Debt is a double-edged sword, it can either build wealth for you or destroy your financial stability. In Kenya, where access to loans has become easier through digital lenders, banks, and SACCOs, many individuals and businesses find themselves caught in a cycle of borrowing.
With the recent drop in benchmark lending rates by the Central Bank in Kenya (CBK) and many banks following suit, credit is expected to be even more accessible. Lenders are now nearing a point where they will be hawking credit on the streets.
But now, if you have a debt or are planning to borrow, how do you determine whether your debt works for you or against you?
Good debt vs bad debt
During an X Space discussion organized by Abojani Investment on Wednesday, March 12, HF Group CEO Robert Kibara emphasized that not all debt is bad, but its impact depends on how it is utilized.
“Good debt is productive—it generates more money and puts cash in your pocket. For instance, if you borrow KSh 1 million at an interest rate of 13% and the investment you make with it yields a return higher than that cost, then it qualifies as good debt,” Kibara explained.
On the other hand, bad debt drains finances rather than generating income. “As a banker, I encourage customers to take loans because that is how we earn a living. However, I must be truthful—debt should always be used productively. The cost of financing should be weighed against the income it generates. If a business incurs more costs from a loan than the revenue it produces, the debt will eventually weaken and even kill the business,” he warned.
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The debt trap: How does it happen?
Debt management is not always straightforward, and without caution, borrowers can fall into a dangerous cycle. Kibara pointed out that “debt creep”—where businesses or individuals continuously borrow to cover existing loans—can be financially crippling.
“In business, this happens when a company takes on credit to fulfill an order but lacks the cash flow to service it. In personal finances, it occurs when you borrow small amounts here and there for urgent needs. Over time, the debt accumulates, becoming unsustainable,” he noted.
He advised that sustainable cash flow is crucial in ensuring debt does not become a burden. “If you can operate a business without debt, that is ideal. Debt is expensive and can create an illusion of wealth because it feels like money you own when, in reality, it belongs to the lender.”
Many entrepreneurs unknowingly put themselves at risk by lending goods or services on credit while taking bank loans to finance their operations. “This means they end up borrowing money to lend to others, essentially subsidizing their customers’ businesses while incurring the cost of interest themselves,” Kibara observed.
The danger of uncontrolled credit
Uncontrolled credit is another pitfall that has led to the downfall of many businesses. Kibara noted that Kenyan businesses often collapse because they are owed large sums of money yet lack the cash flow to sustain operations. This forces them to take on more loans to stay afloat, further deepening their financial crisis.
“Effective credit control is crucial. If I were running a business that extends credit, I would ensure strict policies on who gets credit and the repayment period, and solid contracts to enforce payment terms. Without tight credit controls, businesses risk becoming banks for their debtors while struggling with their own financial obligations,” he said.
To avoid these pitfalls, Kibara advised businesses to sell in cash whenever possible. If offering credit is unavoidable, it should be tightly managed with clear policies.
Responsible borrowing and common mistakes to avoid
Susan Mtana, an HR and personal finance expert, exclusively shared insights on responsible borrowing and common mistakes that lead borrowers into financial distress.
“Responsible borrowing means taking only what you can comfortably repay when it is due. Before borrowing, consider what motivates you to take the loan. Have you ever diverted borrowed funds to other expenses, straying from your original plan? Do you borrow for capital expenses or just for day-to-day survival?” she posed.
She emphasized that borrowers should be able to justify their loans. “When you look at your payslip or loan statement, does it give you peace of mind, or do you struggle to account for the numerous loans? If you find yourself unable to justify your debts, it may be time to take corrective action.”
Responsibilities of a borrower
Mtana outlined key responsibilities every borrower should uphold to maintain financial discipline.
“Proper budgeting is essential to guarantee timely loan repayment. Always provide truthful information when filling out loan application forms. Additionally, use the borrowed money strictly for its intended purpose and make sure to repay the loan within the agreed period.”
She also cautioned against borrowing to start a business without a stable income source to service the loan.
“One of the biggest mistakes borrowers make is taking loans with interest to start a business unless they have a stable salary to repay the loan. It is wiser to borrow for business expansion rather than startup capital.”
Another major mistake is spending money before it is received.
“Many people make financial commitments based on promises from others. This can lead to financial distress if those promises fall through,” Mtana warned.
When it comes to saving, she advised against the common habit of spending first and saving what remains. “More often than not, the remaining amount is zero because available money always finds something to be spent on.”
Finally, she cautioned against signing as a guarantor without considering the financial risks. “Never sign as a guarantor for someone unless you are fully prepared to repay the debt if they default.”
According to Mtana, by understanding these principles, borrowers can make informed financial decisions, avoid debt traps, and use loans strategically to build wealth rather than create financial burdens.
