Ensuring loans don’t end up in acrimony

By JOHN KARIUKI

Justin Maina, a businessman, was recently approached by his friend’s wife with an "urgent" demand for Sh10,000.

She had fallen behind on a loan repayment. As a result, some creditors were at that time assessing the movable assets in her house with a move to auction them.

As her husband was not intended to know, this lady wanted to sort out the matters quietly and would refund Maina’s money in "due course". Maina lent her the money but six months down the line, she had not honoured her obligation.

His incessant appeals for his money fell on deaf ears. Worse, the lady began turning nasty.

She would retort that any dealings between them should be sanctioned by her husband.

And Maina could not simply tell her husband or his own wife this tale lest it lead to an ugly turn of events.

With a heavy heart, he wrote off this loan is now wiser from the experience. "Even if somebody’s wife comes crying to me, I can only part with what I can comfortably lose," he tells Shillings&Sense.

With the runaway lending rates, the sources of personal funds are fast diminishing. Incidents such as Maina’s are bound to increase as more people turn to borrow.

At the moment, Saccos have given their members a little relief but since they don’t operate in isolation from the bigger money market, their interest holiday is only temporary.

While lending by formal financial institutions follows procedural guidelines that have evolved over the centuries, it is a different kettle altogether with personal lending.

Firm guidelines have never developed in friendly lending because each circumstance is unique. But according to personal finance experts, there are ways of making friendly loans safer and more secure for all the parties involved.

According to Cyrus Wang’ombe, a Karatina-based personal banker, many people are reluctant to lend their friends because they are not liquid enough to lose that money.

"If you safely assume, as it should be, that all the money you loan friends and family members will be lost, it can be a huge loss especially now," he says. Indeed, adds Wang’ombe, there are instance when people dip into their retirement and emergency funds simply to loan their friends and kin and the money is never returned.

He advises would be lenders to put their borrowers in the stark picture of what their non-payment means in concrete terms.

INSTALMENT PAYMENTS

"For example, if a working class individual borrows Sh100,000 to pay a hospital bill for his or her kin today and it is not repaid, it means him or her readjusting his or her lifestyle for several years," he says.

Going by a conservative interest rate of 28 per cent, the total loan plus interest would amount to Sh128,000. "If the borrower is to repay this in four years, this comes to instalments of about Sh3,000 per month," says Wang’ombe.

"So if the beneficiary feels no obligation of providing this minimum payment, then the rescuer has to do with less of everything for the next 48 months," adds Wang’ombe.

"If such money was taken from a business, a dent in supplies may be felt for a long time to come," he says. Taking such an amount out of the till may necessitate the enterprise borrowing and going into its own spiral of debts, he adds.

"Such are the hidden and emotional consequences of lending money to family members and friends without putting them in the picture first."

Wang’ombe further warns that by their very nature, friendly loans are bad with the current inflation. "Often people lend their family members and friends at a low or no interest," he says.

"If one lent out money months ago when the inflation was at 13 per cent and the money is repaid today when the inflation stands at 19 per cent, then the lender has lost Sh3 for every shilling he or she lent out," says Wang’ombe.

This banker says that the trick for interest free friendly loans is to lend out money for the shortest time possible before the inflation figures rise. "Otherwise you will keep on hurting your own finances to subsidise other people’s money goals,"

Ms Rebecca Njeri, a hair stylist based in Nairobi, says that she always makes a clear distinction between a gift and a loan when bailing out her friends and kin. "I never expect to be repaid for a gift, but I push for a written agreement for a loan," she says.

And when a written agreement is not possible, Njeri subtly gets her borrowers to commit themselves on repaying in front of a respectable family or neighbourhood person.