At the fall of the hammer: Is the economy bust? Why so many auctions?

Over 22 auction companies have invited bidders to participate in public sales across 20 counties

At the call of the highest bidder and fall  of the hammer, your prized possession will change hands. That is how 29-year-old Mary and her husband Patrick, 36 (not their real names) lost their family saloon vehicle which they had they purchased with a loan.

It is even worse when auctioneers strike in January, a month commonly associated with dry bank accounts following excessive spending in the December festivities.

On Monday January 8, 2018, more than 22 auctioneers  placed announcements on a local daily inviting bidders to participate in public sales across 20 counties.

on offer was agricultural, residential and commercial  land...shops, hotels and so on.  Saloon cars, buses, matatus, vans, lorries and trucks too. Household and office appliances were not spared either.

But how did the debtors find themselves in such a fix?

State of the economy

A prolonged political uncertainty in 2017 threw the country’s economy into doldrums.

The Nairobi Securities Exchange (NSE) was shaken by the September 1, 2017 ruling of the Supreme Court nullifying President Uhuru Kenyatta’s re-election, shedding over Sh50 billion on the eventful day.

“The state of the economy has everything to do with the rise of the auctions. The unprecedented mix of a heated political environment, a raging drought and poor access to credit owing to the interest rate cap all contributed in creating a perfect storm,” says Ken Gichinga, the Chief Economist at Mentoria Consulting.

It's therefore not surprising that households and businesses had a difficult time honouring their loan repayment obligations.

Interest rates cap vs increasing demand for credit

The Central Bank of Kenya (CBK) capped interest rates since September 2016 which has seen the number of loans approved by banks drop significantly.

The traditional sources of credit such as banks have their hands tied by what many describe as a draconian interest rate cap legislation. Ken Gichinga explains this demand is now being filled by the non-bank institutions, which largely charge usurious rates. He maintains that the only way to tame these institutions is by fixing the challenges in the mainstream banking and keeping the credit taps flowing. 

While it is true that after the interest rate cap was introduced banks slowed down on lending, Kenyans had already been dealing with Shylocks .Reason? Shylocks disburse money within 24 hours and requiring less documentation. 

Furthermore, they lend larger amounts of money than the new wave of mobile banking.

Shylocks charge the  Shakespearean pound of flesh; interest rates so exorbitant that would prove difficult to service. When debtors default on payments, Shylocks are quick to take measures such as auctioning to recover their monies.

Non-performing loans

For the first time in 10 years, the percentage of non-performing loans (NPLs) hit double digits in 2017. Data from Central Bank of Kenya indicates one in 10 people did not pay their loans in October last year, a figure higher than previous months.

“The level of non-performing loans is a matter of concern for the banking sector with the gross non-performing loan ratio rising to 11.5 per cent from 10.1 per cent in the first half of 2016. We expect the level of provisioning to increase going forward as banks adopt IFRS 9 that requires a forward looking approach to estimate credit losses,” said Cytonn Investments in their September 2017 banking report.

Non-performing loans are an indicator of a lethargic business environment.

Economist Gichinga advises that this can be remedied with a vibrant mix of stimulus initiatives and policy enablers to trigger higher growth rates.

A worrying trend that saw the number of vehicle auctioned last year rise. Early October, a record 135 vehicles were repossessed for auction.

Inflation

In the last year, we've seen some of the highest inflation figures, dismal growth in jobs and banks not lending as much as they used to; crippling the money supply and disabling debtors from paying their loans.

“In many sectors, such as a banking and media, technological disruption has made many employees redundant and leading to layoffs. With little income left to support them, these unemployed groups cut back on their expenditures leading to the vicious circle of an economic slowdown,” reiterates  Gichinga.

Intervention

The government needs to intervene in the economy with some exciting stimulus measures.

Gichinga advises that repealing the interest rate cap and banks having a latitude in pricing risk will get more money flowing once again at a healthier rate.

The banking system also needs to collectively reflect on measures that could organically bring down interest rates by essentially reducing the cost of doing business.

The government should fast-track payments owed to contractors at both the national and county level for projects that have been delivered. This will see more liquidity in the hands of ordinary Kenyans.

Hitherto, the government needs to have a long-term debt strategy to ensure that servicing foreign debt does not end up crippling other sectors of the economy.

How to escape the hammer

Despite the numerous ways debtors could find themselves tangled up in defaulted loans, Patrick Wameyo, a finance literacy and entrepreneurship coach at Finance Academy and Technologies says most of the consequences are avoidable.

Wameyo says some debtors end up defaulting on loan payments because they lack understanding of loan requirements and the penalties that accompany them while others simply borrow with no intention of paying. Others still fall into the trap because of an unfriendly economic environment like the one witnessed in 2017.

To avoid  auctioneers, Wameyo advises debtors to take into account their comfort levels of repayment before borrowing. They should also avoid taking more loans if they are struggling with payment.  

Don’t be fooled

How best one handles a situation that warrants auction depends on the quality of legal advice. The ignorance of the law by most victims of marauding auctioneers only compounds the problem as they quickly obey illegal commands.

The Auctioneers Act No. 5 of 1996 as read with Auctioneers Rules of 1997 regulates the conduct of auctioneers. To avoid falling victim to crooks masquerading as auctioneers, you must note that a licensed auctioneer should at all times wear his identity card while conducting business.

The law also requires auctioneers to first prepare a list of items indicating their specific value and the condition of each item, and the owner or an adult residing or working at the premises must sign such inventory.

The auctioneer must also give the owner of the goods a seven days’ notice within which the owner may redeem the goods by payment of the amount set forth by the court warrant or letter of instruction.

It is only after the expiry of the notice without payment that the auctioneer can swing their hammer.