Loan apps up the game as revenues hit, default rise

At the Khoja bus stop, Abel, a shoe shiner, is in a fierce phone call as he ushers a client to his spot.

"Not now. I’ll be depositing whatever I get and whenever,” he says ending the call.

Abel has just slammed the phone on an external debt collector hired by one of the many digital mobile lenders to pursue a Sh5,000 loan.

He long defaulted on the loan, which has since ballooned. Abel says he's willing to pay, but, firstly there's no money to spare owing to the economic havoc the Covid-19 pandemic is leaving in its wake.

Secondly, the digital apps have since frozen giving loans, so he’s unlikely to pay and borrow back as he did pre-Covid-19.

Thirdly, Abel is among many Kenyans who see the recent clamping down on digital apps by the Central Bank of Kenya (CBK) as a much-needed measure to save them from a vicious debt trap.

In a major setback for the dozens of loan apps, the apex bank banned unregulated digital and credit only lenders from submitting names of loan defaulters for blacklisting at the Credit Reference Bureaus (CRB).

Some of the apps have also been barred from using CRBs meaning they can’t assess the creditworthiness of potential borrowers.

A huge chunk of the over 3.2 million Kenyans negatively listed as loan defaulters in the CRBs are courtesy of the mobile digital lenders.

They have been listed for loans of as low as Sh200.

The digital lenders have for long been accused of charging high interest rates, using crude methods to recover loans, and predatory lending tactics by offering loans to borrowers with no means to pay back.

With the restrictions of movement, Abel now spends most of his working day seated on his shoe shining spot.

Abel's clients were the office types, majority who are now working remotely.

Due to the fallen incomes and uncertainty, Abel joins thousands of other Kenyans who’ve defaulted and don’t see themselves repaying the loans anytime soon.

CBK Governor Patrick Njoroge has been one of the biggest critics of the digital lenders accusing them of rogue tactics.

He recently laughed off their role in the credit market branding them a “flea in the economy.”

Recently, the digital lenders reached out to the CBK for discussions on a regulatory framework that they would operate on.

However, to some extent the digital mobile lenders -- which are over 40 -- have helped deepen financial inclusion to a class of people ignored by traditional lenders.

Now with the Covid-19 pandemic and the freezing of lending by the apps, access to credit for this section of people has become even harder.

The Covid-19 pandemic has also hit hard digital loan apps and the majority have frozen lending activities.

This includes the two most popular lending apps Tala and Branch.

The loan apps are using this time – and their cash reserves – to pursue defaulters.

Defaulters ignore their phone calls and texts and most of the numbers used by the loan apps are labelled as “spam” in calling applications.

However, defaulters are alarmed at how the apps are able to obtain their location and place of work. 

Boniface Onyango, a journalist, calculates that he owes close to Sh100,000 to over five digital lenders.

He was alarmed by a recent text from one of the external debt collectors threatening to pursue him to where he works and wonders how they are able to trace him.

"We know where you work. You work at Company X. We will use our external debt collectors at your own cost. Please pick up your phone,” reads the message.

Millions of Kenyans have knowingly and unknowingly surrendered their privacy, contacts and location in exchange for the exorbitant mobile loans that have interests of up to 30 per cent. 

For the instant cash, Kenyans sign up for surrender of their personal data including the constant SMS notifications that many decry. Most Kenyans don't read the terms and conditions set by the apps.

Onyango is in a circle of debt that he can’t escape, a situation that the loan apps have been increasingly blamed for putting Kenyans into.

Onyango was borrowing from one to pay to the other until he couldn’t pay any more and defaulted.

“Now they’re threatening me that they know my place of work. I’ve explained I’m unable to pay at the moment, let them come,” he says unbothered.

Speaking last year during the Safaricom’s 19th anniversary, former chief executive Michael Joseph decried how M-Shwari, one of the telco’s loan facilities, had gone "in the wrong direction" with majority of borrowers using it to repay other loans as he promised to review it.

"Unfortunately, in my opinion it’s gone in the wrong direction, the cost is too high people are borrowing too easily to pay off lenders so you have this merry go round of loans and repayment which I hope in the next few months we’ll find a way to deal with this,” he said.

Most of the loan apps are headed for losses due to the high defaults and a worsened economic situation caused by the Covid-19 pandemic.

One of the toughest departments in the digital app loans workspace is debt collection.

Leaked emails from one of the digital apps seen by Weekend Business last year during a lay off exercise showed that staff being sent home were given options of working as debt collection agents or exit the firm, many chose the latter.

As a debt collector one is paid in commissions on every debt recovered, which has become increasingly difficult during this period.