GOOD DEBT VERSUS BAD DEBT

By Peter Owaga

Riches: we all want to be rich; we all wake up every morning with one thought in mind concerning our future, “I wanna be a billionaire so freaking bad.” JI like to refer to this as the commercialisation of the human race; where one’s worth is measured by their bank balance. Where we are inundated by archetypes of the power of wealth; from fast and loose cars and women-in that order of course. Then comes the question, how do we get there?

                 

Robert Kiyosaki and many more wealthy people like him who write many books about how they want to make you rich will tell you about the power of debt. In fact, they go as far as to tell you how to distinguish between bad debt and good debt: bad debt is the loan you take to buy a Range Rover sport yet you live in a rented house that is barely furnished; whilst good debt is the loan you take to build high-rise apartments (hopefully there is no one who will come and pull a Syokimau on them. J What they all forget to intimate to the populace is that debt has to be eventually repaid. Be it a loan from Paul taken to pay Simon; a loan taken from a bank to develop flats that will be later be demolished; or even a loan taken from a local Shylock whose interest rates are more exaggerated than Kim Kardashian’s assets.

Repayment of loans is what drove the United States of America to a recession that caused ripples all across the globe. This was a perfect depiction of the saying that goes ‘when a giant sneezes, even the flies get a cold.’ So, how did this Goliath fall? Simply put debt.

The CMA is in the process of putting across a bill that will see the transfer of loan default risks from the banker to the securities holder. This will see the banking sector receive a much needed boost; by enabling a highly charged asset backed securities market. This means that if a bank has outstanding mortgages, which initially would mean that before it issues any other loans it had to ask for more deposits (that means no more “mtaani agents” so as to woe customers, no more “look at me, now look at you” advertisements to make you feel bad about yourself). But as is often the case, never look a Trojan horse in its mouth.

While this is a really revolutionary move, what happens in case there is default in payment? This is the exact question that the US had answered in the worst possible ways. It was akin to a baptismal by fire.

In 2008, the various mortgage takers realised that they couldn’t repay their mortgages due to a rise in unemployment. This then led the banks to repossess their homes in an attempt to resell them at a lower price so as to recover at least a portion of their debt. The only problem is that no one wanted to buy the homes. As a ripple effect, people began selling off their homes as banks raised the lending rates for existing and new loans. Before long, the homes became worthless and the banks were left with nothing but a large hole in their pockets.

So, what lessons can we take from this? Quite elementary really. In as much as debt is required to grow an economy, it is like a double edged sword that will swiftly and harshly run through both the creditor and the debtor. With the CBK raising its base lending rates, and in essence causing other commercial banks to elevate their own; most citizens are left wondering whether it is astute to take up that loan. That means that you won’t feel like getting that Subaru Impreza (or is it impress her?) as soon as you get your first job.

What does this then mean for banks? Back to square one. This is the point where banks go back to treating you like royalty as soon as your account reads a certain amount; this means that they come up with some really attention grabbing advertisement. As one wise man once said, if you borrow 50,000 from a bank and can't pay it back, you have a problem, but if you borrow a million and can't repay, they have a problem.

Good day folks!