Financial inclusion can disadvantage individuals and companies

0
433

Chris Chenga

One of the most important and trustworthy indicators of an economy’s vibrancy and investment proposition is its ability to generate credit. After perusal, that credit can be assessed on whether it is consumptive or productive; the latter is desirable for sustainability.

A telling outlook on the Zimbabwean economy is its poor ability to create productive credit over several years. Furthermore, the little credit it has produced has been to finance consumption by depreciating incomes and savings. Perhaps this is why much of the capital financing credit in the economy has been governmental, and from the central bank. There has been a prolonged weak case of productive industrial vibrancy that private capital seeking real yields would be deterred from investing in the economy. Many times over, policy makers have misread the behavior of private capital; failing to decouple political vices and narratives such as sanctions and externalization from rationale investor impulses. But the economy has not been a draw.

A focal point of analysis has been the ability, or lack thereof, to implement policies that create sustainable credit for individuals or companies. The otherwise noble principle of “financial inclusion” has inadvertently become an industrial lobby to merely serve bankers and financial institutions.

Credit creation for individuals and companies is an outcome of productively competitive policies in the greater economy. Without such policy infrastructure throughout, financial inclusion becomes a pyramid scheme that enriches bankers and financial institutions as individuals and companies are assimilated into a financial system just to pay for financial products and services that do not improve their welfare.

This is why very few individuals and companies have productively used the credit facilities frequently announced by banks, as financed by government or the central bank. The economy lacks productive capacity for an individual or company to go through consecutive business cycles at the interest rates of credit. Shrewd bankers and financial institutions have protected themselves from the poor outlook divesting from lending, but the pyramid scheme plays out by capturing more individuals and companies into a financial system where they sign up for diversified products that do not necessarily enhance their welfare. A testament is the way banks and financial institutions have been profitable on business models that have lending contributing less than 10% of annual revenues. Interestingly, an overt indicator of shrinking credit capacity is the quick growth of the microfinance lending sector that has grown over 50% in the last five years. Averaging interest rates of 4% per month, very few productive business cycles can keep within margins at such cost of capital.

Perhaps the greatest disappointment in this credit outlook is that no strong entities have a vested interest in interrogating the benefits of financial inclusion, at their intended purpose. As bankers and financial institutions have been making handsome returns, they have no incentive to rectify the scenario. Parliamentarians unfortunately do not interrogate the down side of policy implications, as quite frequently they themselves are fixated on their proximity to the perceived up side. They want loans, and little cognizance is given to whether or not the economy has productive capacity for the use of that credit.

The principle of financial inclusion is founded on credit creation. The fundamental reason why individuals and companies include themselves in a financial system is to create a record that enhances their creditworthiness. They are looking for credit! Besides a less important need to transact through formal channels, of which cash had become a popular alternative for disillusioned individuals and companies, a financial system is only as relevant as it builds credit.

Indeed; this does not suggest intentional foul play. Sometimes desirable policy outcomes, like financial inclusion are inherently difficult to achieve. There are initial winners and losers during the process, but real thought has to be given to how the economy can implement productively competitive policies, otherwise financial inclusion becomes a pyramid scheme that gathers clients for banks and financial institutions without enhancing welfare.