Buying electricity on credit through a Safaricom associate is the most expensive digital mobile loan in the bankers lobby group’s ranking, which also reveals the exorbitant monthly interest charged on other ‘soft’ loans »Granted via mobile phones.
The Kenya Bankers Association (KBA) study shows that the mobile electricity loan, known as Okoa Stima, attracts a monthly interest of 43.4%, making it the most expensive, while Equitel Equity Bank was ranked the least expensive at 2.1%. per month.
Other expensive digital lenders are Pesa na Pesa, which charges similar interest to Okoa Stima, Kopa Chapa (38.8%), Pesa Pata (30.4%), and Kopa Cash (15.3%). These monthly interest rates are well above the average cost of regulated bank credit that KBA estimates at 1.1 percent.
The appetite for digital lending drove dozens of unregulated microlenders to flood Kenya’s credit market in response to increased demand for quick loans and the subsequent freeze on commercial bank loans to individuals and small businesses that followed. the interest rate cap in 2016.
After having had little or no access to credit, many Kenyans are now finding that they can get loans within minutes via their mobile phones.
However, it appears that the proliferation of digital lenders providing credit to banks and the unbanked has plagued borrowers with high interest rates as the banking regulator struggles to keep pace.
“The risks associated with unsecured digital loans force lenders to reduce their exposure to risk by charging relatively high fees and interest rates compared to conventional loan products,” KBA says in the study.
The current legal regime for digital lenders, which does not fall under the direct jurisdiction of the central bank, allows vendors, banks and others to escape the government cap on interest four points above the interest rate of government benchmark, which now stands at 9 percent and caps the cost of credit at 13 percent.
Market leader M-Shwari, Kenya’s first savings and loan product introduced by Safaricom and Commercial Bank of Africa in 2012, charges 7.5% “facilitation fee” on credit regardless of term .
On a one month loan, this equates to an annualized interest rate of 91%. But the Okoa Stima product, when annualized, pushes up the cost of lending electricity to 521%.
Under the Okoa Stima facility, electricity consumers get a credit of between Ksh100 ($ 1) and Ksh2000 ($ 20) to pay their electricity bills, which is reimbursed at an initial lump sum of 10% of the amount borrowed.
Defaulters are charged a 10 percent penalty on the advance. The loan must be repaid within the week.
Court documents show that the Okoa Stima service is offered by Safaricom through its intermediary, Lexco One Limited, which is the seller of the electricity tokens purchased from Kenya Power.
On Thursday, Safaricom and Kenya Power distanced themselves from direct ownership of the product.
What causes the product to cost is the shorter loan repayment period, with the most preferred duration being one week.
The shortest repayment term is one week.
Tala and Branch, other leading players in the mobile digital lending market, offer interest rates of 12.7% and 7.6% respectively for loans borrowed over one month. The Tala loan is equivalent to 153% over one year.
The KBA study strikes at the heart of an argument over whether digital money is productive in helping people in difficulty access money or whether it is a debt trap.
“The high fees and interest rate of digital credit can reduce household income over time, especially if borrowers take out loans for non-productive purposes and therefore the returns on investments funded by digital loans can be insufficient to cover loan obligations as they fall due. ”, We read in the study.
Around 37% of mobile loans go into businesses, according to a FinAccess survey, between 32% and 37% go to daily household needs while 18% to 23% go to education.
Between 13 and 17 percent is used for the purchase of airtime, 7 percent for medical emergencies and 10 percent for the purchase of household items.
KBA says default rates for digital lenders are more than double those for conventional loans when bad credit is measured against loans made.
To avoid defaults, borrowers seek loans from a number of companies to settle loans owed to rival digital lenders who increase their debt, which ultimately leads to a negative list of credit reference bureaus ( CRB) from Kenya.
Over the past three years, 2.7 million people out of a population of around 45 million have been negatively listed with CRBS, according to a study by Microsave, a consulting firm that advises lenders on financial services. sustainable.
The majority of the defaulters borrowed loans of less than 1000 Ksh ($ 10).