The Digital Credit Wave in East Africa: What Went Wrong?

Part two of these series titled, “An Alternative Lending Revolution: What’s in it for Africa?”

The rise of digital lending platforms is facilitated by mobile phone platforms. Photo Courtesy Akeolending

Kenyans, in large numbers, are getting trapped in the cycle of debt as they seek to supplement their incomes amid inflation. This, according to a March 2020 issue of the Business Daily, is the current digital lending situation in one of the largest economies in Sub-Saharan Africa (SSA). A report by an Egyptian Investment Bank, EFG Hermes, stated that a surge in digital lending apps has been witnessed over the years. This is likely to affect the mobile banking revolution, they say. In so much as the additional mobile banking and digital apps brought up in 2016 increased household access to credit by nearly three times (from 32.45 in 2013 to 81.7% in 2019), job creation has been left behind. Effectively, the relatively high cost of living as well as the inability of Kenyans to live within their means has seen the rapid growth of mobile lending apps. These, in fact, continue to take advantage of the pressures of living costs.

The Financial Sector Deepening (FSD) Kenya report released in 2019 in conjunction with Central Bank of Kenya (CBK) estimates the existence of more than 100 digital loan apps in the country. M-Pesa continues to dominate digital payments. Since its launch in December 2007, mobile money subscribers have increased from 1.3 million to 58.4 million in December 2019. Essentially, this can be translated as each Kenyan having 2 mobile money accounts. As of September 2019, the total balance in mobile money accounts was 17% of banking system deposits, a figure of Kenyan Shillings 604 billion. These statistics prove a worthwhile milestone for mobile banking, and a potentially bright future. However, as EFG Hermes states, low formal employment, rising cost of living, and the cost burden households have to shoulder from digital lenders (mostly due to financial illiteracy) are issues that the sector will have to battle with moving forward. Indeed, the government would need to step in; provide financial literacy and regulate these predatory lenders.

It should be noted that the total cost of credit (TCC) from the mobile bank lending apps ranges from 61-315% per annum. Digital loan apps such as Fuliza M-Pesa charge 3% daily, PesaZone 32% weekly, Kopa Cash by Airtel 175 bi-weekly, Dolax 45% tri-weekly, Craft 34% monthly, Branch and Tala 15% monthly, Upazi loans 45% monthly, and Usawa and Utunzi 40% monthly. This being just a snippet of the bigger picture.

Only 2.8 million (about 10%) of Kenya’s adult population were employed in 2019. In the just-ended decade, the country created 820,000 jobs only against the 12 million increase in population, leaving all in awe as to how 1 job will sustain 14 people. Less than 75% of formally employed Kenyans make $633 averagely from their jobs. How then can a digital revolution successfully grow credit without resulting in a significant rise in non-performing loans?

The 2019 FinAccess Household Survey reported that 100% (all) respondents admitted to having taken a digital loan because it was “fast and easy to access”, pointing out just how negligent digital lenders had been in educating their customers (potential and current) concerning their underlying products. Approximately 26% of defaulting customers had no understanding of the terms. February 2020 saw the Competition Authority of Kenya (CAK) announce that it would be investigating the regulated and unregulated digital lenders as pertains to the exorbitant interest rates they were charging.

Is it time to protect Kenyans from a digital lending laboratory? Recent research on Kenya’s digital credit market shows an abnormally high growth in mobile lenders and alarming rates of default and delinquency. With aggressive sales tactics, abusive debt collections, and unacceptable debt stress levels, it remains a wonder if mobile lending will really aid in financial inclusion. It may actually be reversing the progress. Therefore, it is a worthy journey down memory lane to find out exactly what objective digital credit set out to achieve from the onset of its introduction. It was to make visible, to the formal financial system, those people that had no documented financial history; helping low-income people gain access to loans and other financial products. Years down the line, has this goal been achieved?

In a February 2020 an article published by the Daily Nation titled “Suicide that jolted CBK: Inside plan to rein in digital lenders”, Kenya’s regulators were jerked off their comfort zone when a middle-aged man took his life owing to harassment and public shaming by an unnamed digital lending application. CBK Deputy Governor commented that when the man was unable to pay the loan, the lender hacked into his contact list and started getting through to them one by one (including the mother, grandmother and aunt). Interestingly, this revelation was a courage boost to several Kenyans who came out to narrate their similar harrowing experiences with mobile lenders.

The regulators now have their ears on the ground, and eyes on the unscrupulous lenders, to stop the cyber shaming they have been carrying out for a significant number of months now. Listing borrowers with the Credit Reference Bureau (CRB) and charging late payment fees are some of the common methods lenders use to deal with defaulters. It is still to be seen, whether digital lending is much more sustainable than the traditional from financial institutions.

The third part of these series will consider, The Rise of Digital Lending in West Africa.

Written By Ida Mwangi
@Noemie(Twitter) 
@Ida Mwangi (Linkedln)