The Impact of Digital Credit on Low-Income Customers in Kenya

The Impact of Digital Credit on Low-Income Customers in Kenya

Digital credit has emerged as a leading source of financing in Kenya, particularly among low-income customers. A recent nationally representative survey conducted by FSD-Kenya in partnership with the Central Bank of Kenya (CBK), Kenya National Bureau of Statistics (KNBS), and CGAP sheds light on who is utilizing these digital loans and the impact they have on borrowers. Here are some of the key findings:

Digital Loan Usage Among Kenyans

Over one in four Kenyans has taken a digital loan, with approximately 27% of adults (18+) having accessed this form of credit. This translates to over 6 million borrowers in the country. The data indicates a significant proportion of active borrowers, with many having taken loans in the past 90 days. Despite this, a considerable segment of the population remains untouched by digital credit, with many citing fears of debt (34%), lack of need (29%), or insufficient awareness of available solutions (21%) as reasons for their hesitance.

Note: The survey could not account for about 23% of Kenyans who do not own mobile phones, potentially excluding a portion of borrowers who use others' devices for access.

Market Leaders and Competition

M-Shwari, the pioneer in the digital credit space, currently leads the market, boasting more than double the unique borrowers compared to its closest competitor, KCB M-Pesa. Both services leverage Safaricom's M-Pesa platform, which enhances their reach significantly. However, the digital credit landscape is evolving, with numerous banks and fintechs introducing their solutions since 2016, including partnerships and independent apps.

Demographics of Digital Borrowers

The survey reveals that digital credit appeals predominantly to younger, urban customers, with a slight male bias (55% male to 45% female). Despite the narrowing gender gap, men tend to borrow more frequently and larger sums.

Primary Reasons for Borrowing

Digital loans are primarily utilized for working capital and everyday expenses. While casual workers and dependents often borrow for immediate needs, entrepreneurs typically seek loans for business purposes. The survey indicates that the most common use case for digital credit is funding business operations.

Repayment Challenges

The convenience of digital loans brings potential risks, particularly concerning over-indebtedness among low-income households. The survey indicates that 14% of digital borrowers are managing multiple loans from different providers. Alarmingly, nearly 50% of respondents reported having been late on repayments at least once, with 13% admitting to loan defaults. Many borrowers resort to savings or cut back on essential expenses like food to meet repayment obligations.

Complementing Existing Lending Sources

In 2017, digital credit became the most utilized source of financing for phone owners, yet the usage of informal loans remains consistent among both digital and non-digital borrowers. Digital credit often complements rather than replaces traditional sources of lending, as digital borrowers are also more likely to utilize bank credits and SACCO loans.

Conclusion: The Future of Digital Credit in Kenya

While digital credit has indeed opened doors for over 6 million Kenyans by providing quick access to micro-loans, questions remain about its long-term impact on economic and social well-being. As the market continues to grow, it's essential to monitor consumer protection and the risks of over-indebtedness.

Moreover, strategies need to be developed to ensure that repeat digital borrowers can progress to larger and more affordable loans as they establish positive credit histories. Understanding the financial realities of the underserved segments of the population, particularly those with irregular cash flows, is crucial for enhancing financial inclusion.

This blog post originally appeared on CGAP's website: CGAP Blog.

For more insights, refer to the Kenya Digital Credit Phone Survey Case Study.