Start-ups fight for life as bank loans dry up

Business Daily Kenya:  Duke Nyamongo owns a matatu that plies the Eastern Bypass –City Cabanas route. He is also an employee in a catering ...

Business Daily Kenya: 

Kenya Bankers Association (KBA) CEO Habil Olaka at a past event. He predicted that with the capping of interest rates borrowers considered high risk would have problem getting bank credit. Photo/FILE

Duke Nyamongo owns a matatu that plies the Eastern Bypass –City Cabanas route. He is also an employee in a catering company. But lately he is an unhappy man after he lost a lifetime business opportunity after his bank failed to lend him some money to supplement his savings to enable him to put up rental housing units in Nyamira town, a few kilometres from his home.

Just five years ago the bank had advanced him a loan of Sh950,000, part of which he used to buy a second hand matatu and the rest to complete his house in Nairobi.

Unlike most borrowers, Nyamongo completed his loan a year earlier, an achievement that gave him some confidence he would get another last month.

However, to his surprise, the bank he has held an account for the last 12 years, was not ready to lend him money, at least not the amount he had sought.

“I had applied for Sh1.2 million and I was confident of getting the amount because I don’t have any other loan commitments and I have received three annual salary increments such that my net salary could easily support the amount I was seeking,” said Nyamongo.

He was, however, shocked when the bank turned down his application with an explaination that after assessing his risk, they could only advance him Sh450,000, payable within three years and not the six years he had sought in the request.

“I was angry and disappointed because even after proving that I was able to repay the amount and that the project was viable, the bank was only able to give me a fraction of what the project would cost leaving me with no option for now other than to shelve my project until I get another financing opportunity,” he says.

Though Nyamongo is also a member of a sacco his current savings can only afford him Sh600,000 and says he might be forced to sell a piece of land in Ngong area to top up the remaining amount. However, he is not alone in feeling frustrated and disappointed as a result of the abortive investment plan.

A number of Kenyans are increasingly finding it difficult to access loans from commercial banks in the advent of the Banking (Amendments) Bill 2015, which capped bank interest rates at four percentage points above the Central Bank’s benchmark rate. The law also set a floor for deposit rates paid to depositors at 70 per cent of the benchmark rate.

The signing into law of the interest caps in September last year has squeezed credit to small lenders, something that has been blamed on the slowing economic growth.

Before then, banks were offering large depositors about five per cent on their funds while charging borrowers at least 18 per cent on loans. In some instances depending on the customer’s risk rating, some loaned at even 27 per cent.

While for Nyamongo the bank was willing to advance him a fraction of what he applied for, Zipporah Kerubo, a clerk employed by a county government was not lucky when she sought a loan to expand her charcoal and M-Pesa business where she has two employees.

“I only wanted Sh150,000 to expand my business and pay college fees because I am also going to college in the evening but my bank told me I don’t qualify for the amount because I am also servicing a Sacco loan,” she said. At least for her she was able to scale down her borrowing target and got a top-up from her Sacco of Sh80,000.

She then received Sh30,000 from her merry –go –round group where she has partnered with 15 colleagues and contributes Sh2,000 every month, the total is then given to one member each month.

This seems to be the new reality for most borrowers especially those seeking unsecured personal loans. Last year, Kenya Bankers Aciation (KBA) CEO Habil Olaka predicted that with the capping of interest rates borrowers considered high risk would have problem getting bank credit. “If your risk is higher than the four per cent cap that is now in the law, it will be hard for a bank to give you a loan.

If someone realises they don’t qualify for a bank loan because their risk profile is 20 per cent and not 14 per cent, I foresee a situation where there is going to be a very large shadow banking system that will be even larger than is the case now,” he said.

The same sentiments were expressed by the KBA Director of Research and Policy Director Jared Osoro who observed that even with previous repayment history, higher salary ratio or viability project, most people seeking unsecured loans will find it difficult to receive what they seek.

The post Start-ups fight for life as bank loans dry up appeared first on Mediamax Network Limited.

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