Alarm as easy digital loans yoke more Kenyans to debt

Banks and fintechs give loans to millions of Kenyans via mobile phones. FILE PHOTO |NMG

What you need to know:

  • Borrowers locked in debt or losses for lack of financial literacy
  • There is also lack of consumer protection which leaves many vulnerable
  • Many Kenyans have no knowledge on cost of loans they take up, CBK survey

If truly what comes easy won’t last, as the old saying goes, then most Kenyans may be having second thoughts on the country’s rapidly rising access to financial services driven by mobile technology.

Although the proportion of Kenya’s population with access to formal financial services hit 83 percent in 2018, according to a survey part-conducted by the Central Bank of Kenya (CBK) and the National Treasury, many borrowers are fast reporting the downsides of quick and easily accessible money.

“Could this financial inclusion be driven by some kind of laxity that doesn’t quite check on regulations or could we be talking of unhealthy financial inclusion that cannot drive growth?” Joy Kiiru, a lecturer at the University of Nairobi’s School of Economics posed during the launch of the 2019 Financial Access (FinAccess) Household survey report.

Borrowers are finding themselves locked in debt or losses due to lack of financial literacy on key aspects such as cost of borrowing.

There is also lack of consumer protection which leaves many vulnerable to fraud, unfair product pricing among other malpractices.

“The survey results showed that the proportion of respondents relying on their own knowledge was 39.6 percent compared to 34.7 percent who relied on family and friends for financial advice” the FinAccess survey report said.


Reliance on self-knowledge for financial decisions is highest among residents of rural areas in Kenya (42.2 percent) compared to 35.8 percent in urban regions.

Many Kenyans have no knowledge on the cost of the loan facilities they took up despite interest rates being an important factor in deciding the affordability of debt.

“The survey tested the ability of respondents to accurately compute 10 percent interest on a Sh10,000 loan. The survey findings indicate that 42.7 percent of the population answered the interest costs correctly, while 39 percent gave a wrong answer,” the report noted.

More men (48.8 percent) were found to be knowledgeable on cost of borrowing compared to women at 36.9 percent.

Further, respondents were tested for knowledge of transaction costs and the survey found that 58.1 percent of the respondents were able to correctly read a typical message showing transactional costs on a mobile phone.

“More males (63.7 percent) than females (52.2 percent) read and interpreted transactions costs correctly in an SMS,” the report said.

This high level of financial illiteracy is already taking a toll on most Kenyans who are reporting worsening financial status, with many having soaked in excess debt from multiple sources.

The FinAccess survey showed that 51 percent of Kenyans feel they are in a worse financial position, compared to 34.3 percent who had similar view in 2016.

It further shows that over 50 percent of borrowers sold assets, borrowed or cut back on expenses to repay loans while a quarter were using over half of their monthly income to service loans.

Debt distress

“Eighteen percent had defaulted and over two thirds of borrowers experienced at least two of these conditions, showing signs of debt distress,” notes the survey.

When processing loan requests, the Employment Act directs that overall deductions from the employee’s salary must not be more than two-thirds their pay.

However, in the era of enhanced financial access, workers have other places to borrow from such as unregulated digital loans, goods on credit from shopkeeper, chama loan and shylock loans.

These are not in control of the employer. So while an employer may deny an employee a loan or salary advance on the strength that it will cause deductions to go below one-third of gross salary, workers may opt for other sources.

The easy access mobile bank loans and digital app loans accounts for some of the biggest proportions of loan defaults in the country.

“Mobile phone banking and digital apps have introduced new emerging risk,” the FinAccess report said.

The survey also unearthed flaws in consumer protection which left users of financial facilities exposed to malpractices such as fraud.

A key gap in consumer protection lies with mobile money which has over the years reported the highest incidence of money loss.

“The main reason for loss of money through mobile money is attributed to fraudulent activities and sending money to the wrong mobile phone number,” the survey report said.

Hoax SMS

The bulk of cash loss through mobile money is triggered through hoax SMS (40.3 percent), hoax phone call (33.6 percent) and money sent to the wrong number at 22.4 percent.

Director of economic pillar at Kenya Vision 2030, Veronica Okoth, says more consumer protection information and advice on using the multiple financial products is now more critical.

“We should advance this discussion in terms of the impact in the villages and talk about the loss of assets, more young people getting listed on credit reference bureaus, families breaking up and suicide rates increasing,” she said.

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