Households prefer cash loans to banks

An increase in the prime lending rate at commercial banks has direct implications for the cost of servicing domestic household debt.

Since it is now difficult for many to survive debt-free but cannot afford the fees at banking institutions, many are now turning to microlenders to survive.

According to the financial stability report for 2022 published by the Bank of Namibia (BoN) and the Namibia Financial Institutions Supervisory Authority (Namfisa), annual household debt growth fell to 3.3% by the end of 2023 .

The reduction in growth from 4.7% in 2022 to 3% in 2023 was mainly due to lower acceptance of credit from banking institutions by individuals.

Notably, the institutions at the launch of this joint report stated that people mainly borrowed from non-bank financial institutions during 2023, particularly from microlenders, as it recorded a growth rate of 6.1% in 2023 compared to a contraction of 7.8% in 2022.

“Considering the evolution of banks’ credit standards, people are increasingly turning to alternative sources of credit, such as microlenders, to meet their financial needs. Increased borrowing by microlenders, which are often associated with higher costs compared to banks, may be a sign of strain on household cash flows and that there is no more room for banking sector credit. ”the report reads.

He added that this decision by households does not bode well for the financial stability of the national economy, due to possible overextensions and challenges in debt service.

A customer of microlenders, who preferred anonymity, said microlenders are cheap and affordable.

“The banks are killing, although I can afford a loan with my bank, I prefer cash loans because you can pay in a few months and breathe a little before asking for more again. So I really support that a lot of people are now opting for cash loans instead of bank loans,” she said.

The household sector in Namibia accounts for the majority of credit extended to the private sector (PSCE). Therefore, it is an important participant in the domestic financial system and represents almost 58% of the total credit to the private sector granted by the banking sector in recent years.

Household debt servicing costs increased from 9% in 2020 to 17.8% in 2022, reflecting a combination of higher debt levels and high interest rates.

Cost effectiveness

The banking sector recorded healthy levels of profitability thanks to net interest income compared to the previous period.

Net interest income is defined as the difference between interest income and interest expense.

For financial institutions, interest income represents the interest payments the bank receives on its interest-bearing assets, while interest expense is the cost of interest payments to customers on their deposits.

“The improvement in the profitability situation was due to an increase in the interest margin. Furthermore, if interest rates remain elevated, banks are expected to maintain healthy levels of profitability throughout 2024,” BoN and Namfisa said.

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