With external reserves pegged at $630 million, there is little incentive on the monetary side to curb the level of consumer credit. What is the relationship between the level of external reserves and credit? For a small open economy like The Bahamas, an expansion of credit leads to an increase in imports. If expenditure on imports outstrips earnings from external trade (tourism and financial services), this would have a dampening effect on external reserves.
While to the casual observer, zero down payment would appear to be an attractive proposition, it has its consequences. On the positive side, zero down payment leads to an expansion of credit and more business opportunities for merchants. However, it has its consequences: rise in personal debt and a disincentive to investment, particularly when zero down payment is applied for the purchase of consumer goods.
A down payment is a useful barometer. It can be used as a gauge in most cases, to determine whether or not an individual can afford a good or service. There is a caveat; there are cases where an individual who has accumulated significant amount in assets cannot come up with a down payment because of a cash flow problem. There are also cases where individuals may have a significant proportion of their investment tied up in human capital, where individuals may have invested in education and training, and while their earning potential is quite significant, there current circumstances may not permit them to have access to certain goods and services. This is certainly the case for recent college/university graduates, who may have difficulty securing a down payment to purchase that first vehicle.
Given the number of projects that are coming on stream in the Family Islands, it is important for Bahamians to be in a position to take advantage of investment opportunities. As a people we will find ourselves hard pressed to take advantage of these opportunities in our own country, with what can best be described in my view as ‘an explosion in consumer credit’ and by extension the ‘mountain’ of personal debt. This problem of increase in personal debt is compounded by the policy on the part of some institutions extending credit on terms of zero down payment.
The length that some institutions are prepared to go in granting credit was highlighted at the recent car show held at the Mall at Marathon this past weekend. At the show, I witnessed one bank telling prospective clients that if they are not in the position to secure the down payment for the purchase of the vehicle, they can forego the down payment and surrender the cash value of their life insurance. This is both preposterous and scandalous. At the risk of asking a rhetorical question, why would an individual want to surrender the cash value of his/her life insurance for a vehicle?
While some would argue that we should not blame the institutions extending credit, what is arguably the central theme is our propensity for consumerism. While that maybe true, our financial institutions as part of the community have an obligation in my view that goes beyond a profit motive. The increase in personal debt fuelled by easy credit terms, increases an individual’s risk of default, putting the assets of these credit institutions at risk. So, in the long term, there is an incentive on the part of these institutions to exercise some prudence in extending credit.
In The Bahamas, we have benefited from an increase in foreign direct investment and the strong performance of the tourism sector (the principal foreign exchange earning sector), which has translated into a high level of external reserves. These factors have made it easy to sustain our appetite for increased imports and our ability to increase personal debts.
As we move forward as a nation, we cannot continue to mortgage our future with current consumption. What is useful to note is that our current consumption, in large part, consist of goods and services that add very little to future income.
Our economy is small and open, to this end, we are very susceptible to external shocks. Any dislocation, brought about by events over which we have no control, can have disastrous consequences for our economy. How quickly we rebound as a people, would be due to no small measure to our preparedness in planning for unexpected events. The increase in personal debt, particularly for consumer items, reduces our ability individually and collectively to rebound fairly quickly.
While there is a regulatory obligation, given the potential impact on the economy in the long run, as individuals we must accept a level of responsibility. The next time we see an advertisement for zero down payment, we need to ask ourselves the simple question: Can we afford this item?
The Nassau Guardian
