I was having drinks yesterday at Fine Breeze Restaurant in Dago Corner with a couple of friends aged between 25-30. In the middle of our conversation, I asked to see their phones. I wanted to find out how many of them had these money-lending Apps that are mushrooming in Kenya. I was surprised that all of them had these Apps –Branch, Tala, et al. One actually had more than three Apps on his phone, and he confessed to me that he’s borrowed money from all of them. What is more, all of them also had outstanding M-Shwari loans.
I do not even know how M-Shwari works. I’ve heard of Branch and Tala but I’ve never downloaded these Apps. But I think this country and my generation needs serious lessons on financial literacy. Let me give you the data on digital borrowing in this country. An overwhelming 6.5 million Kenyans are digital borrowers. Over 3 million people in this demography do not even know the interest rates charged on these loans.
I’m a firm believer in the mantra that when the deal is too sweet, think twice about it. Apparently, you ought not to have a bank account or credit score to access loans on these Apps. Some actually use your social media profile to assess if you are creditworthy. So today if I need a loan, Tala will deploy an algorithm that assigns me a “social reputation score” based on my online presence. And because I probably have 10K followers, I will get a 50K loan, just like that!
But this is what you don’t know. These money lending Apps rely on venture capitalists to provide them with the crucial institutional investments that they need to kick-start and run their operations. Between 2015 and 2018, money-lending Apps in Kenya have attracted 5 billion shillings in venture capital investments.
Now I want you to read this slowly. There is something called the 10X rule in Venture Capital. Let’s say I am a venture capitalist. You approach me with an idea, and I put money into it. It is important for you to understand that I am taking a huge risk. If you start-up fails, I lose my money. So to justify this risk, I’ll tell you that I’ll put my money in your start-up and get ten times what I invest in return. So if I put 1 million shillings into the start-up, I’ll get back 10 million shillings over a period.
Now we have Venture capitalists who have put in 5 billion shillings into these money-lending apps. In the next couple of years, they are hoping to be paid back 50 billion shillings. How do these Apps make the 50 billion? Two things. First, they grow their loan-books by giving loans to those who do not deserve them. It is not right to give an 18 year-old with no job a loan of 2K just because they own a smartphone. The chances are that they will be unable to repay this loan.
They’ll be blacklisted by the Credit Referencing Bureau (CRB) which will affect their ability to get loans in future. Let’s say Tala gives you a loan of 2K today which you don’t pay and CRB blacklists you. In future, you start a business which you need to expand by seeking a 50K loan. You will be unable to get this loan. CRB will actually require you to pay 10 times the 2K you borrowed to get their clearance certificate. Thereafter, you will have to wait for a certain period for your credit worthiness to be assessed before getting the loan you need.
The second thing that these money-lending Apps do is to hike interest rates. Branch charges interest rates of between 12-170%. Tala charges between 61-243%. KCB M-Pesa has an interest rate of 73%. Okoa Stima charges you 521%. Now look at this and tell me if these Apps are any different from shylocks. These are shylocks in suits and posh offices with institutional backing from CRB.
If Kenyans –especially the youth- do not begin thinking seriously about the harm that the explosion in digital lending is going to cause us, then we will end up with a tragedy larger in scale than what the world witnessed in Andhra Pradesh.
Let me break it down for you. India is the hub of micro-finance schemes. And the South Indian State of Andhra Pradesh is the hot-bed of the country’s microfinance sector. In Andhra Pradesh, almost everyone owes money. In 2010, the state witnessed a prolonged drought which resulted in poor harvests. The loan-dependent farming population, unable to repay credit-bureaus that were on their necks, resorted to suicides. Thousands of people in Andhra Pradesh committed suicide because they were unable to service their loans. In global economics circles, this phenomenon would later be referred to as the Microfinance tragedy of Andhra Pradesh.
Now, the world’s largest Microfinance institution –SKS Microfinance- is based in Andhra Pradesh. When the company went public on the London Stock Exchange in 2010, its stock was 13 times oversubscribed. It attracted a multi-million dollar IPO while the population it serves is the poorest in India. This, in my opinion, is making money off the poor. This is immoral and it should be stopped.
To avoid the Andhra Pradesh tragedy from occurring in Kenya, we need to regulate the digital-lending sector which is profiting off poor Kenyans. Most importantly, we need to teach our people basic financial literacy skills. Otherwise, the young jobless Kenyans will begin committing suicide in droves.