In the past, opening a bank account in Kenya was an elaborate and tedious affair. It was akin to applying for a job: you presented your “curriculum vitae” to bank officials who would determine your fitness as a financially serviceable client. There were forms to be filled (in duplicate) that captured details such as date of birth, schools attended, employment history, reasons for choosing that particular bank and referees to vouch for your suitability. Some banks even asked whether you had spent nights in a police cell and whether you had a criminal record. It was like joining an exclusive members’ club – the odious scrutiny made it look like it was a privilege to be allowed to join the “banking club”.
The procedure for getting a loan was even more stringent and punitive: you would be asked to deposit a valuable item, such as a log book, jewellery or a title deed, as collateral. Money matters were serious business.
That was then. Today technology, particularly smartphones, has revolutionised the financial sector, so much so that traditional banks must be ruing the day smartphones became second nature to humanity. These days getting a personal loan online is easier and faster than calling your nearest bank or micro-finance lending facility. Thanks to mobile banking, a smartphone owner can borrow from as little as Sh500 to as much as Sh70,000 without breaking into a sweat. All he or she needs is to be social media savvy. Having a social media account, such as a Facebook account, is understood by both the online loan apps and the borrowers to be an unstated primary requirement for accessing a loan. There are at least 50 mobile phone lending apps operating in Kenya.
A FinAcess (financial access) survey done in 2016 by the Central Bank of Kenya, the Kenyan National of Bureau of Statistics, FSD-Kenya and the Consultative Group to Assist the Poor found out that 77.5 per cent of Kenyans own a mobile phone. Out of this group, according to a 2018 digital credit survey, 35 per cent, or roughly six million people, have taken at least one digital loan. In essence, the survey found that digital credit had become a leading source of credit in Kenya. Using a sample size of 3,000 Kenyans, the survey showed that digital credit appeals to younger customers, out of which 55 per cent are male and from urban areas. The study also found that by far the most common reason for taking a loan is to meeting day-to-day needs. Financing education also drives use of credit while just over a quarter of users take loans to support their business and agricultural activities.
However, many of these borrowers struggle to pay back their loans. According to a survey by Microsave, a financial services consultancy, 2.7 million borrowers have been negatively listed by the Credit Reference Bureau (CRB) in the last three years, 15 percent of them for amounts of less than Sh200. (CRB is the body charged with the task of flagging or blacklisting all loan defaulters and ensuring that they are barred from borrowing from or transacting with any financial and legal entity, including the government.)
Eliud Njoroge, a financial risk management and private equity fund consultant, told me that mobile phone lending firms financed by venture capitalists were taking advantage of the vulnerability of impressionable youth. “The youth of today want instant gratification – they want it now and here. The notion of delayed gratification, that is, the idea of being patient and thinking through your financial needs, wants, opportunity costs and apparent risk considerations are alien concepts to them,” said Njoroge. “The ‘Java’ generation lives for the moment and developers of these digital apps are exploiting this social phenomenon in the epoch of social media, where the imagined reality of life is being played instantly.” (By Java generation the private equity fund manager, who himself is a millennial, was alluding to the Java restaurants in Nairobi that are popular among the city’s slick young urbanites.)
According to a survey by Microsave, a financial services consultancy, 2.7 million borrowers have been negatively listed by the Credit Reference Bureau (CRB) in the last three years, 15 percent of them for amounts of less than Sh200.
“The crux of the matter is that today the aggressive marketing gimmicks by the owners of these apps are singularly directed at the post-millennials – guys barely out of their teens and who have zilch idea of what constitutes a financial budget, leave alone a plan,” notes Njoroge. “Because they still solely rely on their parents, guardians, benefactors, relatives and friends for their upkeep, they have no qualms misusing and squandering money. Hence, the apps have specifically been developed largely with this group of people in mind. They are ready and willing to spend, but most importantly, borrow money to feed their peer-driven lifestyle habits.”
Njoroge’s opinion is based on his wide experience in advising multinational banks and international financial corporations and, more specifically, financial start-up companies that are being funded to loan cash to young people (read anybody below 33 years of age). Njoroge has worked as a financial risk management consultant in Ethiopia, Rwanda and the United Kingdom. Now based in Kenya, he currently works with start-up companies on the look-out for potential big and small loan risk takers. “I will tell you for free that these online apps will explicitly not come out to state that they are targeting these young adults, but I know it from experience and interactions with today’s bankers and venture capitalists that this is the case.”
However, the 2018 digital credit survey found that “digital borrowers are more likely than average to run their own business or be employed” and “less likely to be … dependent on family or government transfers”.
Njoroge says that the apps make young people believe that they can both save and borrow money, but this is not the case. “There is no saving. The apps exist solely for ensuring that you borrow endlessly.” He says another lie being perpetrated by these apps is that they promote small business enterprises. “A complete lie. These apps would like to masquerade as micro-finance entities. They like to market themselves as tools that reduce the cost of borrowing through technology. But I can tell you for a fact that micro-financing is a different financial ball game, technology or no technology. If indeed there are times when they will provide loans for micro-financing, it is because they must be seen to do so, and therefore, it will be incidental and not the primary intended goal.”
The tragedy of these apps, says the financial consultant, is that the cost of repaying these loans can be very punitive. “Firstly, their interest rates are way above the rates charged by banks. The Java generation is impervious to these high interest rates – they borrow and spend money that they have not sweated for. The developers of these apps figured this a long time ago.”
In addition, “if today you default, your name is immediately forwarded to the CRB. If that happens, trust me, you will not even be allowed to borrow from Okoa Jahazi (a platform for borrowing airtime from Safaricom, the biggest mobile network provider in Kenya).”
CRB has to date blacklisted half a million people, according to the Transunion Credit Bureau’s CEO, Billy Owino, Just three years ago, there were only 150,000 loan defaulters in Kenya. Woe unto you if you are ever blacklisted. You are not off the hook even after you have repaid your loan. CRB still considers you a credit risk for seven years. What this means is that for seven years financial institutions will be wary of you when you approach them for a loan. “Most of the borrowers don’t know that they got blacklisted. We get 200 calls daily from individuals in this category, asking how they ended up in the blacklist.”
Twenty-year-old Charles, a University of Nairobi student, says that he took the trouble to compare the interest rates of the various online money lending apps. He eventually settled for KCB-M-Pesa because it had the best rates.” He says that on average he borrows between Sh2,000 and 3,000 twice a month.
“What do you borrow the money for?” I asked him. “I use the money to finance my Sport-Pesa (gambling) expeditions. I bet for big matches.” Although Charles is a college student, he has not yet outgrown indulging in play-station games. “Apart from betting, I also borrow money to afford my play-station games escapades.”
The digital credit survey found that only 3 per cent of borrowers get a loan in order to gamble. It is possible that this number is an underestimate given the finding that “digital borrowers are almost twice as likely to have tried mobile betting at least once in their lifetime”.
Sports betting has become big business in Kenya and ensnared an entire generation. A GeoPoll survey done in March 2017 found that 76 percent of young people in Kenya are into betting and that these youth spend more money on betting than their Ugandan and Tanzanian counterparts. The survey also identified mobile phones as the preferred tool for sports betting among young people.
SportPesa, a sports gaming company that was established about five years ago, is today the biggest sports betting platform in Kenya. It is among the dozen or so sports gaming companies that have sprouted in the country recently. These sports gaming companies have developed an impassioned craze among millennials and zillennials (the post-millennial teenage youth born after 2000) who have taken to betting as a way of life. The GeoPoll survey found that Kenyans gambled more frequently than their fellow Africans, spending an average of Sh5,000 a month. Charles has yet to win big cash (most people have never won more than Sh5,000) but feels that he has to keep on feeding his craving, which started as a hobby.
A GeoPoll survey done in March 2017 found that 76 percent of young people in Kenya are into betting and that these youth spend more money on betting than their Ugandan and Tanzanian counterparts. The survey also identified mobile phones as the preferred tool for sports betting among young people.
According to Banker Awards held in the UK in December 2017, Kenya Commercial Bank (KCB) is the largest bank countrywide in terms of asset size and has 12 million customers registered for the KCB-M-Pesa mobile service. The KCB M-Pesa loan app, which started in 2015 as a savings account, charges between 4 per cent and 6 per cent interest rate. Its phone loan service rose from 35 per cent between January and March 2016 to 41 per cent in the same quarter in 2017. Because of the success of mobile money borrowing, financial transactions at the branch level fell to 20 per cent from 31 per cent previously. Said KCB Group CEO and Managing Director, Joshua Oigara, in an in-house 2017 KCB newsletter: “We’ve seen a sharp rise in loan requests on all our mobile loans following the decrease in interest rates.” The newsletter stated that the average value of loans per customer was Sh1,800.
Like Branch International Inc., an international online money lending consortium that has its headquarters in San Francisco in California, and which launched its services in Kenya in 2015, KCB M-Pesa, vigorously advertises on Classic FM’s most popular morning radio show. Its target audience, just like Branch’s, is post-millennial youth who have just turned 18, who are college-bound and who have just acquired a national identity card. Branch is giving loans of up to Sh70,000, and according to the radio promos, it claims to have up to a million Kenyan borrowers. “You do not need any collateral, any bank account or a referee, all you need to do is download the Android app and you will receive your loan in 10 seconds flat,” proclaims the ad.
The advertising language used to sell the online borrowing apps is deliberate and intentional, targeted at a generation that is just starting to discover itself and excited about owning a gadget that, to them, seems to unlock hitherto unimagined infinite possibilities. The one-minute radio promos of these online lending apps are couched in language that would appeal to young adults. “Unlocking your growth potential” and other slogans are targeted at a generation that had little or no financial knowledge.
Ken, like Charles, borrows to finance his gambling habits. “So I will borrow every time there are big matches being played on the English Premier League,” admitted Ken. “I bet on Sport-Pesa and I borrow between Sh1,500 to 3,000. He said his favourite app was Tala because, “it is very prompt when relaying the money. I wanted an app that does not waste time in giving me instant cash.”
Dates and other emergencies
The online app of choice for 19-year-old Steve, a Technical University of Nairobi student, is M-Shwari. “I opted to use M-Shwari because it is a solid brand that works together with KCB, another solid brand.” Steve said he borrows between Sh1,000 and 3,000 a month to finance his college lifestyle habits. “Cut a brother some slack,” he said. “I need to enjoy some good life while I’m a student.” Steve said he relies on his parents for pocket money “but can what they give me be enough? I oftentimes have to deal with emergencies, hence the need to have a channel where you can quickly run to for fast cash.” These “emergencies” include impressing and winning over impromptu dates.
Steve told me it is not just once that he did not have the cash to entertain some girl in a fancy restaurant. “On several occasions I have had hot dates, but trust me, I did not have a penny. But tell me, would you let slip a date you’ve been chasing like there’s no tomorrow just because you’re not liquid?”
Steve said he relies on his parents for pocket money “but can what they give me be enough? I oftentimes have to deal with emergencies, hence the need to have a channel where you can quickly run to for fast cash.” These “emergencies” include impressing and winning over impromptu dates.
Steve said he has walked confidently into a Java restaurant a couple of times with a “beautiful catch” with not a single penny in his pocket because he knows he can borrow money from M-Shwari “of course, without her knowledge”. The instant loan is deposited into his M-Pesa account, which he uses to settle his bill. Meanwhile, the Java generation belle will not have the slightest hint that her expensive lunch treat was financed by a loan and that the young man will have to figure out how to repay it later.
By 2017, the M-Shwari (shwari means to be calm or peaceful in Kiswahili) online loan portfolio had 420,000 applications every day; of that, 70,000 are processed daily for repayment every 30 days. It has more than 80,000 agents countrywide and processes US$20 million daily payments, according to a study done by Tamara Cook and Claudia McKay. M-Shwari is operated by Safaricom, the biggest mobile network operator in Kenya, and is considered to be the mother of mobile phone lending apps, largely because it was the first mobile phone loan application in Kenya.
Started in 2012, M-Shwari has to date 21 million customers in Kenya. The minimum threshold required of an M-Shwari borrower is to possess a Safaricom sim card and to be registered as an M-Pesa user. Therefore, technically speaking, anyone with an M-Pesa account qualifies to borrow from M-Shwari. The beauty with M-Shwari, its users tell me, is that you can borrow offline so long as you are on the M-Pesa platform. M-Shwari charges a one-time “service fee” of 7.5 per cent on all loans.
M-Shwari is actually a creation of a partnership between Commercial Bank of Africa (CBA) and Safaricom, who split the revenue accrued from the lucrative business. According to the How M-Shwari Works: The Story So Far report written by Tamara Cook and Claudia McKay in 2015, Safaricom provides access to customers and transactional data on mobile phone and mobile money usage. CBA, on the other hand, develops credit scoring algorithms that analyse the transactional data to make credit evaluation decisions. The actual lending is done by the bank. One of the single biggest reasons why the M-Shwari app is preferred is because money is promptly credited to your phone immediately. But just as you receive money on the spot, you must also pay it back on time. Deferment and delayed payment can be costly and punitive. “I have always endevoured to pay back on time,” said Steve.
According to a Safaricom manager, M-Shwari is busiest from 3am to 5am and from 8.30pm to 10.30pm, not because of the nocturnal spending habits of young men like Steve, but because of the business acumen of women vegetable hawkers (known as mama mboga). From as early as 3 in the morning, the women vegetable sellers begin to borrow money from M-Shwari because they need to go their respective markets to buy their wares, fresh and in good time. These women are experts in M-Shwari borrowing. By the evening, when they are reconciling their figures, they will begin repaying their loan, usually from between 8.30pm and 10.30pm, in preparation for the dawn borrowing. The women borrow anything from between Sh3,000 and Sh5,000 daily. On a good day, the mama mboga will repay her M-Shwari debt and still remain with a tidy sum as profit. However, these women, who are M-Shwari’s most loyal customers, are the exception rather than the rule when it comes to paying back their loans.
According to a Safaricom manager, M-Shwari is busiest from 3am to 5am and from 8.30pm to 10.30pm, not because of the nocturnal spending habits of young men like Steve, but because of the business acumen of women vegetable hawkers.
Chebet, a student at the University of Nairobi, does not even care to know the interest rates charged by these mobile phone apps. She told me that she borrows between Sh1,500 and Sh3,000 per month. And she was very forthright on why she borrows the money: “I borrow to satisfy my spendthrift behaviours. I am always buying shoes, bags and clothes that my meagre allowance that I am allowed by my parents cannot satiate.”
The 19-year-old said her favourite borrowing app is Tala. “I got used to Tala because it is advertised a lot on mobile smartphones. Tala is truly one of the money-lending apps that is advertised 24/7 on Android smartphones. The pop-ups are constantly in your face every time you navigate through the phone.” (Tala was previously known as Mkopo Rahisi, Kiswahili for “easy loan.” The app has devised a system where it rewards referrals: for every person you recommend Tala to, you are paid Sh200. Users of Tala, nonetheless, have to part with an additional charge in the form of M-Pesa transaction fees because the app uses a Pay Bill number. I asked her whether she paid her debts in time; she said she had defaulted a couple of times.
Tasha, like Chebet, has no clue how much interest rate she is charged by Tala. Blandly honest, the 20-year-old student told me she told me she borrows “to buy myself make-ups.” Hence, every three months she will borrow between Sh1,500 and Sh3,000 from Tala.
Tala, which was started in March 2014 by Shivani Siroya, a former United Nations employee, began by dishing out Sh10,000 loans in Kenya; today it gives loans worth up to Sh50,000. The app has the highest interest rate among its competitors – between 11 per cent and 15 per cent. (Branch charges 8.4 per cent.) Tala charges 11 per cent if you pay your loan weekly and 15 per cent if you choose to pay monthly.
Tala has also come up with a system that can detect when customers change their mobile phone number. It has a default message that reads: “Your account is linked to another device.” It is a polite warning from Tala that it would be improper and risky to run away with their money, for example, thinking that by changing your sim card, you will be off the hook insofar as repaying your loan is concerned. Chebet, in not too many words, confirmed to me Tala’s tightening of its lending procedures: “You can run, but you cannot escape.”
Mariam, another 19-year-old, is hooked to Tala. Although not a spendthrift like Chebet, she nevertheless said a good thing will not pass her simply because she cannot afford it. “That’s why these apps came about; to be rescuing some of us when we are stuck.” Getting stuck often means not being able to do things, like going to concerts with your peers, because you don’t have the money. “The first time I borrowed money from my phone was when there was a big music show in town and I just could not afford to miss it. All my friends were going there. How could I be left behind?” Mariam uploaded the Tala app and in the blink of an eye she had money in her M-Pesa account. “I resorted to Tala because it’s really advertised on the phone, plus my friends invited me to use it.” Mariam says Tala’s interest rates are high, yet she opted to stick and continue using the app because she finds it convenient. She borrows between Sh1,000 and 2000 every month.
In an interview she had with the Business Daily in January, Siroya said that Tala’s association with the M-Pesa platform had given her company access to 27 million users. Worldwide Tala has given out 4.5 million loans worth Sh25 billion to clients in the Philippines, Mexico, Kenya and Tanzania. Ninety-five per cent of her clients are repeat customers.
George, 20, a student at the Jomo Kenyatta University of Science and Technology (JKUAT), was as candid as a college student can be. “What do you borrow the money for?” I asked. “To finance dates at fancy restaurants that I know very well I can hardly afford with my own meagre cash.” George also said he borrows to patronise expensive pubs, which ordinarily he would not afford. “How often do you borrow?” Often enough was his curt answer. “Which app do you usually use?” The student said he does not have a specific app and therefore did not also care to find out their respective interest rates. “I will use any as long as it gets the job done. But I have noticed, by and large, I tend to rely mostly on Tala and M-Shwari.” I also asked him whether he repays the loans, if at all. “I do, although I am always falling behind schedule.”
Just like her fellow college mate George, Barbara, 19, a student at the University of Nairobi, does not care about interest rates. “All that I care for is there is money coming my way.” She said she borrows “to get through to the end of the month, as well as to buy my writing books for assignments after squandering my allocated pocket that my parents give me for every month.” Barbara said she religiously borrows between Sh1,000 and Sh2,000 every month. “I use Tala simply because of peer influence – many of my friends use it and they recommended it to me.”
Perhaps it is because of his age that I found Joe’s reason for resorting to the online borrowing money apps reassuring. Joe is 21 and has almost completed his studies at JKUAT. He therefore is already thinking about what he will do after exiting college. He currently runs a mitumba (secondhand clothes) business, selling contemporary clothing to his fellow students. So when I asked him what he borrows the money for, he promptly told me that he borrows it to replenish his stock and to keep his business afloat,“because oftentimes, I’m not paid on time by my customers”. Every month he borrows a standard Sh2,000 from Tala, which he repays promptly.
Chomba, also a university student, borrowed just once because he had a real emergency. His sister’s child, who he was looking after when he was on recess, became sick and needed urgent treatment. “I had heard about KCB-M-Pesa and its reasonable interest rates, so I downloaded the app and borrowed Sh4,000. I later opened an account with KCB.”
Njoroge, the financial expert, pointed out to me that online loans are approved on the basis of the applicant’s reputation, “what they call reputational collateral”. Reputational collateral is dependent on such habits as how many times you make your calls and how often you transact on your M-Pesa account. “The apps’ engineers have developed algorithms that compile your personal data: your social media activities – the kind of Facebook messages you post, your type of friends, how many there are, the sites you like visiting, among other analytics.” He said all this was part of the data analytics that CRB also collects on individuals’ financial habits, which CRB uses to advise whoever requires the data.”
Danson Muchemi, CEO of Jambo Pay, the IT company that collects revenue on behalf of Nairobi County, especially revenue relating to parking charges, praises the online borrowing apps “because they brought down banking barriers. There is no more profiling. The technology has enabled the creation of ‘digital assets’ that approximates what type of a person you are. Armed with this information, the apps are able to sketch your character and identify your spending habits, needs and wants, even though there is a thin line that separates the two.”
“The apps’ engineers have developed algorithms that compile your personal data: your social media activities – the kind of Facebook messages you post, your type of friends, how many there are, the sites you like visiting, among other analytics.” He said all this was part of the data analytics that CRB also collects on individuals’ financial habits, which CRB uses to advise whoever requires the data.”
Unlike the banks, which depended on your “CV” to arrive at a decision about whether or not they will advance you a loan, the power of technology is such that it can, with near precision, detect whether or not you will be a defaulter. By analysing your social media profile, the apps can sum up your personality and your willingness or ability to pay back. “Technology, as opposed to traditional banking methods, which took ages deciding on whether you qualify for a bank loan or not, allows mobile banking financiers to make that decision fast and instantly.”
“Old habits die hard” is an English idiom that explains acquired habits that later become difficult to get rid of. When a loan is just a click away, it is not hard to imagine a future where online borrowing will become a habit, or maybe even a harmful addiction, among Kenyans.