Al-Ahram Weekly   Al-Ahram Weekly
24 - 30 June 1999
Issue No. 435
Published in Cairo by AL-AHRAM established in 1875 Issues navigation Current Issue Previous Issue Back Issues
 
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Easy buying

By Zeinab Abul-Gheit

Buying on credit is probably as old as the marketplace, but for Egyptians the recent boom in instalment plan purchases is unprecedented in the sheer scale and variety of goods and services made available for consumers.

One fairly recent comer to the credit buying market is housing. During the past few years a number of real estate companies have started to use instalment plans, if with a twist. They accept payment for housing units in instalments but without charging interest. Hazem El-Sayed, deputy sales manager at Misr Company for Development and Reconstruction in Alexandria, said that for the apartments the company sells in that city, "the buyer pays 15 per cent of the unit's price in the first instalment period. The payments are made four times a year over three to four years. Our sales have increased, and we sold all the units" due in part to the company's no-interest policy.

For the past two years, the El-Baron Company for Tourism Marketing has also used an interest-free instalment system to sell its villas and chalets in four tourist villages on Egypt's north coast, said Alaa Adham, a salesman for the firm. Adham credits the company's no-interest plan for the sale of most units.

In the tourism sector, Ashraf Abdallah, tourism director at Kabnouri Tourism Company, said it is mostly people from high-income groups, such as doctors, engineers and businessmen, who prefer to use the company's instalment plan since they can afford the monthly payments. The instalment system is available for domestic and foreign trips, the Omra (out of season pilgrimage) and the Hajj and for airline tickets. The firm charges one per cent of the total price of a trip each month, and most clients pay over a six-month period.

"The instalment system has increased the demand for trips. Regular customers now make between two and three trips annually instead of only one," Abdallah said.

The Akhnaton Company for Tourism began offering an instalment plan last February but only for trips abroad. Fouad El-Gindi, director of the booking department, told Al-Ahram Weekly, "The client has to pay a minimum LE300 down payment. The remaining sum is paid in advance of the trip over five months without interest." If the client prefers to pay instalments over one year, he must borrow the money from a bank at an interest rate of around 10 per cent. And if he fails to repay the loan, the bank is committed to pay the tourism company the remaining amount.

Although using the instalment plan has increased the company's business by 15 per cent, this system has also caused trouble. Some clients use a check to pay the tourism company although they have no deposit in the bank, El-Gindi said.

In working class neighbourhoods, nearly 80 per cent of the inhabitants buy merchandise through instalment plans, but they don't always pay on time.

So is the instalment system in the best interest of the ordinary customer who buys from private sector stores?

Ihab Nadim, an economics professor at the American University in Cairo, said that selling by instalment is in the interest of the Egyptian economy because the market is relatively stagnant. But Nadim advises that, in general, the instalment system should not be widely used because it will increase consumption and minimise savings.

Selling by instalment should only be applied to certain commodities urgently needed by consumers, such as cars, Nadim said. He also proposed that chambers of commerce in Egypt should tighten controls on firms which use instalment plans because they charge high interest rates, in some cases as much as one third of the price of the commodity, which burdens the consumer. Moneim Mekheimar at the Egyptian Ministry of Trade and Supply said that regulations have been put in place to protect consumers and sellers who use the instalment system.

Ali Rashid, a librarian who recently purchased an electric fan valued at LE120, explained, "It is better for me to pay LE10 monthly than to pay a lump sum of LE120." However, paying in instalments has its drawbacks. Rashid will be paying LE80 above the real value of the fan, and by the time he has made all the payments, it will have cost him LE200.

The shop owners have their own problems. "When I opened my store in 1990, 60 per cent of the customers failed to pay their instalments. I lost my capital, and I was obliged to sell my belongings to pay my debts," said Mahmoud Abbas, owner of a household goods store in the working class area of Al-Darb Al-Ahmar.

Today Abbas does not sell a customer new goods before he pays the old amount he owes. As a result, the rate of customers who now fail to pay their instalments does not exceed 15 per cent. The customer pays a 20 per cent interest rate on top of the price of the commodity when he pays over a two-year period, Abbas said. Selling by instalment is the best system in popular areas since the local people are mostly craftsmen who cannot afford to pay the total amount in cash, Abbas said.

Public sector stores offer lower interest rates to minimise the instalment burden on the consumer. Abduh Abdel-Khalek, director of Omar Effendi department store on Adli Street in Cairo, said his company applies this approach through collective contracts with organisations, government institutions, syndicates and private sector companies. The employees of those establishments get the goods from Omar Effendi when they sign the contract, and payment is made by check from the establishment which deducts a sum from the employee's monthly salary. Abdel-Khalek said this system is applied on all durable and consumer goods with a seven per cent interest rate. This system has increased sales by 30 per cent.

However, Abdel-Sattar Ishra, secretary-general of the Federation of Egyptian Chambers of Commerce, said the disadvantages of instalment plans outweigh their advantages. In his opinion, the only advantages of the instalment system are that it increases sales of goods and enables some companies to get rid of inventory. On the other hand, he said, high interest rates make commodities much more expensive.

Cars are also available through instalment system plans. Paying by instalment has enabled many people to own a car when they could not otherwise afford one, but the system has its drawbacks. Nabil Fahmi, who owns a car showroom in Cairo's Bab Al-Louk district, said the instalment system for cars puts both the buyer and the seller at a disadvantage. For the buyer, the final price of the car is very high, after all instalments are paid, because the interest rate ranges from 11 to 16 per cent. If the buyer wants to sell the car after paying the instalments, its price will drop sharply. As for the seller, he is committed to pay any unpaid instalments to the bank