When I was growing, my grandmother used to tell us about the village chief who was very rich. Much of his wealth was from bride price from his many daughters who were scattered all over the village. Along the way however, like the way my old folk would put it, ‘civilization came’. The era of hire purchase came knocking with very enticing goodies which the old chief could not resist.
First, he went for an old Sanyo TV that cost several thousands. He said he needed to see ‘Nyayo’ or the then president, Arap Moi talking, those days when the provincial education was akin to political class. Then he bought a fridge through the same channel, for the youngest wife to keep some juice for the old man after a day’s hard work. And the list went on and on.
Besides hire purchase, a number of government finance bodies and SACCOs also enticed him with favorable interest rates to access to funds, which he did not resist, ending up borrowing from multiple sources. The largest was from agriculture based organizations, of course so that he could lead by example in ensuring the country was secure in term food needs.
Multiple borrowing can be defined into so many ways. For individuals, it could be getting too much credit past the person’s income strength, such that it is not possible to honor loan repayment obligations. Entities like companies could face the same scenario or much debt going to operational issues or immediate consumption related matters. This happens when companies access overdrafts in overbearing levels to pay rent, salaries or other operational matters. The scenario is where borrowers access credit from a number of entities. The challenge with this is that each financial entity is viewed separately and at times the borrower forgets to consolidate debts to know the total exposure or liability.
The case of the chief bears this fact. He had facilities from a number of various institutions, all of them coming for his neck for non-payment almost the same time. Of course he ended up losing his wealth through auction, including the coveted cows from dowry payments!
Over the years, I have realized that to manage multiple borrowing, all the parties need to understand and play their roles. A borrower has to practice prudence and ensure the entire borrowing are within their ability and incomes. Financial institutions need to do credit analysis to ascertain viability to pay back, and not to be greedy in loading more burdens for the sake of growing their loan books. Introduction of credit bureaus to provide information to borrowers is helping execute this task adequately. And next week, I share with you about sources and cost of funds.
