‘Loan Sharks on Steroids’: Kenya Shows Downside of Easy Loans Via Mobile

NAIROBI, Kenya–Among the many benefits for which mobile banking has been hailed is the ability to bring financial services to the underbanked and unbanked. But the ease of access has also created an emerging problem—many have also found it easy to get into debt. In this country, where one government official has called the availability of loans via mobile “loan sharks on steroids”–borrowers often lock into rates of 150% or more. 

According to Bloomberg, in Kenya, which has been Africa’s financial-technology pioneer, there are now more people keeping money on their phones than in banks. But in the last year nearly one-fifth of mobile-banking borrowers have defaulted. 

Kenya Loans

Mobile loans are easy to get and addictive,” one borrower told Bloomberg. “I need a fresh start but can’t see it.”

Microlending, for which Muhammad Yunus won the Nobel Peace Prize in 2006, which was a year before the introduction of the iPhone, noted Bloomberg, has been very popular in Sub-Saharan Africa. In 2018, there were 395.7 million mobile-money accounts in the region, or almost half of the world total; the $26.8 billion handled represents two-thirds of the total transactions, according to GSMA, which represents 750 mobile operators around the world, Bloomberg reported.

Asia is the closest competitor, with such transactions equivalent to about 7% of its economy compared with about 10% in sub-Saharan Africa, according to World Bank data. In the rest of the world, it’s less than 2%.

More Than 50 Lenders

In Kenya, Bloomberg reported there are now more than 50 mobile lenders offering loans ranging from $10 to $400. Officials are trying to get their arms around a business that took off after a 2016 law capping interest rates to reduce borrowing costs, Bloomberg said.  

Mobile-money operators “shouldn’t be lending out money in the order of magnitude that it’s out of control,” Christophe Meunier, a senior partner at Delta Partners Group, an advisory firm for technology and media companies, told Bloomberg. “They should have an incentive to control lending through the platform.”

The dominant solution in Kenya is M-Pesa, the payments platform of Vodafone Plc’s Safaricom unit. It is now used by more than 22 million for transferring money and purchases. The option to deposit and borrow can be activated within the M-Pesa wallet via M-Shwari, which charges 7.5% of the amount borrowed per month. 

Increase in Non-Performing Loans

In the year ending June 2018, non-performing loans in Kenya climbed 27% to 298 billion shillings, according to the central bank. 

“Two-thirds of Kenyan borrowers are in debt stress -- those caught in a debt spiral or those who have to sell an asset or reduce food spending to repay loans -- according to FSD Kenya, a Bill & Melinda Gates Foundation-backed financial-inclusion advocate,” Bloomberg said.

Bloomberg noted lenders in Kenya can aggressively dun debtors, calling their friends and relatives to compel them to pay.

They are loan sharks on “steroids,” Central Bank Governor Patrick Njoroge was quoted as saying. “There has to be proper regulation.”

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