The success of mobile lending apps is, admittedly, attributed to the foundation laid by M-PESA services. It is, perhaps, the primary factor that such apps test their trade in Kenya, among other African-based markets before deployment to additional countries outside the continent. For instance, Silicon Valley-backed Tala, which is arguably the largest lender, and Branch (also with ties to the U.S.-based tech hub) have a strong local presence. Also, they started their operations in Kenya before exporting their business to other nations.
For the past couple of months, we have seen several companies jump into this lucrative segment. Some of the lenders have ordinary banking systems, but the bureaucracy and paperwork involved in traditional lending has affected their profit margins since people prefer the ease at which mobile-based loan apps verify eligibility (via algorithms that study user data, including their messages, social media activity, and general online habits, among other AI-based analyses).
The success story of these apps, which is based on financial inclusion and efforts to eradicate poverty among Kenyans is hard to ignore but has come at a cost: high-interest rates and a bad rapport at the state’s credit reference bureaux for people who fail to pay what they owe. In particular, it has been determined that more than 2.7 million Kenyans have been listed. Out of that list, about 400,000 of them are faulted for not paying less than KES 200.
Digital lenders continue to ride on a subjectively unregulated space, which is why the Ministry of Finance has drafted a bill to check their operations and ensure that customers are not subjected to exploitative measures. The black and white version of the bill is that some lenders’ terms and conditions are predatory, hence necessitating the existence of a legal framework to curtail such actions.
Astronomical Interest Rates
All mobile lenders have different interest rates for funds disbursed.
M-Shwari, which spurred the growth of similar products, has been around since 2012. It slaps a facilitation fee (that is a vague reference if you ask us) of 7.5 percent. The fees are not time-oriented, meaning they remains the same. If interest rates are calculated per annum as traditional banks do, it means customers are liable for a 90% fee.
On the other hand, Tala and Branch’s interest rates are not the same as each lender disburses monies based on various repayment periods and plans. Branch, for example, allows weekly (cheaper) or monthly (pricier) repayments. Their monthly rate is 15 percent.
Opera’s Okash and Barclays Bank’s Timiza have restricted payback to a fortnight and 30 days respectively.
These differences have fuelled the suggestions made by the draft bill, which may set new and uniform interest rate caps for all lenders. The bill, however, does not specify how digital lenders will be treated owing to their mode of operation that is riskier than traditional lending.
The outcome of the bill, should it go through in the coming days, remains undetermined.