6 Things You Need To Know

Starting your own business, making a quick shilling, covering daily expenses, purchasing that house or apartment, paying that fee...if any such related thought has ever crossed your mind, then the thought of borrowing money has not lingered too far from that. Most of us hate the idea of borrowing funds due to pride or whatever it is we stroke our egos with. Using your own money in pursuit of anything is as lamentable as it is commendable. What we’ve been excessively exposed to is “normal” bank loans and the occasional family fund raising. There’s more to borrowing money than meets the eye. Here are a few pointers I thought I’d share with you.

1.      Read the fine print – Everything comes with terms and conditions of use. YOU are the borrower. Take your time to read the fine print until you’ve understood the policies. Be sure to ask about penalties charged for late and early repayments. Most institutions will charge you extra for not meeting the repayment deadline by midnight of the contracted day(s) of repayment. An even higher rate will be charged if you pay back the whole debt at once. This is because they have to forfeit the interest they’d be earning had you chosen to pay them back over the planned time period. Both of these are negotiable, so please take your time coming to affordable terms. Most importantly, check on the policies regarding defaulting. This occurs when you show inability to repay the money you borrowed. It typically ranges between lenders from 30 – 90 days, or more depending on how sweet your tongue is.

2.      Avoid unsecured loans – The interest charged on these loans is enough to postpone the apocalypse. Would you lend money to someone else without some sort of guarantee of payment? These loans bear amongst the greatest risks for a lender and inevitable duress on the borrower to repay.

3.   Marginal loans –This refers to borrowing from an investment or investor firm for the purpose of investing, amongst other personal uses. It is common practice to provide collateral for the loan in the form of own shares or assets. The rate at which this type of loan has shot up in Kenya is outlandish. Looking back at the IPOs in Kenya since 2005, lots of people have been borrowing under a ruse that they’ll make a profit from trading within the 1^st week…..and people never learn from their mistakes. This type of loan is a pure gamble.

4.     Search for the best rates – From borrowing from your roommate at an interest of 10% to that of the bank at 25%, there’s a tariff that will suit your specific needs. Rates are not confined to monetary compensation. Some charge you a percentage of your products or time. You might find it better setting aside a crate or two of beer every month from your brewery than repaying money that would have otherwise been plowed back in to your venture.

5.    Borrow money - DO NOT put all your eggs in one basket. Borrowing money lessens the risk you expose your personal finances to. It spreads the risk of loss. Example; You use your personal savings of Kshs.10,000 to start a small bakery that incurs losses amounting to Kshs.3000 every month. I borrow Kshs 5000 to start a similar bakery and incur the same losses. Who would be in a better position? You, who's survival hinges on every cent as you try recover your money, or me who has an extra Kshs.5000 to invest, improve returns and repay loan?

6.  DON'T borrow in a foreign currency - Lots of manufacturers and banks do this. They say that the foreign currency is more stable thus creating some sort of certainty in reimbursement amounts. This to me, is male-cow-manure!! How exactly is it sensible to peg your loan to a foreign currency amidst a depreciating currency with which you make your income? Whoever borrowed $ 1M last year is automatically facing higher settlement amounts, excluding increased interest rates. Did I mention how the effects of the recession are still being felt in Africa? Of all the continents, we usually feel the effects last be it technological advancement (save a limited no. of innovations), climate change or any other thing. Same applies to the recovery from the recession. We're not yet able to let go of the money in our pockets, even when purchasing staple foods.

There's lots to look out for, but that shall be covered at another date. Borrowing money is something all of us have done and as much as we hate it, is a viable source of funding. Conduct deeper research before you do. Borrow this information and advance on it if you will.

Common cents

A few posts back I talked about the sweet high that was -and still is- sugar in Kenya. I compared it's retail price to that of South Sudan and informed you on how the sugar industry was running out of time to meet COMESA's conditions that will enable cheaper sugar.

Update: An application was made to extend COMESA protection. From what I've heard, they've been granted that extension til 2014. Quite unfortunate for us as we've been left at the mercy of the sugar millers.

Just when we speculated that life would somehow get better, the banks raised their rate yet again. Lending rates are now averaging 22% i.e. for every Kshs. 10,000 you borrow, you're paying back a total in excess of Kshs. 12,200. Those who had an ongoing debt payment plan are facing yet another increase in interest rates. According to the BusinessDailyAfrica, the Monetary Policy Committee's decisions were a carbon copy of the IMF’s recommendations made public a day earlier and which rooted for a tightening of monetary policy to limit credit to the private sector and to stop further slide of the shilling. This conclusion was made this past Monday (October 31, 2011). I find it sad that a whole country's money supply policy will revolve around recommendations that are not of our own making. We obviously need to reduce the circulation of our local currency, but to peg it to interest rates and Reserve Ratios is sappy. There has been little use of Open Market Operations.....specifically, government selling securities so that they reduce money flow.

A recently created tool is the Term Auction Facility, TAF in short. This basically allows banks to bid for a fixed reserve from the Central Bank. Instead of loosely dishing money to them in hopes that demand of foreign exchange decreases, CBK can have them bid against each other to see how much they're willing to pay to have those dollars with them. It can also be in the form of assets.Wouldn't they rather have a commercial bank hand in a chunk of the local currency in circulation than have them hoard it? Wouldn't this reduce money supply without stressing citizens and every other Kenyan student as much?? Or is the idolizing of profits that important that they forgot the poor citizens whose Kshs. 30 contributes more to the economy than the rich man's Kshs. 2.5M?

NB: Open Market Operations refers to the purchase and sale of government securities such as bonds, etc. Buying them off the government means you've given them your money in exchange for a given annual interest and repayment to you of principal amount on the final year. In short, you help decrease money currently circulating.

        Monetary Policy is a means via which the Central Bank of any country controls the supply and circulation of money in an economy. It's their mandate as allocated by their respective central governing body.

Mboco For Christmas

The short rains have been punctual this time round. They're finally here and from the looks of it, mostly fall during the night. I've heard a few theories like "Wangari Maathai's spirit is watching over us" and "The universe is weeping over Maathai's death". I don't take kindly to superstitious beliefs and it's sad that people found time to make jokes about one of Kenya's late heroines.

There's been a lot of speculation of how food prices and costs of electricity will now fall coz it's raining....pffft! Short rains definitely increase water supply to the relevant production factors, but that doesn't means that it will have an immediate effect. Beans for example, can take 85 - 90 days before harvest. That's essentially from now until Christmas week. Mboco for Christmas anyone?? If rain be the sole influence on food prices, then earliest price decrease should be expected in Mid Jan through Feb. This isn't to say farmers out there shouldn't plant like crazy. Planting maize now, for example, will increase its supply by Feb thereby decreasing one of the input costs for millers. That means Ugali will be more affordable then...if the millers behave themselves.

 Ugali avec kachumbari et fried goat

(Sourced from Google)

DO NOT, if anything, rely solely on weather forecasts. Our meteorologists have a tendency of making vital information available a tad bit late. I'm yet to confirm whether our National Disaster Operations Centre still exists as they've been a bit silent....a bit! October 2011 saw Turkana face floods and immediate reactions by various ministries to "save" them - a task that cost millions. The same happened last month in Western Kenya and parts of Nakuru. Had measures been taken during these periods to use the flood to our advantage by creating a dam to store the water and irrigate land, we'd be facing lower food prices by Dec....thus amplifying our holiday experience.

As for electricity, whatever increase there is in water supply is probably being channeled to areas with shortage and other areas of expansion. Unfortunately, what they said about electricity being cheaper next year June seems more of a reality right now....if this be the only contributor you're considering. It's an unfortunate cycle we've been following for years. Food prices increase during non-rain seasons then decrease around Jan, but never returning to the original  price. Making demands for immediate reduction of costs solely based on these short rains will be unfruitful. You'll end up eating Mboco for Christmas.

NB: Mboco is pronounced Mbo-sho. English name is runner beans