Late repayment of digital loans can have significant consequences for borrowers.
Lenders typically roll over loans and charge a second origination fee on the balance at the end of the period. Further, when borrowers are late in repaying their loans, lenders freeze the balance in associated savings accounts until the loans and fees are repaid. Borrowers cannot use the frozen funds to repay the loan.
If a loan remains unpaid, regulated lenders are required to report borrowers to credit reference bureaus (CRBs), resulting in the listing of a non-performing loan no matter how little the borrowed amount is.
When the borrower eventually pays, the loan listing is changed to reflect that it has been repaid and the CRBs keep the listing for five years. If they default on the loan, the non-performing loan listing stays in place.
Having your name on the CRB list can make other potential lenders like commercial banks deny you a much-needed loan facility. Additionally, a CRB clearance certificate, confirming that you are not a listed defaulter, is one of the mandatory documents required from candidates being recruited for a public office and can also apply in certain corporate and non-governmental recruitment processes.
Digital credit contributes significantly to the number of individual defaulters reported to CRBs. According to a survey conducted by Transunion in 2016, one of Kenya’s three licensed CRBs, of the 2.7 million Kenyans reported to CRBs with a negative listing for late repayment, more than 400,000 were for loans of less than Sh200.
Digital loans continue to increase dramatically. Data from the Central Bank of Kenya indicate that loan accounts in the overall commercial banking system increased from 1.67 million in 2010 to 8.51 million in 2016, an amount significantly greater than if trends had continued at the rate that prevailed before the emergence of mobile banking. As at March 2017, the volume of new mobile loans approved monthly by commercial banks had increased by 53 percent, while the value of new mobile loans approved monthly increased by 81 percent, according to the Kenya Financial Sector Stability Report released in September 2018.
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It is important that borrowers get all information they need upfront or know how to easily access such information during the period of the loan. Only 10 percent of digital borrowers in Kenya have ever contacted customer care with a question, complaint or concern about a digital loan, according to a working paper on A Digital Credit Revolution by the Consultative Group to Assist the Poor. One in 10 borrowers reported needing to contact customer care but not knowing how to do so, according to the study.
The survey, done in partnership with Financial Sector Deepening (FSD) Kenya and Tanzania, finds that digital loans mostly reach those who are already financially included. In Kenya, digital borrowers are 26 percent more likely than typical adults to have a bank account. They are also more likely to have health insurance and engage with other financial services, including pensions and microfinance.
There are more than 20 digital credit providers in Kenya, including M-Shwari, KCB M-Pesa, M-Co-op Cash, and Equity Bank’s Eazzy Loan. The digital credit ecosystem also includes a range of non-bank, credit-only lenders that currently operate outside of the regulatory perimeter of the Central Bank of Kenya.
About 82 percent of digital credit users have used M-Shwari while 34 per cent of digital borrowers, or 12 per cent of phone owners, have used KCB M-Pesa.