Tuesday, February 12, 2008

Payslip power

Magical power of a payslip
Last Updated on December 10, 2007, 12:00 am

By John Njuguna

Forget the world of plastic money, the real tangible product, which is setting young Kenyans free is a piece of paper called a payslip.

Bankers are courting salaried people like never before and the latest novelty in town is the mortgage scheme, which is making holders of payslips quickly owners of homes. The target group are those between the age of 18 and 65.

This goes against the traditional grain when collateral used to be tangible and immovable assets like land.

The terms are, however, still very tough especially for those operating informally in business despite huge turnovers.

Owning a home has never been made easier with repayment period ranging from one year to 20. With three payslips, a letter from an employer and a down payment of only 10 per cent, one can own a home anywhere in the country, including the exclusive suburbs like Kilimani. The beauty of this product is that interest charged is repayable on a reducing balance.

The biggest challenge would be to sustain this level of income to service the loan.

The same goes for unsecured loans, modelled to suit individual needs, says a mortgage expert with one of the leading banks.

For example, if one is earning a net salary of Sh90,000, he would qualify for a mortgage of Sh3 million. This translates into monthly repayment of Sh44,000 because banks are particular about ensuring one takes home 50 per cent of their salary.

From a layman point of view, a Sh3 million loan would amount to Sh5,375,160 after ten years at a monthly repayment of Sh44,793.

To many this is a large sum of money. But in an era when rent in some estates like Nairobi’s South B rent ranges between Sh25,000 and Sh35,000 for a three-bedroom house, one is only making the owner richer and paying an extra Sh10,000 to eventually own the property is worth it.

Stories often recited by people sent to early retirement by poor health by banks following fluctuating interest rate regime is however not applicable in some mortgage schemes, which is fixed at 13 per cent for a loan lasting between one to 15 years and shots to 13.5 per cent for a 20-year mortgage.

Recently, several old men were debating the new trend of lending. John Kariuki, in his mid 50s was 10 years ago a robust man, who worked hard and life was good. He gambled with a bank loan, secured through his piece of land in Muiki, in the outskirts of Nairobi, as collateral.

This was in the 90s when the economy was on its death bed and a time when interest rates were quite high. However, Kariuki reckoned that there would always be demand for housing in Nairobi, so he invested in a residential housing.

He put up 20 low-cost units which did not attract tenants because they opted for estates closer to the city where they would walk to Industrial Area.

Add the fluctuating interest rates, the then impassable Muiki/Kasarani road and Kariuki’s investment appeared to have been set on quick sand.

Interest rates up

Before long, the bank asked for its money, interest rates shot up and with the land as collateral, Kariuki had to look for money elsewhere to save his land from being auctioned.

Kariuki soon succumbed to high blood pressure, diabetes and hypertension. Mention bank loans and he goes ballistic.

However, his age mates are convincing him to rethink his position about a bank loan to develop the second phase of his Mwiki plot as the area has opened up following the tarmacking of the main road.

Tenants are returning and are demanding good houses unlike the single rooms Kariuki had built.

With the famous Nairobi bypasses being on the development card next year, Kariuki is aware that he can take another gamble which might pay off even it it means providing him with proper medicare.

Banks have come up with long-term mortgage plans which could see the housing boom reach unprecedented level especially in the northern part of the city which still has large tracts of land.

The upgrading of Thika Road from Ruiru, which could ultimately cease traffic congestion, has made this area attractive to investors and people seeking better housing.

But for a man who does business in a very informal way, this might not be easy. Banks are now asking his type to produce audited accounts for the last three years from a business concern which must have been in operation for four years. On top of this, he must produce annual income tax returns.

This is not a tall order for Kariuki. However, he has never employed an accountant and is dodging the Kenya Revenue Authority.

The other requirement is Business Registration Certificate and articles of Association and a trading licence.

Banks predict that once most Kenyans in self-employment learn to operate a formal business, they will be the next target group.

"The idea is to bring sanity in the informal sector where a lot of money exchanges hands and many people tie their money to projects which most of the time take long to complete," said an investment expert.

Meanwhile, the influx of vehicles on Kenyan roads, courtesy of the magical payslip, will soon be competing for space with heavy commercial vehicles.

Many banks are also interested in helping Kenyans to buy vehicles for business with terms being more bearable after the mandatory down payment.

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