Why People Lend to Friends with No Payback Guarantees

Have you ever lent someone money and then instantly asked why you did what you did? 

There are a lot of reasons that could have led to your giving, but to understand why you give let’s first have a look at why financial institutions loan out money.

Benefits of Lending to Banks

Growing up, we all were made to understand to some degree that banks are where all the money business happened, the saving and the giving. To paint a clearer picture here are some reasons or benefits of why banks lend money.

For Interest

Perhaps the most common reason banks lend money is to earn interest. When banks lend money to businesses, individuals, or organizations they add interest on the borrowed amount. The interest and fees from loans are a primary source of revenue for many banks as well as some retailers through the use of credit facilities and credit cards.

Increased economic growth

Banks play a crucial role in funding new business investments.  This helps the economy grow by giving companies the money they need to grow, invest in new ventures, and create jobs. This promotes overall prosperity and economic growth. Additionally, customers can raise their spending on products and services when they have access to credit, which will improve economic activity overall.

Read Also: Money and Friends: How to Lend to a Friend

Why You Lend Money

The Central Bank of Kenya (CBK)'s most recent data indicates that loan defaults totaled Ksh514.4 billion as of June 2022, surpassing the half trillion shilling mark for the first time. 

This data illustrates the alarming rate at which Kenyans are unable to pay off their debt. One can assume the figure stands higher if we compile all the loans given by individuals to friends and family over the years. 

We understand why banks lend money, there are a million and one benefits but why would you lend money to a friend or a family member in most cases without a financial safety net or formal contract? What is the motivation to take on such a financial risk in the absence of interest or guarantee? 

Below are some scenarios to help you understand why you lend money.

You feel obligated to 

John is not only the breadwinner of his household, he is also the firstborn child of his family. Usually, when any kind of crisis hits, he must step in and help. John goes as far as dipping his hand into his savings when the need arises. He feels a sense of duty not only to his wife and children but to his extended family and friends.

The story of John is the story of cultural obligation or black tax, call it what you will. You are expected to lend a helping hand. A common burden is usually given to but is not limited to firstborn children.  If you reach a certain level of success you are expected to support the rest of the family. The support could be educating your siblings/cousins, building family homes, taking care of the elderly in the family, etc.

Some might say John has a survivor mentality. He wants to be a hero or parent figure to those around him. He might say things like, “Money is an artificial thing, it isn’t everything. After all, the good book says we should give to those who need it.” John may also fear that refusing to help may result in his loved ones crushing and burning. As a result, he may feel a  profound amount of guilt if he doesn’t lend them money.

Read Also: Money and Me: Ups and Downs of Lending to Family Members

Emergency Assistance 

On her commute to work, Sarah was doing her usual scroll through social media. She was watching statuses on WhatsApp. She stops scrolling after seeing a post from a friend. She is fundraising for emergency surgery. According to the post, her son was in a grisly accident and he broke every born in his body. Sarah immediately calls to get more details. Moved by the distress from her friend, Sarah decides to lend her friend the money so her son can undergo surgery immediately. 

As a way of providing immediate assistance during tough times, we often lend money to loved ones when they are facing unexpected life crises like funerals, natural disasters, or medical emergencies. 

You want to come off as supportive 

It’s been two months since William lost his job. He has burned through his savings and is struggling to make ends meet. His attempts to secure a new job have not been fruitful. To ease his financial strain and complement his future income, William decides to start a side business. The only problem William has now is that he does not have the funds to start the business. He reaches out to a few friends and family who are familiar with his current predicament. Some sympathize and lend him the money while others tell him they will see what they can do. 

You don’t want to kick a guy when he is already down. You might lend money to a friend as a way of helping them get back on their feet, especially if they are going through a difficult season in their life.

Read Also: Money and Me: Lend Money to Friends and Loose Both

To help those in need 

A video of a woman from rural Kenya has gone viral. The video tells the story of how all her four children got straight As in their Form Four exams but none of them attended university because their mother lacked the fees. After seeing the video, donations started pouring in from all over Kenya, with the #takeall4toschool. More than enough money is collected. All four of her children can now comfortably pursue any degree course.

Social media has been a powerful tool for people seeking financial assistance. Strangers on the internet come together to raise funds for someone they don’t know or have never met. Why?  According to research by Alexander Genevsky and Brian Knutson, two Stanford University psychological scientists. They wanted to find out what motivates us to lend, so they conducted an internet study to test if certain features in a loan proposal lead to its success or failure. They found that if a borrower's photograph evoked positive emotions, this would most likely result in loans. As interesting as this study sounds, it didn't show with certainty that positive emotions increased lending. 

WRAPPING UP

An additional reason we may lend money is to provide alternative financial support to loved ones.  Some Kenyans, especially Kenyans living in rural areas or Kenyans receiving lower incomes may have limited access to banks or credit facilities. Thus lending a helping hand. Another reason could be you want to leave a positive legacy behind or you may be looking for that satisfaction you get from giving. We may have all personally experienced hardship or a loss that may have sparked our giving habits

One of the fundamental components of the financial economy is the loan. Lending facilities can fuel economic activity while getting paid for their risk by making loans that bear interest. For the individual, there are plenty of reasons why we lend to people even with the risk of never recieving your money back. Whatever the reason for lending, one thing for sure is that lending money is an essential function of the modern economy.

Read Also: How Kenya’s Middle-class Families are Saying Goodbye to Black Tax