CBK allows interest-free Lipa na M-Pesa loans plan


Safaricom is working on the return of a zero-interest credit service for the purchase of goods. FILE PHOTO | NMG

Photo credit: File | Nation Media Group

The Central Bank of Kenya (CBK) has finally cleared a Safaricom-backed zero-interest credit service for the purchase of goods for up to Sh100,000 after initially blocking the product that is expected to disrupt the mobile loans market.

The product dubbed Faraja will be launched later this month, ending nearly a year of waiting for regulatory clearance.

It is owned by EDOMx Ltd, a Kenya-based financial technology firm, with Safaricom and Equity Bank listed as its partners.

The CBK nod comes after EDOMx was cleared as a digital credit provider in March under regulations published last year that allow the central bank to regulate fintech to rein in predatory lending and violation of consumer privacy.

The product was set for launch on July 6 last year before the lapse of a September deadline that required the digital lenders to get a CBK permit for operation.

But a call from the CBK came in the afternoon before its launch, with clear directions that the product was under regulatory review and pending approval.

This forced EDOMx to call off the launch and Safaricom hurriedly pulled down from its websites the terms and conditions for Faraja.

Faraja will allow customers to buy goods and services from as low as Sh20 to a maximum of Sh100,000 with selected retailers like Naivas on credit and pay the same amount later, setting the stage for a disruption in a market where short-term loans come with fees and interest rates that top 400 percent when annualised.

EDOMx founder and CEO Julian Kyula told the Business Daily that over 90,000 customers enrolled and about 28,000 qualified and bought goods worth about Sh50 million during the pilot phase of Faraja.

“We have built something that I believe is exciting. Now that the licence is out, you will see us in the market before the end of June. We are beginning an evolution. We will keep signing up more stores, customers and merchants,” said Mr Kyula.

Equity will be providing the money to instantly settle the customers’ transactions through Safaricom’s Lipa na M-Pesa service, he said.

Equity Group chief executive James Mwangi is expected to announce the size of financial backing the lender will be providing for the product that EDOMx hopes to extend to other markets in Africa.

The business case for the product is that customers will buy the goods on credit and EDOMx pays the sellers instantly at a discounted price.

EDOMx will then recover the money from the customer within 30 days, earning the difference between the discounted product prices and market rate costs.

Defaulters will also shoulder costs linked to the hiring of debt collectors. Safaricom will suspend or shut down a defaulter’s Faraja account.

“If we get, say, seven or 10 percent discount (from merchants), why should I charge customers interest? We have seen good repayment during the pilot phase and we hope to see this trend continue,” said Mr Kyula.

Already dozens of outlets have signed up to be merchants, including Naivas Supermarket, Goodlife Pharmacy and Citi Walk, a shoe-selling store.

Unlike Safaricom’s overdraft service Fuliza, subscribers of Faraja cannot send money to other users because transfers from the Faraja account can only be used for goods payments through Lipa na M-Pesa.

Safaricom will earn its fees through Lipa na M-Pesa business till, charged at a maximum of 0.5 percent and not more than Sh200 per transaction. 

Transactions of Sh200 and below will be free.

The fees are paid either fully by the merchants or buyers or co-shared with consumers, which applies to settlements made by motorists at fuel stations.

Faraja is slightly similar to the Lipa Later service currently in the market, only that this time, shoppers will walk away with the goods from a list of selected merchants without being required to pay upfront in instalments.

It will work like a digital credit card where a user will have a credit limit of up to Sh100,000, depending on his or her credit score, to make purchases against and then repay at a later date.

Mr Kyula said the CBK froze the launch because it was in the middle of implementing the law for regulating digital lenders, which was passed in December 2021 and firms had up to September last year to comply.

“CBK told us it was going to be beneficial for us to apply for the digital credit licence first before proceeding with the two products. We evaluated and made the application,” he said.

Mr Kyula said EDOMx used this window to refine the product, improve the market segmentation, the scoring of customers and even signed an agreement with Visa as it prepares to test Faraja in the US.

In the US, the firm plans to partner with banks and Visa in launching a physical card which customers will be using to shop and the money deducted later.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.