Let’s talk about leverage.
I have seen this play out many times, and it used to puzzle me: how does gearing actually work? Everyone talks about it like it is some secret sauce, but very few explain it in plain language.
In theory, it sounds like a cheat code: borrow money, invest it, earn more than what you are paying in interest, and retire in peace.
Simple, right? Guess again, most people use leverage the same way we use alcohol, as if our livers are made of stainless steel. Leverage can devour you from the inside if not managed well. I have seen this and it is not pretty.
So here is how gearing actually works: You start with your money, the banks call it “your equity”. Let’s say you have $10,000.
You invest that in an income-generating fund or asset. Now, to gear the investment, the bank or investment firm offers to top you up with additional capital, using your investment as collateral.
You can go in at 1:1, 2:1, even 3:1 or if you are feeling very brave or like me you do not listen to your more conservative wife, you take 4:1. So your $10,000 now is $40,000 deployed in the market.
If you pick an income fund yielding 6–7 per cent and your borrowing cost is two to three per cent, you are making a solid positive spread. You are using someone else’s money to grow your returns without touching your original capital.
Sounds beautiful. But here is the catch: you carry the risk. If the value of your investment drops, you could face a margin call, which is just a fancy way of saying, “Put in more money or we sell your stuff.” And trust me, they never sell it at the top, they sell at the point when the bank feels their money is at risk.
So yes, gearing can multiply your returns, but it can also magnify your losses.
SMEs in Kenya: Paying for capital with blood
In Kenya, SMEs are the beating heart of the economy. Everyone says it. Every politician swears by it. But let us talk about what it costs to keep that heart beating.
Most SMEs are surviving—barely—on overdrafts and short-term loans with interest rates that would make your chama treasurer faint.
Borrow Sh500,000 at 18 per cent (and that’s a generous rate), and you are parting with Sh90,000 a year just in interest. If you bring in Fuliza, which most hustlers will be accessing, the interest rate jumps five or sixfold.
And don’t forget the arrangement fees, maintenance fees, penalty fees, basically, fees for breathing. Meanwhile, across the globe (enter the UAE), people are playing a very different game. They are using their investments to access liquidity and cheaply.
It works like this: you build a capital base, say a mutual fund or an income-generating portfolio. Then, instead of selling it, you use it as collateral to access an overdraft or credit facility at a much lower rate.
Let’s do the math: you are earning six to seven per cent from your investment and borrowing against it at 4.5 per cent.
The money keeps working, you get the cash you need, and you avoid paying 18 per cent just for staying alive. That is leverage done right. That is how the smart money moves.
But let me ask the question I kept raising (often in vain) in our internal meetings at the bank: “Why aren’t we offering this to more clients?” You want the truth? Because the current system works perfectly for the banks.
They would rather you keep taking overdrafts at 18 per cent. Because that is where the margins live. It is not a bug. It is a feature. The longer you stay stuck, the better their quarterly results look.
It is the same twisted logic that explains why banks would rather keep you revolving on your credit card at 38–40 per cent than help you convert that debt into a personal loan at 13–14 per cent. I have seen it firsthand—conversion requests turned down flat.
Why? Because the client had not claimed “debt distress”. Yes, you heard that right. To get access to a more humane rate, you basically had to wave a little white flag and admit you were drowning.
But you do not want to do that, no one wants to sign off on a document that reads like a polite way of declaring bankruptcy. It is humiliating. It labels you. And once it is on file, it does not go away quietly.
So what do most people do? They keep swiping, keep paying the minimum, and stay stuck in the hamster wheel, racking up interest that makes your credit card balance feel like it’s growing by itself. (Spoiler alert: it is.)
Meanwhile, the bank? Smiling. Because this is the model. The longer you suffer, the better it performs. But I was persistent with my questioning: Why aren’t we guiding clients better? Why aren’t we converting more of these balances into structured loans that actually give people a way out? You would think I was asking to shut down the entire credit card division.
The room would go silent. Eyes would roll. Sales would shrug. And I would go back to my desk wondering why I had not opened my own bank.
If you are reading this and paying attention, you do not need to wait for the system to change (it will not), but you can change how you use the system. Start building a capital base. Use it to access cheaper, smarter credit. The goal is to make debt work for you, not the other way around.
The writer is a Compliance, risk, and fintech executive
