Category Archives: Economy

Credit Cards – Cash is King in Africa

Credit CardsThis is a guest post written by Godlove Ba.

Contemporarily, the lack of access to credit is an indicator of poverty. Statistics show that, there is a near linear relationship between the GDP of a country and the number of credit cards in circulation. According to 2011 reports from Euromonitor International Marketing Data and Statistics, in 2009, the USA, Japan and China, were said to have an estimate of 632.46, 351.28 and 185.27 Million credit cards respectively in circulation. On the other hand, figures taken from the April 2015 edition of the International Monetary Fund’s World Economic Outlook (WEO) Database revealed that, these three countries also fall in the top 3 for the 2009 GDP ranking.

Credit card usage in Africa trails other continents significantly mostly because of the extreme rural nature of most areas in the continent. According to a study done by McKinsey, (February 2014) on “Sub-Saharan Africa: A major potential revenue opportunity for digital payments”, more than 90 percent of retail transactions in parts of Kenya remain cash based, and Gallup’s survey of 11 countries in sub-Saharan Africa found that more than 80 percent of adults there have made bill payments or remittances with cash. Given the lack of digital-payment penetration, consumers, banks, and governments in sub-Saharan Africa are still bearing the high cost of cash payments—costs associated with manual acceptance, record keeping, counting, storage, security, and transportation.

Many African countries in general do not have adequate technological resources that can enable them setup infrastructures such as swipe card systems. The absence of affordable nationwide internet network necessary to establish a credit card system also makes it difficult for credit card networks to be installed.

From a cultural perspective, this difficulty results from the reluctance of the African people to flip pages from their traditional rotary credit association, which is a financial system otherwise known as ‘njangi’ (a practice common in sub-Saharan Africa), to adopting the Western financial system called credit cards. The latter is profit oriented whereas the former is community welfare oriented.

Also, in contrast to Cameroon, other African countries show a more visible trend towards the use of credit cards. In February 2015, the Central Bank of Kenya’s website published the number of ATMs in use at 2643, which is also used as an economic indicator and the number of credit cards in circulation at 20047. Nigeria on the other hand which issued its first credit card in 2004, had 95,000 credit cards in circulation by the end of 2007 as estimated by Euromonitor International.

That notwithstanding, the apparent sluggishness of the pace at which credit cards are gaining grounds in many African countries could be justifiable since it took several decades for what was initially called charge cards, first introduced in the USA in the 1920s, to evolve into today’s credit cards. Cash is certainly still king in Africa.

How does it Work?

A Credit card is a rectangular sheet of plastic issued by lenders (banks in general) to qualified individuals so as to enable them carry out monetary transactions (such as purchase of goods and services) without using their own money. It’s make up consists of a Magnetic strip, a Signature strip and has a number embossed on it corresponding to the Card Number. They have a standard size of typically 85.60mm by 53.98mm. The two most prominent types of credit cards are MasterCards and VisaCards. All of the latter type card numbers start with 4 and consists of 16 digits (or 13 for old cards) whereas all of the former type card number start with numbers 51 through 55 and also consist of 16 digits.

The benefits of using a credit card are pretty obvious. It is highly convenient, serving as a mobile bank to which you can access while you are on the go. In fact, the world of credit cards introduces a cashless society.

The concept of credit cards involves borrowing money now and paying later without the provision of a collateral security. The amount of money lenders will be willing to make available to an individual or entity is based on the assessment of the financial position of that entity. In business, the term Solvency is used to describe the level of credit-worthiness of a potential card holder, with various levels being represented by a numerical figure called credit score. A credit score determines whether or not a credit card application can be approved. In order to come up with this score data such as employment type, employment history, minimum income (individual and/or household) is required.

Credit cards offer a lot of flexibility as purchases can be done in person, online and also over the phone. Its use may or may not be free. Some lenders charge an annual fee for using the card whereas others don’t. It is therefore very important to read the contract terms carefully before adhering to the card. Also beware of hidden fees which are not usually disclosed by the merchant.

Many credit cards will offer interest-rate-free credit during a period, known as the ‘Grace Period’, of typically 20 to 55 days depending on the type of credit card and the lending financial institution (bank). Should the card be paid off by the card holder within this period, no interest will be incurred (Zero interest).

Another important advantage of a credit card is, no collateral security is required but there is a limit however, to how much a cardholder can use on his or her credit card.

Credit cardholders also have many different services linked to the use of the card depending on the type of credit card. These include:

Balance Transfer It consist of transferring credit balance from one credit card to another (that is, paying off a credit card with another credit card) so as to take advantage of a lower interest rate on the card to which the balance is being transferred. Such transfers are usually subject to a transaction fees.

Cash Advance – It consists of transferring funds from a credit card to a bank account. Quite often, instead of using a credit card to withdraw money from an ATM (acronym for Automatic Teller Machine; a computerized telecommunication device that provides clients of a financial institution access to financial transactions in a public place) the card holder might decide to transfer the money into a bank account and then make a cash withdrawal from the account. Generally, for security reasons, some restrictions are placed on type of account into which funds can be transferred. In Canada for instance, some of the major issuers of credit cards, will only allow the primary (or secondary) card holders to transfer funds from their credit card into a checking account belonging to the primary card holder.

Rewards – Rewards are offered in the form of cash (cash back) or points which can be accumulated and later exchanged for cash (or specific goods and services). In the US some credit card holders can get as much as 400$ of cash back per year resulting from cash back cumulated from purchases made each month within that year.

Insurance – When travel tickets for example are bought with a credit card, it is possible for the cardholder to benefit from travel insurance if such an advantage comes with the card. Sometimes it might require subscription before it can apply. Generally, insurance coverage that comes with credit cards, are not easy to benefit from. Advertisement can sometimes make it sound highly attractive by offering up to a 1,000,000$ insurance coverage but the conditions to be fulfilled in order to take advantage of the service are not usually easily met. For instance the loss of an eye, either both upper limbs or lower limbs could be a few characteristics of the nature of an accident, a cardholder must be a victim of before he or she can be eligible for the claim

Hence, with GDP being considered as the broadest indicator of economic strength and growth, one can hope that the occurrence of an economic boom in Africa will incite people to make use of credit cards. In fact, the recent growth in bourses now shows Africa is at the verge of an economic boom, which should generally mean a promising future for the use of credit cards in the continent.