Digital Credit in Kenya: Time for Celebration or Concern?
There are now more than 20 digital credit offerings in Kenya, and new services are launching continually. The hype is similarly growing about the opportunities these products could offer, from increased household liquidity, to small business loans for entrepreneurs. Many users appreciate the convenience and speed of accessing a loan from their phone, and digital credit can be a safer option than informal moneylenders. At the same time, such rapid proliferation raises questions about the various ways the products work (which are difficult to keep up with in the rapidly expanding market), the ways customers are actually using the products, consumer protection issues and risks such loans might raise for borrowers.
A look at the products
Digital credit in Kenya comes in a variety of models, including those that use mobile phone apps, mobile money wallets, and payroll lending, as well as through a range of provider types, including banks, mobile network operators, and even savings and credit cooperative organizations (SACCOs). Many of these lenders are unregulated, lending outside the purview of current regulation. The services generally offer (relatively) small-value, short-term loans. Most use the customer’s mobile phone-based data, such as call and SMS records, mobile money transaction history and social media data, to determine a credit score and loan amount.
M-Shwari is the most well-known among these types of lenders, providing both a savings account and loans from Commercial Bank of Africa by way of the M-Pesa platform. Others take different approaches. To access Branch loans, for example, users download an app from the Google play store, link the app to their social media accounts (e.g., Facebook) on their phone, and grant permission for the app to use social media data, GPS data, SMS and call logs, contact lists, and handset details from their phone. Branch then uses algorithms to analyze these data and determine a credit score and loan size. Saida and Tala are two other examples of app-based lenders using mobile phone data to determine loan sizes.
Still others appear to include questionable (and controversial) tactics. While these products are new, and their user bases small, they highlight particular areas for potential concern given negative experiences in other consumer lending markets. The Mjiajiri model, for example, has elements that are similar to those of a pyramid scheme. It requires users to pay a KES 200 initial registration fee, after which users earn commissions of KES 40 for recruiting others to register for loan access; the user’s available loan size increases as he or she recruits more members.
Micromobile links lending to future payrolls and will lend up to 50% of a borrower’s monthly salary. This model is similar to payday lending in the United States, which often results in a debt cycle where the high-fee, short-term nature of the loans means customers must continue borrowing to pay off previous loans and associated fees.
The table below shows details of digital credit products in Kenya, gathered as part of an ongoing initiative by CGAP to track market development.
Current Digital Credit Offerings in Kenya
Loan range (Kshs)*
Fee or nominal interest rate
Repayment period (days unless specified)
1%-14% (as monthly rates)
14.5% annual rate + 1% of loan amount as appraisal fee
14.5% annual rate + 2%–3% of loan amount as appraisal fee
14% annual rate + 2.5% of loan amount as negotiation fee
App-based payroll lending–repaid through employer
Lesser of 50% of monthly salary or 100,000
Varies; increases as user recruits members
200 Ksh registration fee, earn commission to recruit new members
Similar to pyramid scheme
Set by SACCO; interest deducted from loan before disbursement
Set by SACCO
Varies, as set by SACCO
SIM toolkit; loans for electricity payments
Up to 25,000
7.5% and up
91% and up
Initial membership fee of 5% of loan request, then 5% per loan
Varies according to repayment period
*10,000Kshs = $100 US
These offerings raise a number of potential consumer protection concerns, and possible customer risks.
High interest rates. The table shows high APRs on many of the loans. While most of these loans are short term, and the customer will not be paying on it for a full year, APR is still the most effective way to standardize costs and compare loans to alternative options. In addition, the effective APR is even higher if the borrower repays early – borrowers still must pay the full fee despite borrowing for a shorter period of time. As a reference point, microfinance annual interest yields (a figure that slightly underestimates APRs) in South Asia averaged about 23% in 2011, around the time of both the crisis in Andhra Pradesh and the Bangladeshi government’s investigation of Grameen Bank. Rates in sub-Saharan Africa were about 32% at that time. Many of the digital loans in the table charge 5 to 10 times that rate. Finally, if the borrower doesn’t pay a loan off on time, the loan is usually “rolled over,” and the nominal interest rate is applied to the full balance, again increasing the effective APR.M-Shwari SMS
- Multiple borrowing. In another parallel to the microfinance crisis, there is no way for lenders to know how many (and what type of) other loans borrowers have. While some lenders report information to the Kenyan credit bureau, the information is often incomplete, and most digital lenders are nonbanks who are not required to report data at all. This can lead to situations where borrowers take on more credit than they can manage, or borrowers take out one loan to pay off another loan, creating a debt cycle with potentially negative repercussions for the consumer.
Temptation and push loans. Research and evidence from behavioral economics show that borrowing through a mobile phone feels different than borrowing through more traditional, in-person avenues, and is more tempting. In addition, some lenders have turned to “push” loans – blasting unsolicited messages to potential borrowers saying things like “you have qualified for XX Shillings! To accept your loan call or SMS 07123456.” In this situation, both temptation and loss aversion – the feeling that you have been given something and that turning it down would be a loss – can drive borrowers to take loans they do not need.Unsolicited credit offers, Kenya
- Other issues arise in consumer understanding of the loans. Unclear disclosure of interest rates, fees and other terms means customers often may not understand what they are agreeing to. Some of the offerings available on basic phones, for example, provide terms only through a weblink, and therefore are inaccessible without an internet connection. Related to poor disclosure, some loans are bundled with other products, and their associated fees, both of which may not be clearly disclosed to customers. One scenario in the market is bundling a loan with credit life insurance, which covers the balance of the loan upon the death of the borrower. For a $10, 30-day loan, this makes little sense and provides little value. With the customer (and next of kin) poorly informed, these policies may never be redeemed even in the unlikely event that the borrower dies.
- Data use. While borrowers generally “consent” to the use of their data for calculating loans, it is unlikely they will read the full terms and conditions and understand exactly what data about them and their phone use will be used by the lender. Other data-related policies could affect customers as well, such as how much data providers retain after calculating the loan amount, how long they hold it, how safely they store it and who would be liable if the data were accessed by an unauthorized party or otherwise used in a way that harmed the customer.
While Kenya is at the forefront of digital credit growth, other countries are not far behind. A similar scan of lenders in Tanzania yielded a list of 10, and the number is growing. And it was recently announced that an M-Shwari equivalent will soon launch in Uganda as well. Markets are moving faster than regulations in most countries. While digital credit has the potential to benefit consumers, possible risks must be identified and mitigated for the benefits to be realized.
It would be great to list interest rates in the most comprable way possible. M-shwari's rate of 7.5%, for example, is monthly.
Julie, the nominal interest rate is reflective of the repayment period (in the next column) unless otherwise specified - so you are correct that the 7.5% M-Shwari fee is associated with M-Shwari's 30 day repayment period. APR is most appropriate for comparisons as it standardizes rates - I suggest using that column to compare across products.
I can't speak for my colleagues, but I would advise looking at the APR in the far right column instead of comparing interest rates. That is the most meaningful and standardized reflection of cost not interest rate, which are often cited in different time periods, calculation methods (flat vs. declining), and do not include other costs.
Great! That last column doesn't appear if viewing on mobile. Thanks!
Nice recipe of the mainstream options available.
Very informative. especially the high fees and short-term nature of the loans that makes customers continue borrowing to pay off previous loans and associated fees. a cycle that is hard to break. However still, the high interest rates can be justified to cushion against default since the cost of following defaulters normally outweighs the cost of recouping the profits