Getting a Motorcycle #2: the Loan Scheme
Uganda, one of the fastest growing countries in Africa, has a lot yet to fix in line with transportation. The very nature of the seemingly never-ending expansion of the boda boda industry remains in flux.
The huge increase in boda bodas over the past thirty years in Uganda was mainly fueled by the rental system — kibaluwa — and the wealthy owners who rented motorcycles to youth desperate for jobs. But the kibaluwa system has a number of fundamental issues, most critically the ability of owners to repossess motorcycles without warning, and has left drivers desperate to become owners.
This has encouraged the recent explosion in motorcycle loan schemes by microfinance institutions and banks across Uganda.
Before the introduction of the loan schemes, a lot of boda riders struggled to acquire motorcycles. Many sold off their inheritance, especially land, to gain ownership in the booming business. Others borrowed money from banks and microfinance institutions to buy the motorcycles. Others got financial support from family and friends and rich neighbors. Yet formal loan schemes have been too cumbersome for most drivers, while informal loan schemes’ volatility has left a big gap between the demand for motorcycle ownership and the availability of financing. The motorcycle loan schemes filled this gap and greatly contributed to the number of motorcycles owned by boda riders — but they have not been universally welcomed.
What are motorcycle loan schemes?
Motorcycle loan schemes are microfinance enterprises which specialize in asset financing with hire-purchase payment plans. Similar to other microfinance institutions, motorcycle loan schemes are sustained by the profits generated by the interest rates that they impose on the financed asset per annum.
Though the interest rates are relatively high — many companies charge an annual rate of between 30–50% — more boda riders become motorcycle owners everyday with the help of the loan schemes.
What are the steps for acquiring a motorcycle from a loan scheme?
All loan schemes have specific mandatory steps taken by a customer prior to the acquisition of the motorcycle, usually consisting of the following:
Step 1 — Getting To Know You.
At the office the client is received by the sales team, who explain the motorcycle brands available and take his contact information. The client is then handed over to the vetting team which gives him detailed rules and regulations for the loan scheme, plus a thorough discussion of the loan payment plan.
Step 2 — Dropping a Deposit
The owner-to-be then pays a significant deposit, which may require borrowing from a SACCO or a bank if he is not able to use his own savings. Depending on the loan scheme, the initial amount paid depends on the brand of motorcycle and other services offered. Depending on the formality of the loan scheme, this often includes processing driving license, third party insurance, and Public Service Vehicle (PSV) tax.
The upfront is usually between UGX 300,000 — UGX 1,500,000 ($85 — $420). This amount includes the non-refundable vetting fee which is usually between UGX 50,000 and UGX 150,000 ($14 — $42).
Step 3 — Getting Vetted
Every loan scheme has a vetting team whose purpose is to make sure the client is suitable for the services, and that there are no major red flags or inconsistencies. They visit the client’s home and the workplace — usually the boda stage. The stage chairman signs the vetter’s document. They usually also visit the required guarantors’ homes and make a report.
If the vetting team reports inconsistencies or falsehoods presented by the applicant, they can cancel the client, who then loses the vetting fee. Whenever this happens the client may be advised to wait for a few months and repeat the process, requiring him to pay another vetting fee. In rare cases the upfront balance is refunded to the client who chooses to cancel the process. If the report from the vetting team doesn’t expose a fault, the client is approved.
At this step clients are vulnerable to extortion. The vetting personnel sometimes asks for money to cover up the falsehoods, or to speed up the process.
Step 4 — Licenses
The majority of boda drivers in Uganda do not have driving licenses — largely because of the cost, which can be around UGX 330,000 ($88), a little over the average monthly profit. This step helps ensure the owners-to-be are legitimate on the road.
Some loan schemes prefer clients who go through the license process on their own.
Step 5 — The Motorcycle Arrives
The entire process of acquiring a motorcycle from a loan scheme can take anywhere between 3 days and 3 months. On the day of receiving the motorcycle, the client is supposed to bring the guarantors with him. Valid guarantors must be mature working people, preferably people with some standing in the community. Some loan schemes prefer guarantors who have permanent residences. The guarantors present their IDs and passport photos, and sign on the loan agreement/contract. Some loan schemes ask the client to provide a newly bought SIM card for the GPS tracking system fitted on the motorcycle.
The client and his guarantors may spend a day at the loan scheme office but finally receive the motorcycle with one helmet, plus a card showing third party insurance. The client may pay his guarantors for their time.
Issues with Loan Payment Plans
The most common loan payment period is two years, or 104 weekly instalments. Depending on the loan scheme, the client may be required to pay the first instalment on the day he receives his motorcycle, marking the start of the 2 year weekly instalments journey. Some loan schemes give a grace period of a few days to make money and indicate the day for the first payment.
The amount paid per week depends on the brand of the motorcycle and the payment plan agreed upon. For example, loan schemes usually indicate two years as the maximum payment period and most of their customers agree to that arrangement. However, there are customers who choose to reduce the repayment period to one year or one and a half years. This is made possible by choosing to pay a larger amount than the normal weekly requirement. For example, where the weekly requirement is UGX 80,000 ($23), one may choose to pay UGX 100,000 ($28) or more. By doing this, the loan period, interest rate, and total cost all reduce in comparison to the two year repayment plan.
While motorcycle loan schemes have allowed thousands of boda boda drivers to become owners, several issues remain. High interest rates mean that in many cases, the total cost of a motorcycle bought through a loan scheme on a two-year payment plan is around double the cost of the same motorcycle bought from a shop. This means loan scheme drivers pay significantly more than kibaluwa (rental) drivers for the first two years but should then be benefiting after that period. Additionally, the professionalization of loan repayments can dehumanize the relationship between the creditor and the driver, creating resentment and conflict when motorcycles are repossessed for late payment. However, there is no sign yet that boda riders will stop flocking in to sign up for loans because the cumbersome loan process remains the only option for drivers desperate to acquire a motorcycle, and leave the kibaluwa system behind.
