Digital Lending; The Bane of Financial Inclusion in Kenya

Kenya has been described as one of the most technologically advanced countries in Africa and the growth of the fintech industry only serves to prove this. Silicon Valley tech start-ups are carving a niche for themselves in Kenya with more and more digital lending offerings, even as banks and telecommunications providers try to keep up with this rapidly growing sector. These have been seen as a leap towards financial inclusion, targeting members of the society who have been locked out or underserved by the traditional formal lending platforms such as banks.

Today, overall access to financial services is over 83%, a significant growth from 67% in 2016, with over 80% of the adult population with access to a mobile money account. Since the launch of M-Shwari in 2012, the digital lending landscape has seen a proliferation of offerings with hundreds of mobile borrowing apps being channelled to the Kenyan market. Two Silicon Valley lenders, Tala and Branch, saw downloads of over 1 million each, demonstrating the ease of access to these services, and the depth of their market penetration. As these and more lenders move to have a greater foothold on the market, clarity as to the size and composition of the supply of these offerings remains foggy, a growing reason for disquiet.

Financial inclusion means that individuals and businesses are able to access useful financial products to meet their personal and entrepreneurial needs, where these services are offered in a sustainable and affordable way. Historically, banks have held the mantle in providing financial services and the numerous hurdles placed in the way of accessing credit services have relegated many to the fringes of financial inclusion. The rapid uptake and ravenous consumption of digital lending services is testament to a large chasm that digital lenders have swooped in to fill.

Over 6 million Kenyans have borrowed a digital loan at one time or another. These apps, and presumably with noble intentions, target those who have been ignored by banks for want of creditworthiness, in a bid to lift them out of poverty. However, these platforms only seem to add salt to injury, given the non-regulation of the industry. The borrowers, typically low-income earners, fall prey to lofty, uncapped, interest rates, further entrenching them in poverty. Usually higher than that offered by banks, in some cases it reaches 180% annualised, reducing lenders to cash cows for these platforms. 1 in 10 adults has defaulted on digital loans, many of these being accessed by business owners and those seeking emergency funds.

Users are also subjected to unscrupulous tactics by the lenders in their efforts to have the loans paid back. Digital lending platforms request for various forms of data and app permissions as users sign up, to rate their creditworthiness and find avenues to recover loans. Far outnumbering that requested by banks, aside from the client details and particulars, the lenders have access to messages, phone contacts and call logs, GPS location, and access to the photo gallery. Lenders have been known to publicly shame those who fail to pay back loans, reach out to other contacts to persuade the borrower to pay the loan and even use these details to further threaten borrowers.

More disconcerting, however, are the negative listings to the Credit Reference Bureau for those who fail to pay back these loans. Loan defaulters are reported to the CRBs and are consequently unable to access credit from other lenders and banks. Most resort to borrowing from other apps or informal lenders such as loan sharks to meet these obligations and be able to borrow in future. These negative listings had peaked to over 2.7 million last year, being made by a staggering 2,332 digital mobile and microfinanciers. This has raised red flags for the Central Bank of Kenya which recently disbarred over 300 platforms from making such listings. The limit for a negative listing upon default was also capped at Ksh 1,000, where it was seen that many of these defaulters had a loan of less than Ksh 1,000, in contrast to the average of Ksh 3,500 accessed by borrowers.

With the economy being a picture of job losses, salary cuts and income slowing down to a trickle, many have been forced to turn to the worrying trend of digital borrowing. Fuliza loans, M-Pesa’s most recent credit offering that works as an overdraft, has grown from Ksh 81 billion to Ksh 176 billion in the 6 months following the Corona-induced containment and austerity measures, indicating a daily borrowing of Ksh 976 million. As digital lenders continue to thrive in this unregulated industry, it is imperative that their power is reigned in. The Financial Conducts Management Bill was proposed in 2018 but is still pending in Parliament. However, until this Bill is passed or a principle-based regulatory framework established, millions run the risk of being locked out of the financial system and risk further entrenchment into poverty.