| dc.description.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. | en |
