Peter Kariuki sought my opinion on a loan he took from the Ecumenical Church Loan Fund (ECLOF). In his initial email, he stated that the loan amount was Sh200,000 payable over a period of 24 months at 18 per cent interest per annum. He said that he has been paying Sh16,000 monthly and was expecting to make the final payment this month.

Peter was concerned that at a total of Sh384,000, the repayment was too high – it is almost double the amount borrowed. I also couldn’t believe it since my calculations showed that he should have been paying just under Sh10,000 per month.

So, I asked Peter to request the lender to explain clearly how they were calculating the installments. He did better and sent me the loan contract document that he signed and, after reading it, I was shocked.

SERVICE CHARGES

It turns out that the loan amount was Sh269,000 payable over 24 months. The shocking part was how the interest (ECLOF calls it “service charge”) is calculated. The document says, “Service charge shall accrue daily and shall be payable with principal in 24 monthly installments”.

It goes further to say that "the borrower shall pay service charge to ECLOF at a flat rate of 18 per cent per annum. Finally, the document gives the monthly installment payable as Sh15,907 - this is the figure that Peter had justifiably rounded off to Sh16,000.

When a lender talks about a “flat rate”, they mean that the interest will be calculated for the full amount and over the full period of the loan. That is, in Peter’s case, the lender would calculate 18pc of Sh269,000 for 2 years and then divide by 24 months.

Now 18pc of Sh269,000 is Sh48,420; so, for two years the total interest comes to Sh96,840; adding this to the principle amount yields Sh365,840. Finally, we divide this by 24 months and get Sh15,243. Our answer is significantly different from the Sh15,907 that Peter has been paying.

The statement that “service charge shall accrue daily” reveals the hidden factor. The way I understand it is that we shouldn’t treat the 18 per cent as simple interest. Instead we should compound it on a daily basis.

To do this, we divide 18pc (or 0.18) by 365 days: the answer is approximately 0.05 per cent (0.0005). Then we add one to get 1.0005 and raise this result by the power of 730 days (two years). The answer is 1.433.

Finally, we multiply this result by the amount borrowed (Sh269,000): the answer is Sh385,531. This is the total of interest and principle that the borrower should pay. So, we divide it by 24 months to get the monthly installments. The result is Sh16,064.

In other words, according my calculation, Peter has actually been paying less than what is due! Nevertheless, I think this lender is dishonest. They have told borrowers that the interest is competitive (comparable to commercial banks) yet it is more than double the market rate!lo