BORROW IF YOU MUST BUT, BE SMART ABOUT IT!
When walking through any street in Nairobi, there is a mushrooming of credit lending companies that promise you loans within 24 hours. There are billboards littered with catchy and attractive phrases such as; “Instant loans”; “Quick Cash no Paperwork”, “Hassle-free loans”; “Same day Loans” that make any Kenyan walk, I dare say run, to these credit lending companies to unlock that “small financial problem” that has just popped up and can only be cured by access to quick cash.
These lending companies found a niche tucked neatly in the bureaucracy of borrowing from Banks. Banks can be a tad bureaucratic and inconvenient when in need for cash on short notice. Perhaps too slow in turning around a loan application for a generation that is devoured by instant gratification. Too much paperwork for businesses that have trial entrepreneurs and not too much paper to back.
Lending companies came in and cured this problem- offering credit on short notice. However, there is a catch, what you gain in quick access to the cash, you lose in interest rates charged on the loan.
Interest rates charged on loans issued by credit lending are not regulated. This means that the interest rate charged is discretionary and contractual in the absence of regulation. This position was affirmed in Momentum Credit Limited v Teresia Kabuiya (Civil Appeal E035 of 2022) [2022] eKLR where the Respondent had filed a claim alleging that the lender had varied the interest rate on her loan from 14% per annum to 10% per month (120% per annum). She pleaded that the interest charged was extremely high, usurious, unconscionable, and contrary to rates allowable by the Central Bank of Kenya. The small claims court agreed with her causing the lender to prefer an appeal to the High Court. In the High Court, the judgment of the small claims court was overturned and the court held that;
- Section 44 of the Banking Act, which limits the interest recovered on defaulted loans, does not apply to credit lending-non deposit-taking institutions;
- In so long as the credit lender does not accept money/deposits from members of the public, then, it does not qualify as a financial institution as described in the Banking Act;
- In the absence of any law regulating credit lending non-deposit-taking companies, the rate of interest will be governed by contractual provisions.
It is therefore imperative for a smart borrower, at the time of applying for a loan, to scrutinize the loan agreement particularly clauses on;
- Interest charged on the loan;
- Variation of interest i.e., when can the interest rate be varied?;
- Is there an obligation to inform the borrower on a variation of interest?
- What are the penalty and default rates chargeable on the loan?
This said borrowers need to read the fine lines before signing the dotted lines. The court may not offer any reprieve despite your sympathetic position.
Borrow if you must but, be smart about it!
