BY DAVID WANJALA
It is well over two years since the interest-rates capping law became operational on September 14, 2016. The law was implemented following concerns raised by consumers and legislators about the high cost of credit. Self-regulation on interest rates by banks was viewed at the time as a hindrance to credit access.
The law was expected to kill two birds using one stone – to lower the cost of credit and increase access to credit. What is the impact of the law on the economy two years on? Have the intentions of the interest rate capping law been achieved?
According to analysis by the Central Bank of Kenya (CBK) in a report, ‘The Impact of Interest Rate Capping on the Kenyan Economy’ released in March 2018, the rate-capping law has negatively affected access to credit – particularly by small and medium enterprises – including reduced financial intermediation by commercial banks. This, the report says, is evidenced by the significant increase in the average loan size arising from declining loans accounts, mainly driven by large banks; the result is that small borrowers have been left out.
Secondly, and probably most profoundly, banks have resorted to lending to Government and large corporates. Whereas demand for credit increased immediately the law became operational, credit to the private sector has continued to decline, the report says.
The report also says that while the structure of revenue of the banks has begun to shift away from income from interest, some banks have exploited existing approval limits to increase fees on loans in a bid to offset loss in interest income, which could effectively make the capping of interest rates a zero sum game.
But it is not just SMEs and individuals; players in the banking sector too have experienced the negative effects of this law. According to the CBK, although the sector has remained resilient, small banks have experienced significant decline in profitability in recent months, which may complicate their viability. As well, the regulator says, the rationing out of micro, small and medium enterprises (MSMEs) from the credit market by the commercial banks is estimated to have lowered growth in 2017 by 0.4%age points.
Interestingly, however, and probably out of the desire not to sound alarmist, the regulator is noncommittal on one of the biggest negative impacts of the rate capping law in as far as credit access goes – migration of borrowers to expensive sources of financing – on grounds that there is insufficient evidence to act decisively.
“The capping of interest rates is expected to constrain access to credit by riskier borrowers, who will eventually migrate to expensive sources of financing. While we do not have evidence about the upsurge in the number of predatory lenders, we argue that those borrowers who are rationed out by the commercial banks will seek loans from those institutions which are not subject to interest capping law – micro financial institutions, SACCOS and non-regulated lenders,” the report says.
Truth is, the “riskier” borrowers that commercial banks have shunned have indeed migrated in their numbers – both individuals and SMEs – to micro finance institutions (MFIs) and other non-regulated lenders, the impact of which is devastating not just to the economy, but also to the social fabric of the society. And even though the CBK says these alternative lenders are not subject to interest capping law, absolving itself from the mayhem the lenders are visiting on the hapless borrowers, the regulator is not powerless to act, proactively, to rein in and control the emerging trend where Kenyans are being robbed outright.
To start with, there is a re-emergence of shylocks, a trend that had fizzled out in the period leading to the passing of the rate cap law. Some charge as high as 30% per month on loans, which translates to 360% per annum. This means that people pay Sh30, 000 interest in 30 days on a Sh100,000 loan. If, by some stroke of bad luck, it took you ten months to clear your Sh100,000 loan, you will end up paying Sh300,000 in interest! Now, had the CBK dug deeper in its research, it would have found out that the shylocks are thriving: at the office, in the estates and on the streets, a worrisome indicator as to just how much the economy bleeding.
Then there is the proliferation of online lending, with M-Shwari, KCB Mpesa, M-Fanisi, Branch, Saida, Tala, M-Kopa, just to mention a few, giving loans of up to Sh100, 000, with interest rates averaging 11% per month. These facilities also come with additional costs by mobile phone service providers in transfer charges. When borrowers are unable to honour their repayment commitments, they are promptly reported to and blacklisted by credit reference bureaus for default – without a hearing. As such, there are thousands of Kenyans who cannot access loans from commercial banks on account of CRB reports for even delaying to clear a loan of Sh500. To clear your name from the bureaus is both cumbersome and costly.
The elephant in the room, however, is the proliferation of micro finance institutions. This is where the SMEs, the very engine of a working economy, are getting milked dry, with entrepreneurs left shouldering loans that they are likely to spend lifetimes struggling to clear.
Modelled on simplicity and efficiency, with mouth-watering slogans, MFIs are making a killing by filling in the gap left by commercial banks, which have closed the door on the so called riskier borrowers. They lure desperate SMEs and individuals into taking up loans with them, charging interest rates that are way above any financial probity and frugality. Once they have you in their net, you are theirs for the taking –unless, of course, you sell off your assets to pay off the loan.
Francis Mburu knows it better than most. The 30-year-old father of two took a loan of Sh1.35m working capital on December 8, 2017 from Musoni Micro Finance, to bolster his liquor distribution business, a move he wishes he never made.
The loan was to be repaid via M-Pesa in 36 monthly instalments comprising of principle and interest of a sum of Sh63, 375 to commence one month from the date of drawdown. It was to attract interest at a flat rate of 23% per annum. But it also gave the lender a free hand to revise the rate of the interest at will. Francis was not allowed a repayment holiday for whatever reason, and in the event he failed to pay on the due date, something that was bound, more often than not, to happen in the 36 months the loan tied Francis to the lender, he would be penalised.
“If the borrower fails to pay any sum payable under the proposed facility on its due date, the borrower shall pay additional credit administration fee on the principle repayment instalment amount due from the date of such failure to the date of actual payment at the rate of 5% on the principle instalment due,” reads the contract in part.
There were other charges – a loan application fee of 3% of the total loan value, which in Francis’ case amounted to Sh40,500; credit life insurance arranged for the borrower by the lender at 1% (Sh13, 500) of the loan phase value, a Chattels fee of Sh2000 and RTGS fee of Sh550.
The loan was secured against a Chattels mortgage over household and business assets, his motor vehicle, an Isuzu DMAX, single cab, and a personal guarantee by one Daniel Kamau.
Among other punitive rules, the contract also stipulated that any circumstances arising which in the opinion of the lender have or may have a material adverse effect on the borrower’s ability to perform his obligation would constitute default and cause any amount outstanding to become immediately due.
Three things, majorly of the lender’s own making, conspired to ruin Francis’ engagement with Musoni. First, Francis says, the process of approving the loan was long and tedious, sometimes stagnating and starting afresh from mistakes of the employees of the lender. His first contact with the lender was back in 2016 when his business began showing signs of not performing. A lot happened between then and December 2017 when he acquired the facility from Musoni.
Secondly, the stipulations in the lender’s contract were exactingly punitive, as if they were meant to set up the borrower to fail to fulfill his obligations at some point. Life is never a straight line yet the contract assumed the borrower, for 36 months of engagement, would have money ready to pay on the due date every single month. Francis learnt the hard way that failing to pay on the due date at Musoni, even for a single day, meant sinking further into a financial hole he may never have found a way out of.
Thirdly, the interest rate was way too high. Had the government not passed the cap law making commercial banks lock out people like Francis, Equity Bank could probably have easily given him a top up on his existing loan at, say 16%. That option was no longer on the table.
But the bigger question is, how could the Government not follow up with micro finance institutions, some funded using donor money, to ensure its desire to provide SMEs with affordable credit is not negated? And how can the CBK just stand aside and look on as these institutions run roughshod on individuals and small firms trying to set up businesses that would provide employment and give back in the economy so the country can thrive?
Musoni was extending credit at 23% in December 2016, three months after government had capped commercial banks interest rates at 14%. Couldn’t there have been a policy to deal firmly with this state of affairs?
At this point, some background to Francis’ misfortunes would suffice.
Francis got into the business of distributing wines and spirits for Monwalk Investments in 2013. Business was so good that by mid-2014, he had bought two pieces of land and a Nissan Hardbody single cabin. He later secured a loan in early 2015 from Equity Bank and bought a second pick-up, the Isuzu DMAX.
As fate would have it, in July 2015, government ordered a major crackdown on illicit brews. In characteristic Kenyan style, those leading the crackdown did not confine themselves to the illicit brew. If anything, there still isn’t any clear definition in the local jurisdiction of what illicit brew is. This meant that anything wines and spirits, imported or local was targeted, bringing the otherwise thriving Monwalk Investments to its knees and with it a chain of line services including distribution. Monwalk Investments closed down in January 2016.
By the time Francis was approaching Musoni for a loan, he had decided to re-enter the liquor business, running a wines and spirits shop this time. It would keep afloat his life and enable him to continue to pay off his loans to Equity Bank, as well as meet other financial obligations. He opened one in Kasarani – Flo@ Wines & Spirits – putting in his entire savings, as he continued with distribution on the side. In the end, he expended his savings and sold one of his pick-up trucks, the Nissan, to offset some of these obligations.
Capitalised on his desperation
Francis also decries a lot of misrepresentations in the manner the loan was marketed to him. First, after valuing his DMAX, Musoni had agreed to give him Sh1.5m at 20% interest on a reducing minimum per annum for three years. The position changed several times in between before the institution finally settled at Sh1.35m at a flat rate of 23%. Additionally, even as the loan was approved in December 2018, it wasn’t until Jan 2018 that the money, Sh1.28m – after deductions – finally came through. By this time, Francis was already in the deep seas. A lot of it went into clearing the debts he had accrued as he waited for the loan to come through.
“I had gotten into more debt by this time. The distribution business had become extremely tough, as competition soared. What we would sell in a day now took us more than four days,” he explains.
It did not take long before he began struggling to raise the Sh63, 375 monthly premium, with possible penalties compounding his scenario. The worst came on August 20, 2018 when Musoni finally took possession of the pick-up truck, depriving him of his only remaining means of survival. His wines and spirits shop was also struggling. The repossession came after he failed to pay on the due date for the first time in the five months he had serviced the loan.
The pick was towed to TT Motor Yard near Moi International Sports Centre, Kasarani, at Francis’s cost. Storage charges, he was told, were Sh300 per day.He was promised it would be released to him once he honoured his payments to Musoni. On August 30, Francis made his premium, but the manager shifted goal posts. He asked him to do a two-month pre-payment before he could get back his vehicle; he couldn’t afford it.
Storage fees, Musoni advised, had gone up to Sh500 per day, and he would have to foot the entire cost. Any hope Francis had of the future he had worked so hard for, was beginning to slip away. Not only did he not have a source of livelihood, but his asset was accruing storage fees as its condition – and therefore value – depreciated. He worried not just about his loan, which was attracting penalties, but also for his wife, who was about to deliver their second child.
Because his household goods were part of what secured the facility, people from Musoni’s Zimmerman Office made it a habit to drop by his house unannounced, sometimes keeping him from going out to find a way to fend for his family – he had by now become an Uber driver (he still is), working for a friend.
Throughout August and September, the managers at Musoni openly salivated over his DMAX 4X4 truck. They offered to buy it from him at way-below-valuation prices as an option, which would have seen him lose his vehicle but still remain with a substantial amount of the loan to clear. It was then that Francis put the vehicle on one of the online market sites and found a buyer who paid Sh1.08m direct to Musoni on September 26. TT Motor Yard demanded Sh18,000 in storage charges.
When the buyer paid the bank the car’s value on Francis’ behalf, Francis was told he still had a Sh166,000 balance to clear, meaning that his balance until that point was Sh1,246,000. Having faithfully paid Sh63, 375 monthly for eight months, from February to September, he cannot understand how he had covered so little ground even with some Sh507,000 already paid. As he admits, he hadn’t made effort to begin servicing the remaining debt because, in his own words, “I don’t have a way of doing it.”
For its part, Musoni has not made any effort to claim the balance from him, and he fears the institution could be using the textbook model of buying time to have the amount accrue fees before it strikes again.
“Perhaps this time they will take away my furniture and electronics,” he muses bitterly.
In its website, Musoni outlines its vision thus: “To be the most efficient microfinance institution in Kenya by being, among others, ‘data-driven to offer the best value, most flexible and most customer-oriented financial services in the market’.” It is also on a mission, it says, “to grow, build and maximize the potential of the businesses of the low income and unbanked of Kenya through the provision of affordable, flexible and customer-oriented financial services.”
Ironically, neither the mission nor vision of the micro finance reflects in the manner it has treated Francis. The only thing it has succeeded in doing to cast itself as a prominent member of a family of sharks which have infested the deep seas of the Kenyan financial market post the rate-capping law era.
Musoni recently signed a Sh940m loan portfolio guarantee with USAID, the American aid development urgency. The agreement will allow the micro-lender to develop and roll out innovative financial loan products to increase access to credit within Kenya’s agricultural sector, especially within cereals, dairy, livestock and horticulture value chains. The groups to benefit from this will include individuals, associations, small-scale farmers and cooperatives, as well as micro, small and medium enterprises.
Loans of a flat rate of 23% interest per annum, with numerous costs in commissions and other charges and with such punitive clauses that slap huge penalties on borrowers for failing to pay on due dates, are anything but innovative. Obviously, such facilities are not affordable, flexible and customer-oriented, and one wonders how such as scheme is meant to increase access to credit, especially within Kenya’s agricultural sector. By the time of going to press, Musoni, Zimmerman branch had not responded to our questions.
Not even Kenyan commercial banks, before the rate cap, charged 23% interest on loans. Besides, commercial banks provide ways of helping customers regain their footing when the going gets tough – including providing repayment holidays.
Francis’s story characterises the sad state of Kenya’s financial sector, particularly in relation to SMEs, and access to credit ever since the law capping interest rates was implemented in 2016.
In what, at this point, could be the unflattering conclusion to this tale, the second born in a family of six has since relocated his family to his rural home, having lost everything he had worked for since 2013, including the two pieces of land he had bought when business was thriving. Happily, it affords him some breathing space. The tenacious taxi driver is unsure how long it will take Musoni to come calling again, but he hopes to rise again someday.
Would it not have served every party better, one wonders, had the micro finance opted to guide him out of his financial doldrums, to nurture a relationship with him? How much would it have cost them – especially considering Musoni’s funder is an aid organisation?
How many others out there are suffering a similar fate at the mercy of Musoni and others like it? More importantly, just how effective is the regulator?