A high uptake of loans for consumption and meeting social needs has left many individuals in financial distress and totally unable to save
Customers being served at Postbank’s market lane branch, off Banda Street.
For a country’s economy to prosper, it should be able to mobilize very high savings. In turn, this avails money for more investment, ultimately accelerating the rate of economic growth. Unfortunately, a culture is emerging in Kenya whereby many people (especially young employees commonly known as millennials) are living from hand to mouth because of borrowing heavily for consumption and social needs, as opposed to investing in revenue generating activities.
According to a study by the Savings Societies Regulatory Authority ( Sasra) that was conducted on the loan books of two hundred and twenty three saccos in 2016 in forty three counties , 1,088 borrowers ( out of a sample of 12,021) spent Kshs. 19.2 billion to purchase expensive consumable goods like cars, electronics and furniture. In the same breath, 3,177 borrowers spent Kshs. 10.7 billion to purchase basic needs like food and clothing. Indeed, out of a total of Kshs. 328.4 billion disbursed as loans in 2016 by the said saccos, Kshs. 47.9 billion (an equivalent of 14.58%) was spent on consumption and social needs while education and career growth took Kshs. 39.4 billion ( an equivalent of 12%).
Recently, the Parliament’s information, communications and technology (ICT) committee tabled a report requiring the Central Bank of Kenya (CBK) to publish regulations for the more than five hundred digital micro lenders (fintechs) operating in the country. According to the committee, these lenders (currently unregulated) should be guided by the 2016 law on interest rate capping. Under this law, the cap on interest rate charged by commercial banks is four points above CBK’s benchmark interest rate. An onslaught of fintechs in the marketplace has enabled many consumers to easily access micro loans via their mobile phones. Despite charging prohibitive interest rates ( ranging from 18% to 200% per annum), fintechs have become very popular with many individual borrowers and micro businesses, shunned by mainstream banks ever since the law on interest rate capping came into effect because they are perceived to be highly risky. Fintech’s popularity has been fuelled by the fact that they process loans very fast unlike the mainstream lenders. According to a research that was recently conducted by the Financial Sector Deepening (FSD), these loans are short term and they are mainly used for betting, payment of school fees and settling other loans. Their charges are not only punitive, but they are shrouded with secrecy.
Against this background, saving has become a tall order for many people in the country. Even after receiving their salaries or payments on orders delivered if they are in business, they have little or no money to save let alone meet their daily needs because of servicing huge loans. Caught up in debt traps, such individuals have been forced to continue borrowing in order to make ends meet.
National savings
For many years, Kenya’s national savings as a proportion of the country’s income as measured by the Gross Domestic Product (GDP) has consistently lagged behind similar sized economies across Africa. In 2015, Kenya’s gross national savings stood at 12.7 per cent of the GDP, well below the continent’s average of 14.7 per cent for similar sized economies.
But if the International Monetary Fund (IMF’s) projections are anything to go by, Kenya’s national savings will surpass the average for countries of a similar size by 2020. The IMF has predicted that at 16.1 per cent, Kenya’s savings rate will exceed Nigeria’s (13.1 per cent) match Ghana’s (16.1 per cent) but fall short of South Africa (16.3 per cent) and the global average (17.53 per cent).
One of the population segments that has been adversely affected by this poor savings culture is the young working class. These are young Kenyans on their first or second jobs. They are keen on making their way up the middle class and achieving financial freedom, but frequently make poor financial decisions such as taking unnecessary loans. This limits their ability to save, invest and prosper.
Countries with a high savings rate are able to withstand financial shocks and channel more funds towards critical sectors of their economies. But building this resilience is steeped in a culture of saving that is mirrored at both the macro and micro economic levels.
IMPORTANCE OF SAVING
- To become financially Independent
The measuring stick for being rich is different depending on who you talk to. However, being rich or wealthy to most people means having financial independence. This depends on savings which ultimately lead to investments. Financial independence means having the freedom to make financial choices in your life separate from earning a pay cheque.
This may mean being able to take a vacation whenever you want to, leaving work and going back to school to switch careers, starting your own business or investing in someone else’s start-up or helping family members. Financially independent people are able to take early retirement and pursue other interests. In addition, they are able to take lesser paying jobs that are more personally satisfying than financially beneficial.
- Get out of debt
If you ever want to get out of debt, you have to save some money. Sounds ironic, doesn’t it? However, the credit cards are never going to get paid off if you have to keep using them for every emergency that comes along. Even if you are an awesome planner, the general trend is that half of us experience at least one totally unexpected expense each year.
So before you start aggressively paying off your credit cards, you should save some money as a reserve fund. Then when unexpected things come up, you can pay them out of your reserve fund rather than doing so using your credit cards. Maintaining a reserve fund will also help you to notice if your spending pattern is getting out of hand.
- Emergencies
As much as we hope that emergencies won’t happen, we all know that they do. A family member can develop a health problem, you might need to make an emergency trip, you may have a car accident or breakdown, severe weather could flood your basement or crack your pipes, or you may have to fly to a loved one’s funeral. Any of these emergencies can be expensive and hence the need to save.
To have a good life
People who don’t plan for their future seem to run from one crisis to another. The bank won’t lend you money to buy a house unless you have a down payment, and you are not allowed to borrow a down payment. It is better to have this money saved somewhere, instead of relying on support from relatives and friends. There are many costs and fees that you need to meet when buying a home. Savings will open doors towards that end.
In good times, many people think that their job is secure, but in bad times, they begin to realize that bad things can also happen to them. You could suddenly lose your job, your business could run into challenges, you might get injured either physically or psychologically or become too sick to work.
Not having a budget could lead to living from day to day without saving, or spending all your money and ending up borrowing to continue spending
Any of these things can happen to you. Do you have enough savings to utilize during such times or will you be living on credit?
When buying a new car, you will need to have a down payment in order to get a car loan at a reasonable interest rate. You may use your credit card, but the interest rates are prohibitive. Zero percent financing is reserved for great customers, so a car loan is bound to cost you a substantial amount of money. The best you can do is to save a reasonable amount of money in order to raise the down payment.
There’s so much in your future that you don’t have control over and you therefore need to prepare of any eventuality by having savings.
- Annual expenses
If you want to have a good, relatively stress-free financial life, you need to save for annual expenses. These may include money for gifts, vacations, vehicle maintenance, minor home repairs, fixing appliances, property taxes and possibly income tax. It can be tempting to refinance a mortgage to pay off debt or to use a line of credit to pay off high interest credit cards, but it is dangerous to endlessly put expenses on credit without actually paying them off. The best way to manage these types of expenses is to save for them in advance. This will not only save you money, but it will give you peace of mind.
FACTORS AFFECTING THE RATE OF SAVINGS
A survey by the Central bank of Kenya, Kenya National Bureau of Statistic and Financial Sector Deepening showed that 75 per cent of Kenyans earn less than Kshs15, 000 a month. Most of these people rake in a monthly income of between Kshs3, 000 and Kshs7, 000 which is just enough for their consumption and little is spared for savings. The following are some of the factors that contribute to poor savings.
- Not having a plan for your finances
As individuals, we ought to have financial goals in life and a plan of how to achieve them using the only money we earn, not what we yearn to have. This is the only way you will live a debt-free life. Always plan what to save or spend and how to do so. First analyze your financial position and then set goals according to your cash flow. Most importantly, have a regular review of your progress.
- Debt
Many people spend most of their income clearing debts such as student loans, car loans and credit cards loan. While paying off this debt, they continue to take more debt. Some people think saving is an uphill task. Rather than prepare for the future, bad savers claim they want to “live in the moment”.
Most people lose their hard earned properties to loan recovery agencies, who auction them to recover defaulted loans. You should service your loan promptly, and if you can’t, don’t take one. Guaranteeing other people’s loans without regarding the repercussions will see the lenders come after you if the debt is not settled because your name is on the paper. Unless you are prepared to settle one, don’t be a loan guarantor.
Some people spend time with friends who aren’t good at money management, and their bad habits could eventually rub off on you. Others don’t save when their life is smooth sailing. Bad savers are often procrastinators, so they continuously tell themselves they’ll save at a future date.
Financial goals
There are quite a number of people who don’t have financial goals. Progressing financially will require you to set and keep financial goals to avoid spending on impulse.
- Upgrading of lifestyle
Comparing yourself to your neighbours or acquaintances is normal, but frequently engaging in this behaviour could lead you to making some very poor financial choices. For example, if you always see others dressed well, this could cause you to feel like you don’t look good enough. You might start spending money you don’t have on new clothes, so you can fit in and look nice. However, those credit card purchases will catch up with you and you’ll be left with a bill you can’t pay.
- Focusing on lifestyle instead of financial security
Financial security equates to ownership of invested assets. Lifestyle includes things such as buying clothes for show-off or going with current fashion rather than investing, as well as eating in the finest restaurants in town.
Not having a budget could lead to living from day to day without saving, or spending all your money and ending up borrowing to continue spending. A wise man would put in his budget what he or she plans to spend.
- Not having an emergency fund:
We are advised to always expect the unexpected. A good example of this is a job loss due to retrenchment. You are not guaranteed against job loss for the rest of your life and at some point that may occur. In case that happens, you ought to have money that will keep you going for a few months.
