A recent report by United Nations Children's Fund (UNICEF) shows that around the world, more than 1.2 billion people live in poverty, in part due to structural and governance problems but mostly because they don’t get opportunities to lift themselves out of poverty. For these people, an opportunity to raise as little as Sh2,500 can present an opportunity to start a small business that can go a long way to fighting poverty.
Digital lending is now increasingly helping meet these financial needs. The story of Kiva, is arguably the most remarkable tale of alternative and modern sources of credit where entrepreneurs engage in peer-to-peer lending to support small businesses for people in diverse regions in the world.
Developing countries have seized on mobile technology to fill gaps in financing and achieve financial deepening. Fintech companies make the process easier by implementing swift and reliable ways to disburse loans instantly aided by extensive algorithms that easily scan the financial status for borrowers.
The rapid proliferation of digital lending technologies hasn’t come without a few problems, as expected with a new industry from the perspective of industry cycle. At the onset of the industry in countries like Kenya, many people were excited by the prospect of getting funds in their accounts without paperwork, an excitement that drove some people to take loans without premeditation and understanding of the risk premium.
Either by design or lack of foresight, some lenders struggled to deal with the unprecedented loan defaulting levels, exposing the industry to potential regulatory tussles. However, with the formation of Digital Lenders Association of Kenya (DLAK) and the development of a code of conduct to guide the activities of lenders, the problem is slowly getting under control.
James Omori, who sells mobile phone accessories in Nairobi’s Tom Mboya street, often uses mobile loans to furnish his stock. His biggest fear so far has been not being able to repay the loans in time and being listed with the Credit Reference Bureau (CRB). This, he says may limit his opportunities. Yet, there are slow business days when he is not able to sell enough stock to get profit to repay the loans.
“It used to be a tough balancing act, but lately, I haven’t experienced any harassment, since I choose reliable lenders who do not resort to unfair practices. Most lenders have now extended the repayment period to two months, and those calling rather try to help you to sort things out than to intimidate you” he says.
Faith Kimani, a hairdresser in Nairobi’s Imara Daima estate borrowed money from one of the mobile lenders to pay for the school fees of his daughter. January is usually a ‘dry’ month as most people forego the services of hairdressers as the biting New Year bills eat into the cash meant for ‘luxury’.
“January and February are usually the worst months, so, I took a loan to transfer my daughter to a nearby school and was not able to pay by end of February,” she says.
Whereas she feared the worst, she was relieved, when she was called to be informed of the option of an extension before the due date.
“They offered me an option of repaying in instalments, which was a relief as business starts to get better in March,” says Ms Kimani.
This shows that mobile lenders, especially those listed with DLAK and following its code of conduct — a set of ethical and responsible lending practices — are taking a different, consumer-oriented approach in their debt collection.
The previous outcry of breach of privacy seems to have waned as well as, as debt collectors are using more professional and friendly terms.
Florence Karoki, the marketing director WatchPremier Limited, a debt collecting agency, says, that they have never used threatening language or unethical means when collecting debts for their clients, most of them mobile lenders.
“We have trained our staff to be polite and professional, they try to be convincing and reason with defaulters to remind them that timely repayment will improve their credit scoring,” she says.
Nearly 70 percent of the time, they are successful in convincing people to repay their debts and improve their score.
Mr Duncun Motanya, the chief executive of Zenka Finance, a leading mobile lender says a time for ethical debt collection practices is long overdue, and collective efforts should be taken to implement “customer-centric and, above all, ethical standards in the industry”.
Professionalism is key, he says, noting that Zenka has assembled a team of professionals with many years of banking industry, and who are familiar with debt collection standards.
The company is one of the mobile lenders that have adjusted procedures to help clients dealing with repayment difficulties.
“To do so, we contact them before their due date to inform them that in case they need a helping hand, we are here to help them and offer tailored repayment plans, depending on their financial situation,’ he says.
“Regardless of the above mentioned repayment plans, our customers may also adjust their repayment date by using our extension options.”
This customer-centric approach in debt collection helps in customer satisfaction and building loyalty.
For others such as Raphael Kimeu, the founder of Stawika Capital, the best way to recover debt is to understand the borrower.
"When it comes to lending money the borrower is very important because it's through him or her that business grow. As lenders we need first to understand and listen to our borrower and know why they are taking long to settle the loan. Issuing threats never works," said Mr Kimeu.