Necessary Evil Or Debt Trap? Digital Loans; The New Funding Scheme That Has Left Many Debt-Ridden

Kenya Leading The Pack

The advent of mobile loan apps has transformed the financial landscape in East Africa. A report by the Central Bank has confirmed that there’s been a significant decline in the customer base of micro-finance institutions in Kenya. Most people have shifted from traditional loan lenders and are now opting for digital loans.

Commercial banks have been forced to join the digital lending movement with banks like KCB, Equity Bank, and Cooperative, among others venturing into the digital lending space. Kenya has a total of 49 digital lending apps lending between USD 0.5 and USD 495 with the popular ones being M-Shwari, Branch, Tala, Okash, and Mkopo Rahisi, amongst others.

The market has gained quick traction, and according to the Financial Deepening Sector (FSD) report, M-Shwari has disbursed USD 2.3 Bn loans since inception in 2012, while KCB, the largest lender by asset size in Kenya, now provides 90 percent of its loans through its KCB M-Pesa platform.

Equity Bank had reportedly disbursed USD 565 K via the Equitel platform as of March of last year.

There is a massive uptake of these digital loans even though they carry a high interest rate. This has been attributed to the fact that they are very easy to obtain. When compared to traditional formal loans, fees charged on digital loans generally are expensive as they range between six percent and ten percent monthly for a one-month loan. On the other hand, commercial banks charge an average of 30 percent annually.

As per the FinAccess Digital Credit Tracker Survey 2017, a notable 35 percent mobile device users in Kenya borrow loans online. This means that there are about 6.1 million unique digital borrowers. The interesting bit is that almost three-quarters of these borrowers have at least secondary school-level education compared to less than half (41 percent) of adults in general.

The latest launched in Kenya is Safaricom’s Fuliza. Owing to the telco’s vast reach and robust marketing power, the product gained wide popularity within a short period. A week after its launch, it had attracted 1 million people and disbursed USD 10 Mn in loans in just 8 days. The Telecom company strategically launched the product in January, a time when most Kenyans are out of funds after exhausting their money during the December festivities.

Free For All Or Regulated?

But as digitisation advances apace, concerns have been raised on the need for governments to regulate digital credits. While these small digital loans come in handy for many, there are significant downsides that need to be addressed. These loans are saddling borrowers with high-interest rates: the typical month-long digital loan, with a fixed interest rate, is simply inappropriate for borrowers.

There are high chances that the effective interest rates for many are even higher than those published by many of the lenders. This is because many borrowers repay the loan before the one-month duration elapses.

Being that these digital loans are offered through mobile phones, often with little or no security required it needs to be thoroughly scrutinised and regulated. Central Bank of Kenya (CBK) had earlier warned that digital credit, if not properly regulated, can easily heighten poverty levels and lead borrowers into debt traps.

A survey carried out confirmed that increased accessibility of digital loan platforms has not improved lives. In fact, the results indicate that most Kenyans have become prisoners of these loans. Safaricom’s Fuliza is like the epitome of ‘imprisonment’ as users who have a debt to pay, adopt other means of receiving money to avoid having the money taken to the Fuliza wallet.

The digital lending space has also been accused of over lending and attracting proceeds of crime. This has heightened calls for regulation to shield borrowers from over-indebtedness, terrorism financing or a credit bubble.

In a move aimed at curbing this challenge, the finance ministry in May last year published a draft bill on financial regulation that covers digital lenders for the first time but somehow it has become challenging to crack the whip as these platforms are so many. But this should not only be left to the government, there is also a need for these digital lending apps to go beyond business and show a sense of responsibility. This especially applies to first-time borrowers who need to understand the terms of these loans, as well as their benefits and consequences.

The regulation is crucial more so because a third of mobile-phone owners have borrowed from multiple digital lenders, with one-seventh of digital borrowers balancing more than one digital loan platform simultaneously. There is a need for transparency of digital credit pricing to help borrowers understand the terms so that they reach an informed decision.

The digital loan business has attracted foreign investors like Branch and Tala whose services are easily accessible even by USSD. It is therefore of key importance to have the industry monitored and regulated to ensure foreign entrants do not explore customers with their terms.

What’s The Scene In Tanzania?

While Kenyans use digital credit as a substitute to non-digital loans, Tanzanians use digital credit primarily to complement existing credit sources.

Tanzanian mobile phone owners that have borrowed from any digital lender stands at 21 percent. A report from FSD reveals that Tanzanians are more likely to default on their digital loans than Kenyans as digital credit continues to grow. Ten percent of mobile phone owners in Tanzania have borrowed from M-Pawa while eight percent have borrowed from Timiza. Other lenders such as Nivushe hold a six percent market share while both Branch and Tala control a market share of 0.1 percent.

The Most popular digital lenders in Tanzania are M-Pawa, Nivushe and Timiza. Vodacom Tanzania and the Commercial Bank of Africa (CBA) launched M-Pawa, in June of 2014. As of May 2016, M-Pawa had recorded 4.8 million accounts, with USD 17.9 Mn disbursed to entrepreneurs, most of whom were women or youths. In March 2016, Tigo launched Nivushe.

Airtel Tanzania, in partnership with credit scoring provider, Jumo, launched Timiza Wakala Loans in 2015 – a service that provides 20,000 Airtel Money agents with loans from approximately USD 23 to USD 229.13. The Airtel Money Timiza service has reportedly provided unsecured loans to agents and customers of totaling up to USD 155 Mn.

Ugandan Scenario

In 2016, Telecoms company MTN Uganda and the Commercial Bank of Africa launched a credit facility Mokash. One year later, over 2.5 million Ugandans had registered for MoKash, most of whom get small loans of around USD 2.7 and repay after one month. MTN Uganda and the Commercial Bank of Africa’s micro-loan product MTN MoKash, has lent out more than USD 614 K while subscribers crossed the one-million threshold just 70 days after launch.

Airtel Uganda followed suit by launching Wewole which also picked up. While MTN levied a flat rate of 9 percent interest for its loans, Airtel levied interest based on the repayment period, a move which successfully attracted borrowers.

Unlike the scenario in Kenya where so many youths borrow loans online, uptake of digital loans by Ugandan youths have recorded low numbers. The few who borrow take between USD 2.70 and USD 9.30. Most of them are unable to pay on time hence suffering the consequences.

“Most people have two sim cards, and when they borrow from one provider, they use the other line for mobile money services to avoid deductions,” one Brenda Williams disclosed to WeeTracker. She revealed that most youths have shied away from digital borrowing.

Why Borrow?

The survey, conducted in partnership with Financial Sector Deepening (FSD) in Kenya and Tanzania, finds that household and business needs are the primary reasons why most people borrow. More than a third of digital borrowers report primarily taking out loans for ordinary household needs (35 percent) or business purposes (37 percent).

The report indicated that men are more likely to use digital loans to meet day-to-day household needs, paying bills and airtime while women are more likely to borrow for school fees. The unique borrowers were 55 percent male and 45 percent female.

But There Are No Free Lunches!

Keen social media users noticed many complaints of being wrongfully blacklisted with a number of them even going ahead to tag these digital lending companies in their complaints, especially on Twitter. Some have remained blacklisted even after honouring their overdue payments.

By March 31, 2017, about 10 percent of the adult population of Kenya was negatively listed on the Credit Reference Bureau (CRB). Nearly a million of those blacklisted were suffering for amounts less than USD 10.00.

More than a year later, the number of people negatively listed now exceeds 3.5 million. The sharp rise in the number of blacklisted people came following the advent of digital loans. Many Kenyans remain negatively listed because of the USD 22.00 required for a clearance certificate to remove their names from the CRB lists.

Owing to the availability and quick access of these loans, many people, more so the urbanite youth, have been lured into taking these loans and spending them on leisure activities.

The enticement of using mobile phones as a tool for accessing finances is laying debt traps for many borrowers who are stuck in vicious circles of borrowing from one digital lender to pay another – a proverbial case of robbing Peter to pay Paul.

These credit facilities adverts are all over the internet bombarding users hence tempting them to take up loans. The tough economic times coupled with high unemployment rates have also forced many to take up these easy loans.

The success of these digital lending companies continue to attract foreign investors who end up doling out loans running into billions.

Thanks to technological advancement, loan application and disbursement period has been reduced to minutes. It has created a worthwhile experience for borrowers who were fed up by the tedious loan application process used by traditional lenders.

Featured Image Courtesy: Brookings.edu