Digital lending apps seen slowing down mobile banking revolution

The growing dominance of mobile banking may slow down amid low employment rates and high costs of living which have pushed more Kenyans to rely on digital lending apps to make ends meet, a new report shows.

The report by Egyptian investment bank, EFG Hermes, said the surge in digital lending apps has been witnessed over the years as more Kenyans sought to supplement their incomes following a spiral in the cost of living.

This is likely to threaten the mobile banking revolution.

While more mobile banking and digital loan apps were launched in 2016 and have helped increase household access to credit by almost three times to 81.7 percent in 2019 from the recent low (32.4 percent) in 2013, the report states that the explosion in credit accessibility has not been matched with job creation.

Subsequently, the cost of living and Kenyans’ inability to live by what they earn has seen the sprouting of digital lending apps, which continue to take advantage of the cost of living pressures.

According to the bank, the need for credit among Kenyans has increased relative to salaries, ranging from Sh9,130 ($90) to Sh90,899 ($896) per month, funding the appetite for credit and resulting in easy availability of quick loans.

The digital loan apps are estimated to be more than 100, according to Financial Sector Deepening report released in November 2019 by FSD Kenya and Central Bank of Kenya.

Top mobile banking platform M-Pesa continues to dominate digital payments, holding a share at the digital credit space with a number of banks and non-bank lenders.

Since December 2007 with launch of M-Pesa, mobile money subscribers in Kenya have increased from 1.3 million to 58.4 million in December 2019, meaning that an average Kenyan holds two mobile money accounts.

The value of transactions increased from Sh14.8 billion to Sh4.35 trillion over the period, representing about 44 percent of Kenya’s 2019 GDP estimated at Sh9.7 trillion.

The total balance in mobile money accounts at September 2019 was Sh604 billion, 17 percent of banking system deposits.

“While these numbers are dazzling, this note takes a look at the issues that will affect the sector going forward such as low formal employment, rising cost of living and the cost burden digital lenders are putting on households, mainly due to financial illiteracy,’’ EFG Hermes stated.

“Now is the time for the government to step in to improve financial literacy and regulate the circling vultures.”

Recently, increasing concerns have been raised on the cost of using some of the mobile banking and digital lending apps that EFG Hermes said would continue to impoverish the users as their disposable income decline and eventually slow down growth of these innovations.

According to the report, the bulk of the borrowings from these digital platforms are below Sh5,072 ($50), with many as low as Sh152 ($1.50).

The total cost of credit (TCC) for digital loans has been registered as very high, with the lowest TCC for a digital loan from an app being 352 percent on an annual basis.

Notably, the TCC of borrowing from the mobile bank lending apps range from 61-315 percent per year, the report said.

Digital loan apps such as Fuliza M-Pesa charge (three percent per day), PesaZone (32 percent per week), Kopa Cash by Airtel (17 percent in two weeks), Dolax (45 percent in three weeks), Craft (34 percent in one month), Branch and Tala (15 percent in a month), Upazi loans at 45 percent per month and Usawa and Utunzi charging a similar rate at 40 percent per month.

The pick-up in credit uptake also saw launch of mobile banking loans like M-Shwari by the Commercial Bank of Africa, KCB M-Pesa by KCB Bank and Eazzy Loan by Equity Bank charging nominal rates of eight percent, four percent and six percent per month respectively.

“Given that they are borrowing only Sh500 ($5) or less for one month, we question why they have to pay 15 percent per month at Branch or Tala for example,” the report stated.

And while these interest rates continue to burden households, the bank cites low formal employment as the basis for the troubles in the sector— spelling doom for a revolution that has been on the march, enabling payments, shopping, saving and access of other banking services through mobile phones.

Only 2.8 million, approximately 10 percent of the country’s adult population were formally employed in 2019.

The country has also created only 820,000 jobs over the past decade, while its population increased by 12 million over the same period, meaning every new job has had to take care of 14 people.

The survey by the Kenya National Bureau of Statistics (KNBS) show that less than 75 percent of formal workers make an average wage of Sh64,217 ($633).

“With a combination of poor new job creation, low salaries and high living costs, we question how far this digital revolution can grow system credit without causing a significant increase in retail Non Performing Loans.”

The bank has faulted digital lenders for not doing enough to educate their customers on the underlying products.

This follows similar reporting by the 2019 FinAccess Household Survey that pointed out that 100 percent of respondents said they took a mobile banking loan because it was “fast and easy to access”.

About 26 percent of the respondents that defaulted on their mobile bank loans did not understand the terms.

Last month, the competition watchdog announced through a gazette notice t would open investigations into the exorbitant monthly interest rates charged by digital mobile lenders who also push third parties to recover amounts owed from defaulters.

The Competition Authority of Kenya (CAK) said it will be investigating both regulated and unregulated digital lenders whose steep rates have plunged many borrowers into a debt trap.