Kenya's Mobile Debt Trap

Updated: Sep 24, 2019

Predatory lending apps are putting many Kenyans through a revolving door of payments.

by Mariga Thiothi

All economies run on systems of lending and debt. It enables the flow of money, risk taking and creates spending power in the economy. Theoretically, the system should balance itself, but what happens when it doesn’t? What happens when the debt situation doesn’t create more opportunities, but rather ensures that the debtors are stuck in a system of financial slavery?

Welcome to the world of mobile lending.

Kenya has seen a proliferation of mobile lending apps in recent months bolstered by the growing demand for credit among lower income earners who lack access to formal institutionalised credit streams—the so-called and highly coveted ‘un-banked’. This redline credit situation has been exacerbated by economic downturns over the past few years reflecting rising inflation rates, stagnation in real wages and a major slow-down in business growth even against the on-paper GDP growth, which hasn’t translated into improved lives for ordinary citizens.

“We have a lot of predatory lending out here, which we want to regulate,” said Geoffrey Mwau, Director-General of Budget, Fiscal and Economic Affairs at the Treasury.

In the years leading up to 2016, commercial banks had flexible lending rates. Lack of effective oversight meant that one could take a loan at a rate of 13 percent in 2011 and by 2016, the interest rates were an average of 25 percent. The rates doubled in just five years. This meant that borrowers who had taken loans at much lower rates found themselves saddled in debt with mortgages and other loans that they could no longer afford to service—the ultimate recipe for cooking up a national dish of recession.

In response to the interest rate problem, the Central Bank made the questionable decision to institute a rate cap in September, 2016. Bank interest rates could only be set to a maximum of 4 percent above the Central Bank Lending Rate. This drastically reduced the interest rates, which sounded good for a short while, but the banks pushed back hard.

Commercial banks say they operate in a high risk environment, and can justify their exorbitant interest rates as a way of compensating for this risk. The banks thusly reduced the lending that they offered to individuals and instead moved to what they termed as lower risk lending—buying bonds and lending to larger established organisations. This meant that individuals who would previously have had access to bank loans, were locked out of the credit market. This created a massive credit gap because bank lending wasn’t available and alternatives like SACCOs required long-term savings against which one would take loans.

This massive credit-lending gap was filled by foreign-owned mobile lenders who have gained a solid footing in the country with 27 percent of adults (6.4 million) taking mobile loans according to a joint study by the Central Bank of Kenya (CBK) and the Kenya National Bureau of Statistics (KNBS). The main household names in the mobile lending market are Mshwari by Safaricom, KCB Mpesa Loans, TalaLoans and Branch. All are either partially or fully foreign-owned operators, meaning that not only does the money leave the hands of struggling Kenyans, but it also means that it altogether leaves the Kenyan economy.

The laws in Kenya regulating mobile lenders is a wide-open legal grey zone.

While speaking at the Senate earlier this year, the Governor of the Central Bank of Kenya, Patrick Njoroge said that "There is a huge lacuna because there is no specific law that is targeted at them. There are gaps because we have laws for commercial banks and not credit-only institutions that use individual resources for lending. In fact, these institutions are nothing but shylocks."

A lack of mobile lender industry regulations has allowed these mobile apps to charge usury and shylock-esque interest rates ranging between 90 percent to 200 percent.

The system is not made for farmers and entrepreneurs, though, who are the bedrock of our economy. They are also ironically the primary targets and users of these short-burst loans. In its current form, the mobile lending systems don’t favour the peaks and valleys of a farmer’s cashflow. For instance, when it rains, it pours, and when the drought comes there is no cash. This means that many in this sector have had repayment issues not because they lack the money per se, but because these lending platforms work on a monthly income and payment model. Farmers and entrepreneurs, unlike regular salaried employees who want to finance a new car, need cash in the moment to bridge the gap between harvest and market. They are better off in three months when they have the income to pay down the micro-loan. However, in some months when entrepreneurs and farmers lack the income to pay the monthly loan installment, they incur mounting and severe penalties and this traps them in a revolving door of never-ending payments.

The CBK Governor has on multiple occasions called for regulation of the institutions echoing similar calls by the public and consumer watchdogs including the Consumer Federation of Kenya (COFEK),

There hasn’t always been attention on the market though, and this means that the ordinary citizen has suffered in many ways through unethical and dubious activities by the lenders which include intimidation and breach of privacy which include contacting the borrower’s phone contacts and continuous threats before debt due dates.

Facebooker Peter Chirchir, for example, publicly accused a mobile lender of a policy of intimidation and breach of privacy through a public post.

“I applied for a loan with the digital lending firm which I have been unable to pay due to financial difficulties. The firm has now resorted to calling everyone in my phonebook including my girlfriend in an attempt to get me to pay back the loan.” This is just one of many untold stories of how the lending firms attempt to collect their debts.

Watchdog organisations including COFEK are also raising deeper concerns over the credibility of these lending institutions’ lending portfolios and data collection practices

A lot of these stories were ignored until it happened to billionaire businessman Peter Nduati. And then he took one of the lenders to court. The lender, whose name was never made public, had listed him with the Credit Reference Bureau for failure to pay a loan of a thousand shillings. He only found this out when he was denied a business loan and when his credit ratings dropped. On inquiry, the number allegedly used to apply for the loan wasn’t even registered to him and the lender was at odds to explain the situation. The lender eventually and hastily cleared him to avoid the court process, but this story pointed to a bigger problem. There are plenty of other ordinary unheard citizens who have gone through the same fate, but didn’t have the legal representation to fight a financial giant, for instance, the size of KCB.

The lack of transparency and accountability in the sector means that people don’t have the information and financial knowledge needed to make an informed choice about their loans. This leads to a cycle of financial prison for people who may be, by virtue of education and circumstance, unable to understand how the whole system works against them. This has enabled the mobile lenders to operate freely as they wish, even as people suffer. According to the CBK study, one in five people either don’t understand how the fees/costs of the loan were applied, or how the lender unexpectedly withdrew money from their accounts.

“We have a lot of predatory lending out here, which we want to regulate,” said Geoffrey Mwau, Director-General of Budget, Fiscal and Economic Affairs at the Treasury.

But how are ordinary citizens coping with the interest rates? The CBK report showed that 14 percent of the borrowers were servicing more than one loan at a time, which if in itself isn’t a sign of a problem, many of them are using loans to pay off other loans leaving them in cycles of debt, which most of them are unable to escape. It’s a terrible situation for an already struggling population, and it all boils down to finding solutions to revolving doors of financial servitude.

The packaging of the availability of these loans as efforts towards financial inclusion are misleading because predatory rates and practices are not social impact, they’re well packaged predatory capitalism wrecking the lives of the poor and ensuring that they stay in a constant state of debt and dependency.

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