Small traders shun loans from microfinance institutions

Expensive microfinance loans in Kenya are driving smallscale businesspeople away from the same institutions that are supposed to boost businesses and help in eradication of poverty.

Most businesspersons are shunning loans from the institutions due to high interest rates and strict repayment conditions, which make the loans hard to service. Most micro-finance institutions in Kenya charge interest rates that range from between 1.8 per cent to 2.5 per cent per month. Others, on the other hand, charge at least 0.5 per cent per week.

This translates to between 21.6 per cent and 30 per cent per year. The institutions have repayment periods of weekly and monthly depending on the size of the loan, lending rules and how one agrees with other members of the group ran by the micro-finance institution, who jointly act as guarantors of the loan. Moreover, since most of the loans offered by the institutions do not have grace period, borrowers start servicing the loans as soon as they receive them.

All this means that interest rates from micro-finance institutions are higher than that of most commercial banks, whose lending rates are between 21 per cent and 24 per cent. The institutions lowered their rates by 1.5 per cent after the Central Bank of Kenya (CBK) reduced its benchmark-lending rate by the same percentage point in July following a drop in inflation to below 10 percent and stabilisation of the shilling.

Cut rates

But while banks cut their lending rates, micro-finance institutions — which are normally funded through concessionary loans from international financial institutions — did not since many were not affected by CBK‘s move.

“Maintaining a loan from microfinance institution is expensive, even if it is a small amount. It is only when you complete servicing the loan that you realise to almost paid double the amount you borrowed,” says Margaret Akumu, who was a member of a microfinance institution until recently.

Akumu, who runs a groceries store in Komarock estate in Nairobi, said she quit the institution after taking two loans and struggling to repay them.

Doubling

“The first time I borrowed $240 (Sh20,000) to boost my business and repaid in six months. I borrowed about double the amount the second time after I was encouraged by the organisation officials,” she said. The loan, according to the trader, literally broke her back as she struggled to repay.

“As usual, there was no grace period. I started repaying it the following week even before I had bought stock for my grocery. Each week, I was taking to the group at least $15 (Sh1, 260),” she said.

And unlike the first time, Akumu said she found the loan difficult to service because of the higher installments.

“There is a week I defaulted and officials of the organisation and members of my group did not like it, since they had also guaranteed the loan,” she said. Several months later when she cleared the loan, Akumu said she decided to quit the institution.

“I noticed that my business had barely improved despite taking loans to boost it. What really burdened me was the mode of payment since sometimes I would forego buying stock for my shop to repay the loan,” she said.

The loans, according to Akumu, also made members of the group turn against each other.

“Normally, when someone defaults in paying her loan, group members go to auction her property to recover the cash. And since most groups are made up of people who know each other, the exercise makes them enemies. There is a time I went to auction the property of a friend and I could not stand it,” she said.

Joan Mwikali, a leader of a women group in Nairobi belonging to Kenya Women Holding, acknowledged that she has lost several members of her group.

“Most of them, especially those we started the group with, left after repaying their loans citing high interest rates. Others could not cope up with the strict conditions that they must adhere to in the group,” she said.

Lost members

Since mid last year, Mwikali observed they have lost about six members.

“We have recruited new members but they cannot compensate for the ones who left since they had huge deposits and had helped to build the group,” she said.

In the groups, members are encouraged to take loans regularly to keep funds revolving.

“KWH officials encourage members to take loans once they complete servicing another, but people are now reluctant to do that,” she said.

In a recent study on microfinance in Kenya and Uganda, University of Nairobi economics lecturer, Joy Kiiru, and her Ugandan counterpart, Flavian Zeija, found that microfinance loans were burdensome to low-income earners. The researchers observed that most of the institutions were exploiting unregulated structures to fleece clients, with some of their practices bordering on what shylocks do.

In Kenya, CBK regulates only six deposit-taking microfinance institutions. The rest, about 45, are not policed. Kiiru and Zeija noted that less than 20 per cent of people who borrow loans from microfinance repay them from their business returns. Majority, over 62 percent, repay due to pressure from group members and similarly, about 17 per cent repay loans after selling their assets while about five per cent have their assets auctioned by group members. Association of Microfinance institutions in Kenya notes that their members serve over 6.5 million clients and they have advanced loans amounting to about $350 million (Sh29.4 billion). 

—Xinhua