Hire purchase financing in Kenya

Abstract

Hire purchase has developed in all societies with rising standards of living, as a convenient form of instalment credit for both consumer and producer durable goods. Its special merit for suppliers and customers alike is that ownership does not pass until the final instalment is paid: the merchandise remains as security for the debt and repossession provides a sanction against default. Hire purchase credit has a significant cost, which varies widely depending upon the type of merchandise financed. over the last decade. Yet in comparison with both bank finance and mortgage finance, it represents a very small sector of the economy. Although hire purchase plays a relatively small part in the economy as a whole, it still piays a critical role, since it partially fills a gap in the credit institutions for both the consumers and producers, by: i) providing purchasing facilities for consumers in a wide range of low and middle income brackets, and ii) providing a convenient source of mediumterm credit for the small rapidly growing enterprises which cannot qualify for any sources of capital.

Little study has yet been done on the hire purchase industry in Kenya. This study aims to examine the hire purchase credit and its market in Nairobi, and in particular to determine those factors, such as risk, that influences the charge for this type of credit, and how these factors are resolved in the determination of the credit charge. Finance companies and retailers are the main sources of hire purchase finance. The major finance companies write nearly 80 per cent of the total hire purchase business, a greater proportion of which is for motor vehicles. The bulk of the the retailers' business is in household goods. The Hire Purchase Act (1968) is in the main designed to protect the hirer against what were perceived to be abuses practised by the owner, while at the same time safeguarding the owner's interests in the equity of the goods. In view of some of the restrictions of the Act, the major finance companies have chosen to reduce substantially the business they write ~der the Act. Retailers have compensated for any increased losses they might suffer by increasing the prices of their goods. Since the growtfi of hire purchase plays an important part in the expansion of the economy, the volume of hire purchase should be determined in the light of the current economic position. Advance policy directives from the Central Bank have been used to control the growth of hire purchase. The methods of control used have been less effective than the import restrictions. Because the supply of hire purchase facilities in.Kenya is generally not very competitive, the terms on which finance companies and retailers operate are not very flexible. It would be expected that, since the goods financed provide security for the credit advanced, the credit terms for a particular type of mer-charrd Ls e wouLd be influenced by the amount of risks associated with that merchandise. But this is not the case. In general, the credit terms for a particular type of merchandise are influenced by their effect in promoting the sale of that merchandise, and to some extent by the competitive environment. On the basis of finance charges, the different types of merchillLdisesold on hire purchase fall into three different categories, namely: motor vehicles (18 per cent to 22 per cent per annum); domestic appliances (42per cent to 90 per cent per annum); and radios and ,furniture (72 per cent to 228 per cent per annum). within each category, the finance charge is nearly similar. The difference in the finance charge for each category of merchandise seems to reflect the different credit-risks of purchasers associated with that category. The true rate charged on hire purchase finance is generally higher than most customers realize. Finance companies have argued that their security lies in the credit-worthiness of their customers rather than in the repossession of the merchandise. Therefore, in evaluating an applicant for hire purchase finance, they lay greater emphasis on the credit-worthiness. To some extent the major finance companies have also varied their tGrTIlSand charges for borrowers of high credit rating. Finance companies have generally experienced low rates of repossessions and bad debts in recent years. This reflects their tight credit standards. The rate of repossession and the had debts of retailers have also been low in comparison with their total hire purchase sales, although they have been slightly higher than those of the finance companies. Hire purchase is now firmly established in Kenya. It has contributed to increases in both the supply of consumer and of producer goods and to a growth in demand from the more prosperous and creditworthy hire purchasers.