“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” - John Maynard Keynes
I have always believed there is no such thing as good debt but of late I must confess; I am very confused. Debt is money and money is debt. The credit theory of money states “that a sale and purchase is the exchange of a commodity for credit”. This means that “value” is actually created when the creditor is comfortable accepting payment on credit, and on the debtor agreeing that he is obliged to pay his “debt”. You don’t believe me? Just imagine how a bank works, like really think about it. A bank deals more in credit than it does with real money and it also facilitates the transfer of credit. Simply a bank takes credit (deposits) and transfers the same credit (loans) for a fee.
The entire world runs on debt. The most developed countries in Europe and North America clearly have more debt than developing nations in Africa, Asia and South America. And what’s worse is that the same debt keeps on rising. Then why are we so scared with a debt to GDP ratio of 50% with countries such as the US with ratios of above 100%? Is it that we don’t know how to use debt? We have more growth opportunities and thus “higher capacity to repay” yet we just try to avoid it on every instance.
Imagine lady A and B walking into a bank for a loan. Of course, the bank will demand some sort of assurance that they have the capacity to pay so they both produce their accounts. Both businesses are sound but lady A has delivered growth of 15.0% while lady B has delivered growth of 5.0% for the past 5 years. Holding everything constant, definitely lady A has more prospects of getting the loan. But the chart above clearly does not show this, it defies logic.
The inequality in terms of access to credit is what makes the gap between the rich and poor widen every day. Looking at the chart below, the wealth gap in European countries and the United States is below USD 5,000 but for Africa, Asia and South America it is above USD 25,000. This clearly indicates a strong positive correlation between debt and economic prosperity. Basically, the rich - who can easily get credit - will continue to prosper economically: and that’s where the issue lies.
Now bring this mentality locally. Kenya has delivered strong growth on the back of the most diversified and vibrant economy. For the past 5 years, our growth has averaged 5.0%, way above the 3.0% delivered by the World but our human development index has averaged 0.5, among the low ranked countries in the world. However, the strides made towards improving this has been through financial inclusion of which we rank among the highest in the world. The ease of access to credit has gone a long way into boosting the SME sector which now contributes 38.6% of Kenya’s GDP.
Now imagine a large chunk of the SME sector not being able to access credit. The implications of this are massive considering (i) their contribution to Kenya’s economy and (ii) the livelihoods which will be impacted by this. Given the interest rates cap, the threat of this happening is real. The “spirit” of the law was to protect the consumers from exploitation by banks; which is a noble cause, but at least there has to be some thought process put in place to achieve that…. or is it a conspiracy to widen the rich gap? Your thought is as good as mine. But what I am sure of is that the bottom of the pyramid will suffer and the top crème will benefit given the abundance of funds banks are ready to dish out to the so-called “less risky”.
“I sincerely believe that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” ― Thomas Jefferson
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