When people think of getting a personal loan, a lot of them automatically think of banks as the best (and sometimes only) place where they can access these loans.
In reality, there are many different kinds of institutions that give individuals access to personal loans products.
In this guide, we’ll take a look at the different financial institutions that offer personal loans in Kenya, as well as the advantages and disadvantages of borrowing from these different institutions. Let’s dive in.
Commercial banks are the most common financial institutions in Kenya, and these are the first to come to mind when considering a personal loan.
Commercial banks are large financial institutions that are allowed to provide banking services to the general public, including taking deposits from the general public, providing different kinds of loan products, and offering checking account services.
Commercial banks also provide other kinds of financial products to individuals and small businesses, such as savings accounts and certificates of deposits.
Banks are for-profit institutions, with their profits derived from administration fees and interest charged on loans.
In Kenya, commercial banks are regulated and supervised by the Central Bank of Kenya (CBK), under the Banking Act. The regulation is intended to ensure banks maintain solvency by preventing the accumulation of excessive risk. This is done by including other means, strict capital requirements, reserve requirements, deposit protection, loan pricing restrictions and restrictions on types of investments banks can make.
As of August 2021, there are 43 commercial banks in Kenya, with 25 locally controlled, 3 publicly owned while the remaining 15 are foreign-owned.
Banks are primarily classified by ownership; locally owned, government owned and foreign owned - this in terms of majority (50%+ shareholding) ownership. The next classification is by nature i.e. microfinance banks and commercial banks.
Another classification by the CBK further divides commercial banks based on asset base. Tier 1 banks are the largest with hundreds of billions in assets and millions of depositors indicating a high unlikelihood of collapse.
Tier 2 banks are medium-sized, while Tier 3 banks are the smallest banks.
Commercial banks offer a wide variety of loan products to suit different customers. Some loan products offered by commercial banks include:
These are loans that charge the same amount of interest until the whole loan is repaid. For instance, if you are given the loan at an interest rate of 15%, this is the interest rate you’ll pay throughout the life of the loan. However, the interest will only be paid on the remaining principle, rather than the total amount borrowed.
These are loans whose interest rates are subject to change depending on prevailing market rates.
For instance, let’s say you were given a 13% interest rate when applying for the loan. However, due to economic fluctuations, the cost of lending becomes higher and the Central Bank Rate (CBR) is adjusted upwards. In such cases, your bank can increase your interest rate to, say 15%. The same is applicable when the CBR is adjusted downwards.
Since they give the bank the flexibility to change the interest rates based on prevailing economic conditions, variable rate loans usually attract lower interest rates than fixed rate loans.
Secured loans are loans that require you to provide a personal asset to act as security for the borrowed amount. Secured loans are very common among commercial banks, and can offer either fixed or variable interest.
It’s good to note that by providing an asset as security against your loan, you are effectively agreeing to forfeit ownership of the asset in the event that you are unable to pay back the loan.
These are loans that don’t need any form of security. Commercial banks only issue unsecured loans to people with a very good credit rating, as well as employed individuals with a regular salary and self-employed people with a regular income.
These are a form of unsecured loans that give you access to a predetermined amount of money that you can draw from as needed.
For example, instead of being given Ksh1 million as a lump sum, you are given a line of credit or credit card that allows you to spend anywhere up to Ksh1 million.
This means you can spend whatever you need, whether that is Ksh10,000 or Ksh900,000. Interest is charged on the amount spent, rather than the available amount.
Most credit cards will have an interest-free period where you can make purchases for a specified amount of time without being charged interest. This is typically possible only if you pay the amount due in full each month on time.
It is also possible to withdraw a certain percentage of the available credit in cash from an ATM machine. Depending on the card provider, this may attract additional çash advance’ charges.
These are loan products that allow you to overdraw your account. In other words, they allow you to withdraw more money than you have in your account, up to a specified limit. Interest on overdrafts is charged on the amount overdrawn.
For example, if you have Ksh50,000 in your account, but you withdraw Ksh60,000, interest will be charged on the extra Ksh10,000.
It’s good to note that there are pre-arranged overdrafts, where you have a prior overdraft agreement with the bank, and accidental overdrafts, where you draw more money than is available in your account without any prior overdraft agreements. The fees for these two types of overdrafts can sometimes differ.
Microfinance banks are smaller financial institutions that operate almost similarly to commercial banks in that they allow people to open accounts with them, they can take deposits, give loans, allow individuals to channel their salaries through them, and so on.
However, there are several differences between microfinance banks and commercial banks.
The main difference from commercial banks is their asset base and size of the loan book. Some microfinance banks also have bespoke product that target people who are typically ‘excluded’ by commercial banks, such as informal sector workers, low-income earners, and those with little or no assets.
In a lot of cases, microfinance banks also target people from specific demographic groups, such as women, the youth, and so on.
Another major difference between commercial banks and microfinance banks is how they operate. Commercial banks offer bank door services, which means you have to go to the bank in order to get their services.
In Kenya, microfinance banks are regulated by the Central Bank of Kenya under the Microfinance Act of 2006 and the Microfinance (Deposit Taking Microfinance Institutions) Regulations of 2008.
Microfinance banks have a variety of loan products that are specifically designed to cover the needs of the communities they serve. Some of these loan products include…
These are loans given to individuals running micro-enterprises, such as kiosk owners, mama mbogas, hawkers, players in the jua kali sector, and so on. Microloans are typically categorized as those falling under Kshs.50,000.
These are loan facilities that help you purchase assets like land, machinery, vehicles, and so on, usually with the aim of using these assets for income generating activities.
If an entrepreneur has obtained a letter of award or purchase order, but doesn’t have the money to fulfill the order, microfinance banks can offer financing against the purchase orders, thus giving the entrepreneur funds to fulfill the order.
Microfinance banks also offer invoice discounting facilities, which basically means that they loan entrepreneurs money against the value of the invoices they are holding. Once the invoice is paid, the money is then used to pay back the loan.
Invoice discounting is a great way for entrepreneurs to raise enough money to keep their business running as they wait for payments from clients. Note that commercial banks too offer this service.
Microfinance banks also advance loans to farmers to help them purchase things like farm equipment, seeds, fertilizer, and so on. These loans usually have very flexible loan terms, allowing the farmer to repay the loan after harvesting their crop.
These are loans that are given to help you cover the cost of unexpected expenses, such as medical bills, funerals, and so on.
Emergency loans given by microfinance banks usually have very flexible terms, with the interest and repayment terms determined on a case by case basis.
Microfinance banks also allow individuals to form groups and borrow money together, with the group members guaranteeing each other. In this case, the group doesn’t have to be a formally registered entity.
Borrowing from microfinance banks offers the following advantages:
The downsides of borrowing from microfinance banks include…
Microfinance institutions differ from microfinance banks in that they are credit only entities. This means that microfinance institutions are not allowed to take deposits or cash collateral from their customers. Microfinance institutions lend their own funds, rather than funds collected from members.
In addition, you cannot hold an account with microfinance institutions. This means that, when you take a loan from a microfinance institution, the funds will be deposited into an account that you hold with a different commercial or microfinance bank.
Since they don’t take deposits, microfinance institutions do not fall under the Microfinance Act of 2006, and therefore, they are not regulated by the Central Bank of Kenya. However, microfinance institutions still have to get a letter of no objection from CBK in order to be registered.
Credit-only microfinance institutions offer the following kinds of loan products:
These are loans that are given to help you cover expenses caused by unexpected crises, such as illness. Emergency loans usually come with flexible payment terms.
These are loans that are secured against your car logbook or your title deed. The repayment periods for these loans can be as little as one month or as long as 2 to 3 years.
These are loans that are issued to employed individuals to help them cover their living expenses while awaiting their next salary. These loans usually have a repayment period of 30 days or less.
Working capital loans are credit facilities advanced to entrepreneurs to help them cover the costs of running their business. These typically have short repayment periods, usually from a few months to a year.
Microfinance institutions also offer loan facilities to entrepreneurs who have been awarded a purchase order to help them cover the costs of fulfilling the order. These loans are usually paid back after the invoice for the order has been paid.
These are credit facilities given against a cheque awaiting maturity. This allows you to access the funds even before your cheque matures.
In most cases, the issued credit will be a percentage of the cheque amount. Once the cheque matures, the whole cheque amount is then deposited to the microfinance institution.
Some reasons why you might consider borrowing from a microfinance institution include…
Savings and credit cooperative societies (SACCOs) are another very popular option for people looking for easily accessible credit in Kenya. At the time of writing this, Kenyan SACCOs have a combined membership of over 14 million people, over Kshs.1 trillion in assets, and over Kshs.732 billion in deposits.
SACCOs are self-help, member-based financial institutions where a group of people come together to pool their savings and offer loans to each other.
For a long time, SACCO were usually formed by people united by a common bond, such as belonging to the same church, working for the same employer, engaging in the same economic activity (such as farming), living in the same community, and so on.
Over the last decade however, with many SACCOs having undergone massive growth, some have started allowing members who do not share the common bond. For instance, STIMA SACCO, which initially started as a SACCO for KenGen employees, is now open to everyone.
SACCOs are owned, governed, and run by their members, with the interest charged on loans used to cover the costs of administration. To join a SACCO, you have to buy the SACCO’s shares, thus making you a joint owner.
There are two kinds of SACCOs in Kenya; deposit taking SACCOs, which are regulated by the SACCO societies regulatory authority (SASRA), and non-deposit taking SACCOs, which are unregulated. However, plans are underway to regulate even non-deposit taking SACCOs.
Non-deposit taking SACCOs only accept member deposits in the form of share-capital. This means that members can only access their deposits by selling their shares and leaving the SACCO.
Different SACCOs have different kinds of loan facilities, including emergency loans, asset finance loans, education loans, cash advances, development loans, micro loans, logbook and title deed loans, school fees loans, and so on.
In most cases, SACCOs allow members to borrow against their savings, with most SACCOs giving loans amounting to between 2.5 to 6 times your savings. You’ll also need to find other SACCO members to guarantee you for the loan.
SACCO loans offer numerous advantages, including…
Despite all their advantages, SACCOs also have some disadvantages. These include…
The phenomenal growth in popularity of mobile banking in Kenya over the last decade has led to the rise of digital lending institutions.
Digital lenders are unregulated institutions that allow individuals to borrow money through their mobile phones. Once loans are approved, the funds are similarly disbursed to the borrower’s mobile wallet.
Digital lenders have become very popular to Kenyans looking to access quick loans, as well as those who cannot access loans from conventional lending institutions. Prior to the Covid 19 pandemic, digital lending institutions were issuing about Kshs.4 billion worth of loans every month.
Most digital lenders offer short term loans that one can use to cover small emergencies, living expenses, and the day to day costs of running a business. Repayment periods for mobile loans usually range from one day to 30 days, but there are some that offer longer repayment periods such as Branch, Zenka and Flashpesa.
Due to the high risk of default, most digital lenders only allow you to borrow small amounts of money, with borrowing limits determined by borrowing and repayment history, as well as an algorithm’s assessment of your credit worthiness.
Borrowing from digital lenders offers several advantages, as can be evidenced by the massive growth in the popularity of mobile loans. Some of these advantages are…
Despite their convenience, digital loans have their downsides, including…
If you are considering getting a personal loan, you are not limited to banks only. There are several institutions that you can turn to for this kind of financial assistance, including commercial banks, microfinance banks, non-deposit taking microfinance institutions, SACCOs, and digital lenders.
It’s good to note that each of these institutions has its advantages and disadvantages, depending on your financial situation, the kind of loan you are looking for, how fast you need the loan, and the kind of payment terms you are looking for.
Before starting your loan application process, therefore, take the time to understand what each of these institutions offers and then figure out which is the most suitable for you, depending on your circumstances.
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