Without debts & dates, wealth declarations are worthless

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

23 October 2022

During the parliamentary vetting of nominated Principal Secretaries, the nominees are required to give a statement of their net-worth. All of them presented lists of the various properties they own and the respective values. Though I did not listen to all the interviews, I did not hear anyone talking about what they owed. This was a serious oversight.

The net-worth of a person (or a business or an organisation) is the difference between what they own and what they owe. If you buy a car worth Sh1 million with borrowed money (these days they are banks offering 100 per cent financing), then that car is not yours! It belongs to the financier.

Your statement of net-worth should show that you own a car worth Sh1 million AND the you owe a certain financial institution Sh1 million. Thus, your net worth is zero! Of course, this is assuming that you have no other assets.

As you continue paying off the financier, your net worth increases because you are left owing less and less over time. Suppose you had taken a 5-year loan for the car at the typical 17.5 per cent interest; then you monthly payment would be Sh25,122. However, part of this goes to pay the interest and the rest to clear the principal sum.

Thus, in the first month, the interest alone comes to Sh14,583; so, only Sh10,539 out the Sh25,122 paid will go towards the principal. Consequently, at the beginning of the second month, the interest will be calculated on the remaining Sh989,461. That is, Sh14,430. Notice that this is slightly less than the interest of the first instalment. Correspondingly, the principal payment out of the second instalment is marginally higher at Sh10,692.

This change-over continues throughout the term of the loan. At the end of the first year, you will have paid a total of Sh301,464 out of which Sh137,119 will be principal payments. Thus, you net worth will have increased from zero to Sh137,119. This is because you have a car worth Sh1 million and you owe the bank Sh862,881.

By similar calculation, at the end of the second year, your net worth will be slightly over Sh300,000. For this reason, it is important to state, not only the debts one has but also the date of the calculation of net worth. Without these, a wealth declaration is worthless!