Kenya has one of the poorest savings culture in Africa. In 2015, the country’s gross national savings stood at 12.7 per cent of GDP, well below the continent’s average of 14.7 per cent for similar sized economies, according to the World Bank.
One of the population segments that is adversely affected by this poor savings culture is the young working class. These are young Kenyans on their first or second jobs. They are keen on making their way up the middle class and achieving financial freedom, but frequently make poor financial decision such as taking unnecessary car loans. This limits their ability to save, invest and prosper.
In a country where owning a home is a luxury due to unaffordability, a car is ideally the next best status symbol. This explains why cars, especially secondhand cars, which account for 80 per cent of motor vehicles in Kenya, are an increasingly popular purchase among young professionals.
However, buying a car is a critical financial decision that should never be made in haste, as is often the case when many young professionals take car loans just because these facilities are available. Taking out a car loan should be preceded by careful consideration of a range of different factors. A car that is bought without sufficient prior reflection typically comes with unexpected expenditures that limit savings.
Before you buy a car, particularly if you are doing so on loan, you should assess your financial preparedness, the total cost of owning and operating the motor vehicle, the cost of insurance and the utility of the vehicle in relation to your transport needs.
Buying a car is the easy part. The real expenses come when you start operating and maintaining the car. Therefore, you should not just focus on the purchase price, but closely examine other costs such as fuel consumptions, repairs, spare parts and insurance, among others.
You must weigh the total cost of operating and maintaining the car against your income and long-term financial goals. It is important that after spending on your car, you have enough money left to sustain a decent quality of life and grow your savings.
Savings provide a soft landing in times of financial shock such as job loss, allowing one to clear their debts on time and still get by. A young professional with dreams of achieving financial freedom needs to minimize the possibility of defaulting on loans, as this could negatively impact their credit ratings and limit their access to a loan in future when they really need it, for instance, when starting a business.
Moreover, saving not only benefits the saver, but the economy as a whole by increasing the pool of domestic savings. This helps cut dependence on foreign direct investment (FDIs). Kenya’s current heavy dependence on FDIs means that the country relies on the surplus produced in other countries to grow. This is not always sustainable as global economic shocks may cut the flow of investments into the country.
As stakeholders in the financial services sector, we need to start encouraging Kenyan youth to save. A key intervention to advance this agenda is sensitizing young people joining the middle class on the importance of prudently planning for critical purchases such as a motor vehicle.
Although it may appear counterproductive for a bank to advise a customer to reconsider or postpone buying a car on loan, it is not. On the contrary, it serves in the bank’s long-term interests. A customer who buys a car when they are financially prepared will be able to pay off the loan on time, save a portion of their income, invest and grow. Naturally, the bank that supports such a customer will grow with them through their journey by offering a wider range of products to serve their evolving financial needs.
Mr. Mugambi is the Deputy Director, Asset Finance at NIC Bank PLC
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