Revealed: Kenya’s most expensive mobile loans

Buying electricity on credit through a Safaricom associate is the most expensive digital mobile lending in ranking by the bankers lobby group, which also that reveals the exorbitant monthly interest charged on other "soft" loans given through mobile phones.

The Kenya Bankers Association (KBA) study shows that the mobile-based electricity loan, known as Okoa Stima, attracts a monthly interest of 43.4 percent, making it the most expensive, while Equity Bank’s Equitel was ranked the least costly at 2.1 per cent per month.

Other costly digital lenders are Pesa na Pesa, which charges interest similar to Okoa Stima, Kopa Chapa (38.8 per cent), Pesa Pata (30.4 per cent) and Kopa Cash (15.3 percent). This monthly interest rates are way above the average cost of regulated banking credit that KBA puts at 1.1 percent.

The appetite for digital loans has led tens of unregulated microlenders to invade Kenya’s credit market in response to a rise in demand for quick loans and the freeze in commercial bank lending to individuals and small business that followed the 2016 capping of interest rates.

From having had little or no access to credit, many Kenyans now find they can get loans in minutes through their cell phones.

Digital lenders

However, it is emerging that the proliferation of the digital lenders extending credit to the banked and unbanked alike has saddling borrowers with high interest rates as the banking regulator races to keep up.

“The risks associated with unsecured digital lending necessitate lenders to reduce their risk exposure by charging fees and interest rates that are relatively high as compared to conventional loan products,” KBA says in the study.

The current legal regime of the digital lenders, which is outside the direct remit of the central bank, allows providers, both banks and others, to escape the government cap on interest of four points above the state benchmark interest rate, which now stands at 9 percent and caps credit cost at Sh13 percent.

Market leader M-Shwari, Kenya’s first savings and loans product introduced by Safaricom and Commercial Bank of Africa in 2012, charges a “facilitation fee” of 7.5 percent on credit regardless of its duration.

On a loan with a month’s term, this equates to an annualised interest rate of 91 percent. But the Okoa Stima product when annualised pushes the cost of the electricity loan to an eye popping 521 percent.

Under Okoa Stima facility, electricity consumers get credit of between Sh100 and Sh2,000 to settle power bills, which is repaid at an upfront flat charge of 10 percent of the borrowed amount.
Defaulters are charged a penalty of 10 percent on the advance. The loan should be repaid within a week.

Direct ownership

Court documents show that the Okoa Stima service is offered by Safaricom through its intermediary, Lexco One Limited, which is the vendor of the electricity tokens bought from Kenya Power.

On Thursday, both Safaricom and Kenya Power distanced themselves from direct ownership of the product.

What makes the product costs is shorter loan repayment period with most preferred tenure being one week.

The shortest loan repayment period is one week.

Tala and Branch, other top players in the mobile digital lending market, offer interest rates of 12.7 percent and 7.6 percent respectively for loan borrowed over one month. The Tala loan equates to 153 percent over a year.

The KBA study hits at the heart of an argument on whether digital money is productive through helping distressed individuals access money or it is a debt trap.

“The high fees and the interest rate on digital credit can reduce household income over time, particularly if borrowers are taking loans for non-productive purposes and thus the returns on investments financed by digital loans may be insufficient to cover loan obligations when they fall due,” the study reads.

About 37 percent of the mobile loans are injected into business, according a to a survey FinAccess, between 32 percent and 37 percent goes to day-to-day needs in homes while 18 percent to 23 percent goes to education.

A share of between 13 percent and 17 percent is used for airtime purchase, seven percent for medical emergencies and 10 per cent for purchase of household goods.

Default rates

KBA say default rates of digital lenders is more than double that of conventional loans when the unpaid credit is measure against the loans advanced.

To avoid defaults, borrowers taps loans from a numbers firms to settle loans owed to rival digital lenders mounting their debt that ultimately lead to being negatively listed on Kenya’s Credit Reference Bureaus (CRBs).

In the last three years, 2.7 million people out of a population of around 45 million have been negatively listed with CRBS, according to a study by Microsave, a consultancy which advises lenders on sustainable financial services.

The majority of defaulters borrowed loans below Sh1,000.