As soon as I graduated from university there was an invitation from the managing director of a top Nigerian engineering company to join the organization. There I learned the business of construction and after four years of strategic support work I left to start my own building engineering service firm with a partner. It looked easy!
In Nigeria, starting a new enterprise seems like a piece of a cake and it’s very convenient for people to suggest you should “start something on your own”.  Lagos, where I live, has an annual government revenue one of around $1 billion. With this kind of cash seemingly flowing through the streets, it is assumed it is easy to finance one’s start-up.
My partner and I started our business with our tiny fund – around $320 – and within a few months, had invested most of it on marketing. We didn’t have a car to drive around Lagos so we used taxis to get to meetings. We pushed on until we eventually landed a construction site deal. This process taught us how unsupportive financial institutions in our part of the world can be.
The average entrepreneur in Africa finds it difficult to get their idea to market because of ridiculous interest bearing loans. As we began to talk to our banker for financial support, it became clear that the banking sector was not going to be of much help. We did not have a property, in a choice part of the city, to guarantee the loan which in itself attracts over 20% interest.
With time running out, and needing to get our workers and equipment to site, we resorted to a desperate measure. Desperate people do desperate things. In this case it was a ship sinking decision for us. A private investor offered us a short-term loan with a monthly interest of 15%. We assumed all would work out; we had millions to get people and equipment to site, and substantial work could be done to impress our client. Within 30 days, we would be paid and refund our creditor. It was unrealistic.
In an environment where uncertainty is high, relative to other part of the world, such a straight-line strategy requires many back-up plans. Our company defaulted and the loan extended to a third month, with an accumulated interest of 45% on every million naira. We defaulted because our client delayed payment. He couldn’t pay us because his funds were not released. That circle of failure is the undoing of many businesses.
In a society where moneylenders and investors place an emphasis on the reputation of an entrepreneur, one needs to have a plan to protect this. The harshness of the African business environment triggers desperation and keep entrepreneurs focusing on short-term plans. This needs to change; the longer a business’s plans are considered, the better it will be. There are other strategies that work with raising fund. In south-western Nigeria, Yoruba parlance says that “it is from home that treasures are taken out”. The interpretation is that success begins at home.
Many business owners that I have had the opportunity to talk to use their relationship with family and friends to raise funds, equipment and other resources. The benefit of this is that family is more willing to forgive you and this type of loan usually comes without interest. However, this strategy is limited on a continent where around 70% live below the poverty line.
This provides a huge opportunity for capital ventures and angel investors. It provides opportunities to bridge the poverty gap and create wealth on a continent that is thought to be the next global investment destination. To truly realise this opportunity, the purse of an entrepreneur shouldn’t be bullied.

Desperate People Do Desperate Things

That interest rate spreads have absurdly been high in Kenya has never been in question. Like in many other African countries, commercial banks in Kenya have over the years left their customers choking with the discomfort of unreasonably costly loans.
In fact, market data has shown that, whereas in many developed countries, spreads between average lending and deposit rates vary around 2%, they are often up to 10% or more in developing countries.
The average lending rates in Kenya have oscillated at about 18%, ranging between 17.2% and 19.2% for the six biggest banks.
But even with this in mind, a decision by President Uhuru Kenyatta to sign a new law imposing lending rate caps and deposit rate floor on banks leaves the financial sector at a crossroads. The new law sets an interest rate cap on loans of four percentage points above the base rate published by the Central Bank of Kenya and a minimum interest rate on deposits of 70% of the same base rate.
“Experience across the globe has shown that interest rate caps do not just not work, but they might actually do damage to the inclusion agenda that many policymakers, including in Kenya, are interested in,” says Thorsten Beck, a  professor of banking and finance at Cass Business School in London, who thinks it may affect financial inclusion in Kenya.
Perhaps partly due to the political heat on high lending rates and just a year away from Kenya’s next general elections, Kenyatta may have made a populist decision and even defied the Central Bank, the National Treasury and industry that have opposed capping for fear of market distortion.
Lowering interest rates was a core issue in Kenyatta’s election manifesto and ignoring the rate caps would have seen him play into the hands of opponents who have been vocal about the high cost of business and living.
“This is the third time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates,” Kenyatta argued when he signed the new law.
“Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns on equity for banks in the African continent,” he stated. “Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.”
Though Kenyatta may assume cost of credit could come down with the new law, we will have to wait and see what impact the caps will have in the long term. There is concern that they may cloud the central bank’s monetary policy signals and even undermine efforts to keep inflation within the government’s target range.
The caps may also work against bank customers should banks resort to introducing fees to mitigate operational costs and risks.
“Another possible response will be rationing of customers, effectively excluding marginal borrowers and depositors, where the former will not receive any loans and the latter will be priced out of the market with high fees and documentation barriers. Neither of these reactions is favorable to the inclusion agenda nor fosters transparency and efficiency in the financial system,” says Beck.
The disclosure requirements contained in the new law are welcome because of the different types of costs included by banks in Kenya. Most financial institutions do not only charge interest rates on loans, but also fees. Similarly, they do not simply pay interest on deposits but some also charge withdrawal fees.
In some cases, these fees are as high as 2.5% of the total loan amount. Also, all of them charge withdrawal fees on at least one of their savings accounts.
With the new law, consumers will have clarity on what they are paying over and above a base rate, which is a positive step towards consumer protection.

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Desperate People Do Desperate Things

Kenya At A Crossroads With Caps