The default rate on popular digital loans hit highs of up to 40 percent in the year that ended last December, a new report by the sector lobby shows, piling pressure on service providers.
In contrast, defaults on commercial bank loans stood at 16.4 percent as of the end of December 2024, having dipped from 16.5 percent and 16.7 percent in October and September, respectively.
The Digital Financial Services Association of Kenya (DFSAK) said they are now focusing on write-offs of unpaid principal loans this year to not only lower non-performing loans (NPLs) exposure but also derive tax benefits from bad debts allowable.
“This year, we want to focus on the bad debts allowable to enable us to reasonably write off unpaid principal for tax purposes. This conversation is well underway,” said DFSAK Chairman Kevin Mutiso in the industry’s annual report.
The association estimates that it has lent out Sh15 billion monthly to over eight million Kenyans, placing total annual disbursements at about Sh180 billion in 2024.
This implies that between Sh54 billion and Sh72 billion of the disbursements have been defaulted on.
Digital lenders have welcomed continued changes to the industry including the Business Laws (Amendment) Act 2024, which expanded the definition of a digital credit provider (DCP) to encompass non-deposit-taking credit providers.
The Central Bank of Kenya (CBK) brought digital lenders under its wing through the CBK (Amendment) Act, 2021 which requires entities to seek the apex bank’s licensing among other requirements.
The lobby says the industry has made a lot of progress with the passing of the act albeit what it terms ‘few unforeseen issues’ without giving additional details.
The CBK announced the licensing of 27 additional digital credit providers in October last year, bringing the total number of licensed DCPs to 85.
The apex bank has received at least 730 applications since March 2022.
“Other applicants are at different stages in the process, largely awaiting the submission of requisite documentation. We urge the remaining applicants to submit the pending documentation to enable completion of the review of their applications,” the CBK said.
The licensing of DCPs came amid public concerns about the predatory practices of unregulated players, including high costs, unethical debt collection practices, and the abuse of personal information.
The high rate of defaults on commercial bank and digital loans was amid high interest rates for most of 2024 as the CBK raised its benchmark rate to counter costs and exchange rate pressures.
The high rates squeezed out new borrowers among businesses and households while driving up default rates as customers struggled to keep up with payments with financial institutions adjusted interest rates upwards.
Commercial banks have made provisions to cover increased expected credit losses while incorporating other interventions including debt write-offs and restructures to curb the rise of the NPLs.
