Loan sharks sink Kenyans into financial abyss
Thousands of Kenyans desperate for credit facilities have ended up poorer with the promise of quick loans from informal lenders commonly known as shylocks and loan sharks charging untenable interest rates and now controlling a multimillion trade even as opinion remains varied on their legality.
Michael Kihia, an entrepreneur in Central Kenya, needed a quick loan of $600 to fix his business. The thought of approaching his bank was out of question as this would entail tedious application procedures before he could access the money. He needed a quick solution and since it would only be a one off loan which he could repay within no time he had to explore other options. Passing through Embu town, he spotted a loan company that advertised that it could offer up to one million shillings in loan within three hours. One step into the offices of the company, and he has never stopped regretting. It was the beginning of his woes, and the closure of one part of his hardware business.
“I was convinced after the talk I had with the ‘loan officer that I had found the perfect solution to my financial problems. The desperation to get out of my financial fix clouded my sense of judgement and reasoning. I would later sink further into financial abyss. I lost virtually everything to these people, and the sad bit is that I was still helpless,” recalled Michael.
To access the loan the value of his collateral was supposed to be at least double the amount he wanted to borrow.
He was required to deliver goods worth at least $1200 as security for his loan. Desperate for the loan he obliged and delivered his TV set, fridge, office computers, and printers all worth $1300. The credit terms read that he had to pay the loan and a further 30 percent in 30 days. Failure to do this would see the lender dispose off the goods.
A week later, he realized that he was facing loss because he could not meet the deadline.
When the deadline lapsed, he went to the lender's offices to ask for more time to pay, only to find his television set and music system lined up for auction.
“I am always bitter and angry at myself for allowing myself to go through with their suggestion. I had already made a commitment to pay the loan and had already paid five percent in the 30 days but they would hear none of what I was telling them. I am even not the first one. I have seen housewives, businessmen and even parents desperate to get their children's fees sink deeper in poverty. It has reached epidemic proportions, “said Michael.
His case reverberates across the country where credit seekers are suffering at the hands of what they perceive to be licensed financial institutions. Others though aware will still flock to access credit because they are desperate and believe they can manage to repay the loans after they address a pressing need. Welcome to the world of loan sharks and unregulated money lenders.
With the increase in lending rates and lengthy procedures in obtaining credit from mainstream financial institutions, people are trooping to shylock dens with household goods as collateral to get financing. Borrowers are required to pay interest as high as 25 to 30 per cent.
The shylocks set their own lending regulations and the client has little say. They will offer a borrower cash against their domestic appliances such as TVs, VCR, HiFi, cookers, gas cylinders, microwaves, ovens and fridges. Other valuables that can help in securing a loan include office equipment such as computers, together with cars, share certificates, title deeds and other such assets. A quick check in major towns in Central Kenya reveals tens of dozens of posters and stickers enticing people to go for ‘instant loans.’ ‘Get up to two million instantly with relaxed repayment terms,’ reads one such poster in Murang’a town. This is a line that begins the journey to financial woes which has seen some residents go to the extent of ending their lives.
The most valuable assets to the loan sharks are share certificates and title deeds. One of them said he could only loan cash amounting to 60 per cent of the value of the shares. For instance, if one has shares worth $600, they can only borrow $360 against them. One of the loan shark, who proudly said he doubled up as an auctioneer attributed this to the risky nature of shares due to their fluctuating nature.
The other requirement that must be fulfilled is that all goods presented as collateral should be accompanied by original purchase receipts. With that transfer documents are signed and a contract is entered into. However, the agreement is invariably a farce aimed at fixing the borrower.
With a compound interest of 30 per cent, the shark can recover nearly the principal amount in accrued interest alone in case of a three-month default. They will, therefore, end up with the borrower's item and money if he is not able to repay in less than three months. While a portion of them are members of the Association of Microfinance Institutions (AMFI), majority remains unlicensed and cashing in on borrowers ignorance.
Financial experts now advice borrowers to fully understand what they are committing to and carry due diligence on the institutions they intend to borrow from. “Banks have been vilified due to the prohibitive cost of lending. My advice is, always borrow when you really need to borrow, and when you do, take the time to understand who you are working with, and go through the finer details of what happens when you default,” said Bernard Ndegwa a financial advisor.
