Gideon Boako (Ph.D) replies Onasis of NDC on Credit Scoring

Bro, Onasis Rosely, I am glad that after all your considerations, you opted to go for a payment plan with T-mobile instead of paying the full cost of about $1000 plus. Your fear was that if you opted for the Plan you were going to end up paying more (you put this around $3000 plus) over the life of the Plan instead of the $1000 plus spot payment today.

Do you know why you still opted for the payment plan, which is similar to what Vice President Bawumia is proposing for Ghana? A few reasons:

• First, it could be that you don’t have ready $1000 cash to pay for the phone now. This is the case for many people. We have tastes and preferences that our current income positions are not able to support. It is akin to the situation of that young university graduate who is in the business of trading on IG or any of the social media platforms and needs gadgets to take good and sharp pictures of her products but is handicapped financially. What is the option for such a person? I am sure he/she will prefer having the opportunity you have in the USA to get these gadgets and pay, say GHc5 a month spread over some months. The profits he/she makes from the business will be able to pay off the Plan over its lifetime. Otherwise that person would have to remain unemployed for until the period he/she is able to accumulate the bulk amount of about GHc15,000 to get those gadgets.
• The second reason why you opted for the Plan is because of the principle of Time Value of Money (TVM). This principle suggests that an amount of money today is worth more than it’s identical value tomorrow (in the future). Come to think of this: how I wished my father or grandfather was able to secure a loan in the 80s to purchase hotel in the prime areas of Accra or London and the cost of the loan spread over 50 years for his generations to pay. At the time in the 80s interest rate on such a value that could potentially buy a hotel in prime areas of Accra or London could possibly be around $100 (GHc1500) per month. Such money could mean something in the 80s but today what is $100 or GHc1500 that I cannot easily cough out in exchange for a hotel that will earn me millions? This is possible because of the principle of time value of money. The financial impact of paying the same amount in the future reduces over time, thereby lessening your burden. This is how Great Britain financed most of their infrastructure in centuries past using Consols (perpetual bonds) in the 1700s and 1800s which have been redeemed anyway.
• The third reason why you opted for the payment Plan is the potential earnings you could make on the $1000 today and over time if you invested it instead of using it to pay for the phone now. Many people will prefer to defer payment now to a latter date and invest the money today to earn income on it in the future in anticipation that a favorable net return on their investment in the future is sufficiently high to offset both the preference to spending money now and inflation. This works perfectly under the principle of the paradox of thrift.
• There is a fourth reason which I may not share because people who do so are cruelly minded. They usually do so because of the possibility of diminishing marginal utility for consuming a product over time. We can look at that sometime later.

So, in all angles you made the right choice based on your circumstances and understanding of the dynamics on paying for the phone now as against opting for a payment plan.

What Vice President Bawumia is advocating to implement gives you both options to make outright payment now, if you think you have the means and that works for you, or get a payment plan to use the product now and pay in bits over a period of time. There is so much wisdom in this, especially for young people who want to start-up and those of us who don’t have heavy pockets today.

This is a pro-poor policy and it will benefit the have-nots in Ghana.

I subscribe to a robust Credit Scoring System and efficient digital payments architecture.