Debt has earned itself a bad reputation in recent times, unfairly so in my view. After all, anything is bad when done in excess.
Admittedly, private debt got out of hand in the 2000s and fueled the 2008 financial crisis. And now, public debt continues to cause jitters in the global economy. But debt has played a critical role in economic development over the centuries – especially in the world's most successful economies.
According to the World Bank, Nigeria lags behind its peers when it comes to private sector credit (% of GDP). In 2014, it was 14%, significantly lower than what you would expect for a developing economy. Many Nigerians will not be surprised, however, as their debt levels are likely to be lower than their international counterparts.
Private (or personal) debt faces several obstacles in Nigeria. For one, not many beyond the elite have access to reasonable credit terms. But also, our culture exalts the view that debt is inherently evil. To quote a proverb often used by Nigerians – "He that goes a-borrowing goes a-sorrowing”.
The Role of Debt In Wealth Creation a.k.a Good Debt
The positive impact of private debt is two-fold: one is its impact on economic growth by driving investment, the other is the financial inclusiveness that comes with greater access to private debt.
To quote another well-known proverb, "You have to spend money to make money". Debt facilitates that spending by increasing your available budget. Though entreprenuers are encouraged to raise some capital through personal savings as a demonstration of their confidence in the business idea, relying on savings alone results in undercapitalisation and the absence of buffers or emergency funds, a necessity considering the business environment in Nigeria. That is to say, for the purposes of starting up a business or taking advantage of expansion opportunities, credit comes in handy for the entrepreneurial Nigerian.
Despite often chastising its youth for being job seekers rather than job creators, Nigeria has never taken credit availability as seriously as it needs to. As things stand, it is notoriously difficult to borrow (at reasonable rates) without valuable collateral or a popular name.
Now, with that in mind, and also taking into account the role that small businesses have been found to play in economic growth through employment creation and financial inclusiveness by lifting people out of poverty, it is curious that more attention has not been given to credit availabilty. At a time when unemployment is as high as 14%, credit support for small business owners might very well be all that is needed.
The Frowned Upon Debt-For-Consumption
Although I will not dwell on it here, it is impossible to ignore the role of "necessary debt" in the economy. This includes debt such as mortagages for homebuyers, student loans to provide access to high-quality education, etc.
There are things most people are willing to sacrifice future consumption for but simply cannot afford them in the present. Other consumption-oriented "necessities" include cars and home appliances such as inverters and generators.
At this point, the Nigerian in us may feel some discomfort. "If you cannot afford it, why are you buying it?", would be the instinctive refrain. But this ignores the role credit plays in expanding our budget – if someome can acquire these things through credit while maintaining adequate liquidiity, then what is the concern?
The good news for the economy is that consumption such as this keeps the economic machine turning. People with low disposable incomes and high earning potential will also not be excluded from the opportunity to make intertemporal consumption choices.
Debt to Create Good Debt
One interesting feature of developed financial systems is the credit history of the individual. Usually starting from their early adult years, people build up individual credit ratings by accumulating and servicing debts. Credit cards are a popular avenue for this, and a good credit score is a prerequisite for credit availability.
A similar credit rating system would help address the information asymmetry problem that stops financial institutions from extending credit to low-income groups. Those who have been given the opportunity to prove their credit-worthiness will be rewarded with more credit, irrespective of their income group. But for this system to exist, credit must slowly be extended to the wider population. Only after this will it be economically feasible to invest in such a system, allowing the function of debt as a tool for wealth creation to be realised.
In 2015, a list of bank debtors was published, supposedly at President Buhari’s behest. Many names – mostly the richest Nigerians – appeared on multiple lists, showing the lopsided access to credit prevalent in the country. In fact, it remains a frustration to many that credit is available to those who arguably need it the least (the wealthy) while a hoard of young entrepreneurs suffer under the weight of poor access to credit.
The great thing is that Nigeria can look to the experience of other countries to learn how best to develop and manage its private credit market. In today's Nigeria, there is a clear case for more debt.