Lilian Maina, who operates a groceries shop in a densely populated estate in Nairobi, has become increasingly attached to her mobile phone because it is a lifeline for her business.
The device has three critical apps that come in handy when she needs credit — Tala, Branch and Okolea.
“Being a small entrepreneur means that there are times I need cash to keep the business running,” she says. “These apps have made that possible, as I can apply for a loan and get the money in my M-Pesa account in minutes.”
Ms Maina is among Kenyans who are fuelling the rise of a vibrant alternative credit market, riding on the growth of the financial services sector and smartphone penetration.
Data shows that at least 60 per cent of the population has smartphones, which has made it possible for people to download mobile credit apps.
Since the government introduced an interest rate cap in 2016, the configuration of the credit market has shifted from the tightly regulated commercial banks, to microfinance institutions (MFIs) and savings and credit co-operative societies (Saccos) and then to mobile-based fintech firms.
Fintech companies have emerged to offer credit through the mobile phone, riding on the success of Safaricom’s mobile money service M-Pesa.
Excluding commercial banks and MFIs offering mobile-based products, the firms already boast a significant customer base.
Standard Investment Bank (SIB) has hailed the rise of mobile phone-based lending solutions as “democratisation of credit.” SIB says these have increased the number of household loan accounts by close to 7.2 million between 2010 and 2016.
It adds that mobile phone banking solutions have captured households who were previously excluded from banking services due to lack of a banking history.
While the idea of loans through the mobile phone was pioneered by Commercial Bank of Africa (CBA) with M-Shwari and later KCB Bank with KCB M-Pesa before Equity Bank joined the space with Eazzy Banking, it has begun to spread.
The mobile lenders offer loans ranging from $1 to $10,000.
But, while it opens up credit access to the majority, concerns have been raised over privacy of customers’ data, the lack of laws to regulate the sector, customer protection from the lenders when unable to repay and a rising worry of overburdening individuals with credit due to multiple borrowing.
Besides, the fees and interest rates charged by mobile loans vendors range between 5 per cent to 20 per cent, based on the amount borrowed and the period of repayment.
This has raised concern that the lenders are profiteering from desperate Kenyans. A majority of the loans are short-term repayable within of 30 days.
“The issue of data privacy is a major concern that needs regulation to guarantee privacy” said Eric Musau, SIB head of corporate finance.
He added that while regulators like the Central Bank of Kenya and Communications Authority do not need to interfere in the operations of the fintechs, the fact that they charge high interest creates room for close scrutiny.
Breach of customers’ privacy
A report by Privacy International, Fintech: Privacy and Identity in the New Data-intensive Financial Sector released in November 2017 cited Tala, Branch and M-Kopa for alleged breach of customers’ privacy in their use of customer data to determine credit eligibility and amounts.
“A significant issue with the fintech companies in Kenya is that they keep the data, and in some cases analyse it, even if the user has stopped being a customer and has deleted their app,” the report noted.
It added that some fintechs gather data regularly even when the customer is not using their service and use it to improve their algorithmic decision-making.
“Customers should be at the centre of fintech — not their product. They should have meaningful access and control to their data,” the report added.
According to analysts, the fintechs are riding on the mobile phone revolution to drive universal access to credit, something that is pushing the drive towards universal financial access to reality.
A report by US institution Brookings Institution’s Centre for Technology Innovation ranks Kenya top in terms of financial and digital inclusion.
“Kenya ranked at the top because of its robust commitment to advancing financial inclusion, widespread adoption of mobile money services and an enabling regulatory environment for digital financial services,” the report stated.
The explosion of mobile credit is evident, considering that mobile-loans apps are among the most downloaded on Google Play, according to data by digital market intelligence platform SimilarWeb.
The apps have become popular largely because of offering unsecured loans in record time round the clock, compared with commercial banks which still adhere to rigid credit processes anchored on the know your customer mantra.
Tala and Branch, which are US-based, form part of the top 10 most downloaded apps, at positions six and eight respectively, an indication of the significant growth of alternative credit market.
Shivani Siroya, Tala founder and chief executive officer in Kenya, says the company has helped customers who were shunned by commercial banks to access to credit.
She says Tala has disbursed loans worth more than $250 million in Kenya and Tanzania, with more than a million customers.
Branch says it has so far disbursed $40 million in Kenya.
Okolea, which has been in operation for slightly over a year, says it has about 80,000 customers, something that underpins the huge demand for mobile credit.
“Our desire is to promote universal credit access,” said Peter Muraya, Okolea chief executive.
The fintechs are keen to venture into other East African markets.