Debt is a useful financial tool

Treasury CS Henry Rotich when he appeared before the National Assembly Finance Committee on audit queries at County Hall, Nairobi on Tuesday 03/07/18. He has always maintained that country's debts are manageable.[Boniface Okendo,Standard]

Picture a small startup company emerging within the city of Nairobi. The directors of the said company are your typical young Kenyan guys; ambitious to the core, relentless and determined to make an honest living by meeting the needs of their prospective clients.

The young guys are eagerly purposeful; ideas are overflowing in their minds. They have seen a gap in the market in their field of expertise, and they have a clear roadmap of how they can fill that gap.

Ideas without capital

What’s more, they aspire to be the best in their field, and for that aspiration to come true, they first need to develop a working business model for their company. Consequently, they set up a meeting to discuss the way forward.

On brainstorming further, they realize that they need to finance their grand ideas. They need capital. How do they acquire the required capital to take their company to the next level? They sit down over a cup of coffee one morning, take out a pen and notebook and suggest various ways through which they can source for funds to finance their company operations.

They figure that they can round up their savings, but those are not enough to even pay for office space regularly.

They therefore decide that they will talk to their friends, parents and relatives to invest in their company by buying shares from which they will be earning dividends. Their supportive parents agree, and so do some of their friends. However, some of their friends are skeptical of the business idea, they toy with the possibility of the company going under within a few months and they do not want to lose money in the process. Subsequently, they decline the offer.

A few of the rest agree to invest funds in the company. The remaining lot decide to adopt a ‘wait and see’ approach, so they make a pledge and promise to jump on board once the company starts making profits.

Excitedly, the young guys realise that they now have a substantial amount of capital. They can afford to acquire office space in a pristine location like Upper Hill, and buy a few equipment. Further financial analysis, however, reveals that the funds are not enough to guarantee continued and sustained operations of the company. They still need to ramp up their options or fold up the company because of lack of funds.

They are stuck. One of the entrepreneurs who studied finance brilliantly suggests that they borrow funds from a bank. The rest are skeptical at first, because they have been conditioned to believe that debt is entrapment. But the entrepreneur insists that this is a wrong perception of debt, that debt can be a viable source of finance if prudently and sustainably managed.

He argues that even entire countries including developed nations like the USA and China have existing loans. Reluctantly convinced, the young entrepreneurs walk into a bank and request for a loan.

The bank agrees to issue them with a loan but with a few conditions; that they present their business plan complete with a viable business model and cash flow projections for the next year, and that they also attach company documents and PIN certificates for the company and its directors.

Following the due process, the bank finally issues the loans to the young entrepreneurs, who are finally able to sustainably finance their company, something that they wouldn’t have been able to do if they avoided acquiring a loan from the bank.

Not meant to entrap

Likewise, Kenya has aspirations pegged on economic growth and development. As we seek various sources of financing for our grand ideas of the Kenya we envision, it would seem that eventually, we will have to accrue debt. Subsequently, this debt should not be viewed as a tool for entrapment, but as a financial tool for our economic progress. More importantly, this financial tool should be properly managed and channeled to meet our development targets.

Take an instance where the entrepreneurs in our story mismanage the loans by buying luxury cars and making unwarranted foreign trips overseas with their girlfriends.

How long will it take before their company crashes and for the bank to seize their assets? Equally then, if public debt is mismanaged, channeled to reckless consumption as opposed to infrastructure development, we may find ourselves with a crisis in our hands.

Such a crisis would in turn reinforce negative perceptions that debt is a tool for entrapment rather than a financial tool for economic progress.

 Mr Mokamba comments on social issues.