More than 500 unregulated microlenders have invaded 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, the latest industry data shows.
The lenders, who are charging borrowers annualised interest of between 18 per cent and 200 per cent, have tapped into a market that has become more lucrative than mainstream banking where lending rates are capped by law at 13 per cent.
"It’s a huge industry whose growth is inspired by the likes of M-Shwari and M-Pesa lending,” Zeph Mbugua, the chairman of microlender, MyCredit, said of the runaway success of short-term credit services of telecoms operator Safaricom and its partner banks.
The list of seasoned players in this market includes Letshengo, Tala, Izwe and Branch, while new market entrants include digital lending platforms such as Nairobi Securities Exchange-listed firm Car & General and Mr Mbugua's MyCredit.
More recently, the runaway success of these firms has spawned a new category of players, who use online platforms to link lenders to the borrowers for a piece of the accruing interest income.
None of the players in this market is regulated by the Central Bank of Kenya (CBK) because they do not take deposits from the public, leaving them with the challenge of chasing defaulting borrowers, whose location is often unknown.
“You lend your money and hope you don’t lose it,” he said, adding that there is now a copycat situation where runaway success of the pioneer is attracting new players.
Most mobile-based microcredit services such as M-Shwari charge annualized interest rates of between 46 per cent and 90 per cent though the telco and its emerging rivals sometimes refer to the cost of money as “fees”.
Car & General (C&G), whose operations span rearing of chickens, real estate and selling motorcycles, has further expanded its business with the acquisition of a 26 per cent stake in Mombasa-based microlender Watu Credit Limited for Sh26.8 million.
C&G subsequently provided Watu with a Sh15 million loan at an interest rate of 18 per cent, indicating that the microlender is charging its clients even higher interest rates.
The microlenders mostly offer borrowers short-term loans, lasting days to one month, according to a survey by research firm Financial Sector Deepening (FSD). Others borrow to bet, pay school fees and settle other loans.
While larger loans are secured through collateral or guarantors, most of the smaller sums are disbursed through mobile-based platforms as the firms use a combination of data including historical repayments and credit reference bureau reports to determine a borrower’ risk profile.
Some 21 microfinance firms, which are members of the Association of Microfinance institutions (Amfi), reported a combined loan book of Sh20.4 billion last year, indicating that the entire industry could be much larger.
Borrowers, most of whom are unable to access loans from mainstream banks, are attracted to the microlenders who demand relatively less documentation and are quick to disburse the cash.
The FSD study however found that besides the high interest rates, the micro-lending space is plagued by lack of transparency. Borrowers, for instance, reported that they were charged fees they did not expect while others did not fully understand the costs or fees associated with loan.
The high interest rates are partly seen as a means of mitigating the impact of defaults since the firms lend to some of the riskiest individuals and businesses. The top reasons cited for default include poor business performance, job loss, lack of planning and lack of surplus income to repay the loans.
In some instances, lenders unexpectedly withdrew money from their customers’ accounts. While microlenders in Kenya are not regulated, other markets including China have introduced measures to address potential exploitation of borrowers such as over-lending, repeat borrowing, improper collection, abnormally high interest rates and privacy violations.
China last year stopped microlenders in that market from issuing loans to borrowers with no source of income, with the firms also banned from misleading consumers into over-borrowing.
The Asian country also ordered the companies to keep all their interest and charges within the maximum allowed annualized rate of 36 per cent.