|Thousands of Kenyans are facing ruin as banks and other financial institutions demand that their customers repay the money advanced to them. However, many of those who took loans have been unable to pay up.
|Wananchi queue to buy Safaricom shares in April. Many small-scale investors took loans to buy the shares. However, a large group of debtors who were adversely affected by post-election violence have been unable to repay their loans on time, leading to high default rates. Photo/FILE
Financial experts are blaming easy credit in the form of unsecured loans, credit cards and financial illiteracy for the spiralling debts crisis.
Most of those who are under pressure from banks were adversely affected by post-election violence which destroyed many businesses and left others on the verge of ruin.
Insurers have so far received claims worth Sh1.2 billion arising from destruction caused during the post-election violence. They are yet to decide whether to pay or not. The law does not require them to pay for damages caused by politically-instigated violence.
Many of those faced with the prospect of drowning in debt were tempted by bank offers of cheap unsecured credit over the last five years and are now finding it difficult to service the loans.
The problem has been made worse by rising inflation, the high cost of food, fuel and other essential commodities.
Financial advisers, lawyers and debt collectors are swamped by creditors seeking to recover their money and debtors pleading for relief. Teachers, farmers, soldiers, policemen and civil servants are bearing the brunt of the unserviceable debts.
However, Laboso George of the Kenya Commercial Bank’s savings and loans department said there had been no upsurge in property auction as far as their mortgage book is concerned. Other banks were unwilling to comment on the matter.
In one day this week, the Daily Nation had two pages of advertisements placed by auctioneers selling property seized from those unable to service their debts. Lawyers say this is just the tip of the iceberg.
Mr Evans Monari, a Law Society of Kenyan Council member, told the Saturday Nation that many more properties were being sold without being advertised.
“Most people are selling through private arrangements,” he said. According to him, banks are auctioning property after failing to reach an agreement with the debtor. He said the trend was likely to continue into the foreseeable future.
He said many people had opted for voluntary bankruptcy to escape their debtors and buy time to reorganise their finances. The increase in the rate of bankruptcy is a signal that something is wrong with the country’s economy.
“Our interest rates are too high. They are the highest in the region and this leads to high default rates,” the lawyer said.
Over the last five years, banks have significantly lowered barriers standing in the way of those seeking credit. To secure a loan, one only needs to prove they are in salaried employment.
Some institutions have also been “hawking” loans, luring all and sundry with the bait that one needs no security to get the cash.
Financial experts argue that in addition to the lowering of barriers to credit, loans have become subject of aggressive promotion to the extent that many players in the banking sector actually employ freelance sales agents to market loans.
Due to this, many more people are borrowing than ever before. And with more borrowers comes the possibility of more defaulters.
“Banks are giving out loans on the security of payslips that clearly show that the borrower’s income cannot match the sums advanced,” says Mr Edward Wangila, a lawyer who has handled debt collection cases.
And Mr Manyara Kirago, a financial adviser with First Independent Advisers, says many borrowers use loans on consumption rather than investing in income producing or appreciating assets.
They buy cars, furniture and clothes, pay bride price and even go for holidays on borrowed money.
“This results in spending more than they earn and when the repayments kick in, they find themselves unable to meet their obligations,” says Mr Kirago. This is the category of borrowers who are now being auctioned, he says.
But Mr John Wanyela, the chief executive of Kenya Bankers Association, disagrees with Mr Karago’s assessment.
“Most of the loans have been pegged on an individual’s income. I therefore don’t think that there is a lot of defaulting in that area. That is an area that is substantially growing,” he said.
Mr Robert Warlow, the group head of risk at Fina Bank, advises people to use their loans wisely.
“For example if you are borrowing money to pay school fees you are bound to have the same problems every three months, so that is not a necessary reason to borrow,” he said.
But if one buys say a lorry for a business, it is a good debt because it produces income. According to him, a bad debt normally keeps one afloat temporarily.
To ensure a loan improves one’s financial standing, experts urge people to develop financial plans before borrowing rather than because the money is available. Banks and other institutions are lending as much as they can to maximise their profits.
While the Government can help protect gullible borrowers by introducing regulations to ensure more transparent lending practices, the buck always stops with the borrower.
In the last three years, banks have increased their lending. Many of the loans are unsecured, according to Mr Wanyela.
“This growth has been due to positive political statements and everybody was suddenly optimistic. The economy started growing and there was general positivity to everything that was happening,” he said.
Some banks are likely to be asked to write off their client’s loans. Should that happen, cooperatives and micro-finance institutions are usually the hardest hit.
Mr Carilus Ademba, managing director of the Kenya Union of Savings and Credit Cooperatives Limited, told Saturday Nation that cooperative societies that were hardest hit by the post-election violence were mainly in the transport sector.
“We are telling our members to provide information for such cases which we can write off. But default cases in cooperatives are less than five per cent compared to the bank’s close to 20 per cent,” he said.
Risk management experts say that there is need to intensify loanee follow-up to improve recovery of outstanding loans and prosecute defaulters.
“We should determine how much debt the borrower can comfortably handle, consider income streams and any other obligations that could interfere with repayment,” said Mr Warlow.