Digital credit craze a double-edged sword for borrowers

Peter Kalonzo applied for a Sh500 loan offered by a financial technology (fintech) firm that he was to repay in a week plus Sh76, translating into a 15.2 per cent interest.

He also borrowed Sh11,000 via a mobile bank app to partly pay for maternity charges for his firstborn baby’s delivery, which he will repay within three months. This will cost him Sh800 (7.2 per cent interest) and another Sh80 being the government’s 10 per cent excise duty on transactional fees in addition to the borrowed amount.

Mr Kalonzo, an office attendant in Nairobi, is happy that the bank loan has a repayment period of three months, which has concealed the shame of borrowing from friends to meet essential obligations.

“Mobile loans are the best gift Kenya ever had. Who would have loaned me Sh500 to pay for the taxi that took my wife to hospital and who would have loaned me Sh11,000 at night that was required at the hospital to have my wife attended to?” he posed, adding that having a National Hospital Insurance Fund card settled all other expenses.

Digital loans have become central to Kenyans’ lives that six million Kenyans heavily rely on mobile loans to meet day-to-day needs out of which 35 per cent borrow from multiple mobile based fintech lenders.

A report commissioned by developer of financial solutions targeting low income earners and small and medium enterprises, Consultative Group to Assist the Poor (CGAP) now says Kenya must urgently rein in rogue fintech-based lenders who are fleecing Kenyans by offering short-term loans at high interest.

The study led by senior financial sector specialist Juan Carlos Izaguirre, Michelle Kaffenberger and Rafe Mazer dubbed, “Digital Credit: Borrower experiences and emerging risks” warns that as mobile credit data continues to be amassed, Kenyans risk being blacklisted as bad borrowers for failing to repay airtime and small loans they took from the Fintechs.

The situation is so bad that a tier-1 regional lender recently issued a circular warning its staff that they risked being fired if it is discovered they have been blacklisted for defaulting on repayment of ‘fintech’ loans.

“The bank expects us to borrow from it so as to deduct costly loans from our salaries,” intimated a source who declined to be named for fear of reprisals.

The large-scale phone surveys among 3,150 digital credit users and non-users in Kenya where 1,037 used digital credit shows 12 per cent of them have defaulted on their repayments while 47 per cent cleared their loans belatedly where they paid hefty penalties.

The report laments that despite repeat borrowing, Kenyans don’t enjoy cheap loans as no law compels lenders to consider a borrower’s credit history when issuing new loans.

Central Bank of Kenya Governor Patrick Njoroge has reiterated that banks and other fintech lenders must move fast to apply use of credit data in formulating new products as well as determining the risk of each borrower when issuing out a loan.

“This could see mama mboga enjoy extremely cheaper loans as they borrow in the morning and repay in the evening before borrowing again in the morning. But it is very absurd to treat all borrowers equally regardless of their credit history and this has discouraged many from borrowing high amounts of money for personal development,” he adds.

The CGAP report avers that four million Kenyans are active borrowers where 37 per cent borrow to fund income generating activities, 35 per cent mostly borrow near month-end to fund household expenses hoping to repay when they receive salaries while a paltry 7 per cent borrow to meet emergency medical needs.

“Most digital lending models use such repayment histories to increase loan size, but keep interest or fee rates and repayment periods fixed — limiting borrowers’ ability to qualify for and use loans for longer-term investments,” it affirms.

It also found that while women borrow to pay fees for their children, most men borrow to buy food among other household expenses. Some 20 per cent of the loanees struggle to pay back indicating lack of loan products that suit such borrowers who require ‘very’ patient loans that appreciate that loanees are jobless people who rely on casual jobs to meet their daily needs.

“Some 16 per cent of the loanees took a new loan to repay the former loan before moving to another loan provider for yet another loan. This indicates poor product transparency that motivates delays and default,” said the report.