The rate which Kenyans are accumulating personal debts is alarming and experts have warned that it is significantly threatening their own financial stability.
The same way the government has an insatiable appetite for foreign debts, the citizens are also fond of quick loans.
Take for instance Safaricom’s new overdraft service, Fuliza. Within a month of its launch, the service had run through 6.2 billion shillings, 29 billion in three months and an unbelievable 45 billion shillings in six months to borrowers.
Apparently, the majority of these individuals who have made the credit situation serious are the unemployed youth who continue to borrow through the multiple mobile phone-based platforms.
Experts also say that low-income earners who either do not have clear repayment plans or irregular income are also among the lot.
The borrowed funds are typically used by these vulnerable individuals to get out of a quick fix. They use the money for betting, others use them to pay for school fees, rent, and food.
Only a few of them think of pumping the cash into small businesses and at the end of the day, most of the cash goes wasted.
Sam Omukoko, the managing director of Metropol Corporation, a Credit Reference Bureau (CRB) based in Nairobi, who has been monitoring the borrowing spree is amazed at how Kenyans are accumulating personal debts.
“This thing will soon reach boiling point,” he warns, “an average Kenyan these days has at least five or more accounts, ranging from the bank, Sacco and a number of mobile phone-based platforms”.
Omukoko noted that some of these individuals are unable to repay their debts and are likely to find themselves uncreditworthy soon.
The Kenya National Bureau of Statistics (KNBS) data and reports from other stakeholders reveal that most of the money borrowed is used for consumerism, that is, borrowing for food expenses, recreation as well as other basic current expenditure, and not for venturing into business.
“There is an emerging trend of many borrowers resorting to dodging their financiers, and even worse, in a typical survival tactic of robbing Peter to pay Paul; borrowing from one platform to pay another,” Omukoko said.
He further added that for others, taking flight from the creditors by registering multiple mobile numbers for use when they feel cornered by their creditors, is their best survival tactic.
It is for this reason that entities like Metropol CRBs were started. The body collects information they have on a borrower and converts it into a credit score used to measure if one is eligible for a loan from a lender.
Metropol and other CRBs have become so vital to lenders since they utilize the score of an individual to evaluate potential borrowers.
The score, which ranges between 200 and 900 has rating with remarks from poor to excellent, tells them about the person.
Many of the vulnerable— and with some unaware of some unsettled mundane credit— have found themselves blacklisted because of poor credit scores.
Rate of Loan Defaults
Kamau Kunyiha, chief executive of CreditInfo, says that although the rate of default on mobile phone-based platforms was low standing at around 9.6 percent by the end of 2018, the worry is the growing trend in which people are borrowing to retire existing credit.
“It is a fact that people are multi-borrowing, but the issue is we do not know to what extent,” he said.
Kunyiha noted that currently, 97 percent of the money lent through the mobile loan apps supported by banks and that there is no immediate threat to the financial system.
He reckons that much of the debt is, in most occasions, repaid with just about a million Kenyans blacklisted.
Part of the reason why Kenyans do not pay back their debts is that they did not get any value from it, and this is because they spent the amount on recurrent expenditure.
SIMILAR CONTENT: Kenyans Borrowing Recklessly to Maintain Lavish Lifestyles
“There is no growth value proposition from the amounts borrowed as they are mostly used to plug into recurrent expenditures and not for development purposes. Also, the cost of credit is very high,” an analyst at Financial Sector Deepening (FSD), an organization that follows issues on debt and financial inclusion noted.
The lending market in Kenya has today been dominated by mobile loan apps owned by entities rushing to fill up the lending space left by traditional banking ever since the law capping interest rates was introduced.
There are at least 49 digital lending platforms giving out between 50 to 50,000 shillings. Some of them include MShwari, Fuliza, KCB-MPesa, Tala, Branch, Okash, Stawika, and Saida.
Since its inception in 2012, Safaricom’s Mshwari has disbursed a total of 230 billion shillings whereas KCB, one of the country’s largest financial institutions, now advances 90 percent of its loans through its mobile platform KCB M-Pesa.
RELATED CONTENT: Bad Debt: The Big Ideas Syndrome
Meanwhile, experts have stated that the niche in which these digital lending platforms carry their operation is too fluid and it needs to self- regulate to check predatory lending practices before the government steps in.
The guidelines should be focused on consumer awareness and education on the cost of digital credit and terms and conditions of the loans.
Consecutively, the regulations should also champion an awareness program on how to effectively use the funds borrowed from mobile loan apps.