Why Kenya is a ticking bomb with upsurge of mobile loan apps

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Research has shown that majority of Kenyans struggle to make ends meet and end up taking loans just for survival with mobile technology a key source.

According to the household survey, poverty has contributed immensely to borrowing among Kenyans. And despite the spread of formal financing, more than 60 per cent of the population still uses informal borrowing solutions such as chamas, friends and family.

Although the proportion of Kenya’s population with access to formal financial services hit 83 percent in 2018, according to a survey part-conducted by the Central Bank of Kenya (CBK) and the National Treasury, many borrowers are fast reporting the downsides of quick and easily accessible money.

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“Could this financial inclusion be driven by some kind of laxity that doesn’t quite check on regulations or could we be talking of unhealthy financial inclusion that cannot drive growth?” Joy Kiiru, a lecturer at the University of Nairobi’s School of Economics posed during the launch of the 2019 Financial Access (FinAccess) Household survey report.

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Borrowers are finding themselves locked in debt or losses due to lack of financial literacy on key aspects such as cost of borrowing.

According to the household survey, poverty has contributed immensely to borrowing among Kenyans. And despite the spread of formal financing, more than 60 per cent of the population still uses informal borrowing solutions such as chamas, friends and family.

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According to the report use of mobile money, mobile banking and digital apps has risen considerably, with digital apps now being used by two million people. About 79 per cent of Kenyans have mobile money accounts, 25 per cent have mobile bank accounts, while 8 per cent take digital loans.

The survey also intimates that Kenyans are becoming a more saving people, which is paradoxical, based on their borrowing nature.

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The mobile wallet, the survey states, is the most popular saving device.

Reliance on self-knowledge for financial decisions is highest among residents of rural areas in Kenya (42.2 percent) compared to 35.8 percent in urban regions.

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Many Kenyans have no knowledge on the cost of the loan facilities they took up despite interest rates being an important factor in deciding the affordability of debt.

“The survey tested the ability of respondents to accurately compute 10 percent interest on a Sh10,000 loan. The survey findings indicate that 42.7 percent of the population answered the interest costs correctly, while 39 percent gave a wrong answer,” the report noted.

More men (48.8 percent) were found to be knowledgeable on cost of borrowing compared to women at 36.9 percent.

“Eighteen percent had defaulted and over two thirds of borrowers experienced at least two of these conditions, showing signs of debt distress,” notes the survey.

When processing loan requests, the Employment Act directs that overall deductions from the employee’s salary must not be more than two-thirds their pay.

However, in the era of enhanced financial access, workers have other places to borrow from such as unregulated digital loans, goods on credit from shopkeeper, chama loan and shylock loans.

These are not in control of the employer. So while an employer may deny an employee a loan or salary advance on the strength that it will cause deductions to go below one-third of gross salary, workers may opt for other sources.

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