Costly bank loans stir growth of chamas

By PETER KAMURI

The rising lending rates in the country has made it increasingly difficult to secure bank loans. It is no longer business as usual as the cost of getting such loans has drastically gone up becoming unaffordable to many.

The most affected perhaps are the small business owners who have limited options where they can turn to when they are looking for business funding. Similarly, majority of them find it difficult to negotiate friendlier terms with banks as they lack a strong financial base that can endear them to lending institutions.

However, investment clubs or chamas can bridge this gap and provide an alternative source of funding for investment activities. Most Kenyans belong to at least a chama or two, where they save and carry out investment activities.

LOW RATES

Fredrick Mwaura, a businessman in Nairobi says investment clubs are now coming in hardy when you want to raise business capital. "I have one I joined six years ago and we contribute Sh500 per day. We are ten of us and each person has saved slightly well over one million shillings and one can get a loan three times the saving."

He adds: "Compared to the banks, the terms are very friendlier. You pay back the loan at an interest of ten per cent flat rate. I am sure there is no lending institution can give you money any at this interest rate."

Joining chamas have many benefits. Mwaura says, "Joining a group can bring the much needed discipline in saving. Since it is obligatory you save a certain amount of money daily, weekly or monthly, you cannot spend that money in other ways and in the long run, you will be surprised at the amount of money you have accumulated."

According to hi, there is a lot to be learnt in investment groups. Some members are experienced or are experts in certain areas and they can bring on board valuable information. "These are people whom you can learn from as some are seasoned investors who have expertise in areas you do not know that much about."

Andrew Omondi, a financial expert, says an investment club is usually made up of a group of individuals who have come together as they have a shared objective. Mostly, they pool money together and they undertake projects that they have agreed upon, and those who fail to comply are penalised.

"An investment club offers members a chance to come together and not just pool resources, but also bring along expertise as a club can draw members from diverse areas. Each learns from the other as knowledge is shared and in the end, all benefit from the interchange of ideas. The regular meetings allow members to bring on board new ideas that can propel the group to realise its objectives," he says.

"The size of an investment club can range from a small one with between five to ten members to large ones with more than twenty members. When forming these chamas, there are some basic criteria that guides who is to join. There are some which are strictly for men or women and others allow members of both gender," says Omondi.

"Some other considerations that can limit entry into an investment club include profession or occupation, daily, weekly or monthly earnings and age. Some do not limit admission. They are open to membership and one just needs to comply with the club’s terms of membership," he adds.

If you want to form an investment club, Omondi advises: "The first thing is to look for like-minded people who can be friends, colleagues or professionals. However, it is important to diversify so that you can bring on board a variety of interests, experiences, and perspectives.

"Then organise a preliminary meeting to establish whether the people you have invited are interested and if they are, how you intend to move forward. This is about establishing whether you have shared goals and vision," he adds.

MONTHLY MINIMUM

"As you get started, agree on the name of the club and set rules that will govern your operations. Decide on the amount of monthly minimum contribution, frequency of meetings and the approach you want to use in investing," Omondi advises.

Omondi cautions: "Any successful chama must be guided by some rules and regulations. Whether the club is formal or informal, order must be maintained to ensure you reap the maximum benefits and realise the set goals."

"Set ground rules that will help the club to run smoothly. In addition, define the various positions within the group and their respective responsibilities. Have clear guidelines for electing such officials," says Omondi.

Mwaura who boasts of several years experience in chamas observes: "Most investment clubs crumble due to lack of objectives and vision. All members should work towards a shared goal."

"On the hand, poor handling of finances make most chamas to collapse. Members should agree which bank the money should be kept and who are to be the signatories. The procedure for making withdrawals and authorising the same should be clearly stated," says Mwaura.

He advises, "In case a member flouts the rules, disciplinary procedures should be carried out. That is why they should be clearly spelt out and members be made aware of the consequences of their actions. Indeed, the rules should be applied without favour."

However, he warns, "Before joining a club, it is important to establish whether you can get along with the members and if you have common goals. Remember that for an investment clubs to succeed, it takes time and commitment.

BEYOND MEANS

"Another common mistake many people make is to over-commit themselves. It is advisable not to go beyond your means as this can make it difficult for you to meet your obligations to the club. Evaluate your financial situation regularly to establish whether you are on track and avoid overstretching your means," he concludes.

In his work, Karani has seen many entrepreneurs fail due to thoughtlessly adopting some wheeler-dealers’ ideas. "Be careful in showing too much enthusiasm in such people’s talk for they could be luring you into a trap," he warns.

The best way, advises Karani, is to get on a personal friendship with such people and investigate their background and character. One can send them for a low volume of merchandise in the distant lands where they claim opportunities exist.

"If they deliver, you can go on increasing the volume of money and goods that you can trust to them and their contacts," says Karani.

"But remember not to make it a pattern especially if they claim that every new deal is better than the previous one." The next crucial stage is to formalise your friendship with them by signing a contract for every deal you enter into, says Karani.

With time, business owners develop a sense of filtering through the social chatter of wheeler-dealers and picking crucial leads that can help them improve their enterprises.

Strictly speaking, the entertainment allowance often paid to higher cadres of managers is meant to pamper chatterboxes, wheeler dealers and influence peddlers so that they help them see legitimate business openings.

Frequently, wheeler-dealers and influence peddlers are crafty and unscrupulous people and it’s up to a business owner to know what he or she is getting into by engaging them. The perceived association with some of them may drive away customers and kill a business.