Saturday, 27 July 2013

Family loan pool can ease higher education financial burden

Graduation at Kenyatta University. A family loan pool would help educate many students. FILEGraduation at Kenyatta University. A family loan pool would help educate many students. FILE 

Posted  Sunday, July 21  2013 at  14:16
A student comes back to the dorm and finds his roommate near tears. “What’s the matter pal?” he asked.
His roommate says, “I wrote home for my parents to send money so that I could buy a laptop.” “So I guess they said no?” the student asked.
“No, they sent me the laptop,” the roommate said.
A friend recently drew my attention to an interesting article posted online on Reuters last week titled “A loan pool to help clients help family float school bills”.
The article, authored by Jennifer Hoyt Cummings reports about a growing trend where families pool funds to loan money to family members going to university.
Ms Cummings writes that under a loan pool, a family sets up a trust and bequests an initial sum into it. They then establish rules for how family members qualify for the loans, how long they have to pay them back and what happens if they default.
The family appoints one or more trustees who review the applications to determine who should get the loan.
Later in life, those who benefited from the loan pool can contribute. Can this work in Kenya?
To begin with, we have a well-entrenched culture of coming together to assist family and friends with hospital bills, higher education fees and funeral expenses. It is not entirely alien to us to pool funds in saccos.
Friends and/or family also form chamas (on the smaller informal scale) or investment companies (on the more formal scale) to pool funds to invest in property or in equities. So the concept of coming together for financial purposes is part of the Kenyan DNA.
But whether we undertake these tasks with reasonable success is where the rubber meets the road.
I have worked with several investment groups and chamas looking to venture out. A number of these groups for lack of innovation, energy or sheer determination have failed to make any investments despite years of contribution.
A number of them lend to each other at a rate lower than the commercial banking rate so that the contributed funds do not remain idle.
Very few succeed with this strategy as there is always the presumption by some borrowers that “these are my friends, I can delay repayments….or I can default and there’s not much they can do.” A number of the chamas that adopt this strategy rarely succeed.
The question I always pose is: Are you an investment group or a sacco? If you are the former, you came together to pool funds and invest in diversified sectors of the economy to generate a return from capital appreciation as well as income resulting from that capital which is deployed.
If you are the latter, then you came together to lend, pray that your money is repaid and continue that mode of prayer for the rest of the chama’s shaky existence.
With that in mind, setting up a loan pool amongst family members would be extremely beneficial.
First, it can be an excellent way to stop salivating for a parent to die and distribute their estate. A parent would liquidate his assets during his lifetime, set up a trust and specifically legislate that the beneficiaries would be family members who apply for the funds to further their education.
Trustees could be family members and trusted friends or advisers who have been given clear parameters for loan qualifications.
The obvious reward is that the person setting up the trust would know that his funds will not be squandered on the “good life” and will be used (if well managed) for future generations of his or her bloodline.
Secondly, family members could initially pool a certain amount of funds. Any child in need of financial assistance for higher education would apply formally, making a good case for why he should receive the loan and committing to concluding the college degree.
This commitment would now be not only to their parents, but also to the wider family network, bringing greater responsibility to bear on the loan applicant.
Loan repayment can be set to be undertaken either by the applicant’s parents or by the applicant themselves upon completion of their education.
The benefits are obvious: generations of children get educated which is one of the greatest gifts we can give. The dangers are equally obvious; if the system is abused through deliberate loan defaults, the wider family unit can unravel and a bitter feud ensues.
Absolutely critical for success is a clear charter or trust deed that spells out the purpose for the funds , namely: “family member ONLY college education”.
The parameters for loan qualifications should be included; “degree or diploma from a Commission for Higher Education recognised institution ONLY”.
Strong deterrents against defaults not occasioned by job loss or illness should be put in place to ensure that family members do not take the facility for granted.
Consequences for loan default would need to be painful and rely on social peer pressure. Ms Cummings suggests a very simple solution in one particular family’s pool.
The trustee would send a quarterly update to all family members detailing the status of the loans. The shame factor would ensure compliance to the loan terms.
So yes, I do believe the concept of loan pools would quite easily be adopted in Kenya. | Twitter: @carolmusyoka

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