The Prime Minister recently told Parliament that the government was mooting legislation that would turn college and professional certificates into loan collateral for graduates. This is in order to address a major hurdle cited by many loan seekers, especially the youth and those in low-income categories, that financial institutions impose hard conditions on them before they can issue loans.
These conditions include the need to have collateral in the form of immovable property or assets, the most common of which is real estate. Many are knocked out of access to loans because they do not have certificates of title to land. In most cases, they do not have land. In some cases, they may have land, but it may not be officially planned, surveyed and carrying a certificate of title. Financial institutions prefer the latter, when somebody is seeking a loan.
The second complaint is about the high cost of borrowing which, what with soaring interest rates, ostracises the poor out of access to finance to develop their businesses. The gap between deposit rates and lending rates is considered astronomical.
Poor loan uptake is not an outcry for loan seekers only. Lenders thrive on people taking loans and repaying them. That is how they make their money. Indeed, we are witnessing a major drive by financial institutions and mobile services providers, encouraging people to take up loans, against their salaries, pension payments, or any expected future income, including the purchase of phone airtime and bundles.
Some lenders, including predatory ones ("mikopo kausha damu"), are happy to lend against movable assets such as furniture or motor vehicles. There also peer to peer lenders (P2P), who may not demand collateral.
On its part, the government has been working on expanding the range of assets that can be accepted as collateral. These have included, Certificates of Customary Right of Occupancy (CCRO) in rural areas and residential licences in unplanned urban areas. In encouraging land owners who are hesitant of taking up a formal title, the argument has been that, with a title, one can easily get access to finance. The government has also been purveying low interest loans to the youth from 10 percent of the “own revenue”, of local government authorities.
Nevertheless, it is important to realise, as I was told decades ago by a Bank Manager (NBC, Ubungo), that the possession of collateral alone is not adequate to allow one to borrow. At that time, my collateral was one that is recognised as cash collateral, a certificate of a fixed deposit which could cover the loan I was seeking. The manager insisted that there were other conditions to consider, including what I wanted to do with the borrowed money.
Conditions for borrowing are usually summarised into the five C’s of credit. They used to be three. Now they are five, though some experts extend them to seven. We will stick to five.
First is “Character”; covering the personality of the potential borrower and their credit history. In countries where people live on debt, like the United States, you have active credit rating bureau ranking you on your past taking and repaying loans. A strong history of on-time payments indicates good character.
There are people, in our part of the world, who consider loans to be income. These may not have a good reputation. Even defaulting on a phone debt can tarnish your credit rating; not to mention defaulting on credit card.
Second, is “Capacity” to repay the borrowed money; from your various sources of income, or from the proposed project for which the money is being borrowed. Lenders need to assure themselves that you have the capacity to meet your loan obligations. Your debt-to-income ratio, employment history, and income stability are assessed.
Third is “Capital”. Many times, before you are given a loan, you may need to put down a deposit equivalent to a percentage (say, 25 percent) of the amount you aim at borrowing. Or, you may have to prove that you have other “Capital” which includes savings, investments, or down payments. Large capital contributions reduce lender risk.
Fourth is “Conditions”, in the economy, such as interest rates, and fiscal and monetary policies. This includes the purpose for which the loan is being taken, given the economic climate.
Last, but not least, is “Collateral”, a valuable asset tendered by the borrower, that the lender can fall back to (seize or foreclose, and sell), in case the borrower fails to repay the loan. Examples, include land and buildings, motor vehicles, secured lines of credit; and, inventory, machinery or accounts receivable. Collateral must have value in the market.
So, our graduates and young people in general, have a task of making themselves credit worthy, which includes using the borrowed money prudently and productively, ensuring that it is paid back.
