Reckless borrowing to buy consumables instead of investing in revenue generating ventures is the leading cause of default among saccos and banks, a new report says.
A study by Savings Societies Regulatory Authority (Sasra) says this is fast making Kenyans a loan-hungry nation whose sole aim is to gain a “respectable” status.
The report, which reviewed loan books of 233 saccos in 43 counties comprising 176 deposit taking (DT) institutions and 57 systematically important non-DT saccos, says loan default mainly arises from loanees who spent the money lavishly.
Loanees spruce up their houses, buy vehicles, fund come-and-see weddings as well as bankroll burial ceremonies to affirm their family’s stature within the society.
Addressing this year’s Kenya Police Sacco annual delegates conference in Nairobi, Interior Secretary Fred Matiang’i raised the red flag, saying newly employed recruits with hardly a year or two into service are deep in debt, owing to various loan products on offer that make it easier for them to access credit.
“Millennials (young people) love ‘pimped’ up lifestyles where owning a car within the first year and going on loan-funded holidays coupled with binge drinking is the in-thing,” he said.
Of the 12,021 loanees studied in the deep-dive Sasra study, 1,088 spent Sh19.2 billion in 2016 to buy motor vehicles, furniture and other consumer durables while 3,177 loanees spent Sh10.7 billion on meeting basic needs for their families such as food, clothing, shoes, and household products.
“Consumption and social needs took up 14.58 per cent (Sh47.9 billion), while education of children and professional career development accounted for 12 per cent (Sh39.4 billion) of the total Sh328.4 billion loans taken up in 2016,” it notes.
Interestingly, the majority of loanees used part of their salaries to repay the loans, raising a risk of default in case their services were terminated by their employers, or poor harvests from farms.
“Some 10,282 loanees spent Sh35.2 billion in 2016 on funding primary education for their children, indicating the importance of foundational learning,” it observes.
This, pundits aver, will take years before loanees (parents) see the gains of their investments as the children will continue being reliant on parental support long into their teenage years.
Of the Sh5.5 billion spent on settling financial and insurance obligations, Sh2.6 billion went to settling commercial bank loans, indicating loanees’ passion for top-ups, mortgage (Sh293 million), microfinance loans (Sh120 million), insurance policies (Sh752.3 million) as well as purchase of sacco loans (Sh2.9 billion), with the rest spent on unspecified financial services.
Education and consumption took up 26 per cent of all borrowings in value but had the bulk of reasons for taking a loan by 23,146 loanees or 51.83 per cent of the sampled loanees.
Deputy Inspector General of Police Edward Mbugua called for an urgent review of the loan issuance processes to deter proliferation of “lifestyle” loans, warning that Kenya was fast raising a loan-hungry generation of young workers.
“Why do we allow top-up of loans? I wonder if it is fair to allow a member servicing a Sh500,000 loan to use a top-up loan of Sh900,000 to clear the first loan before going home with Sh300,000. Will that member be proud of his sacco?” he posed.
Dr Matiang’i called for a review on how sacco loans were utilised by individual members to improve their well-being, saying a prize ought to be introduced for success stories from members who borrowed money.
He asserted that heavily indebted officers gave the force a bad name since they went out of their way to seek money to fund their projects, adding that allowing small-time savers to access “top-ups” hurts the sacco’s philosophy of self-driven improvement, leading many to depression with evident signs of perpetual unprofessional conduct.
Sasra’s report further indicated that 143 Kenyans borrowed Sh437 million to cater for burial expenses, weddings among other cultural rites of passage, while settling utility bills — water, electricity car and electronic repair expenses — gobbled up Sh17.6 billion.