Table Banking Is A Better Alternative To Mobile Loans

In the last few months, regulators have raised alarm over the proliferation of mobile loans. According to Transunion, Credit Reference Bureau (CRB), at least 500,000 Kenyans have been blacklisted, mostly for defaulting on mobile loans. We currently have over 50 mobile lenders (including banks such as Barclays, Equity, and KCB that have launched their mobile lending apps), and it seems Kenyans are borrowing multiple times from the different apps.

Another credit issue less written about because it is not as visible as mobile loans are the high-interest business loans that small business owners are resorting to taking because many banks no longer offer friendly business financing as a result of the interest rate cap. Walking around town, you see all these notices “Instant Loans”, “Log Book Loans” etc, and we know many shylocks operate informally, lending to these small businesses.

All these are symptomatic of a systemic issue. First that the economy is not growing fast enough (or the reported growth is not trickling down), secondly, there just isn’t enough money in the economy, and finally, we do not have the right financing structures for small businesses. An oft-quoted fourth reason is that Kenyans are consumerist and not saving enough. While I do agree we could increase our savings rates, I feel that for a majority of Kenyans, saving money is the ultimate luxury, because they can barely afford the basics – decent housing, food, healthcare, and education.

Systemic issues aside, I think there is something we can do to avoid high-interest borrowing for personal and business emergencies. According to Transunion, most people have been blacklisted by the CRB for amounts less than 500 shillings. If we utilised the power of networks, we could instead borrow from each other, instead of using high-interest mobile loans.

Transunion Chief Executive Officer Billy Owino said most of these individuals are finding themselves blacklisted for lack of knowledge on the consequences of defaulting paying a loan, which is as little as the Sh500.

Our table banking story

Some 4 or so years back, my mom asked me to join their table bank. At that time, they were 4 friends, saving 1,500 shilling per month into a joint account, from which they would then borrow at 5% interest per month for emergency cashflow needs.

I scoffed.

1,500 shillings? Why such small amounts? Would it really make a difference?

I was/still am (though won’t be for long) the regular impatient Kenyan youth. I wanted big money things. She insisted that since 1,500 bob wasn’t much anyway, I could just contribute. Help them build capital. You never know.

Mothers are wise. Last year, that table bank lent me 140,000 shillings for a cash-strapped project I was undertaking, at 10% per annum. Cheaper than I could get anywhere else. 4 years ago when I joined, the total capital stood at about 100,000 shillings, today, we are past the 1 million shilling mark if not more, with 6 members.  We still contribute 1,500 bob per month.

How do table banks work?

Unlike investment clubs that are formed for the purpose of pooling money for investments, table banks are solely for pooling money that is then lent to members at an interest. This way, they serve as a way to fix short-term cashflow problems, while at the same time building members’ savings. There are a number of things members need to agree on before they start saving:

1. Like all pooled schemes, members need to agree on a monthly contribution that is not prohibitive. I would recommend that you start with amounts you otherwise would not miss.
2. A lending interest rate and the term of the loans. It is wise to start at a higher interest rate and for short periods for two reasons. First, so as to quickly build lending capital, and secondly to build trust as people borrow and repay. We started out at 5% per month, with a maximum of 6 months repayment period. As capital grew, we increased the amounts one could borrow, reduced the interest rate, and also increased the term of the loans.
3. What to do with the interest. The very informal table banks dissolve at the end of every year, distributing all proceeds, then start all over at the beginning of the year. Others want to “graduate” into investment clubs, and therefore keep re-investing all proceeds until their capital is large enough to invest. Our table bank pays 50% out in dividends at the end of the year, then re-invests the balance. The dividends serve to motivate us to save, and encourage us to meet and “break bread” as friends.
4. If/when to meet. Informal table banks meet once a month. Depending on the level of trust, you could even meet once a year like we do. But we do keep in touch via a Whatsapp Group, and also we are in touch at an individual level because we are mostly in one family.
5. Where to pool the funds. The key thing about a table bank is that it should not be complicated or costly to structure. A joint bank account will do.
6. Lending policy. Ideally, at the very least one should be able to borrow to the extent of their savings, but with time, this can be 2 to 3 times their saving depending on capital levels.
7. Membership policy: Whether you will be admitting new members and the criteria for admitting them. Should they first catch up on savings, and save for a couple of months before borrowing?
8. Default policy: Since this is a social development product, you must agree what to do if a member defaults b

Looking at all of the above, you can see there is an underlying theme: TRUST and SIMPLICITY. Table banks are designed to be informal in structure and therefore anchor a lot on the shared trust among the members. It is also important to keep the structure simple, otherwise the “organization” becomes too bureaucratic.

Many of my personal finance lessons are drawn from our parents, and from teachers. This is because they got/get so much done with such few resources, by employing the principles of TRUST and SIMPLICITY. It is therefore not surprising that I would recommend that you partner with older folk for table banking (or just join one that is ongoing).