Research conducted by Usuta Kavari, a Namibian economist currently furthering his studies in the United Kingdom, found that while microlending and payroll deductions improved the institutional environment that engendered financial deepening in Namibia, a need exists to improve compliance standards to ensure that consumers are protected and not put at risk of unscrupulous and predatory lending practices.
Kavari conducted the research between June 2019 and February 2020 focussing on access to credit in Namibia.
Kavari specifically looked at the role of microlending and payroll deductions in expanding access to credit and unlocking the productive capacity of people who had limited access to financial services.
Although the research covers the period prior to Covid-19, much of the analyses and findings are particularly salient given the economic devastation of the pandemic.
“Understanding the socio- and macro-economic stresses that Namibian households are facing as a result of access to credit, and their temporal dynamics is important in ensuring that policy intervention and recourse adequately and equitably contribute to the easing of those pressures.
This study assessed these dynamics and provided an analysis of the role microlending and payroll deductions play in either smoothing or exacerbating household indebtedness.
This study found that microlending plays a significant role in expanding access to credit and unlocking the productive capacity of people who had little access to financial services,” reads a synopsis of the research.
Although this study does not provide a quantitative analysis of the of the longer-term impact of payroll lending on credit deepening and the impact on economic growth, given the paucity of empirical data, the evidence presented does provide an overview of the contribution payroll deductions has had on the creation of a strong domestic credit market.
The study analysed how policy and regulatory considerations for financial inclusion led to the increase in the demand for credit extended to households and specifically analysed the focus placed on improving financial literacy and access to credit as key determinants in Namibia’s financial sector development strategies aimed at financial inclusion.
“From a financial market development perspective, financial inclusion through increased access to credit is a critical component of macro-economic stability and ensuring a fair distribution of financial assets,” the study reads.
The study also found that increased demand for credit, and in particular micro credit, contributed to the deepening of Namibia’s credit market and the rise in household indebtedness. Analysing the increase in the demand for credit, the study assessed the socio- and macro-economic dynamics of household indebtedness, determining the role microlending and payroll deductions play in exacerbating indebtedness or smoothing consumption in times of economic stress. In addition, the study found that microlending plays a significant role in expanding access to credit and unlocking the productive capacity of people who otherwise had limited access to financial services.
Moreover, the study also found that the payroll deductions – through the collateralisation of future earnings – strengthens the collateral base of borrowers.
“In this regard, it is not implausible to speculate that payroll lending has a strong positive aggregate impact on credit deepening,” the study reads.