek ways of how mobile micro-credit schemes like EcocashLoans can in fact be used to help turn around our economy. Your comments, harassment and suggestions are welcome. – To be continued.