The country’s lenders lobby group, Kenya Bankers Association (KBA) recently released a report indicating of up to 21% of digital loans were not repaid between 2015 and 2018. The report did however not reveal how much the association’s members had given out as digital loans. This default rate is more than twice the average ratio of non-performing loans through conventional borrowing, standing at 10.2% over the same three-year period.
The higher non-performing digital loans have triggered the increase in the number defaulters reported to one of Kenya’s three credit reference bureaus, diminishing the borrowers’ chances of being able to borrow more. A scheme of avoiding defaults has been introduced by the borrowers who tap loans from a number of firms to settle loans owed to rival digital lenders. This grows the borrowers’ debt and ultimately leads to their negative listing on Credit Reference Bureaus (CRBs).
According to a study by Microsave, a lenders consultant advisor on sustainable financial services, 2.7 million people out of a 45 million population in the country have been negatively listed with CRBs in the last three years. Most of these loans were below shs. 1,000 and were mostly accessed through mobile phones. These defaults come at a time when the banking sector is battling a rise in distressed borrowers as Kenya’s economy slows down.
The country’s economic growth slowed in the first quarter of this year, at 5.6% compared to the same period last year at 6.5% mainly due to dry weather that adversely affected the farming sub-sector. Agriculture, which contributes about a third of the country’s Gross Domestic Product (GDP) grew 5.3% compared with 7.5% in the first quarter of 2018 thus denying cash to the economy. Non-performing loans in the banking industry have increased the double digits for the first time since 2007 as banks aggressively seize defaulters’ assets.
This points to the difficulties businesses and individuals are facing to stay afloat in the economy and the reduced spending power of ordinary Kenyans. Top auctioneers continually report a glut of repossessed vehicles, land, homes and office equipment being sold off cheaply across Kenya. Stephen Kang’ethe, an auctioneer with Nairobi based Dalali Traders said that more people are defaulting leaving banks no option but put their property up for auction even as they become aggressive in seeking to recoup the defaulted money hence the rise in auctions.
Bankers however prefer CRB listing for digital loans due to their small nature to justify auctions. Unlike conventional loans which charge an annual rate, mobile loans charge per month thus making them expensive. The current legal regime of the digital lenders falls outside the direct remit of the Central Bank of Kenya (CBK), allowing providers, both banks and others to escape the government cap on interest of four points above the CBK benchmark interest rate.
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