Brace up, forces are up for your credit spending

The Central Bank of Nigeria (CBN) may have finally fallen in bed with the aspirations of the financial institutions with new guideline. That collaboration might be a good thing for the market forces except as a consumer; this might be a good time to question whether carrying a credit card is really worth the effort.
In the new guideline signed by Dipo Fatokun, director, Banking & Payments System Department recently, the CBN stated that “In furtherance of its efforts at strengthening the Nigerian Payments system,” banks are to enforce “removal of fixed interest rate on credit cards.”
To explain what the directive means we may need to go back to how it used to be. Prior to now, the CBN had mandated financial institutions to never exceed 2.5 percent as interest charged on credit cards. Hence, no matter how much you borrowed or spent on your credit card, your bank was not allowed to collect beyond the fixed rate.
The new guideline has now ushered in an era in which the fixed interest rate of 2.5 is removed and your bank is at liberty to adjust either higher or lower what it charges you on any transaction made on the credit card they gave you.
The idea behind removing the fixed interest rates is so that it can be market driven, in other words, become liberalized. As a customer you can decide which financial institution has the best credit card package that suits your needs. You can shop around because there will be competition. An environment where there is competition is a good breeding ground for more investments.
What you should worry about however is, the guidelines are not about to bring interest rates down – at least not in the near future.
According to a source in the banking sector who spoke to BusinessDay, “You know the environment we find ourselves that everybody will try to do within a certain range. Obviously the consumers might likely be paying higher.
“Why I said so is that if banks are losing from where CBN has capped charges, saying this is the maximum ceiling you can get to, they will now exploit where there is no ceiling to make up for where there is ceiling. Maybe what will happen is that the credit card might no longer be lucrative, looking at the forex issue on credit cards as well.”
Inquiries carried out by BusinessDay confirmed that there is no bank with interest charge below the fixed rate. Other credit facility companies issue cards at a much higher rate.
Furthermore, the incentive to carry a credit card which includes cheaper rates is likely to diminish, at least in the short term if personal incomes continue to decline irrespective of competition. On the flipside, while the banks are likely to maintain high interest charges; they may soon introduce new and improved packages and services to attract new market. All that could be in the long term. The way the economy is presently and most companies looking to cut overhead, banks may take the gamble for profit which the directive presents.
It should be noted however that the credit card culture is yet to penetrate the Nigerian market like it has in other countries. In fact, the entire Africa continent is ranked as the least banked region in the world and credit card penetration is very low. In sub-Saharan Africa the penetration is estimated at only 5 percent and most of the credit cards are issued to people within the high income bracket. Nigeria and countries like Morocco, Egypt and Kenya have between 0.18 and 0.33 on average payment cards per person.
One major reason experts adduce for the low penetration is high rate of default. Often people will enter a credit card agreement and are unable to meet their obligations on the due date. High default could be a result of high interest rates and other charges that customers are burdened with by their card providers.
“That 2.5 percent is just the interest rate, but you have finance charges, late repayment fee and other fees involved,” said the source.
So should you still hold on to your credit card? Before you take a credit card be sure you are ready to spend money and take the risk that comes with it. Otherwise, why go for a credit card in an economic recession where interest rates are over the roof tops?

 

FRANK ELEANYA