Wednesday, March 07, 2007

starved of credit

i honestly do not know what to make of news i got recently regarding bank interest rates. just about the time i was negotiating a loan from a leading bank in kenya, news were coming from US that were to say the least depressing. my bank was offering me an interest of 21% unsecured loan. the maximum i could take was 1 million. payable withing 4 years. for that to come through, i was supposed to furnish them with 6 months bank statement (i dont understand why yet they are my bankers), 3 months payslip, letter from my employer proving that am not on notice to leave , proof of place of residence and so on. i am also to insure the loan at about 2% , pay arrangement fee and be paying standing order fee (for the premium deducted from my account to theirs) thats after signing an agreement that my salary will be processed by this bank for which al pay 160 /= per salary!

well at that time my friend told me that he just got a 30,000 dollar loan at 3.6% without much ado. only thing the bank was interested in was his credit rating. this led me to believe what i also heard the other day. another good pal of mine works for a leading micro credit operative. in fact he is the one who established the lenders branch in eldoret. here is how it works:
this guy, a briton, takes cheap loans from UK for onward lending in kenya. he does not take deposits. he is just a lender. his target market; civil servants, parastatals, teachers and the like. what you need to take the loan? your ID, job ID and payslip. as you can see that means the lending is pretty much risk free. i mean how easy is it to lose a job in these places. for a teacher to be fired for example you need 3 tribunal hearings! ok so this guys loan has to be repaid using a check off system. meaning that he gets his money even before you get your payslip!

now the depressing part, the loan amount ranges from 10K to 100,000. 100,000 is the biggest you can get and the interest is 8% per month. yea you got that right 8 % per month! now my friend did not even find that shocking. what was shocking according to him is that his boss does not care even if his clients remain with 0 /= on their payslips after the loan. what i did not understand is how come the personnel dept of these companies allow that.

but while i thought that was inhuman, what i found out next was even inanimal. in the rural areas, teachers and other staff from public firms get another form of credit. there are traders who give their goods on ccredit, professionaly called hire purchase. the teachers can easily 'take' these goods and pay using check off from TSC. now what does a teacher do when he wants cash? he arranges with someone who wants say a TV, the person gives him cash say 10,000 then he goes to the hire purchase and takes the TV which he hands over to the lender of 10,000. it means this lender has effectively bought a 21 inch TV for 10,000 bob and the teacher gets to repay perharps 20,000 bob plus interest when he only benefited from 10,000! now some of the employees of these traders and even the traders themselves have foudn out this and are themselves arranging for this sort of thing.

on a lighter note i got this website from a friend of mine. its a very inovative site by a kenyan. on one post, the author asked kenyans abroad what about the convinieces that they got compared to back home, some said they liked the west since there are dish washers, another liked it because of flat screen TV, another talked of hot showers , while another said it was because in the west there are diapers. ah well now we know!


  1. People in need of Credit will take any rate.Thats why micro-finance banks charge interest rates of more than 30% to poor people taking small loans.

    I think the borrowers r too poor to live on their salaries, so they borrow and live on loans

  2. It is a free market... Not the best of situations but sometimes we have to learn to postpone current consumption for later gratification!

    We need a savings culture in Kenya.

    I always come across people who bad-mouth Kikuyus esp their sense of dressing & habits i.e. being stingy.

    These are unfair comments but at least the Kikuyu guys/gals are not wasting their chumz! The largest "local" financial institutions are owned/controlled by Kikuyus. When you read their stories, most are humble folk who worked hard.

    Equity & Family Finance come to mind. I would have included NIC Bank but the ndegwas' wealth is suspect!

    I remember Banks wrote on the Mhindi shopkeeper whose family worked 6-7 days a week... nothing fancy but I bet they accumulated lots of cash lakini pole pole...

  3. @ coldtusker
    I dont think you can confine hard work and saving to Kikuyus and Asians only. There are also other hard working frugal people from other tribes just because they are less conspicous due to numbers doesnt mean that they do not exist.
    I do agree that we as Kenyans need to save more but this is hard when you arent making enough to live on in most cases.
    Plus with such insane interest rates how do we expect for there to be growth in business?

  4. @pesatu, i agree but i still believe trade must be done responsibly. 96% pa loans are inhuman at any rate!

    @coldi , i dont believe this free market talk, if it was so then how come microsoft lost the anti trust case and even localy safaricom lost to celtel? about the kikuyu, i think their success has more to do with their affinity to risk than savings alone. these guys always try anything that would bring money they sometimes lose big time but they never go down. am having pple like macharia of citizen in mind.

    @acolyte ,,,its not only savings that help asians and even kiuks. these two communities are also known for tribalism. indians do not buy from anyone else even if you are the last one standing! Kikuyu have that tendency as well. but apart from that they really work hard, focus on the goal and take all the risks that are there to be taken!

  5. One of the reasons why money is expensive in Kenya is because the credit system is broken down. Add the dysfunctional courts plus political patronage and you have high default rates.

    In the US, I can sign up for almost Kshs 1 m 0% APR for a few months. All it takes is a good credit history and you'll get access to cheap money.

    With the Discover Miles Card and Citi Platinum Select you can 'balance transfer' cash for free.

  6. Ssem is right. The problem is that genrally, the lending sector lacks one of the key plankf for it to work i.e. probability of loan recovery. That idea by the Briton has been tried by many pple I know, but always the issue is that human nature intervenes, they end up having to take the borrower to Kenyan courts where they then wait for anything upto 10 yrs to get the money back sometimes having to bankrupt the borrowers in the process.

  7. @ssemo , am told that in the US default is soo discouraged that even for you to move to a new rental house you require background checks! no wonder credit is soo available there.

    @MainaT , i dont get how come the jungu is managing? maybe you need to target only public servants or teachers and get check off. or get the cheap loans , lend to me for assured 50% return, (not ponzi :) )

  8. od, you are right on that. in some countries like Germany, you have a clearing house where all banks and any institution with financial dealings are hooked up. When U open an account for the first time or get a hire purchase, you are entered into the database. If you default, you get a score and depending on your ranking, baks would always refuse your loan application. u can't even get a landline or a contract mobile fon without having to a security deposit...

  9. @ruheni , wow! thats lovely. you can create trust from that. but in kenya remember the bill to outlaw bouncing checks was defeated in parliament by the MPs who issue the most of such! problem is you cant get the legislation since the legislators are the main culprits.

    do you know how the German model was done? is it purely private business based or is it supported by some sort of legislation?

  10. Aco & Odegle - I should not have used "tribal" examples... but I was trying to highlight a culture of thrift/savings.

    Odegle - I disagree. One buys from those who provide best value. Best value is subjective & includes elements of trust. Mhindis have branded themselves (or at least within their tribe) as trustworthy & providers of value. They have their own "credit-rating" system.

    There are always some crooks akina kamani, pattni, somaia... Legit businessmen avoid them like the plague.

    If you default, you are branded "untrustworthy" thus limiting other opportunities.

    Equity uses a similar approach that places the responsibility on a group not just an individual. Peer pressure keeps more folks honest.

    Look at the SNO license... every firm that hooked up with a politically connected institution/individual failed:

    - Econet & KNFU
    - Vtel & Kirinyaga

    Reliance (of India) has hooked up with Triton (Wahindis but known players) & they agreed to pay the higher price (KShs 11.6bn) while Vtel chose an untrustworthy partner.

    The Japanese built up huge reserves since the saved a lot. These funds were galvanised into lending to Japanese firms as they expanded. All was not good but overall they have done well.

    The Chinese are doing the same.

  11. Od-UK is the same as Ger-although things are changing since they introduced something called Individual Voluntary Arrangements. I believe things will only ever improve in Kenya when we develop a stronger independent and effecient legal system and us wananchi control our love of a fast/free buck.
    CT-absolutely. Most economies that have had sustainably high growth rates have had to almost force the population to save. Although it can go too far. One of the reasons, Japan stayed in recession for so long is because even with 0% interest rates, the govt couldn't get people to break from their deeply ingrained saving habits and start spending!

  12. MainaT - How do 0% interest rates work?

    Are these for borrowers i.e. can I borrow at 0%?

  13. @coldtusker , I dont see anything wrong with the example you gave. if you look at the kikuyu as a nation rather than a tribe then it makes lots of sense. i have argued before in other fora that what we have in kenya are nations which were called tribes by the colonialists. just look at the value systems and you see the glaring difference!

    @mainaT, i normally feel that savings alone do not translate to robust economies. the population must be encouraged to invest and spend. so that money can circulate.

    how do you quench the peoples thirst to get rich fast!?

  14. CT-that would be what Japan's Central Bank had the interest rates at. Then the banks could borrow from it (in form of govt-bills) and lend but at the lets say 3-4% to the genral population.
    Od- saving and investing as opposed to just spending is in some ways a cultural thing, but also something that can be taught.

  15. @mainaT , strange world we live in. is it true that in china, banks are being given incentives to increase interest rates to discourage spending (the economy is gorwing too fast) while in Japan people are being encouraged to spend? funny people

  16. CT-this link to a comprehensive list of articles on Japan's zero interest policy which was finally changed last yr after 6 or so yrs.
    Od-China is worried about the economy overheating-every conceivable type of asset is suffering a bubble in China at the moment.

  17. Od, the german model organised in an entitity called Schufa. Schufa is a private organisation which obtains information relating to its member organisations' private contractual parties and then distributes it for the purposes of credit evaluations. Almost all credit institutions in Germany are members of Schufa which is an association to protect credit-related transactions. The Schufa stores and makes available only relates to the application for and the commencement and contractual performance of transactions. Furthermore, the data includes information relating to breach of contract and any legal action. No information relating to income and assets, account balances, deposits, etc. is available. They make their money thro membership fees and transaction fees. This could be a model one can implement in Kenya, but there has to be a legal framework especially in connection with data privacy. Just check out their bronschure:

  18. @mainaT , dont you just envy such countries as china. thanks to them oil prices are shot up and even hitherto cheap second hand vehicles from japan have simply disappeared! i felt quite jalous the other day when i read that SA had realised their first budget surplus.

    @ruheni, thank you for the info. I suppose this is what we need. and i agree that the govt must play a part. recently someone i know got a set of new identifications vis; ID card, marriage cert, PIN, birth cert, DL and passport with completely different info. that is different names and even a fake husband. if such things are posible then it does not help to have credit databases.


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