When Brazil was eliminated from the 2018 World Cup after losing to Belgium, Joel Odongo was not just heartbroken, he was broke and in debt. Or, to be clearer, deeper in debt. Odongo bet KSh50,000 ($500) on the odds of tournament favourites Seleção winning by a margin of at least one goal. Thousands of kilometres away from the Russian stadiums, Odongo could not believe his misfortune.
It was not just that the money was gone, but he borrowed most of it from a mobile lending app. “I still have to pay the loan at 20% interest by the end of July,” he tells The Africa Report in Thika, about 38km north-east of Nairobi. This was not his first loss or even his only current debt to a mobile lending service.
The biggest sell for such fintech services for the larger economy is financial inclusion. By giving borrowers access to short-term unsecured loans, these firms provide much-needed capital for individuals and small businesses.
Last year, then Safaricom business manager Sylvia Mulinge revealed that a third of microloan applications come in between 3am and 6am, and that M-Shwari, the most successful fintech product in Kenya, is busiest between 5am and 9am. Most of this activity is from people working in the informal sector, such as jua kali (hot sun in Kiswahili) labourers and market women.
At a fruit stand in Ngara, on the outskirts of Nairobi, Jacinta Kyalo tells The Africa Report: “I use M-Shwari at least three times a week.” Access to short-term loans allows her to keep working capital and pay her suppliers. “It is easier than borrowing money from friends or my chama (informal savings group),” she adds, “and I am now able to borrow more. So I have been expanding my business slowly.”
Kyalo and those like her borrow short-term capital to finance stock purchases and then make repayments as soon as the stock is sold. For Kenya’s informal sectors, this is a lifeline. Three times a week, Kyalo borrows between KSh3,000 and KSh9,000, depending on her business needs, and repays the money either on the same day or within 48 hours. And, as the repayment period on the service is 30 days, her creditworthiness score has improved.
In the past decade, mobile-money platform M-Pesa has evolved from a simple money-transfer service to a formidable ecosystem. Since 2012, that ecosystem has become home to a host of fintech products, each competing to win over borrowers who would otherwise struggle to find credit in the traditional banking sector.
The big telecom operators and banks are some of the top players in mobile money and lending. On the M-Pesa application, there are at least two mobile credit products, M-Shwari and KCB M-Pesa. Late last year, Safaricom’s biggest competitor, Airtel Kenya, launched M-Fanisi in conjunction with Maisha Microfinance Bank to offer banking services to Airtel Money customers.
A host of local start-ups as well as formidable Silicon Valley-backed fintech solutions are also targeting the market. Competitors in the lending space include Eazzy Loan, Tala, Branch, Saida, Haraka, Zidisha, Timiza, Kopa Chapaa and Shika Loan.
Bees in the M-Pesa honeycomb
Because they do not fall under a regulator, it is difficult to confirm how many such products and services are currently in Kenya. The number stands somewhere between 20 and 35, with new ones regularly entering the market.
The borrowers who flock to such apps represent all economic sectors. They also borrow for different reasons, from business activities to family emergencies, to impulse purchases and sports betting. Most, if not all, of the apps are woven together by the M-Pesa ecosystem. Even independent apps, such as Tala and Branch, depend on the mobile-money service not only to process credit and repayment but also to assess creditworthiness.
Tala, which works through an app, was first launched as Mkopo Rahisi in 2014. Branch is a Silicon Valley-backed app, while Timiza is run by Barclays Bank and Eazzy Loan by Equity Bank.
They have different loan offerings and no specific guiding regulatory framework, except that those without a bank partner cannot hold people’s savings. The most successful lender, M-Shwari, has helped Commercial Bank of Africa (CBA) to grow into the biggest privately owned bank in Kenya. M-Shwari, co-run by Safaricom and CBA, turned five years old in December 2017. Then, it had more than 20 million customers, the highest of any fintech product in the Kenyan market. The service disbursed more than KSh230bn against deposits of more than KSh669bn from its launch until December 2017. In a day, the service typically processes 300,000 applications, up from 50,000 two years ago.
Other credit apps are thriving too: Tala disbursed 900,000 loans between 2016 and 2017 to build a loan book worth $30m; KCB M-Pesa processes more than 80,000 loan applications daily and had a loan book worth $170m in December 2017; and Branch has a loan book of $20m. M-Shwari says its average credit size is $3–$3.50.
Despite the success of mobile lending apps, consumers complain that the price of credit remains high. Francis Waithaka, CEO of Digital for Africa, a digital marketing firm that works closely with fintech companies, says the high interest rates are “a rip-off that’s driving more Kenyans into debt”. Most credit offerings have very high annual percentage rates (APRs), with research by think tank FSD Kenya showing that products have APRs that vary between 12% and 621%.
Industry players argue that they take big risks, so rates have to be high enough to recoup any loses. Kevin Mutiso, chief executive of Nairobi-based Alternative Circle, which runs the Shika mobile loan app says: “When it comes to pricing, people misunderstand why we charge the way we do, but it is a complex calculation of risk. It usually has to start high, as the business has to be able to absorb the losses we are inevitably going to have.”
Research by Wapi Capital shows that of the top six mobile loan products on the Kenyan market, bank-backed products have non-performing loans (NPLs) ranging from 1.9% to 2.77%, while independent ones have NPLs averaging 10%. The research also listed multiple borrowing, unclear disclosure of terms and the privacy of the data collected as key problems in the fintech boom.
For many borrowers, access has trumped a proper assessment of the risks, whether they include sinking deeper into debt or being blacklisted from the credit market. For gamblers, the possibilities of mobile credit mean they can bet even when they are broke and in debt. “I have three apps on the phone,” World Cup bettor Odongo says as he shows where he stacks them on his device, “and I borrow from each at different times.” The result is that he has now entered a vicious cycle where he keeps borrowing, and gambling, to pay off his debts and ward off the ever-looming threat of being listed with the credit reference bureaus (CRBs).
“There is growing evidence that a huge proportion of digital credit loans in Kenya are used to finance the sports betting epidemic,” says Digital for Africa’s Waithaka, even before he hears about Odongo’s case. Despite concerns about the risk of problem gambling, the government in Nairobi is not regulating the sector tightly beyond a move in 2017 to charge betting firms hefty taxes.
Regulation, but what form?
While Kenya’s traditional banking sector is heavily regulated, its fintech products are not. In May of this year, central bank governor Patrick Njoroge spoke at Kenya’s first fintech summit, noting the lack of regulatory powers to oversee this aspect of banking. The proposed Financial Markets Conduct Bill could bring more order to Kenya’s financial sector, but it does not specifically address mobile lending apps. Njoroge opposes the bill because it would severely weaken his institution’s regulatory powers and hand them over to a new body.
Industry players agree on the need for regulation, but often differ on how far it should go. Njoroge and market-watchers like Digital for Africa’s Waithaka argue that any new laws should be customer-focused. They would like to see guidelines on the use of personal data and customer protections against exorbitant interest rates and predatory collection techniques. While there is a data-protection bill in the offing, it could be a challenge if there are not many regulators watching over the sub-sector.
Waithaka agrees with many industry players on the need to bring in regulation quickly, but says it must be an informed decision: “We should do more research on how other countries have done it to avoid passing a law that will kill innovation or stifle the flow of credit,” he tells The Africa Report.
“We want to be regulated,” says Alternative Circle’s Mutiso. “We would need light-touch regulations on minimum capital requirements, know-your-customer verification and submission of positive and negative data to CRBs,” he adds. He compares the approach he proposes to the one that drove M-Pesa’s growth, arguing that the proliferation of fintech products should be encouraged, not curbed.
In the meantime, gambling man Odongo’s immediate plan is to borrow from his other microloan applications to repay what he owes. He is wary about his creditworthiness because the stinging loss has not dampened his inclination to borrow even when he does not need to. In traditional lending services, defaulters’ names are forwarded to CRBs, relatively new organisations in the Kenyan financial sector meant to weed out serial defaulters. Fintech companies are not required by law to use the bureaus, but some do so anyway as part of their business models.
One problem has developed as the use of fintech products increases. More people have found themselves listed as defaulters, and in a country of about 50 million people, more than 2.7 million people are listed negatively by CRBs, with 14% of them on blacklists for amounts less than $2.
Being blacklisted drives some customers from the main fintech products to others that might not have access to CRBs or might ignore credit scores in the quest to win market share, increasing their risk of NPLs. It can also reverse the gains made in financial inclusion when amounts as little as $2 are enough to lock someone out of the credit market.
This downside of the new wave of market-driven financial inclusion is not high on the agenda in public debates about fintech. Early in its life, M-Shwari was only accepting about 40% of loan applications. In a joint experiment with think tank FSD Kenya between December 2013 and May 2014, the service extended credit to a segment of the market that M-Shwari would otherwise have declined. The thinking was that the credit-scoring system was undeniably locking out poorer borrowers. The results of the experiment were interesting: of the target risk segment, only 5% of people defaulted.
But defaulting is not the only dark side to the fintech story. Fintech companies have to assess the risk of default for its customers, and they use data, from scanning a user’s M-Pesa records to even looking at call logs to determine suitability.
Data privacy is a hot topic in Kenya, with the new proposed law and the aftermath of data-mining company Cambridge Analytica’s work during the 2017 elections. With lawmakers again questioning Safaricom’s dominant role in the telecoms sector in August, mobile lenders and borrowers will be watching to see if the government continues to let the sector grow with minimal oversight, as policy-makers across the world look to Kenya’s mobile-money experiences to see where the sector can go.
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