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What is the opportunity cost of your current investment?
Finance

What is the opportunity cost of your current investment?

August 09, 2022
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Defined as the next best alternative forgone, it is a popular concept used to assist entities in making decisions given constraints on resources.

Put differently, given the limited supply of critical resources, what are you giving up on being able to expand those resources on one activity?

Although this is often used by companies, it is a very good concept to assist in making personal decisions too.

The most common way that I get to engage with this concept is around investments as well as borrowing. Often people ask what the best way to save or invest is because they are trying to make the most out of their money.

 Of particular importance is knowing whether it is better to save some money when paying off a loan or simply focus on attacking your debt to pay it off. The answer to that is always “it depends” and the defining factor is the opportunity cost of your choice.

When assessing opportunity cost, it is important to note that you should not only focus on the money you could earn if you were to invest in something but also rather what you can avoid paying if you were to choose an alternative course of action.

For example, you have N$30 000 up for investments. You could do one of the followings:

  1. Invest it in a fixed-term deposit, earning an interest of 5.7%.  If early withdraws are done, you incur a 1.5% penalty on the value of the funds.
  2. Pay off a one-year personal loan with an interest rate of 10%.
  3. Keep it in a call account for emergency purposes with an interest rate of 2.4% with on-demand access to the money.  

What is the cost associated with each of the above options on an annual basis:

  1. If you do not invest in the fixed-term deposit, you will lose out on the interest of N$ 1 710.
  1. If you do not pay off the loan, you incur an additional N$ 1 649 in interest (compounded).
  2. If you invest in the call account, you will lose N$720 interest and either incur an early withdrawal penalty on the funds in a fixed-term deposit or interest on a personal loan if you do not have other emergency savings.

Based on the above, although the short-term loan may appear expensive at an interest rate of 10%, the opportunity cost of paying off that loan then becomes the interest you could have earned if you invested the funds in the fixed term deposit.

This example is, of course, simplified but in real life, there are always more factors to consider. 

Given the current increases in interest rate and inflation, are your investments still generating enough return to offset the increasing costs of servicing the debt you have?

If not, you might have homework to do to ensure your choice of investment is still appropriate.

For more, check out our YouTube channel Money matters with Budget Bee- Namibian Youtuber to learn more on the subject.

*Klestina Kauhondamwa is a Chartered Accountant by profession

NSFAF seeks to recoup half a million dollars from former employee
Finance

NSFAF seeks to recoup half a million dollars from former employee

August 08, 2022
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The Namibia Students Financial Assistance Fund (NSFAF) is demanding repayment of N$529 250 from a former employee, who allegedly defrauded the company by preparing payment requisition documents and instructing Bank Windhoek to make payments into the account of a person posing as a student.

Insurance sector leads Q1 consumer complaints
Finance

Insurance sector leads Q1 consumer complaints

August 07, 2022
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Namibia’s insurance sector received the highest number of complaints from consumers of financial services in the first quarter (Q1) of 2022 according to non-banking sector regulator, the Namibia Financial Institutions Supervisory Authority (Namfisa).

Namibia’s financial system stable – BoN
Finance

Namibia’s financial system stable – BoN

August 05, 2022
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The Bank of Namibia (BoN) says the country’s financial system is robust and resilient to withstand elevated risks and vulnerabilities emanating from the global environment.

Letshego inks mortgage funding agreement for Ongos developments
Finance

Letshego inks mortgage funding agreement for Ongos developments

August 05, 2022
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Letshego Holdings has partnered with the Ongos Valley Group to provide financial assistance to aspiring homeowners, including those who do not qualify for housing bonds with other commercial banks.

BoN mulls amending Building Societies Act
Finance

BoN mulls amending Building Societies Act

August 03, 2022
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The Bank of Namibia (BoN) is planning to align the Building Societies Act 2 of 1986 with international best practices.

Job Amupanda withdraws from FIMA technical committee
Finance

Job Amupanda withdraws from FIMA technical committee

August 03, 2022
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Job Amupanda has withdrawn from a 19-member Technical Committee appointed by Finance minister Iipumbu Shiimi to spearhead consultations on the protracted Financial Institutions and Markets Act (FIMA).

Responsible lending: What you need to know when taking up a loan
Finance

Responsible lending: What you need to know when taking up a loan

August 02, 2022
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Have you ever taken on several loans involving too much financial responsibility so that you had trouble making monthly payments? ‘Bitten off more than you can chew’? This has the potential to be very upsetting and begins to dictate many aspects of your life.

This is when responsible lending comes into play. According to the regulations, the lender must make a substantial effort to ensure that a loan is actually a good option for you, because in some cases it simply isn’t. The core focus is on helping you reach financial security—that is, living comfortably while still paying your loan installments on time. In fact, it carries a double purpose: both to protect banking customers and to ensure the solvency of the credit institution.

Erastus Haihambo, Head of Nedloans says, “Nedbank Namibia strives to be a responsible lender, providing affordable loans while ensuring that Namibians do not fall into the debt trap unnecessarily. Financial ill-health from acute indebtedness is not only perceived as a financial issue but a public health issue as well. We are committed to operating within the prescribed market conduct regulations, even in the current tough economic environment.”

According to the Financial Stability Report of the Bank of Namibia, at the end of December 2021 the ratio of household debt to disposable income stood at 77.4% compared with 87.7% for the previous reporting year. This 10.3% improvement notwithstanding, the ratio remains unacceptably high.

According to Haihambo, customers’ access to financial education coupled with adherence to market conduct principles are key to reducing the high ratio of household debt to disposable income and Nedbank is striving to comply with progressive guidelines of the Regulator having proactively adopted market conduct-aligned business model and in partnership with Financial Literacy Initiative (FLI) availed the most comprehensive financial education booklet thus also collaborating to provide financial education to empower Namibian Consumers to make informed and smart money decisions.

Aside from the bank's requirements, clients should examine several crucial issues before incurring debt, such as: How much money should I request? We must carefully consider our true needs and not take on more debt than we can afford to repay. Not all debt is bad, however, having too much personal debt could be considered bad.

Then, Will I be able to make the installment payments if the interest rate goes up? When taking out a loan with a variable interest rate, it's possible that the interest rate may increase, so the increased payments will also make it more difficult to keep up with payments thereby posing a risk that a borrower will not be able to pay back the money borrowed. In addition, how soon will I be able to repay the loan? And is this is the best option for me? A crucial element is the loan period. If we take out a loan for something with a set lifespan—like a car—the loan's term should never be longer than the lifespan of the item.  Nedbank’s goal is to see to it that customers take Nedloans in a responsible way and avoid over-indebtedness.

“In this regard, Nedbank has proactively chosen to comply with the regulation prescribed under the Banks Act and has self-regulated its lending policy to protect customers. Our customers will come to realise that our product offering is one of the best on the market. By ‘over-indebtedness’ we refer to a situation where the customer struggles or fails to keep up with bills and other financial commitments, resulting in missed payments, contrary to the loan agreement,” explains Haihambo

Lending Policy Based On Principles

Lenders must follow lending guidelines, which span everything—from advertisements to loan agreements, from affordability assessments to limits on interest and fees. As ethical corporate citizens, banks must adhere to transparency requirements, and besides asking detailed questions about clients’ income, expenses, and current circumstances, they must help customers to understand what they are signing up to before you sign.

To this, Haihambo emphasizes, “Our lending policy is based on principles that follow the acceptable market conduct and is based on a business model that centres on consumer protection and fair treatment of clients. In addition, Nedloans considers the entire credit profile of a client and as such credit decisions are based on a full affordability assessment and not just on a partial credit appraisal based on the individual’s pay slip.”

Customised Loan Offering

Nedloans offers products across the spectrum of low-, middle- and higher-income earners.  Their clients include government employees, members of the private sector, and public sector companies, as well as regional and local authority institutions that have signed Payroll Deduction Agreements with Nedbank.

“Because we believe that irresponsible borrowing creates over-indebtedness and outweighs the benefit of the initial need for credit, our personal loan policy considers each customer’s unique circumstances, helping customers to meet emergency expenses to care for their families,” Haihambo added.

He also noted that Nedbank consolidates debts, thus providing immediate relief for an employee in financial distress and at the same time, allowing them to benefit from a lower overall interest rate.

Tips on Avoiding Over-Indebtedness

Haihambo says that by taking certain precautions—being aware of the risks and managing your budget carefully—you have every chance of never facing this situation.  He offers the following advice:

To control your budget and maintain your ability to pay and repay, it is essential to keep an eye on your finances.

Do not borrow excessively and always be reasonable: only take out loans that you can repay.

Start an emergency fund for unexpected expenses.

And lastly, compare prices when shopping, spend wisely and avoid buying on credit unless necessary. All in all, keep to good spending habits.

*Erastus Haihambo, Head of Nedloans

GIPF’s pension backed property loans imminent
Finance

GIPF’s pension backed property loans imminent

August 01, 2022
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The Government Institutions Pension Fund (GIPF) says it is ready to roll out Pension Backed Home Loans to help workers secure houses.

Energy, mines drive credit growth
Finance

Energy, mines drive credit growth

August 01, 2022
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Energy, commercial and mining companies were the main contributors to corporate credit growth in June as demand for overdrafts from both households and corporates continue to slide, statistics from the Bank of Namibia show.

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