Why lenders charging 100pc in interest are not worried about MPs’ plan to cut rates

As debate on the Bill that seeks to cap interest rates rages, Kenneth Njeru wishes it would have gone further to include specific type of lender. Shylocks.

Mr Njeru has fallen victim to the blatant profiteering that has characterised the unregulated businesses in the microfinance sub-sector.

His brief interaction with one city micro-lender turned his life upside down.

Early this March, Njeru’s wife had to get an emergency Caesarean section at Nairobi’s Mater Hospital. This saw her medical bill shoot up to Sh300,000, an amount the young couple was unprepared for.

To discharge his wife after the surgery, Njeru had to pay at least 80 per cent of this bill. His first plan of action was to get a loan from his bank. But he was racing against time. His bank would take too long to approve the cash, meaning the medical bill would keep getting higher.

In sharing his predicament with some friends, he learnt about a microfinance institution (MFI) in the city centre that gives “short-term and quick loans” in seven minutes to 24 hours.

He was sold. He approached the MFI and was told he could leave his vehicle’s logbook as security. He walked away with Sh350,000 after the firm deducted Sh50,000 to cover administrative costs, which included installing a vehicle tracker.

Njeru agreed to pay Sh55,333 each month for 12 months, which would come to about Sh663,996 for a Sh350,000 loan.

Being abducted

He did not know the lender’s interest rate, but from his repayment plan, it works out to 105 per cent a year.

This is about five times more expensive that the costliest loan from the country’s licensed commercial banks as at June 2016, according to figures from the Central Bank of Kenya (CBK). As at June, the most expensive loan from a commercial bank was an overdraft given at 22.5 per cent.

But Njeru was in a desperate situation, and at the time, he did not think he had the luxury of shopping around for a deal. He needed money, and the MFI was willing to give it to him fast.

Unfortunately, after repaying the loan for two months, Njeru lost his job. He knew things could quickly spiral out of control, so he rushed to plead with the lender to give him some time before he resumed his repayments. The MFI turned down his request.

The following month, while shopping at a mall in Embakasi, he was accosted by five sour-faced, burly men in black suits. Their sight sapped the energy out of him, so when they demanded his car keys and told him to get into the back seat, he obeyed without question. Njeru thought he had been abducted.

After they had covered some distance in silence, one of the men shoved a letter at him from the MFI he had borrowed money from. His vehicle was being repossessed to pay off what he owed.

By the time of going to press, the MFI had yet to call us back for comment, despite promising to do so.

This kind of story is not unique to Njeru. It is the story of millions of poor Kenyans who for several reasons cannot access loans from regulated financial institutions.

As such, they have been left to the machinations of MFIs that have taken advantage of their desperation.

Deposit-taking MFIs are regulated by CBK, while credit-only institutions largely operate without much scrutiny, a gap some cunning moneylenders have used to run shylock-like businesses that advance credit at near-impossible terms.

Last week, The Standard reported that there are women in Nyeri County hiding in forests or relocating to nearby counties to escape the humiliation of having their assets repossessed by these moneylenders who lured them with the promise of quick cash, but did not emphasise the outsized interest rates as much.

According to the 2016 Financial Access Household Survey, although the country’s financial inclusion has been boosted by mobile money platforms, more than half the Kenyan population does not have a bank account.

It is even worse for women: only 30.6 per cent have access to “formal, prudentially regulated” banks, compared to 46.8 per cent of men, according to the report.

As a result, more women than men have sought the services of MFIs, and ended up paying the price in terms of losing hard-won assets, seeing their homes broken or entertaining suicidal thoughts.

In distress

Even as bankers put up a spirited fight against the Bill that intends to put a ceiling on interest rates, saying this will result in the mushrooming of shylocks, studies show that most Kenyans already rush to shylocks when in distress.

The buccaneering nature of some MFIs has seen governments around the world take extreme measures to rein them in.

In the Indian state of Andhra Pradesh, for instance, MFIs destroyed lives so much that the government was forced to impose new restrictions that in effect halted new loans and slashed repayment levels.

In other jurisdictions, MFIs are not only regulated, but their interest rates are also capped to protect the poor.

According to a World Bank report, most of the countries that have capped interest rates have done it either for microfinance products or on MFIs.

In Zambia, there is one ceiling for banks, another for MFIs and a third for non-banking financial institutions.

In Ireland, there is a ceiling for credit unions and another for private moneylenders.

In the Kyrgyz Republic, there is a cap on microloans, while Poland has a cap on consumer loans.

Informal sector

Most poor people, largely in the informal sector, are not that concerned about whether or not President Uhuru Kenyatta assents to the Central Bank (Amendment) Bill, 2015, as it does touch on the institutions they rush to when in need of quick money.

Treasury Cabinet Secretary Henry Rotich, however, has said the Government is on top of things.

According to him, a number of measures have been put in place to not only slash the prevailing high interest rates, but also make it possible for people who have traditionally been unbanked, such as those who have no land or buildings, to access credit from regulated financial institutions.

This includes enacting a law that will permit borrowers to use moveable assets, such crops or livestock, as collateral. The Government also plans to reduce its uptake of loans from the domestic market so as not to crowd out the private sector.

There are additionally plans to push lenders to use credit reference bureaus (CRBs) not only for their own benefit, but also for borrowers. According to Mr Rotich, banks should reward borrowers who have good risk profiles.

These are welcome efforts from a country whose financial inclusion rate is second only to South Africa in sub-Saharan Africa.

However, Wilfred Onono, the CEO of Interest Rate Advisory Centre, thinks banks are to blame for the mushrooming of shylocks. According to him, banks have made it difficult for small borrowers to access loans by heaping on them heavier interest rates due to their perceived high risk. This has in turn set them up for default.

CRBs have also aggravated things for small borrowers by blacklisting defaulters for at least five years. Mr Onono thinks these Kenyans are not being blacklisted for refusing to pay, but rather because, relative to other borrowers, they are being charged exorbitant interest rates.

“There are many Kenyans who are being thrown out of banking institutions because of some rules they [banks] have recently introduced,” said Onono.

Inject sanity

Locked away from banks, these Kenyans have been left with just unregulated MFIs, whose unofficial tagline these days has become, ‘We do not look at your CRB status’.

Unfortunately for poor Kenyans, the Government has not only been unable to place a ceiling on the interest charged on loans by such institutions, but it has also struggled to come up with regulations that would inject some sanity in the sub-sector.

To be fair, most credit-only MFIs risk their own money, sometimes giving it out without collateral, while others have to borrow from commercial banks to lend to their clients.

Because they lack deposits, they make up for this by charging high interest fees. This has made it difficult for the Government to regulate their earnings.

It struggled, for instance, to control the infamous pyramid schemes of the mid-2000s that saw more than 120,000 Kenyans lose billions of shillings, and some their lives.

In the early 2000s, CBK took Kenya Akiba Micro Financing Ltd, an MFI, to court for doing what it said was carrying out banking operations without meeting the conditions set by the Banking Act.

In November 2005, together with the Banking Fraud Investigation Unit (BFIU), the regulator raided the offices of Akiba and confiscated documents and equipment. It also froze the firm’s accounts in three banks, accusing it of being engaged in the banking business illegally.

Akiba’s founders were arrested and charged before the Nairobi Chief Magistrate for carrying out a banking business without approval.

However, in 2011, six years after they were charged, the court acquitted the firm’s senior officials, holding that they did not break the law.

In its defence, the company said at the time of its incorporation in 2004, there was no specific law governing microfinance institutions.

And even today, MFIs know that there is no law to curtail their roller-coaster lending and repossessions.

Con lenders disguised as MFIs have also found their way into organisations’ payroll, where some employees make repayments for loans they never applied for.

Never again

Njeru, whose daughter will be six months old in a week’s time, said he would never again borrow from an MFI that is not regulated by the State.

“I would not consider those companies that say we will give you quick cash based on your logbook. It looks very appealing, especially if you have an emergency, but in the end it is a total rip-off,” he said.

Even after his car was hurriedly auctioned off at Sh580,000, below the Sh664,000 he was told he owed, the MFI he had borrowed from still called him demanding a top up. For Njeru, being indebted to an unregulated moneylender is akin to walking around with the Sword of Damocles hanging over your head.

“You end up paying back so much, almost double the amount you took. And you are always under threat if you don’t service your loan, even for a month,” he said, adding that he has since joined a regulated Sacco that offers emergency loans within a day at more reasonable 12 per cent.

But he, like many other Kenyans, knows the importance of MFIs in deepening financial inclusion, especially because they tend to be much closer to their clients than many other financial institutions in rural and marginalised areas.

“MFIs should be around, but they should also be regulated. If they cap interest rates for commercial banks and leave these ones out, then capping won’t make sense for the economy,” he said.

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