Beware of office loan sharks

By Mwangi Muiruri

The high cost of living is pushing many workers to the edge, with many struggling to make ends through borrowing.

But most financial institutions have strict lending restrictions in wake of layoffs triggered by the economic hard times.

Amid tight lending, office loan sharks or shylocks are having a field day, offering unsecured loans.

Unsecured credit is money advanced to you but is not backed by any form of collateral.

Most shylocks take advantage of desperate borrowers to lend at punitive interest rates.

Mr Martin Okioma, a civil servant, says in his workplace there are at least four moneylenders who charge between 20 and 30 per cent interest on the amount borrowed.

"These people are messiahs. I am always broke by mid-month and I borrow Sh5,000 from them," he says.

Okioma says the security required to access the loan is his presence in the office, the salary acting as anticipated source of repayment to the money advanced.

Come pay day, he clears the loan and has to part with between Sh1,000 and Sh1,500 as interest payment.

Personal finance experts warn that this arrangement is not healthy because it can easily become addictive and can mess one’s finances.

Ms Angela Sitati, a financial consultant with a local NGO says: "Availability of easy credit in the office is enticing because one is not vetted to qualify for a loan."

She advocates for "borrowing when it is absolutely necessary, when there is no other bailout option to the your financial woes."

She says vetting done by established lenders serves as a gird against indisciplined borrowing.

"When you take out a home mortgage, it is a secured loan because your house is the security the bank will seize if you default," she says.

Mr Shadrack Omollo of Genesis Creditors says an unsecured loan has no such guarantee and the hope to recover the money from a creditor is mutual understanding.

"Because the arrangement is equally risky to the lender, the borrower is the ultimate loser," he says.

No security

"Not many people can refuse extra cash in their pockets as long as there is a willing lender near who requires no guarantee or security."

Regular borrowers eventually get careless with their spending because they know where to get credit fast without much hassle.

Unfortunately, many borrowers who are hooked to these quick credit schemes pay no notice to the high interest rates.

"Most financial institutions charge about 19 per cent interest a year but shylocks charge as much as 20 per cent a month, a rate which pushes many into financial distress," he cautions.

Shylocks also swindle the Government because they don’t pay taxes and other statutory payments because they are off the regulatory hook.

Stiff competition

Mr Simon Kahiga, a credit consultant with a local bank, says in the heat of cutthroat competition by financial institutions many people have taken up loans that they don’t need, only to end up misusing the money.

He says banks have packaged unsecured personal loans, and are usually based solely on the credit rating of the borrower.

"The good side of bank loans is that they have lower interest rates and the Government monitors the lending rates," he says.

He says the only disadvantage with financial institutions is the vetting process, which sometimes can intrude into one’s personal financial affairs.

"If you are not salaried, getting a bank loan is not easy and usually involves making visits to banks and negotiating terms," Kahiga says.

But, he says, the moment the lender ascertains you as a reliable borrower, getting the short-term credit becomes easier.

Indebted?

"For instance, those with salary accounts find it very easy to access instant personal loans," he says.

All the loan officer does is to casually look at your credit rating as derived in the account’s age, money flow in it and promptness of repaying past debts.

"However, they also realise there is always the first time in anything. To anticipate you defaulting, they usually keep the instant loan advance very low," he says.

He cautions that, going for shylocks is bad financial move especially for those in regular employment and income.

But Mr Eric Wanga, a private sector employee who usually borrows from office shylocks argues they are convenient to his financial needs.

"My bank insists on verifying from my employer if I have owe the company money and the terms of my employment," he says.

But Betty Murage, a microfinance practitioner in the Nairobi says: "Office shylocks are no less than payday betting agents."

"Repayment is always due in about two weeks, the time many salaried people get paid. The interest rate as high as 30 percent for a two-week period is a good payday bet, to them but not you," she cautions.