Reasons for a loan without a bank account

loan without a bank account

The argument was that the bank account enabled the bank to determine the ability of the potential borrower to service the loan. The bank account would be used to compare the credit turnovers against the debit turnovers.

Most banks  have realized that this concept does not really make sense to a certain category of potential borrowers; the people in formal employment. Majority of these people in formal employment have only one source of income, that is, the salary income. A salary is reliably paid at the end of every month.

 Loan without a bank account through check off system

In order to have a competitive edge, most banks have reviewed the requirement to operate an account for a minimum of six months before being considered for a loan. They have therefore instituted what is called ‘check off system’ with the employers.

Loan without a bank account through check off system is an agreement between the banks and the employers of the potential borrowers. Deductions for loan repayment are deducted at source through the payroll.

When lending to this category of potential borrowers, the banks appraisal is on the employer and not the borrower.  Banks analyze the employer to know:  how long they have been in business, who the directors of that company are and even staff turnover within the company.

This has made governments to be seen as trusted employers of potential borrowers. Banks have been targeting many Government institutions like Teachers Service Commission (TSC), civil servants, Armed forces, international organizations and even the police forces.

The banks, on agreement with the employer to give a loan without a bank account, will sign a Memorandum of Understanding which will clearly indicate the following:

• The agreed date the deductions for the loan repayment will be done from the payroll and when the same will be submitted or remitted to the bank.
• The preferential interest rate the employees will be charged by the bank.
• The maximum repayment period for the loan granted to the employee by the bank.

 The only requirements for loan without a bank account these potential borrowers need are:

1. Pay slip for at least three months as proof of the amount of net salary they receive on a monthly basis.
2. Letter of appointment from the employer which indicate the terms of employment for example if they have been employed in permanent or temporary basis, retirement age.
3. To be able adhere with the two thirds rule, employers approval must be obtained and confirm that there are no other loan commitments. The two thirds rule means that the borrower must retain two thirds of their salary to live on.

Inspite of the above the responsibility and risks of lending to the potential borrower does not pass to the employer, the bank must still practice prudent lending. Giving a loan without a bank account is a decision that banks all over the world are using to make higer profits.

 Relationship between Lenders and Debt problem loans

debt problem loans

Lending is  risky business which often leads to debt problem loans; it is therefore inevitable that on occasion things will go wrong. Even seasoned lenders will experience cases of bad debts. Many times they will be tempted to indulge in wishful thinking and that the debt problem loans are only temporary. The debtor or borrower believes they will get things right in the end. Debt Problem loans like any other problems in life, do not just go away and  help with debt solutions must be developed.

Irrespective of how soundly based the original lending decision was, at the first sign of trouble, a new appraisal of the position should be done.

Some of the reasons that create  debt problem loans include:

• Natural disasters that have affected the cash flow, for example, earthquakes or floods. Sometimes a person may take up amortgage finance loan, which they expect to pay comfortably. If a natural disaster causes the home to collapse, the loan repayments have to continue. if the home is insured then the insurance pays for the loan. This will lead to debt problem loans
• Political instability and/or civil wars may escalate the debt problem loans. Civil wars and instability lead to displacement of populations. This in turn causes the borrower to default, especially if they have relocated to a far off land.
• Acts of terrorism. This like natural disasters and relocations aggravate the debt problem loans. Acts of terrorism cause distraction of property and loss of jobs. The destroyed property may be the reason why the loan was sourced originally.
• Death of Key man in management of the business is a major cause of debt problem loans. The key man or point man may be the only person who handles many of the financial functions of the company. When this point man dies, the new office holder may not be aware of some of the loans that need to continue being repaid. This interruption in installment repayments leads to debt problem loans since the installments may have grown to unmanageable levels.
• The borrower diverting the cash from the business to other uses may cause debt problem loans. The borrower may lack discipline in managing their finances and diverts money from loan repayment to other uses in the running of the business. This diversions lead to loans not being paid in time and the penalties and interests for such indiscipline are substantial. The diversion of cash may be due to corrupt practices by the borrower or borrowers agent.

Many lenders especially those banking in Kenya have to report on the debt problem loans and provide for these problematic amounts. This means that the profits that are reported by banks is reduced by the debt problem loans amounts.

Help with debt

When taking a loan it is important to get debt advice or help with debt decision and timing. This advice includes and is not limited to: how much money to borrow, whether the loan is necessary, the cost of funds and the best repayment period and is it a quick Loan.

The borrower should ensure that they understand the terms in the contract. They should first read and ask for clarification on any issue not understood. Help with debt jargon may be sought from legal and financial advicers.

In the event the loan becomes a challenge, the borrower should seek help with debt repayment immediately.

 Tips on help with debt management

1. Self examination- candidly investigates the new situation and collects as much information as possible to the exact cause of the default. Borrower has to be very honest so as to get the root cause of the problem if help with debt is to be realized.

2. Ensure that all the paper work concerning the loan is in order, including the position of the collateral held. Factors to be confirmed about the collateral are: if the charge documents were well executed and if the security margin is still adequate.

3. A meeting should be held with the lender to discuss the position of the loan and how they intend to repay the loan. The lender is also interested in the borrower making the payments on time, and so they help with debt management skills. The lender sometimes allows the loan to be rescheduled.

4. During the meeting a clear objective on the way forward based on the information already collected should be obtained. The lender should strike a balance with the borrower and come up with an acceptable and the best solution for both parties involve without any greater loss being incurred.

5. The lender should help with debt restructuring. The lender should confirm in writing to the borrower the decision of the meeting. The time frame for the repayment and the reviewed repayment period should be clearly indicated. At this point any penalties to be charged should be indicated to avoid last minute surprises.

6. The lender should control the position agreed on firmly and carry any intended action through. The lender should help with debt diarizing and sending reminders to the borrower.

Any kind of Help with debt should be welcomed by the borrower so that they avoid debt problem loans

It ensures that the investors and borrowers needs are met. Fundamentally the Treasury department plays a very important role in the continual functioning of a bank. Some of the important roles it plays are:

1. Liquidity position function by Treasury Department

Treasury Department

It ensures that the liquidity position of the bank is sound. One of the conditions of the Central Bank as a regulatory authority to Banks is that banks maintain a deposit account with it.

This account should at all times be maintained at a certain set minimum balance. Failure to ensure compliance to this and the bank faces the risk of high penalty levied on it. The bank could even be placed under statutory management if the problem persists.

The basic function of this account is to ensure that the banks are able to settle their interbank obligations, as and when they fall due. This usually means cheque payment and funds transfer.

So Treasury department in the bank ensures that the account has sufficient money to meet its obligations, even through overnight borrowing from other banks. This quick loan in most cases charges high interest rate.

2. Investment decision by Treasury Department

Treasury department facilitates the investment decisions for surplus cash in the bank. The investment should be one with a good return. Risk should be taken into consideration, as holding idle cash is very unwise.

3. Treasury Department foreign currency policies

The department determines the exchange rate for foreign currencies against the local currency. This is dependent on the market forces of demand and supply of currency.

The department ensures that there is adequate supply of the foreign currencies and that the foreign accounts are adequately maintained to ensure they meet their obligations

4. Treasury Department interest rate policies

Depending on the cost of funds acquired for lending, Treasury department determines the interest rate that is charged to their customers who are borrowers.

The department through market analysis of the interest rates paid to investors, for example, Securities offered by Central Bank, helps determine the interest rate to be paid. Interest rates are paid for time deposit accounts like the call deposit account and the fixed deposit account.

Treasury department critically evaluates the financial activities, the risks and ways of mitigating the risks.

Bank Lending to small businesses

Bank Lending to Small Businesses must understand the Nature of the product

Understanding of the nature of the product of the business is very important. Whether the business is dealing in perishable  goods(food stuff, flowers etc) or un-perishable products. How long the business takes to convert the stock of the product to cash. If the products they deal in have substitutes and are they essential products or what would be termed as luxury products. The products could have a substitute, for example, if the business is dealing in footwear is there other alternatives to the same which can serve their customer.

 Bank lending to Small businesses must understand the Market for the product

Understanding the market for the product is very crucial. Consider if the market is local or they deal with the international market. Does the market consist of a certain age group or is it for the mass population. Products dealing in fashion outfits generally target a certain population. Other factors of the market to be taken into consideration will be if the market is expanding or is it shrinking, as the population grows demand for food products increase hence the market increases. The issue of how easy competitors can enter this market is very crucial with a better product at a subsidized price.

 Bank lending to Small businesses must have background information on the owner

The background information of the entrepreneur running the business is very key. Consider if he or she is a person of integrity because this will determine whether they will keep their word to their customers, which then results to loyalty from their customers. The length of experience he or she has should also be put into consideration, the longer the experience the more certain the success of the business and vice versa. If the business has a Board of Management – what are their composition. does it have a marketer, a financial expert, a human resource individual. These will be able to add value to the business other than a business where the spouses are the Board members just to meet a legal requirement. Take into consideration the business continuity in a case where the founder of the business dies.

The professional lender therefore must not only be able to read and understand complex business accounts and analyze ratios. Bank lending to small businesses must therefore employ competent resources to get it right.

Bank loan in Kenya – Legal fees

bank loan in kenya

These are charges that are a requirement for the bank loan. You cannot get a bank loan in Kenya unless the charges to the lawyer are fully paid. It is usual for the bank to have law firms that they prefer and who they recommend for the loans to be worked on expeditiously. The lawyer fees depend on what the requirement for the loan is. Where there is land, it has to be searched, that is to ensure that the land being bought does belong to the seller. The lawyers also confirm if there are any charges like land rates that are yet to be paid on the property being purchased.

The lawyers also charge for ‘charging’ the land. The security documents have to be charged to the loan. If anyone else wants to use the security documents, they will show they are already charged. When the loan is fully repaid, the loan taker has to pay the lawyers a certain amount of money to have the documents released and the charges dropped.

The lawyers also charge to have the contract for the Bank loan in Kenya drawn and signed. The fees mainly depend on the value of the land and the number of pages.

Insurance fees for bank loan in Kenya

The loan that you take is insured by you in case of permanent disability or death. The insurance company is supposed to pay the bank the amount outstanding on the loan. This insurance amount is renewed every year and the insurance amount added to your loan amount. It is important to ensure you know the time the insurance is renewed so that your account or loan does not fall behind schedule. Insurance may also be taken on the subject of the Bank loan in Kenya, for example, car insurance or mortgage insurance.

Bank charges on bank loan in Kenya

There are charges that are paid to the bank whenever you take a Bank loan in Kenya. These charges are bundled or labelled facilitation fees. Depending on the bank, these could be a percentage of the loan amount or a flat rate. A loan applicant should ask the bank to avail a list of all the bank chanrges on the type of loan that is being sought.

Bank loan in Kenya Interest charges

Interest charges are what most borrowers remember to factor into their loan repayments. The banks could charge interest on reducing balance or compound interest. The interest rate on loans charges as per the changes in the economy. If the interest rate today is 10% this could change to 15% in 1 year due to inflation. Where the rates move very drastically in a short period, it is better not to take the loans as repayment may become impossibly expensive.

Statutory charges for a bank loan in Kenya

They are charges like stamp duty that must be paid to the government. These are usually a percentage of the bank loan in Kenya amount.

The applicant for a bank loan must count the costs associated with the bank loan and prepare for all the costs before approaching the banks or financial institutions. There are some financial institutions that avail full funding inclusive of the costs and charges to the applicant for the bank loan in kenya.

Bank Loan

The availability of loans to the public in recent times is a relief to the government and the public at large. There are numerous loans that the banking industry in Kenya gives to their customers. The loans are also designed to target those who are not yet customers of the bank too. The banks are introducing bank loan products almost on a monthly basis, for example, laptop bank loans to students.

Bank Loan Types

1. Mortgage or Home Bank Loan

These loans are given for the purchase of homes or to build homes. With the housing shortage in Kenya, these loans are very welcome. The banks’ target the high and medium income families and the low income families are left out. The government has introduced the low income housing projects to bridge this gap.

The loans may be sponsored 100% by the banks. Some banks prefer that the applicant finance a stated percentage of the amount borrowed. Different banks have different rates that they offer to the applicants.

2. Business Bank Loan

For both small and large businesses the banks are relevant because businesses required loans. The loans may be start-up loans or loans to help with cash flows. Some businesses have overdraft facilities with banks to ensure that their business do not fail to meet their financial obligations at any time. The Jua Kali industry in Kenya, which has employed a large percentage of the population in Kenya, is now able to access loans through the small and micro economic packages that are availed locally. The packages may be locally or internationally initiated.

3. Car Bank Loan or vehicle asset financing.

The applicant is assisted to purchase a personal vehicle or a fleet of vehicles for business purposes. The percentage of financing is dependent on the individual banks. Some banks finance 100% while others require the applicant to raise a percentage of the loan amount. The transport industry has relied on these loans to run their businesses. The aviation industry together with the rail transport who require heavy capital outlay also rely on these category of loans.

4. Home improvement Bank Loan

These types of loans may range from additional construction for already existing buildings to furnishing the homes. Many customers are not aware that they can get these kinds of loans from the banks and they often approach their Savings and Credit Co-operative society (SACCO) account. The customers get loans to buy furniture or electronic equipment for their homes.

5. Personal Bank Loan

The personal loans may be secured or unsecured loans. These range from salary advance loans or emergency loans. The banks may require that the applicant’s salary be received in the bank advancing the loan.

6. Investment Bank loan

Investment loans include, but are not limited to borrowing funds to invest in shares. Banking in Kenya was treated to frenzied action a few years ago when initial public offers for various companies were floated. The banks started to advertise and give loans to customers to avail funds to purchase the floated shares. The Shares are used as collateral.

7. Educational Bank Loan

Banks avail loans to assist students or parents to pay for education. The loans are not a preserve of the SACCO but are also available in the banks. Apart from the school fee schemes by the banks, the banks are becoming more innovative and are partnering with education institutions to avail the loans.

The Kenyan population should take advantage of the available loans on offer by the banks. Before applying for the loans, ensure you have looked at the costs of the bank loan and compared it with similar offers available in the banking industry.

Home Loan

This is a facility that assists you to acquire your own home. Various banks and financial institutions will give home loans or mortgages to those who have applied and their applications are successful.

Home loan helps you own your own home

The loan applications are processed within given times for most lending institutions. To ensure that your loan is processed within the minimum time limit, ensure to fill out the applications forms completely and properly. Give all the required documents.

The requirements from each bank are different and they depend on the strategy of the bank. Some of the banks require that the mortgage is partly financed by you the applicant. The amount that is required will vary from bank to bank. The bank may tell you that they will finance the mortgage up to 80% or 90% of the property sale amount. This means that you have to get the extra 20% or 10% and deposit it in your loan account with the bank.

Additional costs associated with your Home loan

There are other costs that are associated with the home loan, apart from the property cost. They are:

• Interest on the mortgage amount. The interest will be different depending on the bank or institution financing the loan. The length of the repayment period will also affect the interest charged on the loan. Less interest will be paid if the loan is for a shorter time.
• Stamp duty – This is a percentage cost on the cost of the property. This is a fixed amount which depends on the laws of the land. The current rate is 4% in Kenya
• Valuation fees – This fee is dependent on the valuer. Most banks have their own list of approved valuers which you should get before you have your property valued.
• Legal fees – This will be dependent on the loan amount. The higher the amount of loan the higher the legal fees requested. The bank or lending institution will have their list of preferred law firms. It is important to get this list from the institution providing the loan facility
• Bank Facility fee, which is a fee that is charged by the banks for facilitating the loan. It is a one- time charge. It differs from bank to bank and is dependent on the bank.
• Property insurance may be required by some banks for the life of the loan. This is important as it insures your property so long as the loan is being repaid. The fee is paid annually.
• Mortgage life policy is also dependent on the bank. This policy means that is you died while the loan was still outstanding the bank would claim the balance from the insurance company. This is an annual fee
• Penalty charges for lump-sum or full clearance before the stated life of the loan. These penalties will depend on the bank or institution. Some lending institutions give you a discount if the loan is repaid earlier than agreed.

It is therefore important as you approach the bank for the loan to find out the other costs that will be associated with the home loan or mortgage. Before the loan is taken, you should shop around to get the best offers that will suit your pocket and circumstances.