Our chama has Sh3m. How do we raise more funds to buy Kiambu land, build maisonettes?

My name is Donatus. I’m 29 and I’m in an investment chama of 10 male members. We are all in the informal Jua kali sector. We all have families and children.

We contribute Sh1,000 monthly and take mandatory loans to raise capital from loan interests. We repay these loans every four months at an interest rate of five percent per month – but don’t pay any interest on the fourth month when we repay all the loans.

The loans are then borrowed afresh with every member guaranteed at least the same amount they had previously borrowed. I currently have a Sh100,000 loan with this chama.

Collectively, this chama has Sh3.36 million operating capital. Our aim is to buy land in a prime strategic area in Kiambu within the next five years and develop 10-four-bedroom maisonettes for sale or personal occupation.

We recently invested Sh500,000 in Ziidi Money Market Fund but we are disappointed that rates have fallen to around seven percent.

How can we realise our real estate goal faster without overburdening ourselves with debts? Should we invest in a Sacco at this point with all the fears of fraud going around? Should we build to sell or should we build to occupy? Would it be wise to approach a bank for financing and if yes, what terms should we look at?

Dominic Karanja, a financial planning and investments consultant

It's great that your chama is united in pursuing a real estate dream. With a solid foundation and clear goals, achieving this within five years will need strategic planning, disciplined action, and careful risk management.

Your chama's current model of contributing Sh1,000 monthly and charging a five percent monthly interest rate is effective for raising capital but financially straining due to its high rate (of 60 percent annually). Reducing the interest rate and extending the repayment period could ease this burden.

Additionally, consider a tiered loan system based on members' financial capacity and investment goals to further support sustainable growth without excessive strain.

A tiered loan system can enable the chama to maximise its capital while ensuring fair distribution of funds. Instead of guaranteeing an identical loan amount every cycle, members could be categorised into tiers based on their past repayment history and contribution consistency. For example, the chama currently has Sh3.36 million and operates a loan cycle every four months. If all 10 members borrow equally, each would receive Sh336,000 annually (Sh100,000 per cycle). However, by implementing tiered borrowing, members could access higher loan amounts based on their repayment records.

Consider the following tier structure:

• Tier 1 (Reliable Borrowers): Members with consistent repayments can access up to Sh150,000 per cycle.

• Tier 2 (Standard Borrowers): Most members remain at Sh100,000 per cycle.

• Tier 3 (Cautious Borrowers): Those who struggle with repayments receive Sh70,000 per cycle.

This approach ensures that capital is allocated efficiently while rewarding disciplined borrowers. Over the course of a year, Tier 1 members could access Sh450,000 instead of Sh336,000, enabling them to reinvest or contribute more toward land acquisition.

Additionally, the chama can offer a slightly lower interest rate (for example four percent) for top-tier borrowers to encourage timely payments, while maintaining the five percent rate for others. This structured lending can help the group accumulate more capital while ensuring all members benefit based on financial discipline.

The Sh500,000 investments in the money market fund is yielding lower returns than expected. With a seven percent return on Ziidi Money Market Fund being low compared to your chama’s loan interest rate, consider exploring higher-yielding options. Government securities like infrastructure bonds or equities might be worth considering.

Diversification can help reduce risks; government bonds provide around 10 to 14 percent annually with low risk. Some banks, Saccos and microfinance banks offer fixed deposit accounts with higher interest rates (10 to 12 percent annually), providing a safer alternative to money market funds.

Saccos are an option for savings and loans, but it is important to choose a well-regulated Sacco.

Look for one with a strong track record, transparent operations, and insured deposits. Saccos generally offer higher interest rates on savings (10 to 12 percent annually) and lower loan interest rates (12 to 15 percent annually) compared to banks. This can help in growing capital faster and accessing affordable loans for real estate projects.

Research the demand for four-bedroom maisonettes in Kiambu, including pricing, competition, and target demographics. Instead of waiting for five years, invest your Sh3.36 million to purchase land now before prices increase, then develop it gradually. Land value typically appreciates over time, allowing you to sell it later to fund your project.

Since you are a chama, it is important that you consider all legal frameworks that will ensure each member has an equal and right to every property you acquire to avoid property fights. Among considerations you may want to consider include whether to acquire the property as a social welfare group or whether to convert and register as a limited company with equal member shares then acquire property under this umbrella.

It is also important that you distinguish the overall gains between developing to sell and developing to occupy. Selling maisonettes offers immediate cash flow for your chama, which can be reinvested or used to repay loans. Building to occupy ties up capital, and may end up limiting growth. If there are members who want to occupy, your constitution and resolutions should capture how the burden of funds borrowed for development purposes will be shared, how the units will be shared amongst you – assuming that you aim to build 10 maisonettes.

The better strategy is to develop for sale, and through this strategy, you can consider developing in phases: start with two to four units, sell them, and use profits for the next phase to reduce financial burden and risk. Partnering with a reputable real estate developer can lower costs and share risks, offering expertise, financing, and management while your chama provides land and some capital.

You may also consider partnering with a more established financial institution such as a bank or Sacco with capacity to finance at favourable rates. Negotiating favourable terms with a bank is crucial and you need to consider competitive interest rates, flexible repayment plans, grace periods, and collateral requirements.

Alternatively, use your chama’s internal loan system by increasing monthly contributions to grow capital faster and avoid external debt. Some developers offer financing that covers construction costs, repaid after units are sold.

If you have any money problems, send us an email at [email protected] and include your contact number. Your money questions will be answered in this column.