Taming Digital Lenders in Kenya: Are We Close?

Dr Patrick Njoroge, CBK Governor Photo|The Standard

As app developers in Kenya, we do not just create loans apps. We care about the experience and welfare of the users. Like many Kenyans, we are concerned about the rates the digital lenders charge.

Kenyans have been complaining about instant loan apps for quite a while. However, a suicide case in 2019 caused a stir.

A man borrowed from a digital lender and defaulted on his loan. The lender resulted in what many have termed as “harassment.”

We told you how lenders ask for access to private data such as contacts or phone gallery. Here is the purpose. The lenders will contact everyone on your phonebook if they cannot recover funds from you.

Such was the predicament of this man who resulted in suicide. The lender started sending messages to his contacts, including his mother and grandmother.

What would you do if all your friends and family members start receiving messages about a loan you cannot pay?

Some have termed this as cyber shaming. The suicide provoked CBK to move to action.

Borrowers, on the other hand, started sharing their horrific stories of the means that digital lenders use to demand their loans.

The digital lenders’ side of the story

Every time Kenyans talk about interest rates on mobile loans, the digital lenders come out to defend their case.

Is this a case of misinformation? Do borrowers know how the process works?

In a recent interview on Citizen TV, the Digital Lenders’ Association spokesman, Kevin Mutiso explained how they end up with high interest rates.

Some will call it exorbitant but the lenders call it fair pricing.

Digital lenders in Kenya access funds from banks and other financiers. At the moment, the lenders in the Kenyan market cannot get funds from local banks.

The result has been borrowing money from venture capitalists from the US, China, Poland, and other countries.   

The lenders talk of a high cost of borrowing the funds. The capitalists charge between 18% and 22 % as an interest rate.

Think about it. Who pays for this interest rate? You! And every other Kenyan looking for a thousand or two from a loan app.

Remember we have not yet factored in other costs like developing a loan app, operational costs, taxes, and fixed costs. The lenders still have to make reasonable profits to stay in business above all costs.

When they add their price to the cost of borrowing, the instant loan becomes expensive.

Also Read: 10 Ways to Identify Fake Loan Apps in Kenya

Digital lenders also talk about the high risk of the business. With millions of Kenyans listed on CRB as defaulters, the lenders understand the risk in the market.

Loan apps lend to people that local banks will instantly turn away. When you hear or read that you can get a loan with a poor credit score, understand that you will pay a premium for that risk.

Again, not all digital lenders are predatory. Some are committed to helping small business owners grow their businesses.

Small business owners like mama mboga cannot wait for 30 to 45 days of a business cycle to buy new goods. They must go to the market almost every day to keep the business running.

Loan apps came in to cover this market segment.

Should the government regulate the market?

It is easy to shout and demand that the government steps in to regulate digital lenders. Borrowers would expect that interest rates would come down.

Digital lenders are open to government regulation. CBK can protect both lenders and borrowers by setting standards to govern their operations.

For instance, digital lenders should be required to be transparent about the price of their loan products. Honesty and ethical procedures in collecting funds from borrowers are equally important.

However, capping the interest rates would harm the market, as it is with any other market.

A loan is a commodity that is subject to demand and supply forces. At least the digital lenders view it that way.

From your basic economics class, you know that the price of any commodity goes up whenever the demand exceeds supply.

Unfortunately, this is the case in the Kenyan market for instant mobile loans.

We have a good example from the Kenyan government’s move to cap interest rates for local banks. The bank owners, in response, introduced digital lending platforms that operate as other private loan apps.

The interest rates are nearly the same. However, most local banks are ethical in their practices and are strict about controlling the risk of lending to defaulters.

The financial crisis of 2008-2009 is another perfect example of the long-term effects of government interference in a market.

The way forward

We clearly need order in the digital lending space.  The government through CBK should create rules and regulation for digital lenders in Kenya.

Whether we call it cyber shaming or harassment, dealing with defaulters must be ethical and fair. We do not need to lose another life because of a small loan.

While talking about lenders, we need to look at the real issues as Kenyans. What is pushing Kenyans to digital lenders?

Why are we willing to trade our private data for a loan of Ksh. 1,000?

Most people do not borrow for luxury but for basic needs. Unfortunately, the needs are recurrent and with no sustainable income, the inevitable happens.

Kenyans are desperate for an economic shift that will increase their real income to match the ever-increasing rate of inflation.

The income of the borrowers that loan apps target does not match with the cost of living, especially in the urban setting.

Hence, beyond asking the government for regulation, we need to demand systems and institutions that work for the citizens. Corruption is still a sad case in Kenya where people borrow to eat.

When the government fails to do its job well, the citizens suffer.

Finally, we need to make equal noise about savings as we do digital loans.

As app developers in Kenya, we have heard all manner of arguments and complaints about instant apps yet the demand for the same is still increasing.

However, noise about apps or platforms that help you save consistently is rare.

We need to cultivate the saving culture while we demand ethical and fair practices from lenders and accountability from the government.

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10 Ways to Identify Fake Loan Apps in Kenya

The debate on whether loan apps in Kenya are helpful or enslaving continues. In fact, some people have termed loan apps as modern-day shylocks.

The arguments do not matter much to those facing financial constraints. Most people borrow to meet their basic needs that their income cannot meet.

Recent reports from different groups including the Financial Sector Deepening (FSD) Digital and Lenders Association of Kenya (DLAK) warn Kenyans of rogue apps.

Are you using a fake loan app? Read on…

Statistics

The Bill and Melinda Gates Foundation in association with the government and the FSD conducted a study on mobile lenders. The team produced the Digital Credit Audit report.

The study showed that by September 2018, the two main app stores, Google PlayStore and Apple’s App Store had 110 mobile loan apps.

According to the findings, 74 unique app developers had developed money lending apps.

By April 2019, 65 out of the 110 apps were no longer listed on the app stores.  Instead, 43 new developers joined the stores and introduced 43 new apps.

The changes within just a few months raise many red flags.

The team found out that most of the digital lenders are neither SACCOs nor banks. The lenders are not accredited to any financial institution.

This means that if you save with the lender, your savings are not secured in any way. In addition, such lenders are not insured.

If established banks go down, what do you think of unregulated digital lenders?

If more than half of loan apps are pulled down in just 7 months, why should you consider borrowing money from loans apps in Kenya?

Ways to identify fake loan apps

If your income can meet your bills and emergencies, you may not think of a loan. Again if you can access an unsecured loan from a local bank, an instant loan may never cross your mind.

Unfortunately, this is not the case for millions of Kenyans. Many depend on loans to survive.

Banks have also turned to online lending after the stringent rules that the Banking Amendment Act 2016 introduced.

Hence, if you don’t land in the hands of private digital lenders, you will end up in Mshwari, KCB-Mpesa loan, Stawi loan app, Kopa Chapaa by Faulu, Timiza from Barclays, Eazzy loan from Equity or Co-op Cash.

You may not qualify for a loan from these apps. Your alternative is private or international lenders like Tala, Zenka, Branch, or Saida.

New names have also in the Kenyan market such as Berry Loan App, KopaKash, Okash, Tumiwa, Uwezo Kash and Pezesha among others.

How can you tell if you are just about to borrow money from a rogue digital lender?

1. High registration fee

According to the Digital Credit Audit report, rogue lenders charge anywhere between Ksh.200 to 400 as registration fee.

Of course, the lenders know by now that borrowers are looking for free apps. With the high number of apps in the stores, coming clean with the registration fee is not an option.

Look out for claims that the fee is for checking your CRB record or score. You will never see the evidence that they actually checked your score.

Actually, you may not have access to the app after sending your registration fee. Some begin malfunctioning immediately and deny a fresh registration with the same details.

2. Data access

Beware of the permissions you grant to any app including loan apps when installing. For instance, an app may request to read your exact GPS location, which is expected with loan apps.

However, why should you grant permission to your phone gallery or messages/SMS app? Some will not install until you grant access to your call logs or your device identity.

A genuine lender does not need such information. You never know how the app owners use such information in this age of cybercrimes.

Also Read: Top 5 Instant Loan Apps in Kenya

3. Mimicked names

We know about brands like Tala, Branch, Fuliza, and Coop Cash. As you search the app store, you will come across loan apps in Kenya with twisted names.

For instance, you may see Tala Kash, Fuliza Sasa, Tala Pewa Loans or Mkopo Branch Rahisi.

Such lenders target borrowers who are unaware of the right brand names of loan apps. Stay away from such apps.

4. Rewards or prizes for referrals

If you need to refer other borrowers to an app to gain points, rewards, or qualify for a higher amount, you are in the wrong hands.

Some fake apps will not even grant the first loan before you enlist other borrowers and earn enough points.

Your creditworthiness should be sufficient to qualify you for a loan from a genuine lender.

5. Minimal details asked

How easy is it to qualify for your first loan? Is the app promising a high amount even with a low credit score?

Lending online does not eliminate the need to verify the identity and creditworthiness of the borrower.

If the lender needs few personal details to issue loans, chances are they have obtained the information illegally. Else, the app may go down at any time after earning a high interest from you.

See Also: Safaricom’s Fuliza Wins a Prestigious Award Months after Launch

6. Fake physical address and contacts

Most borrowers do not bother to check the contacts and address of digital lenders until they run into trouble. Check this information first no matter how pressing your financial need is at all times.

If you cannot get through the phone numbers given at any time of the day, discontinue the service. A loan app should be accessible and functional 24/7 with a quick support team.

7. Negative reviews

Do not believe every promise that an online lender makes. Check other borrowers’ reviews on the app store.

If all you read are complaints, do not ignore and assume that your experience will be different. Check the lender’s response to the complaints as well.

8. Exorbitant interest rates

Even the best loan apps in Kenya charge higher interest rates than banks do. However, rogue apps go beyond the normal rates for apps.

Compare the interest rates from established brands first to determine the prevailing interest rate.

9. Sudden changes in terms

Have you ever used app, qualified for a certain amount but your limit went down after payment? Loan apps promise to increase your limit when you pay in full and on time.

If the terms change suddenly, you are probably dealing with crooks who cannot sustain their business.

They come up with excuses for penalizing defaulters or changing loan limits even with evidence of previous communication.

10. Frequent breakdown 

Here is one more red flag for rogue loan apps. An app hangs when you are trying to request a loan or choose a longer repayment period.

The malfunction rarely comes before you repay for the first loan or send the mandatory registration fee.

If you can hardly complete a process without a dysfunction, you are most likely using a rogue app.

You will not miss the red flags if you do your homework. Do not take chances. Seek for information before you share your confidential data with unknown digital lenders

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