Fintech lending leaves a trail of pain in Western Kenya

Sending mobile money should be simple, fast and practical. One just needs to access the service provider’s app, enter the recipient’s detail and your PIN and it’s done in seconds.

But in most parts of western Kenya, it now requires patience and a lot of hassle to transfer funds to beneficiaries. Here it is no longer plausible to send cash into individuals’ mobile wallets without first verifying their debt status because you run the risk of mixing the transactions through docked funds.

Many times you need to get alternative “pure mobile wallets” that you can transfer money into as a strategy to avoid instant deductions from lenders. The debt-free mobile wallets either belong to third parties or are owned by the same people who register multiple SIM cards mainly to limit the risk of being blackballed by debt-chasing service providers.

Such disadvantages of debt-tainted mobile wallets are now very common. By the end of the first half of this year, the number of mobile wallets in Kenya had reached 70.3 million against an adult population of 25 million, indicating that people have more than two subscriptions with a mobile loan default rate of over 50 percent of households, according to official figures from the Central Bank of Kenya (CBK).

Yet mobile wallet switching isn’t just a sign of a genius crowd desperate to escape financial disruption. It also reflects the depth of the turmoil caused by the US Silicon Valley-fanned fintech loans that are available quickly within minutes and with no demanding demand for collateral.

Until recently, loans were honored and largely tapped by older urban working-class members of households pressed for primary reasons such as medical emergencies, school fees, or housing needs. However, the explosion of fintech has revolutionized this and thrown away the tradition with even many youthful members of households in rural Kenya joining the fray, often for consumer loans.

This is reflected in the overall increase in the number of digital loans in the country. For example, loans from the regulated Safaricom’s overdraft service known as Fuliza rose 30.7 percent in the six months to June 2022, driven in part by households looking to cope with high inflation.

The amount of cash paid out on Fuliza reached Sh288 billion ($2.3 billion) in the first half of the year, up from Sh220.38 billion ($1.7 billion) in the same period of 2021.

This equates to about Sh1.5 billion $13 million daily loans on Fuliza alone by individuals between January and June 2022, in an economy still ravaged by the aftershocks of the Covid-19 pandemic.

However, the fintech loans have left a trail of captivity and remorse in western Kenya, where poverty remains widespread after decades of neglect by successive government regimes and the collapse of mainstays such as the sugar and fishing industries.

Residents here tell stories of pain, including selling personal possessions such as livestock to get creditors off their backs, pledging their wages to offset the loans, and shame from debt collectors.

“My child had been sent away for arrears of school fees in 2019 and with no option of funds, I availed myself of a loan facility at Branch International. They initially gave me Sh2,000 against a salary of Sh7,000 and with a high monthly interest rate of 14 per cent,” said Zephania Khamasi, a security officer in Kisumu.

“With this, I was trapped in debt from fast money and I had to keep borrowing to stay afloat. My salary had been tied up in debt and at the end of the month I felt so hopeless. I had a salary on paper, but little to take home. I borrowed from them nine times and felt deeply enslaved and trapped until I opted out in 2021,” he added.

For Salome Otieno, a 58-year-old widow in Kano, Kisumu County, a Sh2,000 fintech loan got her through a nasty experience about two years ago that she will never forget anytime soon.

“I had a severe bout of malaria in 2020 and no money to go to hospital. My grandson tipped me off about digital apps and I signed up for about Sh2,000 from one of the lenders. But little did I know what I had gotten myself into. First of all, I only received about Sh1,600 of the amount I had applied for because they had deducted a service charge of Sh400. The interest charge was also quite high at about 15 per cent monthly and they did not disclose that to me from the beginning,” she shared.

“I serviced my loan for some time but defaulted because the Covid-19 pandemic had affected my small sisal rope weaving business and I skipped a month or so without paying. What followed was a nightmare of calls from debt collectors demanding that I pay or face jail,” Mrs Otieno said.

“One caller even told me they had tracked my farm and would come with the police if I didn’t pay in four days. Confused and panicking, I sold one of my goats just to get these people off my back for good and I’m never going back there,” she added.

One of her close friends even had a nasty experience after defaulting on a digital loan.

“The debt collectors threatened her with arrest just like they did with me and she left her home for about a week in fear of arrest. She put up with a relative in Awasi town and only returned after the debt collectors stopped their threats, Mrs Otieno said.

Paul Opoda, a boda boda (motorcycle taxi) operator in Kisumu, regrets taking fintech loans after he was vilified by debt collectors who informed his relatives about the loan using contact information scraped from his phone.

“Sometime in 2021, I was returning to Kisumu from Koru Girls High School, which is about 100 kilometers from Kisumu. I had delivered there but unfortunately damaged a tire on a bad stretch of the road and I didn’t have the money to change it, he says while resting on the saddle of the boda boda in Kisumu city’s main street in Jaramogi Oginga.

“Out of desperation, I logged into a digital loan app and asked for Sh2,000. The request came quickly and the amount was sent to me, but less Sh400 in service charges. I was upset about it, but then I was desperate and I also couldn’t reverse the transaction, he added.

With business low due to the economic shocks of the Covid pandemic, Mr Opoda defaulted.

“Within days of default, debt collectors began bombarding me with demands to pay up. At first I took it easy as I was looking for money to pay back. However, I was devastated when the debt collectors called my wife and brother, who were hundreds of kilometers away in Kitui, and told them about my defaulted loan. I felt so bad because my privacy had been violated and chose not to repay the loan completely, says Opoda.

Alfred Oduor, a mechanic in Kisumu, also tells of an unpleasant experience with fintech loans.

“I took a loan of Sh2,500 from Tala around 2017. At that time, the election campaign window had hit the business hard because Kisumu is always a hotspot for potential violence and I was desperate for some money to buy some things for use in my garage”, recounts he from his small garage shop with tin walls.

“At first everything was sweet, but trouble started when I discovered that the loan had so many hidden costs that made it outrageously expensive. Tala has three repayment options; one week, two weeks and one month, but they won’t tell you the interest charge, says Oduor.

However, his biggest bitter encounter came after he defaulted on his loan.

“Fintech loans are dehumanizing and I would not wish anyone the shameful experience I had when financial difficulties caused me to default on the loan I took from Tala. I was intimidated and embarrassed by its collection agents who called me up to three times a day with unrelenting threats,” the mechanic continued.

Mr. Oduor says the agents also pulled contacts from his phone book and started calling his affiliates to push for the loan repayment.

“They called my main customer who contacted me to just pay off the loan. I found this deeply embarrassing and inappropriate and looked for money and paid. That embarrassment made me separate from Tala, and I’m not going back there, he says.

For Dennis Ogana, a mechanic in Kisumu’s Kamas area, the digital loans have been helpful, although lack of financial education and sensitization is causing nightmares for many borrowers.

“The loans have positive aspects as long as you lose them in a responsible way. I have used them in business and I appreciate them. I think the masses need to be sensitized more about credit to restore order, he said.

Kevin Mutiso, chairman of the Digital Financial Services Association of Kenya, partly blames the chaos on financial illiteracy and indiscipline, noting that debt shaming of defaulters is no longer tolerated.

“The debt-shaming has been tackled and some rogue players have even been kicked out. However, the bulk of the debt problems experienced by some customers has everything to do with consumer behavior because once you are aware of the terms and conditions, you should make appropriate decisions, he said.

“There is a lot of patron education required to avoid most of the experiences some of them go through. Digital loans serve the masses, but consumer education and behavior make the difference in terms of experience, he added.