15 Dec The Economic Benefits of Consumer Finance
RenMoney’s mission is “leading inclusive consumer finance through simple money solutions”.
Why is this an important mission?
It is important because consumer spending is a key driver of economic growth and development: In Nigeria, the final consumption expenditure of households account for the largest share of expenditure on GDP (accounting for 64.34% of real GDP in Q1, 2015). The macroeconomic benefits of consumer finance are that it smooths liquidity constraints and sustains consumption, which in turn boosts output and creates jobs. The microeconomic benefits are that consumer finance helps individuals with little or no credit history, gain access to reliable and affordable credit for improving their standard of living and enables retailers to grow their businesses.
RenMoney provides services that complement traditional financial institutions by serving underbanked and underserviced consumers. These are typically people with lower-than-average income and higher risk profiles but still have financial needs. In Nigeria these people have been excluded from numerous opportunities to participate in their communities and prosper. This is a particularly pressing issue in emerging markets, and this is precisely where a consumer loan is often more appropriate and more accessible than a bank loan.
Source: Home Credit Group Analysis
Advantages of consumer finance
For the Consumer
- Consumer finance allows people to purchase goods without having to pay for them immediately.
- Consumer finance enforces a discipline of compulsory saving that forces individuals to spend their income wisely
- Convenience – it offers people a convenient way of acquiring durable goods
- Enhanced living standard – it enables people of limited means to acquire goods to enhance their general standard of living
- Meeting emergencies – Consumer finance is useful in meeting emergencies such as illness, accident and death with unexpected expenses
- Attracts more and new customers
- Maximizes revenues – consumer finance facilitates the speedy disposal of goods which would have remained unsold in the absence of a credit facility for consumers. These credit sales increase revenues and profits.
For the Economy
- Accelerates industrial investment, giving rise to growing levels of income and employment
- Promotes entrepreneurship
- Promotes economic development – in promoting higher levels of investment, employment and income, consumer finance increases effective demand thus promoting a higher standard of growth and development
The potential disadvantages of consumer finance
It is important to also note the potential disadvantages of consumer finance, particularly if offered recklessly, and what RenMoney is doing to mitigate these disadvantages. These are:
- Thoughtless buying – consumer finance may tempt people to buy goods indiscriminately, even if they are not needed
- Potential insolvency. Credit, by its nature, causes people to swap a portion their future income for current benefit. If the proportion is too high, or there is an unexpected reduction in future income, then this can lead to an individual’s insolvency.
- High price of credit. In Nigeria, the infrastructure challenges lead to a high cost of doing business. This combines with a high cost of default leading to a high price charged to the customer in the form of monthly interest.
RenMoney’s approach is to mitigate the risks of these disadvantages through:
- Simple to understand and transparent products and pricing
- Educating the consumer at point of loan
- Other financial literacy initiatives
- Price leadership
The high price of credit is a particularly thorny issue in Nigeria. The interest rate that RenMoney charges is risk-based, and is built up on a “cost plus” basis. The costs that RenMoney incurs when giving a loan (and which need to be priced into the interest rate charged to the customer) are:
- Administration expenses
- Origination expenses
- Cost of funding
- Cost of default (risk)
RenMoney is working both internally and with strategic partners to bring down the costs of administration and origination. These cost savings are then passed on to our customers.
The biggest cost driver is the cost of default, and RenMoney is continually improving our predictive models and risk management processes. Our risk-based pricing ensures that all levels of customers are served, and that the low-risk customers do not cross-subsidize the high-risk customers.
Overall, consumer finance is a very powerful enabler of growth in an economy, and RenMoney is proud to be leading inclusive consumer finance in Nigeria.