BY ANTONY MUTUNGA
Access to credit is one of the major problems that Kenyans have faced for the last several years. The problem was made even worse with the implementation of the interest rate cap that saw banks completely reduce access to loans for a majority of the population. As a result, many people were left stranded, as they couldn’t get access to credit in order to operate their businesses.
The situation got even worse for those who originally had loans and needed more credit in order to increase their earnings and pay up. Such individuals got stranded. The businesses that they had taken up loans to finance were not able to yield back enough to repay the banks, leaving a majority with no option but to give up their securities.
The number of such cases in the country has been on the rise, with banks auctioning properties of the defaulters to get back their money and, consequently, listing the individuals at the Credit Reference Bureau (CRB). The situation has continued to grow out of control to the point that the public has started over-relying on mobile loan applications and shylocks even though they charge high interest rates.
As a result, a number of people are drawn into more debt. According to data from TransUnion Credit Bureau, Kenya has up to 500,000 people blacklisted in the CRB, representing a 300% increase from 2015 where the number of blacklisted borrowers stood at 150,000.
Most of those that have gone for shylocks and mobile loans are people who have been locked out of access to credit by banks. Those who already have loans and are unable to repay remain stranded waiting for the banks to auction their properties and list them. All this is avoidable but because of the lack of understanding in financial products, most people are not aware that they have options when it comes to dealing with their loans.
For instance, the norm in the country for most people is once they know that they may not be able to make the monthly instalments, they go into hiding in order to forestall collection. This on the other hand makes the bank assume the worst and because they are a profit-generating venture, they are forced to take drastic actions in order to claim what belongs to them.
However, hiding is the wrong step to make. In fact whenever one feels that it would be difficult to make their monthly instalments, it is advisable to get in touch with the bank and let them know of the situation. Banks, like any other financial institutions hate it when they are surprised. Informing them earlier promotes trust and credibility, which creates a better understanding. Additionally, it also gives banks the opportunity to make concessions that may have been impossible if one had already defaulted.
According to Caroline Njenga, a personal banker, most people think banks are impervious and glad to take people’s property or list them at the slightest sign of default. This is further from the truth.
“Bankers usually make contact to specifically help borrowers move out of debt. No collector can help you out of debt if you are on the run, not declaring some income or unwilling to cooperate,” she said.
If one communicates with the bank earlier in the case of a default, they are able to negotiate the terms of the agreement. For example, the bank may be willing to modify your loan and allowing you to pay lower instalments you can afford for a longer period. Additionally, the bank might also come to an agreement you so you may pay up the interest first then complete with the principal. This gives you time as you get to pay lower instalments for a period of time.
The negotiation following an open communication can also see the bank make modifications of the financial covenants in the agreement. Financial covenants are the provisions that are included in the loan agreement to ensure that the borrower’s financial condition and business is within the limits set by the lender when granting the loan.
In other terms, the financial covenants are there to protect the investment of the lender as they act as an early warning that the borrower may not be doing so well. Henceforth, with trust between the two parties, the bank is able to allow the modification of these provisions in order to allow them give the borrower more time to be able to deal with any financial issues in the way of repaying the loan.
Ms Njenga says that if one is honest about their financial situation, the banks will help one explore all the available options.
“In some cases, banks can waive the penalties that have accrued if borrowers show genuine willingness to resume regular repayment. With the information, for example, about other debts and what one gets from a side job or investment not earlier disclosed, bankers can work out how you can move out of debts smoothly,” she said.
Apart from this, people with a number of loans have the option of doing a consolidation loan in order not to default on their current loans. Loan consolidation is where one takes a larger loan to cover the already existing ones. This enables one to clear all the loans one has leaving them with one major loan which will have a lower interest rate as compared to the other multiple loans combined. Despite being a way to deal with the payment of the current loans, one is usually advised against this unless they have a clear payment plan that will enable them to repay the consolidated loan.
A person with an unsecured loan is also able to convert his loan to another in order to decrease their chances of defaulting. Unsecured loans usually refer to loans that are given out without the need of a security, as they basically determine this in accordance to one’s credit-worthiness. As a result of inherent risk they carry, such loans usually attract a high interest rate. Therefore, in case one has an unsecured loan it is possible to convert it to a secured loan as long as one has an asset that may act a security.
However, a majority of the people do not know this is possible. According to Vincent Mutua, an economics professor at JKUAT, most people end up suffering as a result of lack of information, that they can walk into their banks and convert their unsecured loans to secured loans providing them with lower interest rates. Even though the banks have a security in case you default, the move allows one to be able to pay less for the credit in the long run.
The balance transfer of a loan is another option that is available to the people but very few usually use it to pay less interest and avoid defaulting. This is where a customer is able to transfer their outstanding principal amount from their bank to another financial institution with the aim of a better rate of interest. It is in fact very beneficial to the customer as they get the opportunity to re-examine their debt and make some changes.
It is very crucial for one to study the balance transfer facilities that different banks offer in order to attain one which will save the customer in terms of the interest paid. Additionally, some banks include a charge when one wants to do a balance transfer of a loan, so it’s important to first do research on the banks. The facility may also not be available in all banks so research is important to find the right financial institution to transfer to.
Lack of information has been one of the major challenges that most people face when it comes to clearing their loans. Most people have the notion that banks are always looking to take away their belongings at the first sight of danger, but this is not true, being able to openly communicate with the back is one of the ways to find the best options available to avoid defaulting.