Recent events that have seen the Government borrow to offset maturing loans have raised a storm among Kenyans.
Yet, bombarded with numerous digital credit providers, Kenyans have dug themselves into a refinancing crisis that might be uglier than that of their Government.
Unlike the Government that has insisted most of the borrowed cash has been spent on projects such as construction of roads and hospitals, most Kenyans who have rushed to the digital platformshave splurged the money on their day-to-day needs, sometimes on alcohol and other forms of entertainment.
The allure of using mobile phones as a tool for financial services is laying debt traps for many borrowers, with most stuck in a vicious cycle of borrowing from one digital credit provider to pay another.
Just as a sluggish economy in which exports have underperformed has forced Kenya to arrange for another credit to settle a loan that was maturing, tough economic times such as poor business performance, lay-offs, or delayed salary have seen digital borrowers struggle to repay their loans.
High mobile internet connectivity and the pervasiveness of mobile money transfer services have attracted deep-pocketed investors into the country’s vibrant fintech.
Banks too have wound down their mortar-and-brick branches and set up shop in smartphones where they have made a kill by pricing the microcredits expensively despite the little overhead costs.
Investors in digital loans have been able to dole out loans running into billions without attaching stringent conditions.
There are currently over 25 digital credit providers, with new services being launched continually, according to a recent report by online marketplace Jumia.
All they have required of borrowers is for the latter to allow them access to their Facebook accounts, text messages, and call logs.
Loan application and disbursement has been truly instant, creating an unbelievably heavenly experience for borrowers who are already bogged down by the tedious loan application process used by banks, Saccos and microfinance institutions (MFIs).
But there might be a sad ending to what was supposed to be an uplifting story of financial inclusion in Kenya.
Rather than leave the users better off, the many digital credit providers might have pushed them into a financial bondage. Many Kenyans are now hooked to several of such firms, sometimes being forced to borrow from one mobile loan app to pay another.
Darren Mulamba, who is in his late 20s says that mobile loans have helped him to balance between everyday needs and the timing of his salary. He was hired by a friend as an online writer and that means his earnings depend on how much he has written.
“Many times I have to take such loans to pay rent and buy food and later repay when I am paid,” says Mulamba whose credit access limit in one of the apps now stands at Sh18,500. Quitting this cycle, he says, has been impossible because sometimes the money he earns from writing is never enough to allow him repay the entire loan and survive without requiring another one.
On March 16, Barclays Bank of Kenya launched its Timiza app that enables both customers and non-customers to access quick mobile loans. It joins Commercial Bank of Africa (CBA), Equity and KCB which have micro-credit products that allow users to take loans and save on their mobile phones. Barely half a month, more than 10,000 people have downloaded the Timiza application to use the service.
Mobile lender, Branch, which has over one million people using the application, recently raised Sh7 billion to deepen its ability to meet the rising demand for mobile loans. Branch currently loans out $4 million (Sh400 million) monthly and is one of the top five most downloaded apps in Kenya, according to Jumia’s Kenya Mobile White Paper 2018.
Branch Chief Executive Matthew Flannery says they process tens of thousands of loans daily with values ranging between Sh250 and Sh5,000. He says he expects to disburse over Sh25 billion this year.
Many Kenyans are now caught in several mobile loans to service forcing them to jump from one service provider to another, according to Financial Sector Deepening Kenya (FSD- Kenya).
The survey, also showed 14 per cent of the digital borrowers were balancing loans from more than one digital lender at the time of the survey, pointing to a refinancing crisis in which one borrows from Paul to pay Peter. Six per cent of the respondents in the survey said they used the money to repay other loans, both digital and non-digital loans.
Moreover, digital borrowers are not your normal hoi polloi. According to the survey, digital borrowers are more likely to be men, young and more educated. They are also more likely to be employed or have a business of their own.
Other than farmers and entrepreneurs who borrow for business, 37 per cent, most of the digital borrowers (employees and casual workers) use the money for their day-to-day needs, including buying personal households and airtime.
Casual workers such as Mulamba use most of the money they borrow digitally on day-to-day needs, partly due to erratic income. For those aged between 18 and 25 years, for every Sh100 they borrowed digitally Sh42 went into their day-to-day needs.
FSD recommends for a check on this habit. “Better tools need to be developed to track over-indebtedness and multiple borrowing. Many borrowers report cutting on consumption to repay loans and many report dipping into their savings,” says FSD.
Banks and microfinance institutions are now competing with fintech firms to lend out money to customers. Top banks such as KCB, Equity, Cooperative Bank and Commercial Bank of Africa lurecustomers to transact on phones. This helps them grow their non-interest income.
While the amendments in the banking laws restricted banks to price loans not above four per cent the benchmark lending rate from the regulator, banks intensified their investments in mobile loanproducts riding on huge volumes to mitigate the lost interest income.
With mobile loans, banks have an opportunity to rake in crazy interests as shylocks. For example, at a rate of 7.5 per cent month, M-Shwari annual interest rate would be a massive 138 per cent!
However, M-Shwari has insisted that the 7.5 per cent is not interest but a one-time fee levied for each loan. A week ago the High Court ruled against a suit by Consumer Federation of Kenya (Cofek) who had sued the Central Bank of Kenya (CBK) and CBA for non-compliance with the lending rates on M-Shwari service.
This will see most banks move their loan services to the mobile phone, and give interest rate a different name. Already, this migration has started.
For instance, Equity Group was able to grow its non-funded income by 24 per cent to Sh27.6 billion. This even as loan interest income plunged by 21 per cent to Sh34.1 billion.
Equity’s mobile banking commission grew the fastest (64 per cent) among the eight major sources of non-funded income. While in 2016, the commission was Sh731 million, that increased to Sh1.2 billion last year.
Equity Bank CEO James Mwangi noted 96 per cent of bank transactions now happen outside branch. Equitel and the Eazzy Banking mobile app took 74 per cent of all transactions in the bank, which is a self-service platform. While Equitel had 251.6 million transactions, the mobile app had 92.8 million.
The FSD survey showed a growing number of FinTechs and non-finical institutions that are now offering the service since the inception of Mshwari product by CBA in 2012.
Mobile loans come with processing fees which banks take advantage of since many customers take loans whose maturity is about three months.
Last year, KCB mobile loan transactions more than doubled from 53.1 million to 88.8 million. During the period, the value of mobile loans disbursement hit Sh29.6 billion from previous year’s 14.1 billion.
KCB’s fees and commissions on loans and advances increased by 13 per cent from Sh4.6 billion to Sh5.2 billion. For Equity, that increased by more than a third from Sh3.83 billion to Sh5.25 billion.
With such mobile loans having opened loan taps for so many Kenyans who had been locked out of borrowing bracket due to lack of jobs, collateral or bank account among other requirements, so many people are now borrowing at the comfort of their homes.
They are willing to give away part of their privacy- bank account information, mobile money balances, location, social media chats, text messages etc. - in exchange for loans. Mobile loan lenders depend on predictive analytics to score a customer’s credit worthiness.
However, with Kenya yet to have clear laws on data protection, FSD is advising that it is important to monitor transparency and consumer protection in the digital credit market place.
“The last two years registered the entry of many unregulated players who do not respond to any law or regulatory authority. An oversight body should be designed to monitor this growing market segment,” said FSD.
Banks such as CBA, KCB and Barclays have partnered with Safaricom to use customers’ data at both the bank and telecom to make decisions on how much to lend. Since inception in 2012, CBA has disbursed mobile loans worth Sh230 billion, according FSD study.
With about a third of Kenyans estimated to be digital borrowers, many of them have been caught in debt trap, often borrowing loans to offset others. Over a third (35 per cent) of the digital borrowers have been on multiple applications looking for roans.
It is estimated that 18.2 million of Kenyans own mobile phones and 35 per cent of them have tried at least one digital mobile loan. About 20 per cent who have not said it was only because of lack of information. At the time of the survey, FSD found out that about half of the borrowers had an outstanding loan.
The number of borrowers who spend the loans on consumption rather than use to generate more income is high, forcing some to be perennial borrowers.
“Most borrowers use digital credit for business or to meet household needs. Education plays a very important role as well,” notes FSD.
While 37 per cent borrow to advance business, 35 per cent borrow to meet day-to-day needs. About 15 per cent take loans to buy airtime. Six per cent take loans to repay other loans, recycling the debt cycle. Others, the study shows, take such loans to loan to others while about 3 per cent borrow to bet. Betting craze has caught up with many Kenyans as more betting firms continue to set up in Kenya.
“Only 3 per cent of digital borrowers report using their mobile loans for betting. On the flipside, digital borrowers are almost twice as likely to have tried mobile betting at least once in their life,” notes FSD.
Even though the loans were initially targeting those who could not access conventional loans that come with red tape, the product has now attracted almost all categories of customers with some preferring the product because of convenience.
Among those in employment, the study says that 40 per cent borrow to meet their day to day needs. Even for causal workers, 41 per cent also borrow for consumption. This is usually with anticipation that when they earn salaries or wages, they will repay.
“Younger customers (below 25 years) primarily borrow for day to day needs. The key age group for digital credit (26 to 35) is equally split between business and day-to-day needs,” says FSD.
For those in business, while 59 per cent of them borrow for their business, 31 per cent also borrow to meet their daily needs such as food. In times of medical emergency, about 8 per cent of those with access to mobile loan app, turn to it for help.
With many borrowing for non-income generating purposes, about half of borrowers report to have delayed in repayment time, with men being more frequent culprits.
Those who default say that they are forced to do so because of poor business performance, loss of source of income, poor financial planning or the fact that all the money was used on food and utility bills.