Gaborone — Batswana have been urged to embrace financial literacy to reduce increasing household debt estimated at P40.8 billion as at April this year.
In an interview with BOPA, a First National Bank Botswana economist Mr Moatlhodi Sebabole said financial literacy would enable people to appreciate and properly apply financial management skills.
Being financially literate, he said, included effective financial planning, properly managing debt, accurately calculating interest, and understanding the time value of money.
Noting concerns for indebtedness in Botswana, especially for households, Mr Sebabole attributed it to rising debt service costs where there was no increase in revenue and disposable income levels.
He explained that among the different ways individuals went into debt were banks, formal micro-lenders, SACCOS for different institutions, metshelo (traditional investment schemes) and hire purchasing.
He said while debt came at a cost due to borrowed funds and interest repayment over a calculated term, it also resulted in a mismatch since repayment accrued interests, which could be either stipulated bank rates or prime lending rate.
"The working class is said to experience financial turmoil wholly because the majority of their earnings goes towards servicing sourced loans yet income levels are not catching on," said Mr Sebabole.
Unfortunately, he said, as household debt increased, individuals resorted to taking more loans eventually making it difficult to come out of debt.
Mr Sebabole said the reduction of interest rates by 0.5 per cent in April, benefited existing loans and not new loans, mortgages and refinancing.
Essentially, he explained, positive inflation reports meant prices of goods and services would go up, putting disposable income levels under intense pressure hence the rise in debt service cost despite bank rates reduction in the past 10 years.
Mr Sebabole said Bank of Botswana played a pivotal role in imposing a ceiling for interest rates to be capped at a level that allowed customers to service loans with ease. He said where bank rates plunged, it ought to be reflected and fundamentally translated to customers' payback in terms of loans accessed.
The National Credit Act ought to be promoted to regulate credit providers such as banks, micro-lenders, retailers and all other businesses providing loans or charging interest on overdue accounts, he said.
Mr Sebabole said Batswana should have financial integrity when sourcing loans with every agreement signed involving wise choices, reliability and beneficial ends for both parties.
He explained that it was within a customer's right to negotiate or restructure repayment plan in times where secured loans could not be serviced well due to unforeseen circumstances such as COVID-19.
Repossession should be the last resort, he said. Mr Sebabole suggested that government, being the largest employer, should revise the recommended P1 500 take-home after loans deduction.
He further recommended that government should consider devising tax incentives and pension considerations to encourage a saving culture among the public, especially employees.
"In principle households and small businesses are encouraged to have savings buffers that make up for almost around 6-12 months of their financial commitments," Mr Sebabole reiterated.
As a rule of thumb, Mr Sebabole said, 20 per cent of one's income should go towards saving.
The practice had great potential to assist in servicing loans and mortgage premiums especially during crisis such as the COVID-19 pandemic where revenue streams had been affected, he said.
Mr Sebabole said the overarching power was with the individual to make an informed decision with their monies.
Financial education, behaviour and accountability were key components in addressing household debt, he added.
Sharing his views on the recommended take-home of P1 300 - P1 500 after deductions, BOFEPUSO secretary-general, Mr Tobokani Rari concurred that the threshold was too low and did not align well with current market trends.
Government came up with the policy with the understanding that employees did not rely only on salary but had other income sources, he explained.
He said as a trade unionist, employee welfare was a priority.
With commodity prices having gone up, it was difficult for people to earn a decent living with the recommended take-home, especially in cities, he said.
Mr Rari reiterated that government employees should increase their disposable income by engaging in businesses with the employer's knowledge.
He said raising the minimum wage could stimulate consumer spending, help businesses and ultimately grow the economy.
Source : BOPA