Mobile loans: The new gold rush minting billions from the poor

More than half a million digital borrowers have been blacklisted by credit reference bureaus (CRBs), and the number keeps growing as more digital lending platforms enter the East African region. [Courtesy]

Last week, tragedy engulfed Githumu Village in Murang’a County after 25-year old Samuel Ngari was found hanging from his house in an apparent suicide.

The young man had been working with his parents on their farm when he excused himself, went to his house, locked the door from inside and hang himself.

According to neighbours, Ngari had taken a Sh3,000 loan from a mobile lending application. That weekend, he had received a text message that he had been blacklisted from receiving future credit for failing to repay his loan on time.

The story is not unique to Githumu Village. It is one that is all too common across the country, with young men and women being pushed to the edge by easy to access mobile loans.

Many of them end up getting depressed in a country that does not give mental illness the attention it deserves, and to escape their darkness, they end up taking their own lives.

Digital lending

The cases of borrowers sinking into deep debt as they ravenously take up loans for personal consumption are widespread.

More than half a million digital borrowers have been blacklisted by credit reference bureaus (CRBs), and the number keeps growing as more digital lending platforms enter the East African region.

There are more than 50 mobile and nline credit providers offering loans at a click of a button. But this convenience comes at a high cost, with some applications offering interest rates as high as 150 per cent a year.

This has seen borrowers juggle loans from different digital credit providers. Indeed, most of them are borrowing from one platform to pay another, a situation that has driven them into a debt trap.

In 2016, Kenya introduced the law that caps interest rates at four percentage points above the Central Bank Rate (CBR). As a result, commercial banks became more cautious about lending to individuals and small businesses, saying the law did not provide room for pricing risky borrowers.

This provided a market for digital lenders who have found booming business in the region, helped by the success of mobile money platforms.

And for the past few years, Kenya has been hailed as the regional hub for financial technology (fintech). This has largely been due to the hugely successful M-Pesa, which Safaricom launched in 2007 and hailed as a revolutionary platform in the fight against poverty.

M-Pesa has proven to be a runaway success, raking in almost Sh300 billion in service revenue for Safaricom in the last five years.

This has seen numerous other providers, including Silicon Valley-sponsored apps like Tala and Branch, as well as commercial banks launch mobile lending products, seeking to replicate M-Pesa’s success.

Investors have understandably taken note, with Tala and Branch topping the list of the most heavily invested start-ups in Kenya.

Earlier this year, Branch announced it had raised Sh17 billion in debt and equity financing to expand its loan portfolio. Last year, Tala announced it had raised Sh5 billion in its third round of investment, bringing its total financing to Sh10.5 billion.

The two lenders usually crop up in lists of the ‘top global fintechs to watch out’. And these eye-watering figures have drawn attention to Kenya’s fintech sector and the disruptive effect of mobile banking on largely poor economies.

However, new research indicates that fintech solutions could be worsening poverty and underdevelopment in poor countries – and leading to capital flight, with some development economists raising the red flag.

Economic empowerment

In a paper published early this month in the Review of African Political Economy journal, economists Milford Bateman, Maren Duvendack and Nicholas Loubere raise significant questions on much of the earlier reports of fintech’s transformative effects on poverty reduction.

The researchers argue that a household study conducted between 2008 and 2014 concluding that fintechs translate to economic empowerment was deeply flawed.

“The key estimate of long-run impact is calculated by comparing households that experienced a large increase in access to M-Pesa agents during this time period with households that did not,” explain the researchers in part.

This, it is believed, happens through improving poor communities’ ability to save, send and transact money safely and directly, boosting their economic wellbeing.

Mobile money users were particularly said to have more access to financial resources, which they can then use to leave unproductive subsistence agriculture and start their own enterprises.

The problem with this analysis is that researchers ignored the high rate of businesses’ mortality among Small, Micro and Medium Enterprises, (MSMEs) in Kenya.

“In emerging economies, enterprise exit is a problem that greatly undermines all job creation interventions, but especially microenterprise development interventions,” explain Bateman, Duvendack, and Loubere.

“The essential problem is that while it is relatively easy to provide financial and other stimuli to encourage certain groups to move into petty entrepreneurship, if there is no commensurate increase in local demand at the same time then the zero-sum end result is simply the redistribution of local demand among a larger number of market participants.”

This means that while many MSMEs are cropping up and could well be fuelled by capital mobilisation through mobile money, as many or even more MSMEs are failing every day from a lack of demand, cancelling out the effects of new wealth generation.

The same happens when determining the impact of new enterprises on jobs, where new businesses displace jobs across traditional businesses that do not have the same financial cushion.

The researchers argue that the net income and jobs impact of new entry stimulated by mobile money is likely to be quite low if not near-zero – overstating the positive impact of the service.

Another glaring omission in the glorification of fintech as the solution to achieving financial inclusion is the link between mobile money and gambling.

It is now easy to access funds from mobile lending apps and use them to gamble.

“The individual over-indebtedness situation in Kenya is now approaching near-crisis level and leading financial analysts and long-time promoters of financial inclusion express real concern that over-indebtedness is now out of control and are petitioning the Kenyan government to implement urgent measures to restrain and control the rapid growth of microcredit,” the researchers explain.

The researchers say the biggest problem is that the bulk of the billions of shillings that fintechs generate in Africa does not go to the poor but gets repatriated to a select few owners and investors in the US and Europe.

“Fintech is very clearly designed to hoover up value and deposit it into the hands of a narrow global digital-financial elite that are the main forces behind the fintech revolution,” said Bateman, Duvendack, and Loubere in the report titled, Is fin-tech the new panacea for poverty alleviation and local development?

They say the money could be redirected towards Kenya’s poor population and reinvested locally, for example through community-owned financial institutions and financial co-operatives.

 “The 2008 global financial crisis showed the world that an exciting new innovation said to be of huge benefit to America’s poor minority communities – sub-prime mortgages – was actually expressly designed to enrich a narrow Wall Street financial elite.

“And when the bubble burst, it was the poor who disproportionately suffered the consequences. Worryingly, in the rise of fin tech as a development strategy, we see many of the same precursors to previous financial collapses that have wreaked havoc on local communities and the livelihoods of their poor inhabitants,” the researchers said.

They also criticised a study done by US-based economists William Jack of Georgetown University and Tavneet Suri of Massachusetts Institute of Technology, who with funding from Financial Sector Deepening (FSD) Kenya and the Gates Foundation, produced a series of studies since 2010 that extolled the benefits of fintech.

“… their flawed study failed to depict fintech more generally for what it really is – a financial ‘innovation’ that enriches elites at the expense of the poor, while also shifting risks to the poor themselves, ultimately ensuring that it is the poor that will be the ones most devastated by a future financial collapse.”

They noted that fintech could be the revised version of the natural resource extraction paradigm that was largely responsible for under-developing Africa and other colonised countries over the last four centuries.

Financial status

The study confirms recent trends of Kenyans growing disillusioned with their mobile money and micro-credit service providers.

The 2019 FinAccess report released in April by the Central Bank of Kenya (CBK), Kenya National Bureau of Statistics (KNBS) and FSD Kenya indicated that financial inclusion had grown from 75 per cent in 2016 to 82 per cent this year on the back of fintech expansion.

However, the prevailing question was whether the reported financial inclusion translated to real poverty alleviation.

When the FinAccess survey was conducted in 2016, 38 per cent of respondents reported their financial status had improved while 34 per cent said it had worsened.

This year, 23 per cent reported it had improved and 51 per cent said it had got worse.

At the same time, while 46 per cent of respondents in 2016 reported the ability to invest in their livelihoods and future, the figure had halved to 21 per cent this year.

Similarly, 36 per cent said they could raise a lump sum of money in three days in 2016, and this year the figure dropped to just 19 per cent.

Overall, the 2019 FinAccess study found that the vast majority of Kenyans feel their financial status has weakened and their ability to use financial services and products to manage their daily needs, cope with shocks and achieve big goals has significantly declined in the last three years.

This is one of the reasons kiosks, friends and family still rank as the highest sources of credit for Kenyans, despite the proliferation of fintechs.

However, the Government has been slow to respond to these concerns, despite regulators, including CBK and Communication Authority of Kenya, speaking on the need to regulate fintechs.

As late as last week, CBK Governor Patrick Njoroge said the bank would introduce legislation to police mobile lenders within the banking regulations.

“There has to be proper regulation, where similar products are regulated in a similar way so long as you are lending to customers or receiving deposits,” said the governor during a press briefing.

“If you have a banking function, it’s not just about the name; you have to be regulated in the same way or it will lead to arbitrage.”

The CBK is, however, at the forefront of pushing Stawi Loan, a mobile lending product conceived by Commercial Bank of Africa (CBA), Cooperative Bank of Kenya, Diamond Trust Bank, KCB Bank, and NIC Bank.

This has raised speculation on the regulator’s commitment to actively develop legislation to protect consumers.

A recent report by a credit reference bureau indicated that more than 2.7 million Kenyans have been blacklisted owing to defaulting on mobile loans.

Of these, more than 400,000 people have been blacklisted for defaulting on loans of Sh200 and below.

Other research shows that 16.6 per cent of digital borrowers take up one loan to pay another loan, trapped in a vicious cycle.

High costs

Further, digital borrowers asking for low amounts (such as Sh200) have to incur high costs to the point where when paying the principal and interest, they are likely in a worse off position than they were before the loan.

According to Egyptian financial services firm EFG Hermes, the interest on loans advanced by different mobile money products are punitive to poor borrowers, many of them in desperate need of the money and with limited options.

In a report on financial inclusion in sub-Saharan Africa, EFG Hermes noted that Kenya digital lenders were advancing money to borrowers at unreasonably high rates that were punitive to the poor.

The firm argues that Kenya’s financial access had come at a prohibitive cost to the poor and urged the Governments to look into the possibilities of making financial access for low-income segments more affordable.

“While we are very encouraged by the depth of mobile banking across our universe of sub-Saharan Africa countries, we believe that now is the time to focus on the costs,” said EFG Hermes in the report published at the end of May

The report, Deepening Financial Inclusion, But at a High Cost, notes that taking small amounts of loans on mobile money platforms is more costly.

“Although not technically called loans, the effective cost of borrowing $1 (Sh100) on your mobile using M-Shwari and Fuliza accounts in Kenya is 7.5 per cent per month (138 per cent annual percentage rate (APR)) and Sh2 per day (137,641 per cent APR), respectively.

“However, the APR of borrowing more than $25 (Sh2,500) on Fuliza is only 17 per cent. This means Fuliza is disproportionately expensive for the poor,” said EFG Hermes in the report.

“The question we would ask is, why is it ok for this product to be so disproportionately expensive for the poor?

“Although Safaricom has told us that this is a bank overdraft facility (using the M-Pesa platform) and that the rates were approved by CBK, we would stress that just because they were approved does not mean they are fair.”