Hooked on digital loans? Try this remedy

It has become almost a culture among Kenyans that whenever one is in a fix that needs money to resolve, and they have none with them at the time, they turn to digital lenders.

Sometimes these digital platforms have been used to finance unnecessary expenditures like wants or unplanned expenses like when one realises they have surpassed their budget in a supermarket.

Despite how handy these platforms are, they have become a source of perpetual debts in people’s incomes that is too difficult for some to get rid of.

Considering the tough economic times, which have been made worse by the Covid-19 pandemic, the allure of these digital lenders is hard to resist.

 Yet as people flock these platforms for loans, a latest survey released by Central Bank of Kenya shows individual are not knowledgeable on how their interest rate work.

Calculation of interest

As documented in the 2021 FinAccess Household Survey December 2021, Kenyans are not knowledgeable of the calculation of interest related to the amount they borrow.

The survey tested the ability of respondents to accurately compute 10 per cent interest on Sh10,000 loan.

“About 49.3 per cent of the respondents got the correct interest rate cost, while 32.4 per cent gave the wrong answer,” reads the report compiled by Central Bank of Kenya, Kenya National Bureau of Statistics, and Financial Sector Deepening Kenya (FSD) among other partners.

Additionally, respondents were shown a typical message on the mobile phone showing the transaction value and associated costs as short message service (SMS) test as commonly used by providers of digital loans.

Of the respondents, six out of 10 were able to read correctly.

Perpetual borrowing cycle

How to get out of this cycle is a maze for many especially those who do not have a source of income.

“When I look at the situation first of all I would say stop any further borrowing because what we have seen is a perpetual borrowing where you borrow Peter to pay John and that kind of hoping from one platform to the other,” says Elizabeth Irungu a financial expert.

Irungu, while speaking during an interview with The Standard sister platform KTN News said when the pandemic came, most people lost their income and small businesses were affected. These individuals were literally not working yet they have expenses like food and rent.

“What happened is that a lot of people may have jumped into loans which are alluring, cheap and easy to access and then they got into debt,” she explains.

Irungu says one needs to be conscious while borrowing.

“It is not clear to many Kenyans the cost of borrowing. They only sell you that you an access Sh10,000 or Sh5,000. They do not go ahead to say at what cost you are getting the credit,” she notes.

Irungu says if one was to do the math before borrowing, they would rather seek alternatives. For example, she explains, if a lender’s interest rate is one per cent daily, it translates to 365 per cent per year.

Killer loan

“Your eyes will pop. By only mentioning 365 per cent you will run away from that, because you know for every Sh100 you borrow you are going to pay back Sh365 more. That is a killer loan. Nobody should borrow that. You would rather look for alternative ways,” she points out.

If you are broke, she says, you should examine your source of debt.

Additionally, plan ahead of time, she adds.

“Emergencies are likely to happen, and that is what happened last year. None of us foresaw the pandemic but by planning life we know that emergencies will come so we are told to always save for that rainy day.” 

Irungu says the use of digital portals that can help you get money quickly were actually a trap. She says during the pandemic as documented in the survey, many borrowed because the situation was dire as they needed to feed their children or cater for other urgent needs.

Soon they become debt trapped.

Though the government has been pushing that such people are not litsed in the Central Reference Bureau, she adds that the truth is those who borrowed are still debtors as those who lend them will still need to recover their money.

“You will (still) need to pay that loan that you took on phone when you were not even thinking straight,” she warns.

Irungu says even when one is not making more money, they can still save for rainy day by cutting their expenses. The survey cited lack of enough money (54.6 per cent) as the leading reason behind those not saving followed by irregular income (18.4 per cent) and 7.4 per cent who simply preferred not to save.

She notes that from the survey, there are individuals who made some changes in their expenses as a result of the economic shock.

“Though the survey did not ask, I believe some of them might have moved from expensive homes to the village or from one estate to the other to cut on costs,” she says. “Whatever you cut even if it is Sh100 start keeping it aside.”

She adds: “Do not say you will start saving and investing when you have a lot. Start with small. It is the discipline.”

Irungu notes that the biggest cost that any household in Kenya has is food which can force many to borrow when they have no income as this is a basic need.

However, one can still shop prudently with less.

For example, one can have a conversation with your children on expected lifestyle changes and shopping in fresh market produce like Marikiti unlike buying packaged food.

“Marikiti is cheaper,” she notes.

One can go ahead and create kitchen garden to cut cost of buying food.

“It is unfortunate that for a country that is so productive, many of us are using half of our money to put food on the table. A lot need to be done in terms of policy and government intervention, to reduce the fact that so many Kenyans are using almost half of everything on food,” she observes.

But even for those who save, the survey indicates that most of it goes to cater for day to day household needs showing how expensive it is and such may lead to borrowing.

Reasons for saving according to the survey are day to day household needs, followed by emergencies like burial or medical and education needs.

Retirement comes fourth.

“The most cited factors impacting savings among Kenyans were lack of regular income and sufficient money to save at 42.3 percent and 38.3 percent respectively in 2021.

Given that the survey mainly covered the Covid-19 period, the responses could easily be influenced by the perception of hard economic times and job losses due to the Covid-19 shock,” the survey reads.