Before 2013 accessing a loan from a bank or a Sacco was quite a tiresome task. One had to go to the nearest branch of the bank a considerable distance away to apply for a loan. Once at the bank queues had to be made, background checks done and finally a further ten or so days before confirmation on qualification for the loan. This process involved costs for both the applicant and the bank. Times have changed significantly. You are minutes away from your next loan and you do not even have to move. The financial technology sector in Kenya has been growing at a fast pace with the number of Kenyans using bank services increasing almost eight-fold from the onset of mobile banking in 2013.
As good a deal as this sounds there is, of course, another not so shiny side to this coin.
The dark side
Due to the increase in the number of people acquiring loans, there has been a need for institutions which monitor the behaviour of lenders to avoid non- performing loans and reduce the loan default risk. These institutions are known as Credit Reference Bureaus (CRBs) and are regulated by the Central Bank of Kenya. CRBs receive information on lenders from any organisation that can lend out money. Over 2.7 million Kenyans have been reported to a credit bureau with a negative listing for late payment or default. Over 400,000 are for loans of less than 200 Kenyan shillings. Several questions must be asked. Why do people take out these loans, how much is borrowed and what exactly are the implications of a negative listing from a credit bureau?
Surveys done by the Financial Sector Deepening Kenya reveal that one in three applications are for a business or farm application. Others use loans to pay for education or to purchase airtime. Additionally, poorer digital borrowers reported having used their last digital loan for education and personal or household goods. Negative listings which are undertaken upon default can adversely affect one’s chances of borrowing money from any lender regardless of their overall borrowing history. To get cleared from a CRB listing a borrower would have to acquire a clearance certificate at about 2,200 Kenyan shillings which is above what some people even borrowed in the first place.
What is more, most people who use these platforms are unaware of the terms that they agree to and find themselves facing the consequences in case of default. Individuals with primary schooling or less were reported to have difficulty understanding loan terms or contacting customer care. This translates to a lot of ignorance when one enters these agreements by giving away personal information and agreeing to high-interest rates.
Failed attempts by the Government
In 2016 the government capped interest rates chargeable by banks at 4% which is equal to the base rate set by the Central Bank of Kenya. The high rates that were there before were an obstacle to greater investment, financial inclusion, and economic growth. This move, however, did not prove to be favourable as this move reduced credit to the private sector which in turn damaged economic growth. Additionally, potential borrowers were forced to turn to informal lenders who charge much higher rates and are not subject to supervision as banks were not as willing to lend to them. Owing to this the president did not assent to the financial regulation bill when it was tabled before him in 2019. This was an attempt by the government to regulate the activities of banks and in order to protect borrowers. This bill was not assented to law leaving lenders to their own devices. Although the finance regulation bill was not assented it still shows that the government can have an impact in this sector.
Unfortunately, most digital lending platforms do not fall under the classification of a financial institution under the Banking Act, the Finance Act, and the Central Bank of Kenya Act. The result of this is that other digital platforms are not subject to the regulations put in place by the CBK as directed by Parliament and are thus able to operate outside the acceptable standards. Due to this many Kenyans are subjected to high-interest rates which they cannot pay for loans which amount to a significant amount of their wages. Digital platforms resort to tactics such as reaching out to one’s contacts subjecting people to significant debt stress. If these methods do not work, one is blacklisted under the credit reference bureau and cannot ask for a loan from a financial institution for five years on top of having to clear their name.
The effect of the COVID-19 pandemic
For Kenya, the COVID -19 pandemic could not have come at a worse time. On top of dealing with the pandemic, the country is also dealing with floods that are raging in different parts of the country and a locust outbreak. All this comes at a time when the economy was already weighed down by a rising public debt currently standing at $60bn. With such overwhelming debt, the government has resorted to heavily taxing its citizens hence stressing them financially. The pandemic has forced many employers to either cut down on salaries, send employees on unpaid leave or even let go of their workers leaving Kenyans in a worse off position.
These circumstances spell out great difficulties for Kenya’s population. There is a shortage of income and a looming food crisis due to the extent of the damage caused by the locust invasion. There is thus a great temptation for many Kenyans who are short of cash and down on their luck to turn to digital lending platforms to meet their day to day needs.
This is worrying in this pandemic era as most households that are starved for cash will resort to taking on such loans which unbeknown to most customers have hefty consequences if not paid back on time. To make matters worse, at the moment customers can obtain digital loans from multiple providers within the same day resulting in heavy borrowing.
The consequences that follow the default of payment will deal a huge blow to Kenyans trying to recover once the pandemic is over. Many who may perhaps want to try their luck at a business venture will be unable to secure loans as they will have been blacklisted over loans worth around under two thousand Kenyan shillings. This will only serve to prolong the process of recovery from these tough economic times. On top of this, many of those who are not blacklisted will put off their ideas as a result of fear of the consequences that will arise in the case of default from loans
The way forward
Regulations that affect the informal digital lending space ought to be put in place to avoid disproportionate penalties that overburden already vulnerable households. Firstly, a review of legislation will have to take place to ensure that informal digital lending platforms are classified as financial institutions. Taking this step would mean that digital lenders are subject to regulations put in place by the government. Other measures could include establishing simpler ways for borrowers to get off the listings from the bureau by making it cheaper and reducing the amount of time the negative listing stays on the credit record. Additionally, the population needs to be educated on the terms of loans before getting into them. This could be done through social media campaigns, radio messages and informal conferences. Lastly, a stronger information sharing system will have to be put in place to ensure that borrowers do not abuse these platforms by taking multiple loans.
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Roselyne Mwanza
Strathmore Law Clinic
