This article is written by Bonface Kamau, who is going to be writing on banking right here on Like Chapaa. Is there anything that you’d like to know about banking in Kenya? Bonface is the man, just contact us with your questions.
Money makes the world go round. Based on this principle, banks have seized the opportunity to bridge the gap between the financially surplus and the financially deficit through loans and overdrafts (bank credits). Since banks are actually businesses with a profit motive, they charge interest on the credit, calculated on a compound interest basis.
This interest that banks charge must cover their bad debts and non-performing loans – referred to as the interest exposure – which is calculated by professionals before banks come up with a standard interest rate.
Commercial banks’ having defied a directive to reduce their interest rates by the Central Bank of Kenya has led to customers being offered loans at very uncompetitive terms. The only banks offering competitive interest rates on their loans are K.C.B and Southern Credit Bank (which unfortunately operates in Nairobi only). However, the Central Bank of Kenya issues directive to banks to subsidise their interest rates on loans meant for nation building like loans to start a business and currently to farmers which is at about 15% p.a as compared to 17-21% offered on normal loan terms.
It is worth noting the tremendous growth in our non-banking financial institutions which offer loans at a much lower interest rate. However, any transaction entered into with these institutions such as a loan agreement, should be weighed heavily as this non-banking financial institutions are not regulated and/or scrutinised thoroughly as banks. This leads to questions being raised about their integrity and accountability. One may consider the youth and women’s fund if you want do not meet the requirements asked by the banks.
This should not discourage you, however. If you have a viable idea and a burning desire to transform that idea into a lucrative business, then go for financing. Business owners and entrepreneurs are known as risk takers – just bite the bullet and go for what you think works for you.
As we review the merits of bank loans, acquiring one should not lead one from a bad situation to a worse one. Ask your banker all the relevant questions not forgetting to inquire about any hidden charges. Let the banking hall be the birth place for success.