Why proliferation of logbook debt traps is causing concern
By People Reporter, November 20, 2019By Musa Radoli
The capping of interest rates saw proliferation of unique micro-finance credit firms fighting to fill the gap created when commercial banks declined to lend to their regular customers.
Though rates cap regime is gone, the law has left behind thousands of Kenyans reeling under its unwanted outcomes including mushrooming of shylocks and unregulated lenders.
Assented to by President Uhuru Kenyatta on September 14, 2016 with the aim of making credit affordable to the “common man”, the Act caused exactly the opposite of what the government intended.
It saw banks decline to give credit to their regular customers, apart from big borrowers, leading to invasion by shylocks and loan sharks that charge exorbitant monthly interest rates which analysts now say has left consumers in a refinancing crisis that might be worse than that of the government.
One credit issue less written about but proliferated during the rate cap era, just like the unregulated mobile loans, are Log Book Loans – the high-interest business loans – that small business owners and individuals, mostly middle class income earners, resorted to taking.
Armed with a car logbook, it became pretty easy to get a loan ranging from Sh40,000 to more than Sh5,000,000 from dozens of willing lenders within 24 hours, some of which were never spent on projects but on day-to-day needs.
However, Consumers Federation of Kenya (Cofek) said because of the acute shortage of money in the economy amidst ever-spiralling financial demands and taxes, consumers risk getting trapped in the emerging high-interest loans market while those with log book loans are likely to lose their vehicles.
Cofek Chief Executive Officer Stephen Mutoro warned that the fast developing phenomenon of log book loans across the country could end up being worse than the defunct pyramid schemes in which consumers lost hundreds of millions of shillings.
“The fact that these entities are emerging in the counties while those with national presence are also opening branches in the counties with promises to give loans with a log book security within six to 24 hours from as little as Sh15,000 to as high as Sh5 million must raise alarm nationally,” he added.
Mutoro said apart from loan sharks known to demand high interest rates, there have never been financial – micro or otherwise – institutions giving huge loans at such a short notice based on a personal car log book and other conditions.
The groups are using a wide range of advertising platforms right from some of mainstream media outlets to outdoor billboards and streetlight posts pronouncing that they provide loans within hours ranging from Sh40,000 to more than Sh5,000,000 per applicant.
They accept more than one log book from an applicant as collateral to process loans with vehicles involved ranging from saloon cars, pick-ups, lorries and buses. Applicants are also expected to use online loan application forms platforms and must include telephone contacts as well as e-mail address contacts.
Some of the companies are found in major towns such as Nairobi, Mombasa, Kisumu, Nakuru and Eldoret with branches in virtually every county.
Investigations by People Daily confirmed that a micro-finance company could be leading with branch outlets in Busia, Kisumu, Eldoret, Kericho, Nakuru, Nairobi and Mombasa and a number of other county towns across the country.
In an advert, one of the businesses define Logbook Loan as a form of financing, whereby the loan advanced is secured against the borrower’s motor vehicle.
“We can lend up to Sh5,000,000 to help you unlock trapped cash in your car within 24 hours to help meet your personal and business financial needs,” it says.
Upon clearance
It goes on: “This product enables you to get a loan using your vehicle as security or collateral. Once the loan is disbursed, the log book is kept by… and is transferred back upon clearance of the credit advanced plus interest accrued,” adding that the firm holding the log book is regulated by the Central Bank of Kenya (CBK).
The question is how many of these entities are licenced and regulated by the CBK? How many are just loan sharks climbing the loaning credibility ladder? Do they strictly comply with the banking credit requirements or are they merely registered as companies?
People Daily established that most have hired sales and marketing personnel or executives who ply the streets of these towns looking for customers especially on market days.
Inquiries in major institutions such as KCB Bank, Equity Bank, Co-operative Bank of Kenya and Barclays Bank established that they do not process customers’ loans within 24 hours or aggressively solicit loan applicants most of whom must have active accounts and title deeds.
Nuru Mugambi, Director of Communications and Public Affairs at Kenya Bankers Association said the institutions have stringent procedures to follow despite the digital technology for one to get loans of any type.
“It takes equally stringent processes to vet applicants to ensure their qualifications and credible sureties to get credit – at least two weeks to a month depending on the financial institution before any applicant’s loan request can be ready – not within hours,” she said.
Mugambi acknowledged that the loans interest capping law led to credit scarcity from the regular financial institutions hence the possible emergence of the logbook loans targeting mostly middle class income earners whereas previously the prime security for loans were land title deeds.
To get a log book loan, an applicant is expected to produce the original car log book to be used in the transactions as security, production of the vehicle for valuation and Sh4,000 paid up-front to trigger the process.
Other demands are a personal six months’ bank account statement, Kenya Revenue Authority PIN, National Identity Card, passport photos and a comprehensive Insurance Certificate of the Vehicle or vehicles involved.
Julius Karanja, an official at Wananchi Credit Ltd, a micro-finance company that has logbook loan as one of its products, said the requirements are for security purposes of securing the loan.
“Our customers continue using their vehicles to conduct their business but we require them to repay their loans as per individual schedules,” he added.
Karanja denied reports that many applicants have lost cars after first being undervalued and then strict loan re-payment regimes put in place with almost no option for reprieves in case of delayed repayments.