The Wrong Kind of Credit: Why Loans to Gig Workers Must Reflect Income

For many low-income workers in Kenya’s nascent gig economy, the only way to buy the tools and equipment needed to perform gig work is to borrow money. CGAP’s interviews with gig workers in Nairobi have confirmed that poor access to credit is a major barrier to these workers. However, the story of one of our interviewees, Daniel Njoroge, is a reminder that there is something that can be even more destructive to a person’s livelihood than having no access to credit: having access to the wrong kind of credit. In particular, his story points to the need for flexible loans that adjust repayment schedules based on gig workers’ volatile incomes.

A promising start

Daniel was working as a driver for a tourism and airport transfer company in Nairobi when he first heard about digital taxi services, back in late 2016. The first digital taxi platform had emerged in Kenya about two years earlier, and by this time, ride-hailing apps were catching the attention of many drivers.

“Fellow taxi drivers were talking about this new opportunity, and I realized that some of my clients had started using digital taxi apps and were no longer using my service. I researched and found that digital taxi drivers don’t have to look for clients and was motivated to sign up,” he said.

At first, Daniel rented a car for $30 per day, but within three months of registering on the platform, he decided to buy his own car. He had saved $4,000 and approached a car bazaar in Nairobi that agreed to take the money as a deposit. He signed a contract with it to pay the car balance of $5,800 within nine months. He was able to repay easily, as he was earning approximately $1,400 per month as a ride-hailing driver, compared to his previous earnings as a tour driver of around $550.

Things were looking up for Daniel, and after a year he decided to upgrade to a more powerful car.

He considered the loan facility that a financial services provider was offering via his ride-hailing platform — part of a growing trend of platforms and providers partnering in Kenya to offer financial services to gig workers. However, the conditions for this loan were not ideal for him. For instance, the loan would have required him to purchase the car from a specified vendor that was selling cars at a higher margin than other cars on the market.

Daniel also considered borrowing from an established microfinance bank but learned that he would be ineligible for a loan until he’d had an account with the bank for six months.

It was then that he decided to again approach a car bazaar — this time in Mombasa — that would sell a car to him on hire-purchase terms. He would make a down payment and repay the balance with interest in installments. He sold his car for $4,500 to a third party, used the money for the down payment and agreed to pay $550 per month for the next 14 months.

“My worst nightmare”

By the time Daniel upgraded his car in early 2018, Kenya was already flooded by ride-hailing apps. To remain competitive, Daniel’s platform slashed customer fares, meaning that Daniel had to work longer hours to earn as much as he did before. Gig workers are considered contractors, not employees, which enables platforms to change conditions abruptly.

Daniel registered with additional apps but still could not make the monthly payments on his loan. Within two months of taking the loan, he defaulted. The car bazaar repossessed his car and demanded that he pay the $960 he still owed for the first two months, along with auctioneer fees amounting to $500.

“I suffered depression and was very stressed, and if my father and friends did not help me to come up with this money, I don’t know what I would have done,” he said.

With the money he raised from his family and friends, Daniel was able to pay the car bazaar what he owed it, and it returned his car. But Daniel had had enough. He sold the car, paid off the rest of his loan and said good-bye to ride-hailing.

“A very good deal turned out to be my worst nightmare. I ended up working more hours, therefore spending less time with my family, and I was at the brink of a mental breakdown. Lower fees made it impossible to service my loan,” he said.

Return to peace of mind

Daniel says he’s done with ride-hailing. He went back to working for a tourism and travel company, even though he earns far less than what he made during the good times as a ride-hailing driver. But his peace of mind is the most important thing to him.

“The digital taxi platforms have been sending me texts to come back, but I am done,” he said.

Gig platforms have an opportunity to avoid this scenario. There has been a growing appetite among both platforms and financial services providers to offer financial services to gig workers. Platforms see these as value-added services that can help them retain trained workers, while providers see platforms as channels to reach new markets. Working together, both can help soften the financial stress of inconsistent and erratic income and eliminate information gaps between workers and financial services providers. But to achieve this, loans must be designed to meet the needs of gig workers. And one key aspect of this is pegging repayment schedules to the income earned on gig platforms, providing a cushion for workers during economic downturns.

Would a different type of loan product have worked better?

Daniel’s story highlights a key consideration when designing credit products for gig workers: their income volatility. Daniel easily repaid his first loan but struggled once his ride-hailing platform changed the rate drivers charged passengers, limiting his ability to earn what he’d been making before. When we asked Daniel whether it would have made a difference if he’d taken the loan from his platform, he said no. The loan payments still would have been independent of the income he earned through the platform, so he would have been in the same position when his platform slashed fares.

CGAP’s research in Kenya has highlighted the importance of giving gig workers access to credit, and the sporadic nature of gig income does not make this easy. The lack of safety nets for workers who are incapacitated or cannot work poses risks to their daily income, making financial services providers hesitant to extend credit. This, in turn, leads to workers exploring harmful options that can leave them worse off. Those that do partner with gig platforms to offer services generally do not design the products to reflect this income volatility.

But as Daniel’s story illustrates, more flexible repayment schedules are in the interest of both lenders and borrowers in the gig economy.