Opinion: Mobile money lending fraught with risks that call for regulation

The mobile phone and all its attendant applications have impacted Africa’s social and economic developments in a manner totally unforeseen two decades ago.

One of the most revolutionary developments of the 21st century for Africa has been the rise of mobile telephony.

The mobile phone and all its attendant applications have impacted Africa’s social and economic developments in a manner totally unforeseen two decades ago.

From a simple communication gadget for the privileged, the mobile phone has facilitated democratisation and opening up of public sector transparency and transformed the financial environment fundamentally.

The mobile phone is not just a telephone, but a fax and email facility, a bank, a voice and video recorder, an Internet hotspot and so much more. It is however in the sphere of mobile money that mobile telephony has been most impactful.

Twenty years ago, banking services were largely the preserve of those in the formal sector. Transactions in this sector required physical presence and extensive documentation.

With today’s mobile money, one needs no bank account to carry out substantial financial transactions through mobile money platforms. A farmer in the deepest parts of Marsabit and the Kanyaboli fisherman have almost the same access to financial services as the corporate executive in the city of Nairobi.

RATES NEVER LOOK PUNITIVE

The most recent entry in this expanding network of financial services is mobile money lending. Initially managed by a few operators, mobile lending is now a big industry through which billions of shillings are routinely lent to an estimated seven million Kenyans currently.

I was amazed when I tried the service a while ago. In less than five minutes and without providing any information other than my phone number, a Sh40,000 loan was granted and released to my phone.

 I am told that other than the most famous of these applications like M-Shwari, numerous other applications exist which offer the same immediate service. Mobile borrowing is the ultimate form of financial convenience and must be lauded and enhanced.

My worry, however, is that while there is extensive regulation of other traditional lending services, including a cap on lending rates on banks, this sector appears largely unregulated in key areas.

The most critical of this is interest rates. Because these loans are given for short periods, the interest rates never look punitive. My Sh40,000 loan aforesaid was borrowed for 30 days and a sum of Sh1,600 was charged on the amount and deducted upfront.

Though looking meagre especially in view of the convenience of the borrowing, when I calculated the lending rate, it was clear that I had paid an interest rate of well over 45 per cent per annum, way above the interest rate capping law.

Mine I am told is one of the cheaper ones, many charge well over 100 per cent interest.

While I would assume that this rate is informed by amongst other factors the risk attendant to lending money in such an informal manner, the rate is so punitive that sooner or later, the burden of this high rates will cause massive non-repayment and will collapse the entire sector.

ULTIMATELY BE BLACKLISTED

Worryingly, most of the people who routinely use these services, many of them jobless young people who borrow simultaneously from three or four of these lenders, have no idea of the cost of the loans.

As more and more of them use these services and take multiple loans usually for luxury and leisure spending, they will fail to repay and ultimately be blacklisted in the various Credit Reference Bureaus thus prejudicing their long-term ability to ever get any loan facility at a time of need.

The other challenge with these services is the impact it is having on a saving culture.

If one compares them with the other more popular form of lending - the sacco loans - the latter emphasizes savings as a corollary of borrowing. These mobile money services make no saving emphasis.

 No doubt, mobile lending is a great development. But like all good developments, it comes fraught with risks and the sector regulators need to find a way to rein in so that it does not mutate into a financial ogre that eats its children.