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Are cheap loans from digital platforms a blessing or a curse?

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It appears to be Christmas all year long as cheap and easy credit has become available for majority of the population in Kenya from apps such as Tala, Branch, Shika and Safaricom’s M-SWHARI.

This is a good thing for the mum who needs small sums to feed her children for the week and just as good for the shop owner, SME or entrepreneur who needs a couple of thousand to stock up the business.

Several lenders are tripping over themselves rushing to lend small to dizzying sums of money, with little to no security at all. Some of the most popular digital lending platforms in the country are:
Branch: which offers loans between KES 500 and KES 50,000
Tala: which offers the same loan range as Branch
Utunzi: This lender peaks at KES 100,000
Pesazone Loans offer a much smaller range of KES 250 to KES 5000

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Earlier this week Mastercard and Unilever have partnered to come up wth their very own lending platform, christened ‘Jaza Duka‘, an inventory based lending platform for microentrepreneurs in Africa. These are just a skim off the top of the large pool of online platforms that are making cash easily available to members of the public that the banks generally tend to ignore.

However, much this is a positive thing for people in need, and the economy, as it facilitates financial inclusion and boosts the economy by increasing the amount of money in crculation as people make purchases; easy credit is a double edged sword, in many an experts opinion. Things could go south quickly and potentially damage a debtor’s credit for life.

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A study (pdf) was carried out around the loaning sector in Kenya and there was not much to smile about in the results. (digital credit revolution in Kenya) “Digital loans are easy to obtain, short-term, carry a high interest rate and are available from numerous bank and non-banking institutions,” reads the report.

The study shows that these loans have become the proverbial ball and chain around the ankles of millions of Kenyans.”35% Of digital borrowers have ever borrowed from more than one digital lender,” the report reveals. More than half of every person that took a loan had not completed their loan repayment, let alone begun their repayment, at the time of the survey. As a result, millions have been plunged into debt, borrowing from one platform to repay the other inevitably landing themselves on the dreaded CRB blacklist, denting their credit for good over very tiny sums of money.

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It is also interesting to know the demographic of these borrowers. Th digital borrowers are more likely to be men, young and more educated.”

According to the report, 55% of all borrowers are men. The report also reveals that these digital borrowers are more likely to be running their own business or be employed. It states that they are less likely to be farmers or dependent on family or government transfers. “Almost half of the digital borrowers report having been late in repaying the loan, with late repayment being slightly more common among men than women.” Kenyan’s can looking for loans can now check their credit score for free here on Lending Expert.

The report summarizes that the borrowed money is used by entrepreneurs and farmers for business purposes while the employees and casual workers use it for day to day needs. This is all in order but comes with great risk. Poor business performance and losing the source of income are the main reasons for most defaulters. They are susceptible to several risks at this point, particularly if they access the loan without a proper understanding of the terms and conditions. The borrower may be charged unexpected fees; these are fees that may have been embedded in the fine print of the terms of service. The lender may also make unauthorized withdrawals from the borrowers account. According to the survey, 19% of borrowers encountered these challenges.

The risks associated with these easy loans are eerily reminiscent of America’s payday loans, which plunged millions of working-class people into thousands of dollars in unanticipated debt. In light of this, anyone going onto any of these platforms with the intent to borrow ANY sum of money should exercise a lot of caution in doing so, taking care to carefully read and understand the terms of service before accepting the loan and sharing their banking information.

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