How Kenyans are being lured into mobile loan Apps slaves.

Since the introduction of Safaricom's M-Pesa, Bharti's Airtel money, Essar's Yu cash and Telkom's orange money in Kenya some years back, mobile money is now an obvious thing in the finance industry.

Likewise, mobile loan Apps are in high demand in the country, attracting quite a number of players, some of whom have a very good reputation with their users and excellent services and others who are as shady as shady gets.

These Apps have been set up to make loan products more accessible, fast and confidential since any person with an android phone can to access credit anytime and anywhere. Such short-term unsecured loans have entice so many Kenyans especially the youth to take loans through their mobile application.

These companies are using personalised marketing such as sending individualised messages to consumers’ phones as a constant reminder that they can get a loan through their mobile app anytime time they are broke and need to settle their bills.

Prisoners of these systems.

A joint survey conducted recently by the non-state financial inclusion agency – FSD-Kenya, Central Bank of Kenya, Kenya National Bureau of Statistics and Consultative Group to Assist the Poor revealed that so many Kenyans have become prisoners of these systems and in some instances borrowing to gamble or settle previous debts.

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The study showed that about 6.5 million Kenyans are digital borrowers with 20,000 Kenyans (3%) reported borrowing to place bets. Only 16% of Kenyans have never taken loans through mobile phones.

Unfortunately, most Kenyans who have rushed to the digital platforms have splurged the money on their day-to-day needs, sometimes on alcohol and other forms of entertainment.

Digital credit is not reaching everyone and remains ill-suited for most of the population, such as farmers and casual workers, whose livelihoods are characterised by irregular cash flows,” read the phone survey.

Excessive borrowing and over-indebtedness.

The rise of the digital credit market has raised concerns about the risk of excessive borrowing and over-indebtedness among lower-income households. While borrowing to meet basic needs as well as replenish stocks in small businesses were the main reasons for digital borrowing, 800,000 Kenyans reported taking several loans to repay others.

The allure of using mobile phones as a tool for financial services is laying debt traps for many borrowers, with most stuck in a vicious cycle of borrowing from one digital credit provider to pay another.

Consumerism is overwhelming for many people. The desire to take care of oneself and not just the needs but also the luxuries can easily overcome the financial indiscipline to take a pay-day loan when they are enticed by such facilities.

Poverty cycle.

Digital loans are easy to obtain, short-term, carry a high interest rate and are available from numerous bank and non-banking institutions.

Rather than leave the users better off, the many digital credit providers might have pushed them into a financial bondage. Many Kenyans are now hooked to several of such firms, sometimes being forced to borrow from one mobile loan app to pay another.

Many Kenyans are now caught in several mobile loans service provider to another, according to Financial Sector Deepening Kenya (FSD- Kenya).

Even though they attract very high interest rates compared to a bank loan, people will opt for it as solution despite it being costly as long as they make life easier in that they are easily accessible at the time. This, in turn, creates a poverty cycle because when one opts in, it becomes a habit because the constant supply of cash and the fact that one is given a specific period to settle it, is enticing.

A pay-day loan’s interest is calculated on daily basis and one is required to repay the entire amount including interest at once as compared to a bank loan the repayment is spread over a period of time with flexible terms.

Yet when one is broke, the high-interest rate is not a factor because when one has limited resources, it captures all their attention as they seek a solution to their problem.

“When scarcity captures the mind, we become more attentive and efficient. There are many situations in our lives where maintaining focus can be challenging. We procrastinate at work because we keep getting distracted. We buy overpriced items at the grocery store because our minds are elsewhere. A tight deadline or a shortage of cash focuses us on the task at hand,” says Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir in their book Scarcity: Why Having Too Little Means So Much.

They note that when scarcity captures the mind, people become more attentive and efficient. There are many situations in people’s lives where maintaining focus can be challenging. They procrastinate at work because they keep getting distracted. They buy overpriced items at the grocery store because their minds are elsewhere. A tight deadline or a shortage of cash focuses people on the task at hand.

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Credit Reference Bureau (CRB).

About 3 million borrowers have reported late loan repayments, attracted hefty penalties with 9% of defaulters being reported to the Credit Reference Bureau (CRB) as risk-averse loanees.

“Half of borrowers spent their savings to repay loans, 20% of loanees reported reducing food purchases and 16% reported borrowing (mostly through family and friends). Poor business performance and loss of jobs in 2017 were the main cause of default,” says the study.

With many borrowing for non-income generating purposes, about half of borrowers report to have delayed in repayment time, with men being more frequent culprits. Those who default say that they are forced to do so because of poor business performance, loss of source of income, poor financial planning or the fact that all the money was used on food and utility bills.

The survey calls for the establishment of an oversight authority to scrutinise the lucrative interest rates and penalties used by the digital loan providers some of which don’t fall under any regulatory regime.

The rates used are not bound by the Central Bank interest regime currently at a maximum of 13.5%, giving a leeway for digital loan providers to charge higher. Some providers charge between 7.5 to 10% interest for a one-month loan.

The study proposes development of tools to track over-indebtedness whose adverse effects were hurting the well-being of families with 9% of the borrowers (breadwinners) being blacklisted.

It calls for further studies on product innovation that will promote proper use of loans, thereby, ensuring digital borrowers are not stuck with low-value, short-term, expensive credit despite building positive credit histories.