Mobile Lending has Expanded Kenya’s Credit Market but Regulation is Necessary
Mobile lending is an emerging mobile financial service whereby consumers apply for and receive loans through mobile phone devices. Mobile credit services in Kenya developed from the original mobile money transfer service – M-pesa platform launched in 2007 by Safaricom, a leading mobile network operator. The mobile lending model has been adopted by financial technology firms that develop mobile phone applications that offer mobile loans.
Mobile lending services take three dynamic forms. First, is the bank-backed mobile lending pioneered by Safaricom and Commercial Bank of Africa dubbed M-Shwari in 2012, KCB-Mpesa by Kenya Commercial Bank introduced in 2015, Eazzy banking by Equity group’s Finserve introduced in 2016, MCo-op Cash by Co-operative Bank introduced in 2016, and Timiza launched in 2018 by Barclays Bank.
Secondly, lending can be based on mobile applications by financial technology firms, which form the bulk of the mobile lending services platforms. These applications are downloaded from Google Playstore and Apple-store and they include products such as Tala by Inventure Capital Corporation, and Branch by Branch International, which are backed by venture capitalists from Silicon Valley.
Thirdly, non-bank finance institutions have also embraced the mobile loans model as providers of the product. These include microfinance institutions and Savings and Credit Cooperative Societies (Saccos), which have diversified their product portfolios through digital credit services either in collaboration with a network operator or through a Fintech. An example is the Caricash mobile loans by Caritas Microfinance bank and M-loan by Kenya Bankers Sacco.
The growing use of digital credit is fueled by the quick access to funds by the borrowers, zero collateral requirements, no paperwork by lenders, remote accessibility, and use of alternative credit scoring models such as mobile money transaction data to determine eligibility for credit. Mobile loans services have filled a gap created by the exhaustive, time consuming, complex and uncertain credit assessment methods by commercial banks.
Credit assessment in the mobile lending sub-sector varies with different mobile loans providers but, fundamentally, one can borrow without having an account with the provider, unlike bank’s procedures where one must be an account holder. The Fintech platforms such as Branch, Tala, and Stawika use social media accounts, mobile data usage analysis, personality assessment and the borrower’s support network to build a borrower’s credit profile. M-shwari and KCB-M-pesa are embedded in mobile network operator’s sim toolkit, and use the applicant’s M-pesa transaction records, data from the Credit Reference Bureau (CRB) and mobile phone utilization data to assess the borrower’s eligibility.
Mobile loans have been attracting casual workers, wage earners and small business enterprise owners who face challenges in accessing banking system’s credit. Digital borrowing is preferred for in-demand liquidity management by individual borrowers and providing working capital for small businesses. The 2016 FinAccess survey reported that 27% of adults are digital borrowers with 55% male and 45% female. Forty-six per cent of male borrowers had outstanding loans and 14% of the surveyed borrowed from multiple digital credit providers at the time of survey. Thirty-one per cent of borrowers reported borrowing for betting purposes while 14% were balancing between several mobile loans, leading to a possibility of debt trap.
Digital credit service providers offer ranging costs for their loans with different models. The cost structure of the mobile loans involves interest rates charged weekly or monthly, and facility fees or commissions. For commercial banks-backed mobile loans platforms, they charge monthly facility fee; for example, M-Shwari charges 7.5% facility fee, which adds to 90% in annual rates charges. Established mobile loans applications such as Branch and Tala charge 14% and 15% monthly interest rates, respectively, which if standardized annually is 168% and 180%, respectively, way higher than the commercial banks’ average of approximately 13% per annum.
Some Fintech applications require the borrower to pay registration fee to be eligible for credit while others require loan appraisal fee from borrowers. At maturity, some mobile loans platforms automatically roll-over the loans if not settled and apply interest rate on the rolled-over total or service fee, therefore increasing repayment cost and making the loans expensive in the long run. This is significant because 50% respondents in the 2016 FinAccess survey reported having delayed repayment of loans due to various reasons such as irregular flow of income. Due to the challenges in regulating the mobile loans providers, the country’s financial sector regulatory bodies have warned the public on the rising risk of the unregulated mobile loans services, especially since there are no entry checks on the mobile credit applications.
While mobile loans services have changed the credit market landscape and entrenched formal financial inclusion in the country, many challenges face the industry, such as transparency issues where 19% of survey respondents in the 2016 FinAccess survey raised concerns over unexpected fee charges and unclear costs of loans. Further, these applications collect a lot of data on the customer, including sensitive personal data to analyze their digital footprints for credit scoring and marketing, and in some cases this occurs without the customer’s knowledge and consent, thus breaching data privacy practices. Moreover, lack of data on the operations and performance of the mobile lenders to aid in understanding the industry’s working environment is another key challenge.
Digital credit services are both a success story in formal financial inclusion and a regulatory minefield. Therefore, focus should be on development of a sound regulatory framework that will not disincentivize innovation but at the same time provide solutions to challenges faced by the customers as the services continue to grow. Mobile credit services cross-cut regulatory environments, and therefore there is need for a harmonized coherent regulatory framework on matters of consumer protection, use of mobile money transactional data, predatory lending behaviour to borrowers, over-indebtedness, and guidance on collection of operational and performance data.
Authors: Purity Kagendo and Protus Shigoli, Young Professionals, Private Sector Department