The advent of digital banking in Kenya is promoting financial inclusion, with low-income households having access to credits to scale-up living standards and small businesses gaining access to capital to boost production at a finger click. But with the rise in FinTech products in the East African country – which aids digital banking – comes a rise in debts for borrowers who have not been able to pay back loans. This is because the Total Cost of Credit (TCC) on loans by digital banks are very high for borrowers to pay back.
Failure to repay loans has caged many Kenyans in a debt-trap as they did not fully understand the kind of product they had subscribed to. It has further resulted in the blacklisting of over 3.2 million Kenyans by the country’s Credit Reference Bureaus (CRBs). But in a bid to cushion the effect of the current COVID-19 (coronavirus) pandemic on borrowers, digital lenders in Kenya have agreed to waive late repayment fees on borrowers.
A report shows that a recent market survey by analysts at the Kenyan-based investment bank, EFG Hermes, indicates a bulk of the borrowings from digital platforms to be below $50, with many as low as $1.50 while the lowest total cost of credit for a digital loan from an app is 352 percent, annually.
According to the analysts, the TCC for digital loans is very high, especially when its annualise by the daily, weekly, Bi-Weekly and monthly rates that these providers quote to their prospective borrowers. The interest costs are not just disproportionally high for low-income earners, Hermes believes that digital lenders have not done enough to educate their customers on new products.
Digital loans, through mobile platforms such as Kenya’s M-Pesa, have increased access to affordable credit for many households in the country. Meanwhile, the number of banks offering financial services over the internet is increasing rapidly in Kenya creating a competition between commercials banks and FinTech companies as they all plunge into the market to service the unbanked and financially excluded.
83 percent of Kenyans are now formally financially included as of July 2019. This percentage of Kenyans now have a formal account and financial exclusion is down to only 8 percent. Digital banking has helped, to a large extent, in bridging the financial gaps in the country. But on a flip side, it has equally made debtors out of many Kenyans.