A few days ago, Safaricom reported that its overdraft mobile money service - Fuliza- had risen by over 30 per cent in the first half of 2022.
The amount disbursed was almost Sh70 billon more compared to the same period last year. The estimates on how people use this service which is accessible through M-Pesa, a mobile money transfer services by telecommunication company Safaricom, is that Kenyans ‘borrow’ Sh1 billon daily.
Fuliza is not necessarily a savings and borrowing platform but an overdraft. However, on its launch in 2019, it has grown to even surpass M-Shwari, a savings and borrowing facility by Safaricom.
The growth of such services and other digital loans platforms show the key role debt plays in the finances of Kenyans. However, while such debt could be the only option out for individuals trapped in the pit of increased commodity prices and changes in cash flow as a result of the Covid-19 pandemic, there is a lot that Kenyans need to know.
Wahome Ngari, certified financial coach and Chief Executive Officer Citadel Consulting says debt or being in debt is not a bad thing. Ngari, while speaking during a TV interview with the local media noted that even nations including the acclaimed superpower United States, institutions, companies have debts.
“So individuals cannot afford not to have debt,” he says.
Helps to achieve goals
Ngari said debt is necessary in one’s journey of growing in life. This is because there are many things in life which will be difficult to accomplish without using other people’s money.
An example is owning a home. It is less challenging to own a home through a loan like mortgage as opposed to saving so that one day you can afford it.
“It is actually easier to go to a financier, who can be a bank, employer, housing company or Sacco; borrow the money and use it to buy a house,” he says.
The same can be done for education when one wants to further their studies.
From his explanation, there is good and bad debt.
So what is good debt?
“This is any money you take from others that improves your future,” says Ngari insisting that this kind of debt must improve your future.
Good debt also stretches to who you borrow from, he notes, as he explains that there are two types of lenders: regulated and unregulated.
Regulated lenders are banks, microfinance and cooperatives. Banks and microfinance are regulated by the Central Bank of Kenya (CBK) while cooperatives are regulated by the Saccos Societies Regulatory Authority (Sasra).
The source of a bad debt can be the money you borrow from a friend, a colleague, chama or shylock.
“There is no regulator for that,” says Ngari.
Logically, while getting into debt means that one is not making enough, Ngari says this is not necessarily the case.
“I think it speaks to us of our savings culture. We do not have a good saving culture,” he says. “For some people, there is more than enough to save but we actually do not get to save. There is also another big set of the population who do not have enough to save.”
He says saving is a mindset.
“It does not matter how much your income is. You can always look for means and ways not to spend everything you make,” he adds. “And the fact that people are indebted is not a bad thing. It is a question of: what are you indebted for.”
For example, if you are indebted because you have borrowed to own the house you live in or if you are in debt in order to further your education for you to be eligible for a promotion in the near future, that is not a bad thing.
You can also choose to take a car loan if you are a salesperson and using public means is a challenge because you take too long to reach clients and this affects the business.
“Those are what we call good debts,” he says.
A bad debt is a kind where one borrows to buy a phone or do something just for fear of missing out popularly known as (FOMO). When you borrow to put your children in expensive school that is also an example of a bad debt.
There is also a way one can avoid debt but still use someone else’s money to improve themselves.
Anthony Mwithiga, Group Managing Director Old Mutual Investment Group EA, while speaking to students affiliated to AIESEC, a global body for young people to develop their leadership skills, said the use of credit is one of the ways of building a business.
“One of the things as young people you need to guard very closely is your credit history,” he said. “Bad debt leads to bankruptcy or a process in the US called chapter 11 or leads to all the negativity associated with the inability to service the debt.”
Chapter 11 in the US is what allows one to file for bankruptcy.
“Good debt for students is to have a venture and say: "Mr so and so, this is the idea we have. This idea only requires Sh10,000 or Sh100,000 or Sh1 million but we do not have the money,” he explained. “But for that (this idea) to happen, invest in our idea and we will give you 30 per cent of our business. That is how much we think your money is worth to the idea.”
The only burden you then remain with is to grow the idea into a business that can generate dividends, impress and satisfy your investor. But the advantage is you do all that without the burden of a loan on your back that needs to be serviced every month.
Mwithiga explains that a bad debt is one which leads to unnecessary consumption of money while a good debt is used for productive purposes.
Moses Njuguna, a personal wealth advisor with Nabo Capital concurs with these sentiments.
“A good debt is one that you use to acquire an asset and in return (this asset) is able to give you a return which helps to offset the interest you are otherwise being charged on the loan,” he explains in an educative video by the investment firm.
“A bad debt is the one you acquire to consume hence you have to go back to your pocket to pay this loan,” he adds.