Ring­ing up some crush­ing debt

Bank­ing by phone makes bor­row­ing eas­ier and harder

The Morning Call - - NATION & WORLD - By David Mal­ingha

With no bank ac­count to his name, J. Barasa still found a lender to fi­nance his pas­sion for gam­bling on soc­cer. All it took was a few clicks on his phone and his will­ing­ness to pay an­nual in­ter­est of more than 150 per­cent.

The 32-year-old Nairobi taxi driver rep­re­sents the new fron­tier in the mar­ket for mo­bile money, the uni­verse where bank­ing is done over the phone. Its pro­lif­er­a­tion is mak­ing it eas­ier than ever to bor­row, mar­ry­ing con­ve­nience to need and cre­at­ing a level of stress that only crush­ing debt can pro­duce.

In Kenya, Africa’s fi­nan­cial­tech­nol­ogy pi­o­neer, there are now more peo­ple keep­ing money on their phones than in banks. Al­most one-fifth of mo­bile­bank­ing bor­row­ers there de­faulted last year — like Barasa, who has failed to pay three sep­a­rate loans. He’s hop­ing friends and fam­ily will help to re­pay the 22,000 shillings or about $213.

“Mo­bile loans are easy to get and ad­dic­tive,” said Barasa, who asked that his given name not be pub­lished. “I need a fresh start but can’t see it.”

Mi­crolend­ing was once a good news story. Muham­mad Yunus won the No­bel Peace Prize in 2006 — a year be­fore the in­tro­duc­tion of the iPhone — for pioneering the con­cept in Bangladesh: loans of as lit­tle as $10 to mostly women entreprene­urs too poor to tap banks. Along the way, Kenya es­tab­lished a goal of pro­vid­ing univer­sal ac­cess to fi­nan­cial ser­vices, a prom­ise made eas­ier amid the smart­phone rev­o­lu­tion.

Sub-Sa­ha­ran Africa has proved the most fer­tile ground for mi­crolend­ing through mo­bile de­vices. In 2018, there were 395.7 mil­lion mo­bile-money ac­counts in the re­gion, or al­most half of the world to­tal; the $26.8 bil­lion han­dled rep­re­sents two-thirds of the to­tal trans­ac­tions, ac­cord­ing to GSMA, which rep­re­sents 750 mo­bile op­er­a­tors around the world.

Asia is the clos­est com­peti­tor, with such trans­ac­tions equiv­a­lent to about 7 per­cent of its econ­omy com­pared with about 10 per­cent in sub-Sa­ha­ran Africa, ac­cord­ing to World Bank data. In the rest of the world, it’s less than 2 per­cent.

In Kenya, with more than 50 mo­bile lenders of­fer­ing loans rang­ing from $10 to $400, of­fi­cials are try­ing to get their arms around a busi­ness that took off af­ter a 2016 law cap­ping in­ter­est rates to re­duce bor­row­ing costs. Banks in­stead in­vested more in government debt and tight­ened their stan­dards, send­ing small un­se­cured bor­row­ers to mo­bile lenders.

Mo­bile-money op­er­a­tors “shouldn’t be lend­ing out money in the or­der of mag­ni­tude that it’s out of con­trol,” said Christophe Me­u­nier, a se­nior part­ner at Delta Part­ners Group, an ad­vi­sory firm for tech­nol­ogy and me­dia com­pa­nies. “They should have an in­cen­tive to con­trol lend­ing through the plat­form.”

By far, the dom­i­nant force is M-Pesa, the pay­ments plat­form of Voda­fone Group PLC’s Sa­fari­com unit. Be­gun more than a decade ago, M-Pesa be­came a revo­lu­tion­ary ser­vice now used by more than 22 mil­lion for trans­fer­ring money and buy­ing ev­ery­thing from gro­ceries to shop­ping on the Alibaba ecom­merce site. An over­draft fa­cil­ity, called Fuliza, recorded trans­ac­tions of 29 bil­lion shillings in three months af­ter its in­tro­duc­tion in Novem­ber.

M for mo­bile and Pesa for money in Swahili, M-Pesa pro­vides a dig­i­tal wallet on Sa­fari­com phones. The ser­vices “have opened up ac­cess for mil­lions of Kenyans over the last five years,” a Sa­fari­com spokesman said, adding al­most half of bank ac­counts are mo­bile based. The op­tion to de­posit and bor­row can be ac­ti­vated within the M-Pesa wallet, send­ing you to M-Sh­wari, a mo­bile-bank­ing ven­ture be­tween Com­mer­cial Bank of Africa and Sa­fari­com. KCB Group PLC, Kenya’s big­gest lender, also joined Sa­fari­com to start a sec­ond lend­ing ser­vice in the M-Pesa wallet. Spokes­men at CBA and KCB didn’t im­me­di­ately re­spond to an email re­quest for com­ment.

M-Sh­wari charges 7.5 per­cent of the amount bor­rowed per month. That com­pares with an­nual com­mer­cial bank lend­ing rates of about 13.2 per­cent. De­fault­ers have their sav­ings frozen and are re­ported to the credit ref­er­ence bureau.

There are also fi­nance com­pa­nies like Al­pha­bet Inc.backed Tala, which raises money from in­vestors. Tala, whose big­gest mar­ket is Kenya, has dis­bursed $750 mil­lion in loans of be­tween $10 and $300 in the last five years, says its East Africa growth man­ager, Ivan Mbowa. Its cus­tomers bor­row from 21 to 30 days and are charged as much as 15 per­cent — a rate that re­flects non­tra­di­tional credit checks, such as in­for­ma­tion mined on so­cial me­dia and dining and shop­ping pat­terns.

The ex­pan­sion in con­sumer debt has an in­evitable dark side. While to­tal lend­ing by banks grew 5 per­cent to 2.5 tril­lion shillings in the year end­ing June 2018, non­per­form­ing loans climbed 27 per­cent to 298 bil­lion shillings, ac­cord­ing to the cen­tral bank. Two-thirds of Kenyan bor­row­ers are in debt stress — those caught in a debt spi­ral or those who have to sell an as­set or re­duce food spend­ing to re­pay loans — ac­cord­ing to FSD Kenya, a Bill & Melinda Gates Foun­da­tion-backed fi­nan­cial-in­clu­sion ad­vo­cate.

“My worry in Kenya is that the bor­row­ing mid­dle classes may also find them­selves in a cy­cle of es­ca­lat­ing debt,” says Am­rik Heyer, head of re­search at FSD. For the vul­ner­a­ble, in­clud­ing young or poor peo­ple, “who may bor­row to sur­vive, dig­i­tal credit is in dan­ger of de­stroy­ing the very mar­ket that feeds it.”

It’s not as bad as it looks, says Tala’s Mbowa. “Our charges should be looked at as to­tal cost of bor­row­ing, and not an­nu­al­ized,” he said in an in­ter­view from his of­fice in Nairobi. Some Tala loans are re­paid within days.

Author­i­ties are most con­cerned about un­reg­u­lated fi­nance com­pa­nies, giv­ing them more lee­way both in pric­ing and col­lec­tion prac­tices. Some lenders ag­gres­sively dun debtors, calling their friends and rel­a­tives to com­pel them to pay.

They are loan sharks on “steroids,” cen­tral bank Gov­er­nor Pa­trick Njoroge said in May when he started be­ing vo­cal on the ne­ces­sity to su­per­vise dig­i­tal mi­crolen­ders. “There has to be proper reg­u­la­tion.”

TONY KARUMBA/GETTY-AFP 2007

Over 22 mil­lion peo­ple use the pay­ments plat­form M-Pesa to trans­fer funds and make pur­chases.

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