Category Archives: credit reference in Kenya

Digital App Loans: Understanding Borrower Behavior

An Interesting conversation was started by a tweet by Francis Waithaka on the true borrowing of costs of app loans that hundreds of Kenyans take every day by making a few clicks on their phones.

It elicited a lot of comments on the cost of finance offers to Kenyans, since an interest capping law passed in 2016 that restrict banks to lend at a maximum of 14%, the lack of regulation of app loans who may be taking advance of Kenyans by charging usurious rates etc. It also led to a mention of a research report from Micro Save about the digital credit landscape in Kenya that was shared by one of the authors.

The Microsave Report (PDF) titled “Where Credit Is Due: Customer Experience of Digital Credit In Kenya”  had lots of insights. It was drawn from feedback from 1,009 farmers located in 50 villages, equally split between Central Kenya and Western Kenya, and also with an equal number of men and women in the study.

At the end of it, the report makes some recommendations to the Communications Authority of Kenya and the Central Bank of Kenya – such as to control the type of messaging sent by text to consumers, and to require app loan companies to share information and to list all defaulters, respectively.

Habits of Borrowers 

  • There is a preference for Chama’ s, SACCO’s and M-Shwari as a source of funding. App loan amounts are too small for significant investments.
  • Majority of the customers took up loans to smooth consumption, emergencies or to boost business.
  • They don’t understand terms and conditions of app loans and they don’t understand credit reference.
  • There are three types of borrowers: repayers (who pay loans on time), defaulters  (who don’t understand the consequences of being listed), and jugglers who take both traditional and app loans – but if they are financially stretched, they are more likely to repay the traditional loans.
  • Customers have learned to game the system through timely repayment of loans and juggling multiple borrowers.
  • There is no extra “PIN” required to request and withdraw an app loan and some family members have done this in secret leading the phone owner to default on a loan.
  • Digital credit usage doubled in Kenya between 2015 and 2016, with awareness and usage of digital credit by far lower in rural Kenya.
  • Digital credit, which offers privacy, is replacing shop credit and family/ friends as financiers.
  • The simplicity of the loan application procedures matters;  too much information requested or if there are too many variables that make it confusing, makes potential borrowers drop off.

Phone Types 

Download a loan app or use USSd

  • App usage is rather low – and this probably related to lower usage of smartphones as their batteries rarely last a full day as compared to cheaper feature phones that retain battery charge for several days of use.
  • Phones are mainly used for money transfer,  deposits, and withdrawals. There is little usage to get information or to browse the internet
  • 64% of respondents in the survey had a basic phone (57% in 2015). Smartphones were 14%, growing slightly and off-setting feature phones which declined slightly to 26%.
  • Loss of a phone may result in a  borrower defaulting on repayment.

Credit Reference Bureaus

  • Formal lenders require clearance from a credit reference bureau (CRB) which costs $22 (i.e Kshs 2,200) and that may exclude borrowers from formal finance. App loans don’t require this, e except that borrowers have not been black-listed.
  • One concern is there is little understanding of credit reference bureaus, and of channels for redress of any disputes.
  • Not all fintech’s report loans to credit reference bureaus.

App loan costs

  • High loan/interest charges are not a concern as they are comparable to other informal money lenders

At the time of the survey, M-Shwari issued 62 million loans (worth Kshs 1.3 trillion), while Equitel and KCB about 4 million each. In comments to accompany the release of their 2017 bank results last month, KCB had 13 million mobile customers, Equity Bank has 12.1 million, while a  CBA statement noted that the bank also serves 33 million mobile savings & loans customers, in East Africa, in partnership with mobile money operators.

Moody’s Debt Summit Nairobi

Moody’s 4th annual East Africa investor summit Kenya, held in association with Rich Management, looked at East Africa’s resilience in Sub-Saharan Africa’s low growth environment.

Excerpts

Economic growth:

  • Kenya and Nigeria summit audience think political risks are main challenge to credit in emerging markets. Dubai summit ones are watching USA (policies under Trump and China (economic slowdown) events
  • Between 2007-15, 6 of 10 fastest growing African economies were commodity exporters, but for 2016-18, 5 of fastest growing ones are in East Africa. While Sub-Saharan Africa growth is at a 20-year low, East Africa is attractive as their growth is not about commodities.
  • Kenya’s economy growing due to infrastructure, FDI, population but banks not benefiting, partly due to the interest rate cap.
  • Investors in Kenya want to see a benign August 8 election with a first round winner and a gracious loser.

Bank’s and interest rate:

  • Banks face a dilemma – on whether to lend to companies in the Kenya economy or to the Kenya government (where they can earn 10% per year short-term, or 14% in the long-term).
  • There was already a slowdown in bank lending (due to regulation and NPA’s) before the interest rate caps.
  • The Cost of borrowing in Kenya was too high; and even after interest rate caps, large banks are still getting good 20% returns on equity.
  • Some firms are opportunistically raising debt – locking in cheap funding ahead of the election e.g. East African Breweries announced they would build a brewery at Kisumu even as they are yet to agree on the financing. But the problems at Nakumatt are probably due to the drying up of their credit lines as banks feel 14% lending does not compensate their risk.
  • At Moody’s, they rate three large Kenya banks – Coop Bank, Equity Bank and KCB Group all equally. Equity has 55% SME exposure and KCB is big in property, while Coop is well-balanced between business and consumer lending – but they have all taken steps to mitigate risks from the interest rate cap law.

Africa Debt markets

  • While Moody’s recently upgraded Senegal and Ivory Coast and stabilized Ghana, 8 of 19 Sub-Saharan Africa economics are still rated negative.
  • South Africa preempts state corporation defaults through bailouts – e.g. at Eskom, SAA – but this doesn’t inspire business confidence.
  • East Africa economies have solid reserves (4-5 months of imports) but key risks are fiscal deficits and debt accumulation (50% debt to GDP is a warning point).
  • One of the best performing Eurobonds in Mozambique defaulted.. a flood of money can ignore fundamentals

Kenya’s Debt

  • Kenya has a history of debt going back over the last ten years.. it knows how to live with the debt. Currently 15 to 17% of Kenya’s income goes to pay debt – (Moody’s get data from government budgets or IMF)
  • The London Stock Exchange, and some European ones, are considering issuing some debt in Kenya shillings.
  • Kenya can do better in terms of exports & revenue e.g. by improving productivity – the government explained this to the IMF.

Water Moment: Understanding Nairobi Water Bills

Have you been getting more and more visits from the water meter crews from Nairobi Water (NCWSC), demanding payment?

For years, I’ve been paying every month the same amount of about Kshs 500 (~$5), without seeing my bill, but of late, the bill has always remained over Kshs 1,000 even when I have paid twice within the month. One day they even came around with a bulldozer which they told area people was to yank out meters from people who have not paid.

So I had some tweet chats and went  to the NCWSC offices and found out some stuff:

  • They no longer send out statements or hardly do. They have cut back on mailing statements via the post office. They won’t even issue you with a bill event at the office
  • They increased their rates at the end of 2015. The guy who came with the bulldozer and another at the NCWSC office said the rates doubled at the beginning of the year.
  • They have instituted a charge of Kshs 1,000 on every unpaid or overdue bill. This means even if you’re late on a Kshs 204 bill (the lowest bill you can get), you get charged Kshs 1,000.
  • You can check your bill via *888# on your phone. Sometimes the SMS comes through without information but you still get charged Kshs 10 for the service.
  • They have an online platform for one to check bills but not ready. Alternately there is a There is a Jambopay Water Bill checker that’s  free to check your bill. It is accurate, but often offline.
  • It costs Kshs 33 to pay your water bill via M-Pesa (assuming Kshs  30 goes to Safaricom and Kshs 3 excise tax charge of the financial service.
  • The due dates for bills vary in the month, depending on when the water readers come round to read or estimate the amounts.
  • Water, electricity and other utility companies can now report customers to credit reference bureaus over unpaid bills.. but who is the customer to be reported? The person who pays the bill? This is often a tenant of a house or building. Or the registered owner of a property with a meter? Sometimes this is the landlord or the contractor who put up the building.

waterOther water tales:

  •  A few years ago, IBM Research in Nairobi gave a talk on the water situation in Nairobi. There are 3,000 known boreholes in Nairobi and it can cost $10,000 to drill one as you have to go deeper than 400 meters instead of 200 in the past.
  • IBM also reported that 40 – 50% of water sourced is lost (just doesn’t get to consumers) AND that 50% of hospital visits in Kenya may be water/sanitation related.
  • A feel good story about water supply and the World Bank in Kenya.
  • Are water charges going up again? – Not sure if these are even more new charges from October 2016
  • Adding value to waterHow the business of bottled water went mad ..How did a substance that falls from the air, springs from the earth and comes out of your tap become a hyperactive multibillion-dollar business? (The Guardian)

Even with the new water rates, getting water from the NCWSC is a lesser evil than paying for your lorries, but…

$ = Kshs 101

Bad Debts in 2016

According to the Central Bank’s Q1 summary,  non–performing loans at commercial banks have increased this year by 15% to Kshs 171 billion in March 2016..Real estate sector recorded the highest increase over the quarter by 42% – attributable to slow uptake of housing units. apartment blockPersonal/household sector registered increases of 21% as a result of negative macroeconomic drivers such as job losses and delayed salaries. The manufacturing sector had an increase of 15% due to slow down in business leading to failure to generate enough cash flows to meet all financial obligations. Transport and communication, agriculture and mining and quarrying economic sectors registered decreases in non-perfomign loans between December 2015 and March 2016. 

Non-performing loans are still only about 6%, but the report also excluded Charterhouse, Chase and Imperial banks.

End Credit Reference in Kenya?

A well-meaning Kenyan has taken a petition to parliament, asking it to disband credit reference bureaus. He complains that they  have listed more than 700,000 individuals in their database as defaulters..causing a lot of anguish to the listed individuals as they are unable to access financial facilities from local banks

Parliament hansard from mzalendo.com

Credit reference petition to parliament

Credit reference bureaus have been operating in Kenya for about five now, and this petition comes at a time when many banks have heavily increased their provisions for bad debts in the year 2015.