Why that side hustle is driving you straight into debt

In a country that glorifies side hustles, there is no shortage of salaried employees looking for ways to earn an extra income.

There is also a growing number of Kenyans going into business, forced by the cruel hand of rising unemployment.

Academic qualifications do not count for much, and all one needs is a workable idea and some capital, depending on the business of choice.

And therein lies the problem, according to a new report by digital lender Tala, which shows many entrepreneurs have limited knowledge on how to manage expenses.

According to the MoneyMarch 2022 report, majority of Kenyans need training on saving and how to manage business expenses, among other key areas.

The report released earlier this week identified how to grow or start a business (24 per cent), saving effectively (24 per cent), and being in control of debt (21 per cent) as areas of concern for majority of respondents.

Other areas included creating a budget to manage expenses (15 per cent), learning how to adapt to financial emergencies (14 per cent), and others not indicated (three per cent).

Of all the areas, how to start and grow a business took priority among the 423 Tala customers who were polled.

This points to the reason why most of the respondents seek loans on the mobile lending app.

While presenting findings, Tala User Research Manager Mr Teddy Kahiro said the report’s main objective was to ascertain financial literacy levels and their resilience.

He said it was also meant to help the fintech firm understand its customers, their needs, how their preferences are changing and how it can evolve to meet their needs.

“In addition, we believe that empowering our customers to make financial decisions based on education will help break the cycle of over-indebtedness and bring more underbanked Kenyans into the financially healthy circle,” Mr Kahiro said.

Tala noted that for majority of the customers whose borrowing has increased in the last six months, their need for money was business-related.

“This speaks to the growing need to have more than one income source, hence need for capital or funds for running their side hustles,” says the report.

It says 43 per cent of the 423 individuals surveyed cited “business expenses” as the reason for borrowing. Another 35 per cent of borrowers cited the need to “add stock” to their businesses.

Other needs included school fees (20 per cent) and medical (six per cent). Utilities, house and personal expenses took 19 per cent.

“For those whose borrowing has remained the same or lower, it’s mainly for school fees and utility or personal expenses,” the report says.

Majority of Tala customers have increased their borrowing in the last six months, it says.

“This speaks to the growth in expenditure, with 53 per cent of them claiming their expenditure has increased in the last six months.”

Majority of the app’s customers use more than one mobile lender, on average two.

“This signifies that there are unmet needs by the different lenders being used,” says the report.

“Half (52 per cent) of customers borrow between Sh25,000 and Sh30,000 on each borrowing occasion.”

The report findings tally with the latest FinAccess report by the Central Bank of Kenya that raised concern on Kenyans’ financial literacy, especially when it comes to business expenditure.

The FinAccess report noted that most of the respondents who reported to have taken business loans indicated that the purpose was to fund expansion, indicating demand for solutions tailored to this need.

“Turning to the quality dimension of financial inclusion, as assessed on the basis of financial literacy and consumer protection, the survey indicated that 45 per cent of respondents relied on friends and family members to get financial advice, with formal institutions playing a peripheral role,” said the report released at the beginning of the year.

While rapid adoption of financial technologies and innovations has increased access to financial products and services, the FinAccess report said that has brought with it financial literacy and consumer protection concerns.

This is because some of them have experienced fraud and unexpected charges.

Family and friends make up the biggest percentage of financial advice (45 per cent) followed by self or nobody (43 per cent), media and advertisement (3.6 per cent) and financial institutions (2.9 per cent).

“When assessed by the level of education, 50 per cent of the population with no education and 46.6 per cent with secondary education relied on friends or family for advice when making a financial decision in terms of rural-urban divide, 46.5 per cent of residents in rural areas depended on friends or family in decision making on financial matters compared to 42.4 per cent in urban areas,” said the report.

The FinAccess survey said the source of financial advice is an indicator of trust in an institution or person.

“Knowledge of basic financial terms and the ability to identify transaction costs related to a financial service are important elements in consumer protection and personal financial planning and budgeting,” the report said.

The Tala report shows that on borrowing, almost six in every 10 Kenyans (59 per cent of Tala customers) have increased their borrowing in the last six months.

“The top reason for 78 per cent of the participants taking loans is business related, to either pay business expenses or add stock, supported by the finding that eight out of every 10 respondents have side hustles other than their main income source,” says the report.

Tala Country Growth Manager Ms Annstella Mumbi said empowering customers with a solid education on finances is a key objective.

“We believe financial resilience among the underserved and underbanked Kenyan majority can be enormously boosted by helping them understand how money works in everyday life,” she said.

“Financial literacy education will give young people the foundations of future success and can help economically disenfranchised Kenyans out of deprivation.”