No receipts? No credit card? No problem! Characteristics of credit in informal or cash-based economies
One of the most memorable questions I’ve fielded after pitching Colibrí had to do with our pay-as-you-go service, a form of credit in which customers can rent to own solar in small installments.
“Tell me more about this pay-as-you-go plan… I know way too much about credit— more than I wish I knew,” one of the MassChallenge judges commented, “How are you going to provide credit to a population that isn’t familiar with what credit is?”
The base of the pyramid? Not familiar with credit? I was unsure on how to effectively clear up his assumption. This question was surprising, and admittedly, a bit comical, as I’m sure it would be for anyone who works in financial inclusion or in BoP business. BoP aside, the concept of credit is as old as money. Even if you have zero knowledge of the BoP or development economics, you’ve surely heard of the hyped-up, glorified-turned-debatable solution to world poverty, microfinance—yes, that’s credit, and yes, the BoP is very familiar with it.
I talk a lot about Colibrí’s pay-as-you-go solar service, especially to people who are not from Nicaragua or Latin America. Understandably, credit can get people on guard. The realities of credit card debt in the USA, young individuals guided to believe that responsible use of credit only comes in the form of student loans, car leases, and a mortgage, the gravitas of the student debt phenomenon… These things can be deeply engrained in us.
In the USA, for example, we’re so accustomed to the mechanism of credit in the form of a credit card that it seems alien that payments on credit can be made with cash. Thus, credit is even more alarming when talking about its use in an almost strictly cash-based economy such a Nicaragua. Not only is it important for Colibrí to implement holistic risk mitigation strategies, but I also find it useful to paint a picture of the credit landscape we’re working in, which, in its informal or cash-based nature, can raise eyebrows.
In Nicaragua, you see credit offered as often as you see someone in their 20s taking pictures of their food in the Mission in San Francisco.
Lending and micro-lending aside (also everywhere), I want to focus on purchasing with credit— installment plans. La Curacao and El Gallo Más Gallo are two competing businesses in Central America that offer home appliances, electronics, and furniture. Every price tag on an item lists the weekly or monthly installment payment and, occasionally, the total price in small font in the corner. They offer flexible installment plans with terms ranging from one month to two years. The parent companies of La Curacao and El Gallo Más Gallo also own Almacenes Tropigas and El Verdugo, respectively, which offer the same assortment of items as La Curacao and El Gallo Más Gallo offer, just at slightly lower prices and quality.
The normalcy of these forms of credit can initially be slightly amusing to a foreigner (me). Why advertise the installment payment where the total price should be? When I’m in these stores I wonder: Is it really that necessary to buy a $50 mirror in monthly installments over the course of 18 months… or a $30 blender in weekly installments over a year? I used to mull this over while failing to think twice about my own country’s standard—credit cards.
Is it necessary? Yes—these are the realities of a cash-based economy—and it’s extremely effective. It eliminates the financial barriers middle-income or lower-middle household may face with respect to upfront payments or limited savings if they want a fridge or a nice couch, right now. Default rates are below 5%. Financing frees up cash and can make purchasing more appealing. On a far smaller scale, for BoP households, paying for their monthly provisions such as oil, rice, and sugar, in two payments can help even out spending and, in a way, protect against unpredictability.
Customers in La Curacao just have to show their credit score, right? Think again. To walk out with a $1,000+ fridge, for example, all you need to provide is a proof of income, three personal references, and an ID. In the case of a client in the informal sector who cannot provide a proof of income, a title to land or cattle or a verification of the household and income generating activity will do. For the requirements, a ~20 minute “interview” in which personal data is required and the preferred financing plan is determined is all that is needed to approve the credit. The customer pays their monthly installment in the store (in some cases, or other payment locations around town are options) for the financing term.
For an economy where credit comes in the form of credit cards, it might seem bizarre that customers can walk into a store, get a washer-dryer, and be trusted to walk back in every month and pay $100 in cash for the next year. Bank accounts or credit cards can provide such an easy way of monthly billing. Because the cost of credit in the US is obfuscated with credit cards, purchasing outright with credit cards mean cardholders often don’t instantly see the full cost including interest even though it’s there—mostly in the form of higher interest rates for those who take longer to pay off their debt. With credit cards, an individual’s credit score serves as collateral; in this economy, defaulting just means being banned from future purchases.
I went around to all four stores (Curacao, Gallo, Tropigas, Verdugo) pressing salespeople about what happens if someone doesn’t pay. They’ll call a few times. They throw in some late fees (although minimal). They never take the product back. They were more than puzzled by my inquiries, (also maybe a bit suspicious as to why I was asking so adamantly) as if wanting to just shoot right back at me “Why would someone not pay?” In fact, that was one salesperson’s answer.
To what extent has credit become a feature of Nicaraguan culture? The overall necessity of multiple payments has made it the standard—credit is almost always an expected feature of purchasing (above of cost certain threshold, of course). People are surprised when things aren’t offered with the option of at least two payments, because, well, that’s just how things are done here. Whether solar products came financiados (financed) was easily the most common question we got during our pilot. Many of our point of sale agents sell solar products to their customers in two payments—the risk is on them. Is this something we should be encouraging our agents to avoid? While initial though may be “yes,” the truth is that not a single agent from over 400 products sales to date has ever had an issue with their sale on credit.
And it is just that that makes me wonder—is it the cultural normalcy of credit and paying en cuotas that serves as the biggest reduction of risk? To a certain extent, I believe it is.
/ Morgan Babbs, Founder & CEO
Disclaimer: these are the realities / observations from the field— This post does comment on the utility of credit. It does not comment on the nuances of the behavior of those who engage in credit.