Banks still giving defaulters cash, new study shows

At least seven out of ten people who have defaulted on a past loan are likely to default on a new one, says a new survey based on reports to credit reference bureaus.

Despite this knowledge, banks and mobile lending apps continue lending to these high-risk borrowers as the lenders pursue high profits but end up burning their fingers.

The report, complied by CreditInfo, a credit reference bureau, noted that digital lenders (a combination of both digital apps and online platforms run by banks) advanced loans to 398,160 borrowers with a default history, 70 per cent of whom ended up defaulting on the new loans.

It also noted that banks advanced loans to 115,869 borrowers also with a default credit history, with half of these listed borrowers going on to default on the new loans.

Kamau Kunyiha, the chief executive of CreditInfo, noted that the failure to pay loans speaks more to the character of a person rather than the financial ability to service a loan.

“A good number of individuals who had defaulted on both mobile and traditional loans managed to get new facilities thereafter. About 70 per cent who had previously borrowed went ahead and defaulted, while 50 per cent of the people who previously defaulted went on to skip payments of the new traditional loans they had been given,” said Mr Kunyiha when he launched the report that analysed mobile loan trends between November last year and April 2019.

“Not everyone who defaults is necessarily bad but a good majority of the defaulters have character and discipline issues once they default... they will default again. They are not managing their finances well.”

Kunyiha added that while the lenders are taking a hit for advancing credit to known defaulters, it is not a major hit as the loan limits for people with negative listing at the CRBs is usually lower.

“The lenders have used the tools available to them to learn the behaviour of the borrowers and are selecting customers and giving them limits based on their risks. The high-risk borrowers are getting low limits, which gives them an opportunity to redeem themselves and build a better profile,” he said.

CreditInfo developed the report from analysing reports made by banks as well as some digital lenders to CRBs. The analysis was on loans below Sh50,000, which revealed that a vast majority of borrowers – some 66 per cent – stick to one mobile lender, while another 24 per cent were found to have borrowed from two lenders.

It has long been held that Kenyans subscribing to digital lenders usually hop from one platform to another, usually borrowing from one to pay the other. While there is truth to this notion, only 10 per cent of the borrowers usually borrow from more than two lenders.

The banking industry dominates mobile lending, having advanced 93 per cent of the loans, leaving the balance to more than 50 other lenders.

“Kenyans appear to be risk-averse to borrowing from more than two lenders even though the market has more than fifty digital loans products available. Our data also shows that the banking sector dominates the mobile lending space by a staggering 93 per cent while the other seven per cent lent out by digital mobile apps. Since banks are regulated, we can, therefore, deduce that most of the mobile lending in the Kenyan market is regulated,” said the CEO.

CreditInfo analysed data on 19.1 million loans lent to 4.5 million individual borrowers and 855 companies by 15 lenders between November last year and April this year. A total of Sh112.2 billion was advanced by the 15 lenders to their customers over the period