Credit advanced by shopkeepers in the form of goods and services has become a key lifeline for consumers amid a slowdown in loans from formal channels such as banks and digital lenders due to high interest rates and defaults.
Findings from the ICEA Lion Asset Management (ILAM) Consumer Spending Index shows a growth in the prominence of local shop arrangements as a source of credit in the three months to September compared to the previous quarter.
Thirty percent of consumers who bought goods or services on credit used local shop arrangements, compared with 22 percent in the quarter to June.
The ILAM index is designed to monitor consumer spending as a reliable indicator of the state of the economy, with the third quarter survey based on interviews with 1,190 individuals and 222 retail businesses.
The use of formal credit channels slumped in the quarter to September, with the deployment of credit cards, mobile loans, buy now pay later (lipa later) and bank overdrafts all dipping.
The use of mobile loans, for instance, fell to 15 percent from 18 percent previously, while the use of the pay later financing options more than halved to five percent from 11 percent previously.
Consumers’ reliance on credit for purchases marked an overall slump to 11 percent from 13 percent previously, as the bulk of Kenyans at 89 percent opted to wait until they had cash on hand before spending.
The evolution of credit use comes amid a soft economy characterised by higher costs and flat incomes, with the share of private sector credit growth slumping to just 1.3 percent in August, a low last seen during the capping of interest rates.
Overall consumer spending was higher in the third quarter, largely due to increased prices of goods and services, which further wiped-out savings in the economy as households dug into the safety net.
“There is increased spending compared to the third quarter of 2023 largely attributed to an increase in the price of goods and services. There was a very low allocation to savings and investments with overall spending increasing at a higher rate than income,” the ILAM Consumer Spending Index notes.
The prominence of credit from shopkeepers points to a reversal in the waning usage of informal channels as access to formal credit takes a beating from the prevailing high interest rates and elevated defaults.
Loans by shopkeepers in the form of cash and goods or services is regarded as an informal channel along with groups and chamas, family and friends, and employers and shylocks.
The usage of the informal channels was on the decline from 2021 with the rise of digital platforms, including mobile loans, overdrafts and the emergence of the buy now-pay later model.
The channels are considered informal as they are not registered or regulated by any authority or legal entity.
“The increase in informal usage in 2021, may highlight the important role of the informal providers in supporting households during the Covid-19 pandemic period. The decline in the use of secret hiding places and shopkeepers, however, may reflect the increasing role of digital platforms in supporting households,” notes the 2021 FinAccess Household Survey.
