Brisk business for auctioneers as loan defaults rise in Kisii

Residents in Kisii town and its environs have resulted to buying water from vendors after supply of water by Gusii Water and Sewerage Company was interrupted over Sh 17 million unpaid electricity bill.

Nairobi; Kenya: The sight of household items by the roadside in Kisii reminds one of the risks of taking a bank loan and the consequences of defaulting.

And on one of the public service vehicles enroute to Kisii town from Keroka, the sight of furniture along the road needs no reminder on the dangers of taking loans. “When you participate in a high jump, you must know which height you can comfortably jump,” quips Mzee Mokaya , an auctioneer at Gianchere market, as he gazes at the furniture.

Better still, he says that when planning to cut a tree, you should have a good idea of where it will fall. “If it falls on a neighbour’s house, you will pay dearly for your negligence,” he warns.

Calling auctioneers

Even as the businessman who had taken a loan protests that the bank never informed him they were bringing in auctioneers to recover their money, he feels the shame is already in public domain. “Their attempts to auction my household items has brought shame on my family,” the borrower says.

He nevertheless admits that the loan was not used for the intended purpose, which is why he defaulted. “I had taken about Sh250, 000 and I have paid back about Sh180, 000. However, the money was not used as intended,” he says, as he makes frantic phone calls to sell a piece of land and repay the loan plus the fine.

He is one among hundreds in the region who have taken up loans, only to default. Some, especially women, who borrow from a financial institution have ended up seeking unorthodox means to repay the loans.

In a few instances, some have ended up committing suicide to avoid the shame of defaulting and subsequent auctioning of the family property.

Analysts point to the growing number of commercial banks in the populous town, all eyeing a stake in the town’s impressive growth. There are currently about 25 commercial banks and a number of micro finance institutions in the town and with it is stiff competition to stay relevant.

Recovering loans

Unknown too many borrowers, lack of proper information on borrowing and poor repayment and default has seen auctioneers have a field day in their efforts to recover loans for banks and other financial institutions in the area.

The Dean of Kisii University’s Faculty of Commerce Dr Charles Kombo Okioga regrets that in numerous instances, prospective borrowers are not told the full cost implications when seeking for a loan, drawing attention to the hidden charges by banks and other financial institutions.

“Some banks do not provide relevant information to prospective borrowers especially on matters touching on interest rates and penalties and this increases defaulting amongst borrowers,” he reckoned.

He singled out interest rates that are unclear, where majority of the bank employees only mention a certain percentage of the rate without providing the details to majority of prospective borrowers.

Investment returns

However, a branch manager with one of the banks told Business Beat that the risk appetite in the region has increased tremendously. “The enterprising nature of the community has whetted their appetite to take risks in efforts to invest for a good return,” the manager, who requested for anonymity stated.

He noted that with constrained fiscal resources in the region, chances of defaulting are high hence the need to re-look at this trend. “Besides a number of business persons who take loans for a specific project, some divert the cash flow even from a performing business and this is affecting loan performance,” he stated.

The banker ruled out financial illiteracy as the reason for the lacklustre performance of loan repayments, arguing that even those who are financially literate have non-performing loans. The only difference, he argued, is that the financially literate have learnt the rules of the game. Okioga urged banks to teach prospective borrowers how the loans are utilised and the implications of non-repayment.

Unlike other towns and cities such as Nairobi, where banks have business clubs where they teach their customers about their products, Okioga stated that lack of this kind of thing in other town’s leads to defaulting. “Banks need to alert their potential customers on some of these underlying factors,” he stated.

“That is my next target; to organise for financial training in the region and ensure effective use of loan facilities,” he said.

Going by Mzee Mokaya’s words, banks have to devise ways of restoring the confidence of locals. Okioga partly blames this on culture, where a Kisii man will not understand how a woman can take a loan for investment.

“Though women are development conscious and would take loans for that cause, some men would take a loan for non-income generating activities like partying and this is affecting their repayment ability,”stated Okioga.