How investors are pouring cash into lucrative digital loan firms

Three out of every 10 shillings that investors put in Kenyan startups last year were in mobile lending firms, a new report shows.

Mobile lending has been in existence for less than a decade but the industry is growing rapidly and proven attractive to investors due to higher returns.

Though there is a significant risk to lending to a person with whom the lender does not have a ‘personal’ relationship, high interest rates charged per loan offset the potential high defaults.

According to a new report on the deals concluded last year by Partech, a global investments firm, Kenyan technology startups received $564 million (Sh57 billion) worth of funding in 2019.

The report, which captured deals whose values were recorded, indicates that of the amount that Kenyan firms received from different investors seeking to buy equity in the companies, 31 per cent (Sh11 billion) went to Tala while Branch got Sh6.9 billion.

The two are some of the largest mobile lenders in the country.

In addition to the mobile lenders are other startups in different sectors but with certain aspects of financial technology (fintech) that substantially increase the share of funding to technology.

Partech placed Kenya second in terms of the money flows and the number of deals, behind Nigeria and ahead of South Africa. Investments into the tech sector that the company tracked grew 62 per cent to Sh57 billion in 2019 up from Sh35 billion in 2018.

“Kenya is squarely sitting at the second place both in total funding as well as number of transactions with $564 million (Sh57 billion) in funding over 52 deals (18 per cent growth),” said Partech.

“Driven by fintech, financial inclusion remains the main investment sector on the continent, attracting 54.5 per cent of total funding.”

Partech said the online and mobile consumer services sector had witnessed a steep increase to 29.3 per cent of total funding, while business-to-business and tech adoption represented only 16.1 per cent of total deals last year.

“The Africa tech sector’s attractiveness to investors is the highest it has ever been, there being 70 investors who made two or more transactions in 2019 compared with 20 investors only back in 2017.”

The mobile lending industry has locally been blamed for impoverishing young people by trapping them in a vicious cycle of expensive loans.

There are more than 50 mobile and online credit providers offering loans at the click of a button. But this convenience comes at a high cost, with some applications offering interest rates as high as 150 per cent a year.

A recent report by a credit reference bureau indicated that more than 2.7 million Kenyans have been blacklisted owing to defaulting on mobile loans. Of these, more than 400,000 people have been blacklisted for defaulting on loans of Sh200 and below.

Research shows that 16.6 per cent of digital borrowers take up one loan to pay another.

A customer survey report by research firm Ajua noted that other things that mobile lenders are unduly aggressive in debt recovery including accessing customers’ phone books and calling their friends and family about the borrower’s debt status.

“Despite the growing demand for these services, customers increasingly reported experiencing hostile treatment when being asked to repay their loans,” said Ajua in the report released in January.

Aggressive tactics

“In a bid to recover debts, some lenders resort to accessing information from their customer’s contact list prompting their contacts to push the loanee to clear their debt.”

Mobile lenders, on the other hand, insist that people should borrow responsibly. They say mobile loans create a credit history and score that borrowers can use to get larger development-focused loans from commercial banks.

In the years before the mobile lending craze, sub-sectors within the larger tech industry that received attention from investors included e-commerce, agri-tech, health, solar power and logistics.

Some investors in these areas are still making inroads and deepening their market coverage while others fell by the way.

A report by Disrupt Africa, which also evaluated the startup environment in Africa in 2019 and the interest that investors have shown, noted that while other sectors are getting money fintech remains at the top.