The other day I dropped by Judy’s hair salon for a quick touch up. I have been patronising this salon for several years; not really because she is the best hairdresser in town, but mainly because going to Judy’s always leaves you in stitches, literally!No sooner have you settled in a seat than she starts to regale you with stories on who came to the shop the other day, who dyes her hair black yet we know her real age, who got married, who got divorced, the real Kenyan political situation and lots more.
However, on that day Judy wasn’t upto her usual customer information routine. In fact after she pulled my hair a couple of times, I asked her what was wrong.
It took me longer than my usual hour visit before I managed to leave.
Judy was in low spirits because she had taken out a loan from a local bank to buy shares on the Nairobi stock exchange. Specifically, Judy was the now-not-so-proud owner of 10,000 safaricom shares which as of when we spoke had lost 40% in value. However the loan Judy took out is still earning interest which in turn is eating into the salon’s kitty.
Judy is not alone. In fact the most recent IPO of the Co-operative Bank showed a lacklustre performance, not only because of the closing down of rogue stockbrokers, suspect trading of shares (Bamburi and Crown Berger) and the financial crunch. Investors such as Judy had no money to buy shares because they are now paying off loans for shares whose prices have plummeted. I dare even Joseph Nyagah the enthusiastic Co-operative Minister to try and convince Judy that Co-operative Bank shares are a good buy. In fact I dare the entire co-operative movement to pull off this one!
The NSE and Capital Markets Authority also have a dire job on their hands of convincing investors such as Judy that when they finally finish paying off the Safaricom share loans, that the stock market will still be a worthy wealth creation opportunity. I personally wish them luck in this endeavour.
From the media blitzkrieg over the Safaricom IPO with banks fighting for prime time media slots to pawn off loans to Kenyan investors, the Co-op bank IPO came and went very quietly. Maybe even the banks realised that trying to entice prospective investors to take out loans again would be in poor taste, especially following the debacle of the Safaricom share dip.
However this silence does not mean that the war for loans is over. The battle to flog loans is still raging. In fact on main streets of many Kenyan towns you find the ubiquitous tent sporting a financial institution's logo with marketers offering loans. Apart from a pep talk and maybe even a cup of tea for the lucky, you can get a house loan, car loan, education loan or even money to go to Dubai to buy goods that you can sell on your return. As long as you have a payslip, you can get a loan.
Then the banks have also become innovative in their accounts. One time monthly payment accounts are all the rage. However, these one size fit all accounts do not give any leeway if say you don’t use the majority of the features. You get charged every month regardless. Furthermore, consumers who previously would never have even thought of applying for a credit card are having them forced onto them. Most bank ATM cards at least double up as debit cards.
Banks are eating up Kenyan investors mercilessly… and it smells of predatory lending.
Predatory Lending
According to the US Federal Reserve Board, predatory lending includes:
1. Offering unaffordable loans without regard to the borrower’s ability to repay the obligation;
2. Inducing a borrower to refinance a loan repeatedly, even though the refinancing may not be in the borrower’s interest; and
3. Concealing the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.
According to Wikipedia types of lending sometimes also referred to as predatory include “payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high”.
Predators characteristically target the financially unsophisticated as well as those who do not qualify for mainstream credit products.
In the United States, the practice is prevalent amongst minority populations. Predatory lending in Native American communities is significant. The National Community Reinvestment Coalition in a 2000 survey found that nationally, Native Americans fall victim to predatory lenders more often than the general population and were 2.5 to 3 times more likely to receive “sub-prime” loans than whites.
African Americans and other minorities have also been found as being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts . An article on kenyanemergency blog called it a ‘financial Katrina’ which is unfolding, threatening to wipe out low-income neighbourhoods.
With such destructive loans currently being widely publicised in the media, one would think that this practice is a new phenomenon. However, Muhammad Yunus arguably the most popular micro-financier began Grameen ostensibly to protect small entrepreneurs from predatory lenders.
Barack Obama also used predatory loans as a campaign issue.
Closer to home, columnist Joachim Buwembo writing in the East African in the September 1-7 2008 edition in an article “Kampala debtors compete for 4Ws and space at Luzira Prison” talked about this consumer debt as a “new” disease. Reporting that in August four prominent Ugandans were imprisoned as a result of debts, Buwembo said that this crises has shown “how fragile our businesses and personal economies can be”. Ironically the same newspaper also had an article about the (central) Bank of Tanzania formulating a mechanism to reign in micro-finance institutions that were charging as much as 200% of the principle amount.
The current financial crisis and increased consumer indebtedness makes it clear that entrepreneurs such as Judy need to learn early and well how to manage finances responsibly and develop healthy “money habits”.
In simple English, that means when the deal is too sweet, think twice!
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