Banking & Crypto Give Kenya’s Embattled Digital Lenders A New Playbook

Digital lenders always seem to be caught in some kind of crosshairs in Kenya.

No thanks to a sustained period of negative public perception, consequent prohibitory regulation, and the post-pandemic shock, it’s a tough time for the teeming crop of digital lenders that found a stomping ground in Kenya over the last few years.

To survive these difficulties, some of Kenya’s biggest digital lenders are putting themselves through an extraordinary metamorphosis. Over the last week, lenders like Branch and Tala have announced moves that suggest they are not only spotting a new look but are moving into another area of fintech real estate.

After the Kenyan leadership put a cap on interest on bank loans in 2016, banks basically stopped offering loans to millions of low-income customers, as well as small and medium-sized businesses.

That was the cue for digital lenders/micro-lending platforms – brandishing quick loans granted within minutes from a mobile phone by means of an app or USSD channel – to step in. There are now over 120 digital lending platforms in Kenya, according to some estimates.

In light of the heightened appetite for small, quick loans, these digital lenders capitalised on rising demand. But this resulted in the proliferation of predatory lending.

In Kenya, there has been a rise in unwholesome lending practices in recent times, ranging from absurd interest rates and abuse of private user information to debt-shaming loan defaulters and hiding disturbing terms and conditions on certain loans in the fine print.

Hence, they (digital lenders) have found themselves on the wrong side of Kenya’s banking regulator time and again. In fact, at this time, a legislative process seeking to effectively put digital lenders under the thumb of the Central Bank of Kenya (CBK) is in progress.

Add all that to the economic shocks that came with the pandemic-stricken year that was 2020 and the order that saw the CBK stop digital lenders from forwarding loan defaulters’ names to credit reporting agencies, and it appears the lending business has not only lost some of its sheen in Kenya but is in for a sustained period of woe.

However, some of the biggest names in the local lending space seem to have read the room and are now looking to wean themselves off of lending while branching into other fintech segments.

One such company is the U.S.-based fintech, Branch International, which is best known in these parts as a lender in markets such as Kenya, Nigeria, and Tanzania. Indeed, Branch claims it has disbursed the better part of USD 330.4 Mn in loans to more than 3  million customers across those markets.

But it appears the fintech now has eyes on other things besides lending. Last Friday, it came to light that Branch has acquired a distressed Kenyan microfinance lender, Century Microfinance Bank, in a move that gives the fintech firm a stronger presence in Kenya’s financial sector.

According to regulatory filings published by the Competition Authority of Kenya (CAK), Branch has acquired 84.89 percent of the issued share capital in the microfinance bank and the deal has been approved by the market regulator.

Licensed by the CBK, Century Microfinance Bank has been providing a full range of financial services such as savings account and credit facilities since 2012 and it claims over 26,000 clients. In 2019, Century reportedly made USD 774 Mn in total income and much of that came from interest on loans, fees, and commissions. But the bank has, in fact, been stuck in a rough patch for a while now with assets taking a significant hit year-on-year. 

While it has been widely reported that the deal will give Century Microfinance Bank a much-needed lifeline – coming in the wake of depressed earnings due to disruption from digital lenders and recently, the Covid-19 pandemic – it also comes with important benefits for Branch at this time.

Currently, Branch seems to be disengaging from the identity that solely characterises it as a lender and not much else. The fintech is morphing into something of a neobank that offers everything from money transfers and bill payments to instant loans and investments.

The acquisition of the Kenyan microfinance bank aligns with this new path. Also, maybe there’s a point in becoming a regulated bank and taking advantage of cheap deposits instead of lending their own money at much greater risk and still having to deal with stiff regulations.

Similarly, another company that became popular (or unpopular) as a digital lender appears to also be shedding off the “just a loans company” identity. Santa Monica-based Tala, which has reportedly delivered more than USD 2 Bn in credit to more than 6 million customers across Mexico, the Philippines, Kenya, and India, has seen its lending business wane in Africa.

But Tala appears to be re-inventing itself with a new partnership. On May 5, 2021, word got out that Visa is working with Tala to help underbanked populations participate in the cryptocurrency economy.

As it was reported, “Tala’s partnership with the card scheme will enable the firm to offer payment cards linked to its digital wallet, giving customers a way to spend against their USDC balance at any of the 70 million merchants worldwide that accept Visa.” It should be recalled that two months ago Visa became the first major payments network to settle transactions in USD Coin (USDC), a stablecoin backed by the US dollar.

“The crypto integration effort, conducted in partnership with Circle and the Stellar Development Foundation, is intended to enable secure and stable storage of money, fast and affordable cross-border money transfers, and easy exchange into other digital assets or local fiat,” reads a portion of the announcement.

In simpler terms, Tala is working with Visa for crypto-to-fiat payment cards and it’s quite the payments-themed switch for a company that was wholly associated with digital loans not that long ago.

On the whole, these two high-profile examples might just be the beginning of an inevitable evolution that would sweep through the local lending space given the current factors that make micro-lending scorned and consequently unsustainable in some African markets.

Featured Image Courtesy: The Atlantic