Stop being fleeced by your bank

Kenyan banks are known to be some of the most expensive in terms of provision of credit. Kenyans are not able to compare interest rates due to ignorance, the unavailability of information, and the inconveniences associated with moving from bank to bank in order to get their terms of credit. This is now set to change with the Central Bank of Kenya (CBK) having started to publish the various banks lending rates.

On its website, the Central Bank of Kenya has published the average lending rates for various loan products by banks as well as the overall average weighted lending rates by the commercial banks. This will promote transparency in pricing of credit by the commercial banks and give customers reliable information to evaluate which banks have the friendliest lending rates. This is also likely to trigger healthy competition among the lenders to the benefit of borrowers.

Based on the average of the overall weighted lending rates, the banks with the highest rates over the 2nd half of 2015 were K-Rep Bank Ltd, Jamii Bora Bank Ltd, Middle East Commercial Bank Ltd, Chase Bank of Kenya Ltd, Guaranty Trust Bank Ltd, Credit Bank Ltd, Barclays Bank of Kenya Ltd, Consolidated Bank Ltd, NIC Bank Ltd and Transnational Bank Ltd with the rates ranging between 24.0% and 18.6% respectively.

The bottom ten representing those banks with the lowest lending rates is taken by CfC Stanbic Bank Ltd, National Bank of Kenya Ltd, Kenya Commercial Bank Ltd, Standard Chartered Bank of Kenya Ltd, Habib Bank A.G. Zurich, UBA Bank Kenya Ltd, Family Bank Ltd, Housing Finance Company, Citibank N.A, First Community Bank Ltd, Guardian Bank Ltd. Their rates range between 15.8% and 12.4% respectively.

It is however important to note that the published interest rates by the Central Bank of Kenya are the average weighted lending rates for each type of loan product and the overall average weighted lending rates for each bank as at the end of a specified time period. As a result, the actual rates charged by the banks may be higher or lower than the published average rates. The actual rates are based on negotiations between the bank and the borrowing customers.

In addition, banks may levy other fees and charges, including administration fees, processing fees, valuation fees, legal fees and commitment fees, among others making the effective rates charged by individual banks higher than the published interest rates. It would therefore be important to ask around before settling for a particular lender for a loan.

Understanding the effect of inflation on investments

Inflation refers to the increase in supply of money in the economy which causes an increase in prices of goods and services. It could be an effect of reduced output, increase in cost of production or oversupply of currency. The effect of inflation is that a shilling today is worth more than a shilling tomorrow in terms of what it can buy. The reason why you should not save your money under the mattress is not security. It is also because as long as there is inflation, your savings keep losing value.

When making an investment, it is therefore important to consider the inflation effect. You expect that on the bare minimum, if you save 1 million today, that money will be able to acquire say after 5 years what it can acquire today. The only way this can happen is if the value of the money is adjusted accordingly relative to inflation.

To realize this preservation of value therefore, an investor should not accept a rate of return that is lower than the level of inflation. If the inflation rate in Kenya for example is 8% per annum, the rate of return for any investment should not be less than this. In fact the investor should require a rate of return that is higher than 8% because financial institutions charge a rental on the money they lend out.

Accepting a rate of return that is lower than the inflation rate will mean that your savings or investment will lose value in the course of time. If say you are getting a return of 6% per annum on your investment/ savings and the inflation rate is 8% per annum, it means that your funds are losing (8-6) 2% per annum by the Fisher’s equation (nominal interest rate – inflation rate = real interest rate). In several years, your fund will have lost so much that it will not be able to accomplish what you had set it aside for.

Before you put your funds into any savings or investment therefore, satisfy yourself that your funds will be secured from loss of value due to inflation. That is the duty of your financial services provider and if they cannot do that, you have no business giving them your money to keep.

Interrogating the prospect of saving or borrowing for a home

Many young people are often carried away by the desire to own a home even before they have enough finances to achieve their vision. It would be better to gradually build up resources before investing in a home. Starting saving at an early age ensures that one can keep small amounts in interest bearing savings plans and/ or investments and raise the required amount in the course of time.

Saving for a home within a short duration is mostly not a good idea. It can leave you cash strapped driving car that is not roadworthy, living in a poor quality rental, wearing worn-out clothes and straining to provide your personal/family’s daily requirements. It will also affect your ability to invest in other areas and grow your income. For example, to build/buy a house worth Shs 12 million in two years will require you to save on average Shs 500,000 per month. Such goal therefore may not be realistic.

However, when stretched over a longer period, it may be fairly easy to raise funds for the home. For example, saving about Shs 50,000 compounded annually at 12% interest will give you about Shs 9 million. Topped up with a loan from a SACCO or funds from other investments, one is able to comfortably acquire their dream home.

On the other hand, borrowing in order to acquire a home may be an extremely expensive affair. Assuming that you would want to own the Shs 12 million home through borrowing from a bank. If you borrow Shs 12 million repayable within 10 years at 21% interest as are the rates nowadays, you will be required to pay about Shs 240,000 per month. This will be in order to pay a total of Shs 29 million, with Shs 17million being the interest.

Essentially, it would be therefore cheaper to save as you pay rent. If you are saving Shs 50, 000 and paying rent of Shs 50,000 per month, you will have spent Shs 12million in 10 years. This means that the interest that you would have paid on a loan is enough to pay for your savings, investments and rent for a decent house for 10 years.

It would be good to avoid financing your home though a means that you may not be able to repay in the long run and end up losing your home. You can live comfortably today and live comfortably tomorrow by ensuring that you do proper financial planning. Avoid procrastination and start saving for your future today.

Financial security

The man who because of his understanding of the laws of wealth, acquireth a growing surplus should give thought to those future days. He should place certain investments or provisions that may endure safely for many years yet will be available when the time arrives which he has so wisely anticipated. George Clason, The richest man in Babylon.

Passive income investment
Financially successful people have multiple sources of income. Some of these sources are passive, that is, you do not have to work to earn because money works for you. Some of the secure ways of investing safely is through unit trust funds. Through a unit trust fund, you can choose where you would wish your money to be invested. The fund is managed by professional asset managers who identify the best investment areas for the funds.
Unit trusts are collective investment schemes that pool funds from different investors, to invest in a wide range of assets like interest bearing assets, government and government bonds, shares, property and offshore investments. This allows you to save and grow your investment.
You may choose to invest through the following funds: Money Market Fund, Equity Fund, Balanced Fund, Bond Fund or Reits.
Life cover
A life cover ensures that your family or dependants are financially secure through a lump sum cash benefit in the unfortunate event of disability, sudden medical condition or death.
Always make sure that your debts do not exceed your life policy cover. A life policy benefit will ensure that in case of your demise, your family can pay off your personal debts, loans, mortgage and just slightly adjust their living standards.

Premiums paid for a life cover are calculated on the basis of mainly: age, health status and exposure to the risk of death. Every day that passes increase your risk profile in all these factors. This means that the more you delay in taking a life cover, the more you will be required to pay when you discover that you need one.
Funds from life cover plans are invested in longterm high return investments. This enables an insurer to give a life cover that is at times more than four times the total contributions of the insured. You might for example find that for a KShs 10 million cover, your total contributions amounts to KShs 2.5 million.
Savings plan
You probably will need to save and invest your money for a specific period in order to achieve a specific financial goal in the future. Such goal may require a lump sum to fund which may not be easy to raise in a short time. Taking a savings/investments plan can help you raise funds for your goal in a flexible manner and with competitive returns. When started early, the fund earns a rate of return that grows it by more than half its value.
Education savings
An education savings plan ensures that your child(ren)’s education is planned for and your child can achieve their academic goals in the course of time. The plans provides security in that even if something were to happen to you leading to occupational disability due to physical impairment or demise, your child(ren)’s education is guaranteed.
A child knowing that the parent has already provided savings for her/his education in high school or university, locally or abroad, can be highly motivated to achieve that goal. It is always important to be ready for what the future holds. And this is one of the right steps in that preparation.