Half of shopkeeper Peter Maina’s customers buy foodstuff and other household items from his shop on credit.

Mr Maina has four categories of customers who shop on loan. Customers, such as owners of food kiosks in Dandora where his shop is located, who buy items on credit which they pay for at the end of the day.

Others, mostly construction workers, settle their debts weekly when they get their wages. Families who live nearby foot their bills at the end of the month once they get paid while others request to be loaned items randomly.

Given that food takes up the lion’s share of household budgets, it is should not be surprising that it eats up much of the loans. For every Sh100 spent by Kenyans, Sh45 goes to food and drinks.

Mr Maina’s customers represent a large number of Kenyans who borrow money to make ends meet, painting a worrying picture of the tough economic times households are grappling with, reveals a review of loans and income data by Nation Newsplex.

Nationally, a third of households seek credit, a four percentage point increase from 2006, according to the Kenya Integrated Household Budget Survey 2015/2016. One in three shilling (39 per cent) borrowed by households is spent on basics such as food, toiletries and water. It is followed by school fees (21 per cent).

Mr Maina says that the number of customers who buy goods from him on credit haphazardly are rising. “Many of my customers are usually destabilised by any increase in the prices of products, so I lend them,” he says.

This trend could be explained by the rising cost of living and stagnant wages in the last few years. From 2010-2017, the average annual inflation rate was 7.6. In contrast, the real average monthly income increased by less than two per cent from Sh31, 213 in 2010 to Sh31, 654 in 2016.

Purchasing power

Real wage is the income of an individual after taking into consideration effects of inflation and purchasing power while inflation is the rate at which prices of goods and services rise over time, resulting in money losing value. That means that with inflation increase, Kenyans spent more money to buy less goods.

Given that food takes up the lion’s share of household budgets, it should not be surprising that it eats up much of the loans. For every Sh100 spent by Kenyans, Sh45 goes to food and drinks, an earlier examination of consumption patterns of Kenyans by Newsplex found.

Nationally, one in three Kenyans say they sometimes go without food due to financial challenges.

Further, figures from the Labour Force Basic Report by the Kenya National Bureau of Statistics show that almost half (48 per cent) of Kenyans are either unemployed or inactive, implying that they rely on other people. This has a ripple effect on the purchasing power of Kenyans, with many spending way more than they earn just to survive. In 2016, the country’s private disposable income was Sh5.5 trillion, but spending was higher at Sh5.7 trillion.

Mr Maina believes that shops are preferred by households because they do not require much paperwork, charge no interest and are given instantly.

He lends items to his customers based on trust. “My customers do not provide a guarantor or any form of collateral. These are the people who frequent my shop and therefore are known to me. However, there are those who buy goods for a while to build trust then request for credit and disappear.”

But Mr Maina says if he refuses to lend his customers they will go elsewhere. “Deciding to only serve those with cash in hand will negatively impact your business as the buying power among residents here is very low, and it also antagonises the community since you’re blamed for not helping people when they are in need of food to eat,” he says

Although his business is doing well he explains that a single defaulter has a huge negative impact on his bottom line. “A box-full of milk has 12 packets, with each being bought at around Sh45, to sell at Sh50. So the profit I make is one packet of milk. If a person defaults, it translates to a huge unanticipated loss as the only profit I’d make is Sh10.”

The third main reason households seek credit is to invest in business which takes up 16 per cent of household loans. It is followed by buying agricultural inputs, machinery and livestock (seven per cent), construction or buying of houses (five per cent), medical expenses (four per cent), and buying land (three per cent). Weddings or ceremonies and buying vehicles each constitute about one per cent of loans.

Shops and chamas

Of the various sources of credit available, one in four households (28 per cent) prefer to seek loans from shops. Self-help groups, famously referred to as chamas, attract a fifth of the households that seek loans. They are followed by relatives, friends and neighbours (14 per cent).

Secondary school teacher Mbau Kimeu is among the people who prefer to get loans from chamas. “We are a group of women who make monthly contributions to help each other financially. If I need money, I simply go to them and ask.”

“The process is very fast, and involves very little paperwork if any. My individual contribution which is equal to the amount borrowed is used as the collateral should I fail to repay. The interest rate is also significantly low, at 10 per cent, thus quite manageable,” she says.

Ms Kimeu, a mother of three, uses the borrowed funds to top-up her children’s school fees. Despite combining her earnings and those of her husband, the amount is not enough to pay all the school fees. “My salary as a teacher and that of my husband who does short term consultancies occasionally is not adequate enough to sustain our family,” she says.

Like Ms Kimeu, a quarter of people who got credit from chamas used the cash to settle school fees. Among the formal sources, Savings and Credit Co-operative Societies (Saccos) were the most popular (11 per cent) followed by commercial banks (nine per cent), mobile phone platforms (eight per cent) and micro finance institutions (five per cent). Employers, shylocks, non-government organisations, government funds and religious organisations combined are preferred by about five per cent of people who seek loans.

Even though they have been around for a relatively short time compared to banks, clearly mobile phone banking platforms such as M-Shwari and Tala are giving banks a run for their money. Launched in 2012, M-Shwari enables M-Pesa subscribers to access loans from as low as Sh50 up to Sh1 million.

The purpose of taking a loan influences where Kenyans seek them from. Over ninety per cent of loans from shops are spent on subsistence needs while the share of credit from mobile platforms that is spent on basic needs is 72 per cent, and friends, relatives and neighbours (53 per cent).

Eighty per cent of loans from insurance companies go to paying school fees. Commercial banks, microfinance institutions and mortgage finance companies are preferred by people who are looking for business investment loans. More than a third of people who seek loans from the three sources invest in a business.

The share of people seeking credit in rural areas (34 per cent) is almost the same as those in urban areas (33 per cent) but urbanites have a slightly higher chance of obtaining the loan.

Nyamira, Migori, Wajir and Vihiga lead with the highest share of households who seek loans with two-thirds. Busia and Mandera had lowest proportion of households that sought credit each (six per cent), followed by Samburu (seven per cent) while Marsabit and Isiolo tied at 11 per cent.

However, not every household that seeks a loan succeeds. The national success rate is 90 per cent. Marsabit County had the lowest success rate at 34 per cent, followed by Garissa (43 per cent), Kilifi (47 per cent) Isiolo (57 per cent) and Bungoma (58 per cent). Makueni, Embu, Elgeyo Marakwet, Baringo and Nyamira had the best credit access rate at 99 per cent.

The country’s capital, Nairobi, is ranked 31 in the probability of accessing credit, at 89 per cent.

Collateral

A large proportion, 42 per cent, of those who seek loans prefer unsecured loans, but about 15 per cent make use of a guarantor who is expected to assume responsibility for the loan should the lender default.
A fifth use market shares as collateral, with about half of the transactions where shares are used as security being in chamas (47 per cent) followed by saccos (40 per cent). Over half of those who seek credit from their employers use their salaries as collateral. Salaries are also used as collaterals for mortgage financing.