By - Kiraithe Daniel Mutemi
The growth of technology, especially on digital credit, has presented fortunes and misfortunes in equal measures to credit consumers in Kenya. Digital borrowers are finding themselves in bad books of lenders for loan repayment defaults. Digital credit, which is borrowing and lending using electronic technology, is majorly facilitated by mobile technology in Kenya. Mobile penetration in the country in 2018 was at 95.1 percent, and this number has been on the rise since the establishment of the industry.
Banking and non-banking institutions in the business of lending have been relying heavily on mobile service providers to reach potential customers and offer other banking services. Safaricom, the largest mobile telephony service provider by market share, introduced a mobile wallet Mpesa in 2007, which revolutionized the cash transfer and banking generally. The company has joined the lucrative bandwagon business of mobile lending via loan facility dubbed fuliza. The Mpesa overdraft facility became an instant success after it received loan applications of ksh 6.2 billion (USD 620 million) in one month after it was launched early 2019. Such an overwhelming loan request gesture points to a high credit appetite and potential market.
Kenya is a global leader in mobile financial services innovation. This leadership is majorly attributed to Mpesa and banking innovation tied to it. However, it is coming with loss jobs as some banks send home hundreds of employees every year after the digitization exercise. Over 90 percent of significant banks loan transactions are done via mobile according to the banking reports. Through this revolutionary money transfer service Mpesa platform by Safaricom limited, lending institutions, mostly the commercial banks, have been able to provide mobile services to both the urban and the rural population without opening physical branches.
Mobile phone users in Kenya has continued to rise as cheap Chinese products profoundly enter the market, targeting low-income earners in the country. A mobile phone is used to most of the basic things form communicating, banking, and now it is facilitating chronic betting. Of particular interest is the use of mobile to get digital credit and subsequent blacklisting of Kenyans from accessing future loans.
The Central Bank of Kenya has licensed there credit reference bureaus (CRB) to give reports of credit consumers to lenders. These entities are Transunion, Metropol, and Creditinfo. Data from Transunion Credit Reference Bureau indicates that half a million people are annually blacklisted with Credit Reference Bureaus (CRBs). This is a significant increase from about 150,000 only in 2015. There is a total of more than 2.5 million Kenyans who have found themselves listed as defaulters and most of these cases are emanating from digital lenders.
Blacklisted individuals cannot access any loan facility from any lender before they clear their names. Their names remain in bad books with low credit scores for seven years. Worse still, with high unemployment rates, these Kenyans cannot get specific jobs when background checks reveal they are defaulters. With as many as over 50 mobile app lenders in Kenya and new players entering the space, credit access is definitely on the rise. Some borrowers even apply and get loans from multiple lenders at the same time. Others may borrow one lender to repay the other, creating a vicious cycle where the customer pays interest every single day with no tangible investment of the initially borrowed cash.
Due to high unemployment rates witnessed, the majority of young people take mobile loans to ‘invest’ in betting activities and end up defaulting. There is a high risk of moral hazard among the borrowers due to information asymmetry. The use of the cash borrowed may not be used for the purpose indicated in the loan application hence a possible explanation of the defaults and blacklisting. It is even possible for people to acquire loans for leisure and social crimes such as drug abuse.
While banking regulator requires lenders to lend at no more than four percentage points above the central bank rate (CBR), mobile lenders do not adhere to these regulations. The average CBR has been 10 percent meaning the average loan cost in Kenya is 14 percent per annum. Mobile lenders are, however, offering loans at exploitative interest rates some charging as high as 12 percent per month translating to over 100 percent interest per annum.
There is a need to regulate the industry to protect vulnerable customers who may be desperately seeking cash without considering the implications of cost and non-repayment. New proposals by the central bank of Kenya to give credit defaulters a 30-day notice before blacklisting them is welcome. It will go along way in avoiding some cases where some defaulters are listed even without their knowledge. Some have even denied ever borrowing the loans they are accused of defaulting raising the red flag of fraudsters impersonating, borrowing and failing to repay the loans. Lenders should also be compelled to stop using customer’s credit scores as the only decision-making factor in denying them loans.
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