Financing Schemes

Prahalad has also praised Brazil’s Casas Bahia: “More BOP consumers in Brazil are able to buy appliances through Casas Bahia because the firm provides credit even for consumers with low and

unpredictable income streams____Casas Bahia is able to provide

access to high-quality appliances to consumers who could not otherwise afford them.”40 Unfortunately, providing credit does not change the affordability of a product, even though it does provide some other value to the poor. The finance term for a Casas Bahia loan ranges from four months to one year, with an average of six months. The customer can choose between saving money for six months and buying the appliance later, or buying now and repaying the loan over the next six months. The financing terms do provide value: instant gratification; for the privilege of this instant gratification, the consumer pays an interest rate of over 4 percent per month.41 While these customers often lack access to efficient credit markets, the interest rate charged by Casas Bahia is lower than that of informal moneylenders. However, this does not change whether the customer can really “afford” the appliance, which is a function of the price of the product. People with “low and unpredictable income” would be well advised to save and pay in cash, especially given the high interest rate. In a similar vein, consumer groups in the United States (e.g., Consumers League of New Jersey) advise low-income people not to buy appliances from “rent-to-own” stores. Unbundling the purchase price and the interest cost will enable the customers to do a better job of comparison shopping too. It is not surprising that Casas Bahia deliberately does not provide this information; many of its customers do not understand how to unbundle the purchase price and the interest cost, and instead focus on the monthly installment payment.42

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