Things fall apart for Kenyans as loans burden bites

KENYA: Former Nairobi Central Business District Association chairman Timothy Muriuki runs two companies in Nairobi. One deals in construction while the other is a trading company.

He was shocked when he was informed by his bank that the interest on his Sh30 million overdraft had just been raised from 16 to 20 per cent.

As if things could not get worse, the Government, which is one of his biggest clients, was slow in paying for services rendered.

"Our profit margins have been wiped out by the higher finance costs," said Mr Muriuki during an interview with The Standard.

He is sceptical of Deputy President William Ruto's promise that the interest rates would come down by next week.

"It could be another three months before any correction on interest rates. Maybe next year," Muriuki reckons, adding that other medium-size businesses like his own were likely to have been hit harder by a sharper climb on borrowing costs.

Joseph Njoroge does not know how long his photocopying business in Nakuru town will last.

Like many small entrepreneurs, Mr Njoroge relied on small loans to keep his business afloat.

This time round, he took Sh5,000 through a mobile banking loan facility to increase his stock of ink and paper. He was expected to pay Sh200, being interest rate of four per cent.

But on Monday, he received a text message notifying him that it would be even costlier – effective immediately. He was to start paying Sh300 after the interest rose to six per cent. For one who charges Sh2 per page to photocopy, this will have far-reaching implications on his profitability.

"I will not borrow again," Njoroge told The Standard in frustration, vowing that the Sh5,000 was his last.

Muriuki and Njoroge's situation are replicated across the nation where many people have to deal with the shock of rising interest rates.

Owen Musoma, a resident of Kakamega County, has an outstanding loan of Sh300,000 with a local bank. He took the loan at an interest rate of 20 per cent but was shocked when he was informed that it had been revised to 24 per cent. Things don't look bright for his chicken business.

"My monthly repayment has increased and it is eating into any money I make. And things are not likely to improve any time soon," he said.

Njoroge and Musoma have no clue as to what is happening. The technical language and talk about local borrowing, mega projects and inflation might not make sense to them. There is no one to give them a satisfactory explanation.

"How are those mega projects of concern to us, if they are the cause of higher interest rates," Njoroge vents, adding that business just became tougher.

Njoroge finds no comfort in the fact that his problem pales in comparison with other borrowers from banks with longer-term arrangements.

Edwine Anayo, a resident of Kisumu County runs a car hire business for VIPs. He bought 10 vehicles on loan from a bank and was paying Sh70,000 per month. But after the interest rate shot up, he will be forced to part with Sh77,000 at the end of every month.

"It is really difficult for me as a businessman yet clients still expect me to charge them the same amount as before. Slapping me with an additional Sh7,000 for a business like mine is killing my source of income," he says.

Jeremy Otieno, another resident in Kisumu, took a motor vehicle loan with the aim of boosting his matatu business. His monthly repayment was Sh31,000 but shot to Sh40,000 after the interest rates rose. He is considering selling the vehicle to clear the loan.

"I'm afraid the rates may continue to rise and the business is not yet financially stable," said Otieno.

John Obonyo is a second-hand clothes dealer in Narok County. He took a loan of Sh2 million from a local bank hoping to repay it in two years.

"I have been informed that the repayment period will be extended by an extra year. This has completely disoriented me," says Obonyo.

"I have greatly been affected and the extended period will eat into the profit I had anticipated. We are quickly losing faith in the stability of our lending institutions," he adds.

Lucas, a public relations officer from Bomet, is considering what many would term desperate measures.

"I'm very tempted to quit my job and go into business after my bank notified me last week that my loan repayments will go up by Sh16,000. Every single shilling I earn does something important; I have nothing to spare," said Lucas.

His initial monthly repayment stood at Sh100,000 and he cannot see where he will get an additional Sh16,000. He has many projects at the moment including building a house. He thinks it's time his loan insurer steps in for about a year.

"Finding an additional Sh16,000 would be like paying rent on a second house. I don't have the wiggle room  in my monthly budget to do this. Defaulting, on the other hand, would spoil my chances of ever getting another loan, but a job loss is covered by insurance. I may need to quit; what other option do I have?"

Peter Kirui, a businessman from Bomet County, took a loan of Sh1 million from a local bank.

"I took a Sh1 million loan last month to start a restaurant and I was to repay Sh40,000 monthly. I knew I would comfortably raise this amount but now I have to contend with an increased rate, which I must push on to my customers by increasing the cost of food," he said.

Stephen Muli of Central Rift PSV Sacco said the increased interest rates has left many borrowers servicing loans with bitter taste in the mouth.

"Many of our members are already grappling with dropping number of travellers and some have been forced to withdraw vehicles from the routes to reduce on losses," he said.

ARM Cement's Managing Director Pradeep Paunrana told The Standard that the high interest rates were hurting consumption and effectively, the larger economy.

"The high interest rate regime is hurting the economy. It was very rapid," said Mr Paunrana, who doubles up as the chairman of the Kenya Association of Manufacturers.

The higher rates are part of efforts by the Central bank of Kenya to stabilise the shilling but the result has been that local products have become more expensive in the region than they were before.

"These high interest rates should come down," he said.

ARM returned an after-tax loss of Sh469 million for the nine months to September, compared to a Sh1.1 billion profit for the same period last year.