Greek crisis a lesson on unplanned borrowing
Posted Monday, June 25 2012 at 19:29
“The fool and his money are soon parted”
Thomas Tusller, Five Hundred Points of Good Husbandry
Anthony was a very prudent businessman. Everything he undertook in his vibrant IT business was based on strong personal convictions, with family prayer preceding every major decision. This approach served Anthony well; his business quickly grew.
In 2006, Anthony, realising that he needed new premises , engaged in a session of prayer and fasting for a property and the means by which to pay for it. He soon identified a plot in an exclusive residential area and, in answer to his prayers, was miraculously blessed with the Sh30 million he needed to buy it.
Anthony was on top of the world; everything was going according to plan. As he planned the purchase of the “God-sent property”, he decided to engage the services of financial consultants to help him plan the next phase of his business’s growth. As soon they arrived on the scene, they reacted with shock and consternation at his decision to buy property for cash.
This being the first decade of the new millennium, with Richard Kiyosaki (of the Rich Dad Poor Dad fame) as the world’s favourite author, leverage and other people’s money (OPM) being all the rage, they convinced Anthony that it was much more efficient to borrow to finance the deal than to sink Sh30 million in cash into the property.
Anthony, ignoring his innate discomfort, decided to follow the plausible logic of his new- found advisors. He did not just borrow the Sh30 million; he went ahead to borrow Sh80 million to buy and develop the property, convinced that future cash flow would quickly offset the debt.
Bank interest rates at that point were lower than they had ever been; the future looked bright.
The first year was delightful for Anthony; he thanked his maker for his new-found fortune, marvelling at the spanking new offices, top of the range vehicle he drove and his move to an upmarket residential estate—the latter bought with the cash previously meant to buy the office property.
Given his new profile, invitations to be the keynote speaker at gatherings of upcoming business leaders flowed in.
Life was good.
Then, in 2008, as it is said in local parlance, Kenya happened. Political turmoil followed disputed elections, business dried up in the volatile climate.
The orders that Anthony’s business had in hand were put on hold. Cash flow reduced to a trickle, the enterprise barely able to meet its wage bill, let alone the now humongous mortgage payments for the office premises.
In a desperate bid to keep the business running and to save the office property he sold his house then his new car; these proved to be drops in the ocean of debt. He has since been forced to relinquish the office property, being left far worse off than he was before he started.
Anthony, like the republic of Greece, ignored cardinal rules of prudent debt management.
First, he borrowed money he did not really need. According to him, his prayers had already been answered by both the property he was looking for and the means by which to pay for it.
He should have used the cash for the purpose for which it had been set aside rather than putting it into a new car and a house.