In 2006, I was privileged to attend the public meetings at Parliament in Windhoek to address the high cost of finance, especially bank finance, in the country. The late parliamentarian Reinhard ‘Kalla’ Gertze had proposed an investigation into financial institutions through public hearings of the Parliamentary Committee on Economics, Natural Resources and Public Administration. This Parliamentary Committee was then under the chairpersonship of our present President, Dr Hage Geingob.
They held public hearings on bank charges and regulations and one of the submissions, by a banking institution, outlined why banks charge interest. This bank explained that in the beginning of banking, interest was used to offset the risk of providing the credit to the borrower.
There are four risks to banking starting with costs incurred by the bank while providing the loan, the inflation which means the lender will be able to buy less for the money as time passes, scarcity meaning once money is lent to a borrower at a specific rate, it cannot be used for another loan, and the risk of the borrower not being able to pay back the loan.
Further, the bank indicated that of these four, the only real difference the government can make is in reducing the risk of a borrower’s inability to repay.
I have written about credit risk before but this week I was reminded of this topic after reading an article wherein one of our municipalities gave its prices for pre-paid and post-paid electricity.
What had me sit up and take notice was that the pre-paid electricity is at least one-third more expensive than the post-paid price per unit.
Let me repeat that again: If I give my money for electricity that I will use in future, I have to pay a lot more than the customer who has already used the electricity and only has to pay some thirty days or more after using it. Somewhere this flies totally in the face of the market economic rules that I have been taught.
In my limited understanding, a bank or service provider would like to get the money from your pocket into theirs as soon as possible. If they can get you to purchase the service before you even use it, it means they have money for something they have not yet created. If however, they give you the service or product on credit, it means that they have already spent the money on creating that product and now have to wait to recoup their investment. Thus any properly run business would give you the same product for cheaper IF you paid for it before usage as they would be having the money before they have to spend it in creating the product.
Now why are municipalities (and cellular providers) charging you the consumer more for a product which by free market definition should be sold to you for cheaper because you are paying for it before the product was actually consumed? This opportunity cost being lost due to post-paid accounts is not seen in their bill, but rather in the bill of the poor consumer – who has no choice in having a prepaid meter – and is being made to bear the cost.
If we in Namibia are to talk about being “pro-poor”, we have to recognise that these business practices by private and public business are deliberately making the lower-income consumers pay more because of their ignorance. In my mind it is even worse because the product or service being sold is easily manipulated by the seller to increase their profits without any interference or agreement by the consumer.
• Milton Shaanika-Louw is a consumer activist and prolific blogger on consumer protection issues (http://milton-louw.blogspot.com). He serves as the voluntary director at Namibia Consumer Protection Group.