LETTERS: Why digital credit revolution should slow down

According to findings of a survey conducted by FSD-Kenya in partnership with the Central Bank of Kenya (CBK), the Kenya National Bureau of Statistics, and the Consultative Group to Assist the Poor last year; digital credit has become a leading source of credit.

The platform is mostly used to finance working capital and day-to-day consumption needs. Six years after Kenya launched its first digital credit solution, the market has expanded rapidly.

According to the survey, 27 per cent of Kenyan adults have taken at least one digital loan. Over six million people borrowed money between January and March 2018, suggesting a large number of loan seekers.

In recent years those agitating for financial inclusion have supported digital credit because they see its potential to help the unbanked or underbanked meet their short-term household or business liquidity needs.

However, the rapid growth in digital credit has raised concern over the risk of excessive borrowing and over-indebtedness among lower-income households.

Digital loans are easy to obtain, short-term, carry a high-interest rate and are available from numerous bank and non-bank institutions. The survey found that 14 per cent of digital borrowers were repaying multiple loans from more than one provider at the time.

This means that over 800,000 Kenyans were juggling multiple digital loans last year. Although having multiple loans is not necessarily an indicator of debt distress, it is important to monitor the market going forward and detect possible risks.

While commercial banks were the first to offer digital loans in partnership with mobile network operators, a number of start-ups offering the loans through apps have emerged.

Tala and Branch, for example, use alternative data such as call logs, GPS, social network data and contact lists obtained with the permission of the user to assess credit risk and tailor loan offers. Tala and Branch have more than a million Kenyan clients. Data on the number and performance of app-based loan accounts is not reported publicly since financial service providers that offer credit but do not take deposits are unlicensed and not regulated by the CBK.

This also means that app-based lenders are not subject to the law that limits loan interest rates to four percentage points above the central bank reference rate.

Reports indicate that to date Tala has disbursed over 5.6 million loans worth Sh30 billion to over one million customers since its launch in March 2014, known then as M-Kopo Rahisi. By mid-2017 Branch had disbursed 1.5 million loans worth Sh3.63 billion to 350,000 customers since its launch in April 2015

Even though digital loans are low value, they may represent a significant share of a poor customer’s income and repayment struggles may harm consumers.

Overall, the use of high-cost, short-term credit primarily for consumption coupled with high rates of late repayment and defaults suggest that funders should take a more cautious approach to digital credit markets — and perhaps stop providing grants or concessional funding terms for this segment of products.

Although digital credit has had an interesting impact on financial inclusion in Kenya, unregulated market players pose a risk.

We need an oversight body to monitor this market as more players are poised to enter the fray. Telcos, while having a massive customer base in Kenya, need to learn from microfinance institutions that have been at this game for a long time.

It is not difficult to lend out money, however it is very difficult to collect repayments.

Getting people into debt is not helping anyone.

Let us focus on teaching our people how to save money and choosing more convenient, safer and cheaper credit.

Dominic Nzuki is a management consultant at Altima Africa LTD.