Easy digital loans drive Kenyans into multiple debt

digital credit

A large proportion of borrowers take out loans to pay off old debt, driving many to default

Wednesday March 18 2020

The growth in digital credit is driven by a segment of active individuals who borrow money monthly or weekly but are struggling to stay afloat.

One in eight digital borrowers report having defaulted on a digital loan while almost half (47 percent) report paying late, according to a survey by the Consultative Group to Assist the Poor (CGAP), a developer of financial solutions targeting low-income earners.

The portfolio of non-performing digital loans extended by banks is consistently higher than that of the entire bank loan book. Statistics from Central Bank of Kenya (CBK) show that the non-performing loan (NPL) ratio for bank digital loans averaged 11.4 percent as compared to 9.69 percent for all bank loans. A NPL is considered to be in default or close to default.

The typical borrower is likely to be urbanite, be age 26-36, wage-employed or self-employed and have completed at least secondary school. They are also more likely to be male than female.

Among those who have defaulted on a digital loan is Miss Valerie Nekesa, 34, who has been borrowing money through M-Shwari, the leading digital lender, for the past four years. She once defaulted on a loan because she did not have money to repay it and ended up being suspended from the service for a month.

Like one in six digital borrowers who cleared their loans late, according to the survey, she had not planned well on how she would repay the money.

Eventually, she repaid the loan and returned into the good books of her lender. Valerie spends the credits on routine household goods and bills.

Reasons for borrowing

The survey, conducted in partnership with Financial Sector Deepening (FSD) in Kenya and Tanzania, finds that household and business needs dominate reasons for borrowing. More than a third of digital borrowers report primarily taking out loans for ordinary household needs (35 percent) or for business purposes (37 percent).

The reasons are similar to those given for seeking loans from traditional lenders such as commercial banks and Savings and Credit Co-operative Societies (Saccos). An earlier NationNewsplexanalysis found that one in three shillings (39 per cent) borrowed by households in Kenya is spent on basics such as food, toiletries and water. It is followed by school fees (21 per cent).

READ: Know the heavy cost of late repayment before taking digital credit

READ: Two-thirds of loans taken by families are spent on food and school fees

On average, the size of digital loans ranges between Sh1,000 and Sh5,000 at the beginning, but borrowers can become eligible for larger loans through repeated borrowing or positive savings behaviour, among other factors.

Valerie, a project manager at a digital lending firm, borrows between Sh1,000 and Sh18,000 a month. But sometimes, during moments of reflection, she questions whether she really needed to take a loan or she did it just because such loans are easily available.

Digital loans are easy to obtain and short-term but carry a high interest rate. The fees charged on digital loans generally range between six percent and 10 percent monthly for a one-month loan, which is relatively expensive compared to traditional formal loans. Microfinance institutions, for example, tend to charge an average of 30 percent annually.

More than a third (35 percent) of mobile phone owners in Kenya are digital borrowers, translating to about 6.1 million unique digital borrowers, according to the FinAccess Digital Credit Tracker Survey 2017.

Like Valerie, the typical borrower is likely to be urbanite, be age 26-36, wage-employed or self-employed and have completed at least secondary school. They are also more likely to be male than female, according to the survey titled: A Digital Credit Revolution: Insights from Borrowers in Kenya and Tanzania 2018.

Almost three-quarters of borrowers have at least secondary school-level education compared to less than half (41 percent) of adults in general.

Almost two-thirds (60 percent,) of digital borrowers had a digital outstanding loan at the time of the survey. The same fraction of the borrowers had taken out at least one loan in the past 90 days.

Debt cycling

A third of Kenyans have ever borrowed from more than one digital lender, double the proportion in Tanzania, according to the survey that was done in both countries. About 14 percent of digital borrowers in Kenya had a standing loan from more than one digital lender at the time of the survey, more than double Tanzania’s rate of six percent.

Multiple borrowing can indicate debt cycling – taking out a loan to pay off another.

Mr Peter Oketch, a marketing manager in a medium-sized business, knows all too well about juggling multiple loans. For more than a year, he regularly borrowed digital credits of about Sh10,000 to top up his daughter’s school fees or when experiencing cash-flow problems. Concurrently, he was servicing a bank loan. But when the 40-year-old father of three had to borrow money from friends several times to meet his loan repayment deadlines, he re-evaluated the benefits of digital credit. He shopped around for less expensive loans. “Now when I need a short-term loan I use a bank facility. The first time I used it, I got a loan of Sh40,000 but the interest rate was almost the same as what I paid for a digital loan of Sh10,000. The interest rates for many digital loans are about double what banks offer,” he says.

Both Valerie and Peter say they knew before taking the digital loans that they would have to pay high interest and other fees.

Valerie goes for digital loans even though they attract a higher interest because they are fast, one does not need to visit a bank to get them and the process is private. “For me, the ease with which the loan is processed outweighs the extra costs,” she says.

Not so for many other borrowers. The survey findings indicate that more than a fifth of borrowers have experienced at least one form of poor transparency such as unexpected fees, not understanding the cost or terms of loans, and unexpected withdrawal by the lender.

The youngest category of borrowers, aged 18-25, experienced the highest rate of poor transparency by digital lenders.

Borrowers who reported poor transparency were also most likely to report having paid digital loans late or defaulted.

A third of borrowers reported having had to use one or more potentially adverse repayment strategies − borrow more, reduce food purchases, skip a school fee payment, sell assets or forego medical treatment. A fifth of digital borrowers in Kenya report that they have reduced food purchases to repay a digital loan while a sixth of borrowers have taken another loan to repay the digital credit.

Less than Sh200

Multiple borrowing can be a pointer to the fact that loan offers do not adequately consider the ability to repay. Digital lenders rely on data they or their partners hold rather than data from external sources such as credit bureaus to assesscreditworthiness. But even those who check credit sources may not have the full picture of borrowers’ outstanding debt, because credit reference bureaus typically receive data monthly rather than daily or in real time. This means that data on short-term digital loans may not be up to date. Lack of data on other outstanding loans may result in loan defaults.

Digital credit contributes significantly to the number of individual defaulters reported to credit bureaus. According to a 2016 survey by Transunion, one of Kenya’s three licensed credit reference bureaus, of the 2.7 million Kenyans who had been reported to a credit bureau with a negative listing for late repayment, about 400,000 were for loans of less than Sh200.


The gender gap in digital borrowing declined to 10 percentage points, with 55 percent male and 45 percent female unique borrowers. However, the wide gender gap in volumes and values of digital lending persists.

Men are more likely to use digital loans to meet day-to-day household needs, paying bills and airtime while women are more likely to borrow for school fees.

With a third of mobile-phone owners having borrowed from multiple digital lenders, and a seventh of digital borrowers balancing more than one digital loan simultaneously, there is a need for clear disclosure and transparency of digital credit pricing and terms to ensure that borrowers understand their obligation and can make informed decisions when taking out a loan. The survey recognises limited disclosure and transparency as areas of concern in digital financing loans.
A total of 3,150 respondents in Kenya and Tanzania completed the large-scale phone surveys, of which 1,037 had used digital credit. Additionally, FSD Kenya partnered with some of the largest digital credit providers to interview and analyse an additional sample of about 5,000 recent digital credit borrowers in the lenders’ list during the fieldwork.