How Covid shocks hooked more Kenyans on survival loans

Isolated human legs attached to chain ball in the concept of debt. [Getty Images]

Thousands of Kenyans are driving to work but in cars financed by loans and sometimes fueled by a mobile overdraft facility, Fuliza.

When late or sensing traffic snarl-ups, the temptation to drive the very car over a debt-financed highway that attracts toll fees is high.

They are living on borrowed means. But what can they do with these debts that have become like an irritable pimple on the backside?

For many, Covid-19 took a bad situation and made it worse.

They lost their jobs, then lost the cars. Others lost their houses and many more have lost their hope, with appetite for loans now spilling to the dining table.

In such a mess, those who can still borrow to repay are seen as doing just fine. They are living in a house built by precariously balancing playing cards.

Their solace, they say, is that even their government lives on borrowed means and now plans to spend Sh6 of every Sh10 collected as tax to repay loans in the financial year starting next month.   

The coronavirus economic fallout led to a record 4.6 million personal and household loan accounts opened in two years ending December 2021, Central Bank of Kenya (CBK) data shows.

About 3.03 million personal and household loan accounts were opened in 2020 when the Covid-19 disruptions such as lockdowns and layoffs were at their peak.

A further 1.56 million accounts were opened last year, sending the total value of personal and household loans to Sh902.72 billion — a Sh157.7 billion or 21 per cent rise in two years. 

The additional 4.6 million loan accounts translate to a 58.5 per cent jump in two years and took personal and household to 12.46 million accounts.

The rise in personal loan accounts, which was nearly four times the 1.12 million that had been opened in two years preceding the pandemic, sums up the agony of breadwinners who found debt the only answer to the many questions the economy was throwing their way.

Thousands of people who had been hit with salary cuts or total job losses, yet locked up in cities and towns by State restrictions, turned to debt as they joined banks in guessing when the pandemic was going to end — or at least soften.

The personal loan accounts took up 95.7 per cent of all the loan accounts in the economy, showing the appetite for survival loans in an economy that had shed 737,500 jobs in 2020.

Take long to clear

The Covid-19 economic fallout may be softening but personal debt may take longer to clear—just like that of the State, which hit Sh8.4 trillion in March. As the cost of living soars and income remains at near stagnant, households are increasingly turning to a fresh round of borrowing.

But the room to soak in additional debt is getting narrow. In fact, for many families, they have had to sell some of their assets to pay off debts. Everything has its breaking point.

The latest CBK credit survey shows while 59 per cent of banks had seen increased demand for personal and household loans in the quarter ending December last year, the rise in demand has been seen by 63 per cent of the banks in the first quarter of 2022.

This means that more people are still seeking for loans. Yet, 81 per cent of banks’ chief executives told the CBK they intended to intensify recover efforts in this area to stem rising defaults.

But the rising cost of living has put borrowers in a tight spot, especially with official data showing inflation last year handed workers the worst inflation-adjusted pay cut in a decade.

Government data shows real wages — a measure of income after accounting for the cost of goods and services people buy shrank by 3.83 per cent last year to add to the 1.4 per cent decline posted in 2020.

The inflation-adjusted pay cuts have put a strain on household budgets and made it strenuous thing to repay loans, especially as the latest round of rise in cost of living threatens to surpass State desired upper target of 7.5 per cent.

Commodities such as cooking oil, fuel, cooking gas, wheat flour and maize floor have all seen major rises, making it strenuous for households to run balanced budgets.

Many people have now turned to mobile loans to make ends meet, further condemning them into a debt trap.

Kenyans for instance borrowed Sh9.67 billion weekly via Safaricom’s overdraft service Fuliza in the year ended March 2022, according to the telco’s data.

Safaricom disclosed that the value of disbursements via the service hit Sh502.6 billion in the financial year ended March 2022, up from Sh351.2 billion that had been disbursed in the previous financial year. The latest overdrafts translate to Sh9.7 billion weekly borrowing between April last year and March this year — a 43.1 per cent rise when compared to Sh6.75 in the preceding similar period of 2020/2021.

The review period saw an additional one million customers join the service to send the total number of daily active Fuliza users to 6.9 million.

Salary advance borrowings from the Co-operative Bank of Kenya rose to an average of Sh164 million daily last year, pointing to the tough balancing act facing salaried employees.

The lender disclosed that salary advances, issued under its product dubbed, e-flexi, grew by Sh59.91 billion last year compared with Sh50.28 billion in the preceding year. This means that workers were on average tapping Sh164 million daily in salary advances, a rise from Sh138 million in 2020.

The rising value of short term loans points to the increasing number of people who are now forced to tap survival loans, with many cheating the system by borrowing from one lender to repay another.

Main drivers

The state of affairs agrees with a CBK and Financial Sector Deepening (FSD) Kenya survey that showed livelihoods of 73.6 per cent of households had worsened in 2021 compared to 2019.

“The main drivers of the deterioration were the inability to cope with shocks and challenges in managing their day-to-day needs,” said the 2021 FinAccess Household Survey.  “Further analysis shows that 73.6 per cent noted that their lives had worsened in 2021 compared to 51 per cent in 2019, supporting their argument about the adverse effects of the Covid-19 pandemic on the socio-economic well-being of households.”

The survey showed the top priority for respondents during the 12 months leading up to the survey was putting food on the table compared to investing in education as was the case in 2019.

The economic situation saw 43.3 per cent of households tap into their savings for survival, 40.6 per cent cut the non-food budget, 38.9 per cent cut food spending, 22.1 per cent sold assets while 29.6 per cent turned to debts.

Many Kenyans are yet to recover from the Covid-19 shocks, going by the data captured by the World Bank in the latest Kenya Economic Update. The World Bank notes that cutting food and non-food budget remains one of the most frequently used tactic by households, with about a quarter of the households finding it useful, alongside use of debts.

“The continued reliance on coping mechanisms suggests households still lack disposable income, for instance, the use of credit remains at its highest level since the start of the pandemic (27 per cent of households),” says World Bank.

The report observes that food insecurity continues to affect one-third of households.

The share of households unable to access staple food has increased to 36 percent with half of the affected population citing a sharp rise in prices.