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Saturday, 4 October 2008

Kenya: Relief for battered borrowers

By John Njiraini/The Standard (29/9/08)
After being lured to take up personal loans by commercial banks, the reality is now sinking for many people that servicing a loan is not as easy as they were made to believe.
Over the past two years, the number of individuals who signed up for personal loans have been high, with the total loan portfolio running into billions of shillings.
With commercial banks literally hawking loan products with easy repayment through cheque-off system, many fell into the trap and rushed to sign up for the loans ranging between Sh100,000 and Sh3 million.
Because of the easy processing of the loans, many salaried individuals did not read the fine prints critically, particularly the interest rate clauses.
With the cost of living skyrocketing to unprecedented levels and inflation having its toll on the payslip, servicing the personal loans has become a monthly torment.
To most individuals, any relief on servicing the loans would be Godsend. This is what many saw when First Community Bank put out advertisements to the effect that it was taking over personal loans and converting them to non-interest loans.
So far the high number of applicants is posing a challenge to the bank because of overwhelming response from both Muslim and non-Muslim applicants.
Although the product is open to all, the bank would want clients to justify why they want to transfer loans, says Habib-ur-Rehman Parkar, First Community Bank chief operating officer.
Due to this requirement, some applicants might be disappointed if their main reason of transferring the loan is to have an easy way out from their debt.
"We are out to serve Kenyans but this product is targeting a niche market and we do not expect it to be attractive to everybody," says Parkar.
He adds that although it might be open to anybody repaying a personal loan, applicants should have the conviction that they would not go for another interest paying loan.
Being a fully Sharia compliant bank — which adheres to Sharia law —that prohibits charging of interest, the bank seeks to convert conventional loans into Sharia compliant financing products.
"We want to assist clients who want to convert interest paying loans into Sharia compliant products. In the process we expect the client to refrain from taking up interest paying loans in the future," says Parkar.

Paying interest
While the thinking among those who seek to transfer their burdensome loans is that they only need to present their payslip, copy of the loan statement and a copy of the identity card and sit back to service the loan at First Community Bank without paying an interest, this amounts to a big misconception.
Parkar explains although Sharia law prohibits charging of interest and that money should only be used as a medium of exchange and not a commodity, the bank is nonetheless in business and it expects to give returns to shareholders.
Consequently, the personal loan takeover is supposed to ease the burden on the borrower and generate a profit for the bank.
The concept, which is based on Sharia law, thus does not come for free.
It works in such a way that First Community Bank buys a commodity, like sugar, or property that is equivalent to the loan balance.
The bank mutually agrees with the client on the profit margin the borrower is expected to generate from selling the commodity or property.
The bank assists the client to dispose the item and use the money realised to pay off the original loan.
"Being an interest free concept does not mean it has to be necessarily cheap," says Parkar, adding that everything comes at a price.

Profit margin
After paying off the loan, the customer will embark on repaying the amount to the bank.
While there won’t be any interest charged, the client is expected to service both the converted loan amount and the profit margin.
How do borrowers benefit from the arrangement?
For instance, if an individual signs up for a Sh100,000 personal loan in a commercial bank repayable in 12 months at 18 per cent interest rate, it means that he/she would be paying Sh9,167 a month.
Considering that interest rates are never fixed and they are constantly adjusted upwards because the bank want sto protect itself from inflation, six months down the line the individual might end up repaying the loan at 24 per cent interest rate. This means that the monthly instalment would also rise to Sh9,417 a month.
In conventional banking, if a borrower fails to pay a loan, a penalty is charged automatically. But in an Islamic bank, if the borrower fails to pay a monthly instalment, one is not penalized immediately.
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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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