Borrowers have defaulted on 83.1 percent of digital loans of below Sh1,000, highlighting the difficulty of recovering microloans from low-income earners.
Central Bank of Kenya (CBK) data shows the regulated digital lenders struggled to recover small loans while borrowers of larger loans settled their dues.
The high default rate suggests that borrowers may be exploiting the rule barring digital lenders from listing defaulters with loans of less than Sh1,000 with the credit reference bureaus (CRBs).
CBK data shows the default rates on digital loans eased based on the size of the credit in a market trend that has pushed the lenders to shy away from advancing small amounts.
The CBK says the default rate improves to 69.4 percent on digital loans of between Sh1,000 and Sh5,000.
Borrowers taking loans of between Sh50,001 and Sh100,000 had the lowest non-performing loan (NPL) ratio of 16.4 percent.
The CBK started regulating digital lending on December 23, 2021, through the Central Bank of Kenya (Amendment) Act, 2021.
The amendment saw the regulator introduce the CBK (Digital Credit Providers) Regulations, 2022, which, among other things, bars digital lenders from listing defaulters of below Sh1,000 on the CRBs.
Some digital lenders have been raising the minimum size of loans above Sh1,000 in efforts to use the negative listing with CRBs as a tool to encourage repayments.
The CBK reckons that the majority of the digital loans were below Sh20,000, which is consistent with the digital lenders’ model of advancing microloans of maturities ranging between one week and two months.
Offering quick, collateral-free credit to the largely unbanked, digital lenders provided millions of Kenyans with access to finance to pay for everything from medical bills and school fees to capital for their businesses.
Economists have hailed them for boosting financial inclusion in a nation where only about 40 percent of people have a bank account, but many are also accused by customers and digital rights groups of using unethical practices to profit from the poor.
With mobile penetration surging, fintech start-ups have emerged, eager to tap into the high demand for loans from low-income Kenyans who struggle to access credit due to a lack of employment, collateral or guarantors.
Hundreds of digital lenders operate in Kenya - some backed by Silicon Valley and Chinese investors - and are found on various platforms, including the App and Google Play stores.
Using machine learning algorithms, the apps assess the creditworthiness of borrowers by scanning personal data on their phones, including contacts, mobile money transactions, social media footprint and web history.
Within minutes, loans—ranging from Sh500 to Sh50,000—are deposited and are accessible on borrowers’ phones. Demand for such loans has surged: 5.5 million Kenyans had taken loans at the end of June from the 126 digital lenders already licensed by the CBK.
The loan accounts rose from 2.4 million in December 2023 to four million in December 2024, underlining the appetite for digital loans.
They have dished out loans valued at Sh76.8 billion between their licensing date and the end of June this year.
The CBK says the short tenure of loans makes them relevant for meeting emergency needs for individuals and working capital for small businesses.
The regulator cautions that when loans are too small, they do not enable households and businesses to make investments that can boost their earnings and help with repayment.
The digital lenders boast an average lower non-performing loans ratio than banks.
The fintechs’ ratio stood at 16.02 percent in December and 15.9 percent in March, compared to banks’ at 17.1 percent and 17.2 percent, respectively.
Small-ticket loans
The CBK has cautioned the digital lenders to address the higher default rates on small-ticket loans.
“The elevated credit in the DCPs (digital credit providers) requires them to enhance credit risk management, including refining tools for identifying borrowers and their needs, to enable them to reduce loan default,” said the CBK.
“The DCPs rely on transactional and communication data as well as adverse ratings from the credit information system as a deterrent against potential defaulters. Yet, there is a tendency for borrowers to change their behaviour once they obtain the loan, especially borrowers of small amounts.”
Last week, the regulator licensed 27 more DCPs, bringing the number to 153 out of the over 700 applications it has received since March 2022.
This means more than 547 applicants, or 78 percent of entities interested in offering digital credit, are still on the waiting list, pointing to the sustained interest in this financial space.
“Other applicants are at different stages in the process, largely awaiting the submission of requisite documentation. We urge these applicants to submit the pending documentation expeditiously to enable completion of the review of their applications,” said the CBK in a statement.
The CBK said it has been working closely with the applicants in reviewing their applications and also engaging other regulators and agencies pertinent to the licensing process, including the Office of the Data Protection Commissioner.
The central bank started regulating this space to remove the legal lacuna that had sparked public outcry about the pricing of digital loans and the extent to which lenders could go to recover their money from defaulters.
Digital loans have gained popularity due to their ease of application for borrowers seeking quick cash for emergencies and survival without requiring collateral.
Many customers had raised concerns about predatory practices, in particular the high cost, unethical debt practices and abuse of personal information. Digital loans are also popular due to the speed of disbursement.
Many digital lenders do not conduct background checks with CRBs, opening a back door for those blacklisted by banks, savings and credit cooperative societies (saccos), and microfinance institutions to access debt.
DCPs do not demand collateral but rely on client usage of mobile money services to determine the amount that they qualify for and upgrade them to higher bands based on their settlement of previous debts.
The speed of disbursement also appeals as the cash is directly transferred to mobile money platforms.
