Informal lenders are supposed to be a reliable last resort, but the increasing number of defaulters is slowly straining them
By Kevin Gikonyo
Even as Kenyans blame the government for untamed debts, study shows that individual borrowers are overcrowded in the informal sector. Statistics according to FinAccess 2019 report regarding personal loans and credit show that the gap in savings to credit ratio is narrowing by the day, with a reduction in the margin by nearly 12.7 per cent from 2016 to 2019 with the former recording a 32.2 per cent gap and the later a 19.5 per cent gap. This has been occasioned by a quantum leap in the amount of loans being sought informally since the nuance of interest rate cap and mobile bank lending and applications. Mobile bank lending registered an increase from 5.9 per cent to 9.5 per cent and digital app loans increased from 0.6 per cent to 8.3 per cent in years 2016 and 2019. Another informal credit line that grew was that of shopkeepers and family members from 9.9 per cent to 29 per cent and 6.6 per cent to 10.1per cent respectively.
These statistics not only indicate that Kenyans are borrowing more, but are increasing their credit options to informal sectors with shopkeepers, family and digital applications leading at 29.7 per cent,10.1 per cent and 8.3 per cent in pecking order.
The revelation to these trends from FinAccess 2019 report is that, there is a slow lockout by formal lending institutions or from the borrower’s credit history. These two are true and their causal effect influence to informal sector borrowing is positive.
Lending institutions shift focus to government
The economy has been experiencing an increased domestic borrowing by the treasury through fixed income securities and syndicated loans to feed its growing infrastructural development demand. The counter effect to this is that lending institutions shall prefer lending money to a less risky client (The government) than an individual whose risk pricing has been regulated at 400 basis points. This risk pricing set by the Monetary Policy Committee (MPC) is considered insufficient by Kenyan banks, which have subtly placed it at close to 10 per cent. Naturally, logically and rightfully so, Kenyan banks have been cornered into lending to the government than to the needy public, to cause what is commonly referred to as crowding-out effect of the private sector.
Another pointer to the cause of increased informal credit is the use of borrower’s credit history in reducing the risk element to as near 400 bases point as possible by formal lenders. Most formal loan applicants have been declined since they have been negatively listed with credit reference bureaus in Kenya. According to Billy Owino CEO of Trans-union Credit Reference Bureau (TRB), the increased negative listing has been from digital and mobile banking channels that stand at 500,000 persons up from 150,000 in year 2016 to 2019. The FinAccess 2019 report classifies reasons for defaulting as;
Reasons for credit default
The FinAccess 2019 report indicates that the most contributing factors to credit default include: poor business performance, payment more than expected, high interest rates, lack of understanding of terms and conditions, decline in household income and lack of proper planning. These new channels of lending have created an avalanche of defaulters since most people who take them lack proper understanding of technical terms of borrowing or do not understand the language at all. Most prevalent is the tough economic times that most businesses are facing especially those in the Small and Micro Enterprise. There are more than 50 mobile banking and lending applications so far, with an indication that 22 million Kenyans have so far borrowed from mobile platforms as at 2019. The interest rate is also deemed very high with some digital platforms lending for as much as 100 per cent per annum on interest. Kenya Commercial Bank has aligned its mobile banking lending platform to those announced by monetary policy committee (MPC), a move deemed to set the pace in reducing the cost of credit on existing mobile banking channels.
The looming danger
The informal credit sources will be strained in the near future if these trends are anything to go by. Unfortunately, they can only serve for mid-term and the long-run effect could lead to a disintegrated social-economic support which is usually relied upon as the last resort.
It is time other instruments of managing risk are introduced in the market to mitigate on the strained credit environment for formal lenders such as derivatives and hedge funds to mirror most developed economies whose risk to commercial credit are usually below 3 per cent. In addition, a lot needs to be done to educate and regulate the mobile and digital lending, whose interest rate pricing is not encompassed within the Finance Act amendment of 2016. Lastly, the borrowers need to be protected by ensuring they understand the terms and conditions of their credit engagement. This shall ensure credit is sourced with a clear understanding of its implications and utilised correctly to generate more income to repay the principal, interest and still benefit, to avoid getting into a credit abyss.
Kevin Gikonyo is the Director Spine Global Solutions: Email: Info@spineglobalsolutions.co.ke.
