It was past midday on Saturday. I walked along Gakere Road in Nyeri town to Whispers Park.
The park is now converted into an open air market, thanks to the on-going refurbishment of the main market a few meters away.
As I stood at the edge of the park I heard loud noises of people talking in different languages mixed with the blare of matatu horns and the hum of traffic I noticed a trader silently seated in his stall.
I walked towards the stall and when he saw me he smiled and beckoned me to buy some fresh fruit. His broad smile attracted me and in matter of minutes the buyer-seller relationship had blossomed.
I noticed that he was busy transacting some business on his mobile phone. Text messages kept coming in as he replied.
Then out of the blue he shouted: “I’ve received the money! My M-Shwari loan has been approved, now I can pay for the morning deliveries.”
His name, he said, is Cyrus Gichuki, a groceries trader at Whispers Park. His story is similar to what many ordinary Kenyans go through every day with the advent of digital credit. To him, getting a loan through a mobile phone feels different from getting one through more traditional avenues.
Mr Gichuki said he has been using the M-Shwari product since its inception, adding that he also uses KCB’s M-Pesa mobile loan service to finance his business.
“It is easy, convenient, no collateral required and you receive the money instantly,” he said.
“If one is able to repay then one can continue borrowing more and more.”
There are more than 20 digital credit offerings in the country and new services are being launched continually, attracting thousands of Kenyans.
But the World Bank’s research affiliate, the Consultative Group to Assist the Poor (CGAP), warns that mobile based lending is expensive and hurts the needy.
“These offerings raise a number of potential consumer protection concerns, and possible customer risks," says CGAP.
The report further cites that these mobile lending platforms charge “high interest rates”.
Mobile lending apps are fast gaining currency in Kenya, with about a dozen major players in the market — including commercial banks — launching products such as M-Shwari, M-Co-op Cash, KCB M-Pesa and Equitel.
Others are the Facebook-linked Branch, Tala, formerly (Mkopo Rahisi), and Saida.
Most of the loans offered by these lenders have a repayments period of 30 days. Any outstanding balance is rolled over after the one month and the nominal interest rate is applied.
According to the CGAP findings, M-Shwari is the most well-known among mobile lenders providing both a savings account and loans from Commercial Bank of Africa by way of the M-Pesa platform.
Research and evidence from behavioural economics show that borrowing through a mobile phone feels different than borrowing through more traditional, in-person avenues, and is more tempting, the report says.
In addition, some lenders have turned to “push” loans – blasting unsolicited messages to potential borrowers saying things like “you have qualified for xx shillings! To accept your loan call or SMS 07123456.”
“Unclear disclosure of interest rates, fees and other terms means customers often may not understand what they are agreeing to,” researchers said.
CGAP is a global partnership of 34 organisations housed at the World Bank. They seek to advance financial inclusion.
CGAP develops innovative solutions through research and active engagement with financial service providers, policy makers and funders.
Many mobile phone users appreciate the convenience and speed of accessing a loan through their phone as they consider digital credit a safer option than informal money lenders.
The service offers relatively small value and short-term loans. Also, most lenders use customers’ mobile phone-based data, such as calls and SMS records, mobile money transaction history and social media data to determine a credit score and client’s loan amount.
However, issues of whether customers understands terms and conditions for the loans have risen.
Mr Gichuki, for instance, did not carefully read and understand the terms and conditions before registering.
“I learnt about the loans through the media and friends, I never bothered to read that long literature about terms and conditions,” he said.
Bundled with other products
There are concerns of unclear disclosure of interest rates, fees and other terms meaning that a customer may not understand what they are agreeing to.
“Some of the offerings available on basic phones provide terms only through a weblink and therefore are inaccessible without an Internet connection,” CGAP states.
CGAP also indicates that some loans are bundled with other products and their associated fees, which may not be disclosed to customers.
One practice in the market is bundling a loan with life insurance, which covers the balance of the loan upon the death of a borrower.
While borrowers generally consent to the use of their data for calculating loans, it is unlikely they will read the full terms and conditions and understand exactly what data will be used by the lender.
Though digital credit has the potential to benefit consumers, there are risks which must be identified and mitigated.