Okoa Stima tops list of most expensive mobile lenders

Digital loans hit Kenyans hard, new survey shows. [Photo: Courtesy]

Purchase of electricity on credit from Kenya Power is the most expensive type of loan, an analysis of the costs of various digital loans shows.

Kopa chapaa, which is operated by Faulu Kenya and Pesa na Pesa, a product owned by Nairobi-based AVLC Group, complete the top three most expensive loan products in the survey carried out by the Kenya Bankers Association (KBA).

Okoa Stima, the product which allows distressed electricity consumers to buy units on their pre-paid or post-paid connections on credit, charges 43.4 per cent monthly interest.

It is offered by Safaricom on its M-Pesa platform on which several other products, including M-Shwari, are hosted.

A 10 per cent levy is charged on the value of the tokens purchased by the customer on credit which is repayable within one week.

Unaware of costs

Compounding the weekly rate which assumes that the borrower would purchase on credit at least four times in a month, gives the 43.4 per cent reported in research.

The KBA report titled Digital Credit, Financial Literacy and Household Indebtedness intended to analyse the uptake of loans on mobile phones and their impact on borrowers. 

A key finding of the study indicated that borrowers who accessed the digital loans are hardly aware of the costs, while the lenders are doing little to educate them

“However, the increase in digital credit uptake amid increasing default rates among borrowers has raised questions about the information consumers have on them,” the report reads in part.

Lenders were also found to be exploiting “insider information” about the borrowers including their ability to pay.

Kopa Chapaa’s monthly interest rate is set at 38.8 per cent while the fourth most expensive product - Pesa Pata - has an interest rate of 30.4 per cent. Pesa na Pesa by AVLC Group is third.

Mainstream lenders including Kenya Commercial Bank Group and Commercial Bank of Africa (CBA) through their platforms KCB M-Pesa and M-Shwari respectively, price their loans at a rate of 7.5 per cent a month.

Researchers in the study highlighted that the high interest rates applied by the various lenders reduces household incomes, while borrowers were likely to be pushed into distress.

Among reasons for the high default rate was that borrowers are highly unlikely to earn returns big enough to cover the interest charged on the loans.

Interestingly, the survey found that most borrowers sought credit for capital for their small businesses, before meeting their daily living costs.

“Despite the fact that digital credit is easy to access and meets unanticipated needs, the ease of access and the high cost of obtaining it exacerbates debt distress, especially when credit is used for non-productive purposes,” KBA reports.

Promptly reported

Defaulters are promptly reported to the Credit Reference Bureaus where they are blacklisted and subsequently blocked from accessing credit from any other digital lender.

Already, more than 500,000 people have been blacklisted in a worrying trend which has informed the recent crackdown on the betting industry since many youth are thought to have borrowed to stake bets.

Subsequently, such gamers would default on their loans after losing the bet and often end up dumping the SIM card used to borrow.

Concerns about the soaring debt distress among ordinary households, specifically brought about by digital lenders, has caught the attention of Parliament which is considering proposals to regulate them in the same manner as banks.

During discussions on the amendment to the Banking Act on Wednesday, legislators who contributed to the Bill promoted by Kiambu Town MP Jude Njomo sought to have the interest rates on digital lenders capped.

Baringo Woman Representative Gladwell Tungo said in her contribution that all lenders should be treated in the same manner, regardless of whether they offered conventional or digital loans.