A few years ago, most of us had ‘informal creditors’ amongst our friends. These were people we would call at odd hours for ‘Mpesa’ and in five minutes they would send the cash. No judgement or questions on why you need the money and due to mutual respect, they would not soil your reputation by exposing your debts to your social circles. The consumer debt would mostly be interest-free due to the social capital invested in the relationship.
In the age of fintech revolution, our friends have been replaced by various digital credit offerings. CGAP highlighted credit providers in Kenya and the specific interest rates charged for loans in this report. The number of digital loans has skyrocketed due to advantages such as convenience, zero collateral, flexibility, and privacy. Short-term debts are attractive and most of us ignore the cons such as higher interest rates, multiple borrowing and consumer protection gaps which could lead to being stuck in a spider web of cyclic debt.
The short-term debt business is lucrative and other non-financial institutions are tapping into this market, for instance; tour firms with ‘okoa-holiday’, okoa-stima and retailers also have high purchase offers for consumer products such as furniture, television sets, home theatres and even mobile phones. In the informal sector, we also have the second-hand clothes dealer in the estate who calls us to pick a few outfits and is okay waiting for end month to cash in. Same as the watchman who washes our car three times a week and the cleaning lady. On payday, we settle these bills and also the pay-TV, internet, Netflix, postpaid mobile plan, rent, water, electricity, credit card, mobile loans etc.
After payday, we are drained financially and this forces us into the same dept loop and by the time we realize our habitual problem, we are neck deep in debt. This leaves no headroom for emergencies that may include job loss or hospital bills for relatives. We settle into this habit loop solidly and if anything else is introduced in the list of responsibilities we can easily crash!
Unfortunately, most of the money is used to purchase wants not needs. Another drawback is that some of these firms’ business models are such that they benefit from the high interest they earn from loans which have been rolled over – as a fresh loan – after the due date. An article by CNBC’s Herb Weisbaum highlights the plight of Americans who have been caught up in payday loans. It states that 60% of the borrowers roll over the loan so many times that they end up paying more in fees and interests than the initial amount borrowed. In Kenya, most of these digital lenders operate in silos and utilize non-traditional data to check creditworthiness thus it’s easy for customers to get multiple loans. This raises the issue of consumer protection through regulation and harmonization of service providers. CRB is only mandatory for financial institutions.
The young working class generation needs to intentionally seek financial literacy due to the fact that they get into the job market already burdened by education loans. Education is an equalizer in terms of bringing the students from various backgrounds together but it’s not always a rosy outcome for some students as highlighted in this article. According to the article, the young working-class considers their relationship with college as a broken social contract due to the frustrations and loan burdens compared to their peers who have financial and emotional support from the family. On getting employed, other society/ peer pressures pile up such as owning a car, house and maintaining a certain lifestyle regardless of your background. If one is not well grounded, the peer pressure can lead to the lure of consumer debt. Cyclic debt is a habit loop which maybe hard to get out of unless one is deliberate and highly disciplined to avoid unnecessary debt.