Global Reach & Credit

The views portrayed in the Global Reach blog are subject to change at any time based upon market or other conditions and are current as of May 27th, 2020. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.

Globalization has happened!

My time in Nairobi further cemented my initial research on this thriving market. The process by which businesses have developed international influence was apparent with the massive multi-use JW Marriott complex going up next door to our hotel accommodations. The energy, the excitement and construction for growth was everywhere. However, one challenge kept on arising during our meetings. Credit with a global reach. Access to credit is fundamental for growth in any economy. Yes, credit exists in Africa, but the credit infrastructure today was not as easily found. Especially for small and medium size businesses.

Why is that we as a global economy have more access to modern technology and supporting data, but credit has limitations? First, it is understood that a lot goes on behind the scenes of a credit transaction. When you make a purchase against your available credit, a merchant's terminal asks the credit issuer whether the credit amount is valid and if you have enough available credit. The credit issuer communicates if a transaction is approved or declined. If it's approved, you can take your goods and services and go on your way. And vice versa, if it is declined.

However, the above still doesn’t directly answer my statement question.

Now of course, there is a cost to using credit and a viable path needs to exist to lend. In the credit business model, the credit issuer gives you a certain amount of time to pay back the entire amount that you’ve borrowed before you're charged interest. The period of time before the interest is charged is called the grace period, which is typically between 20 and 25 days. If you don’t pay off your full balance before the end of the grace period, a fee or finance charge is added to the balance. The finance charge is based on the interest rate and your outstanding balance. This is the business of lending money.

Moving forward into the blog, it is important to note and understand your interest rate. Culturally, I was told that people in Nairobi were more interested in understanding their monthly payment versus actual interest rate. (More factual research and a survey is required, but I found the topic fascinating.) Moreover, the interest rate should be the main factor to understanding the amount of credit used and what it costs to use it. Interest rates are generally based on market interest rates, your credit history, and the type of credit you have. If you have a good history of paying back your credit used, you will usually qualify for lower interest rates than what's typically charged, and more capital/credit can typically be assigned.

As alluded to above, using credit isn’t free and you have to pay your balance in full before the end of the grace period if you want to avoid paying interest. However, the credit issuer usually doesn’t require you to pay back all of what you owe at once, but you must pay at least the minimum payment by the due date to avoid a late penalty. It should be noted that paying only the minimum amount is the slowest and most expensive way to pay off your credit balance. Furthermore, it’s also important to always pay at least the minimum amount on time each month to maintain/create a good credit history and to avoid late fees. As you build a stable credit history, you may qualify for a lower interest rate on the card.

We are eager to find and build relationships within micro-lending and explore scenarios of solving some of the short-term challenges. More to come!