Are mobile loans sinking people into financial ruins, more debt? Kenyans react

Loan applications and disbursements are a marvel of the modern age. By following prompts and several taps on a phone screen, you can replenish thirsty bank accounts. Pure bliss.

When financial inclusion first took off in Kenya, many Kenyans were thrilled at the idea of handling transactions without the hassle of going to the bank.

In the years that followed, many digital credit providers emerged. Kenya’s booming fintech scene has caught the attention of wealthy investors, thanks to the increasing availability of smartphones, widespread mobile internet access, and the strong presence of mobile money services.

Banks too have found themselves winding down their brick-and-mortar branches to set up shop in people’s smartphones where they are making money from microcredits.

In what was meant to be a success story of financial inclusion in Kenya, the rise of digital credit providers has instead left a majority of Kenyans teetering on the edge of financial collapse.

Recently, there’s been growing discussion about digital credit and questions surrounding whether it’s done more harm than good.

The allure of using mobile phones for financial services has led many borrowers into debt traps, leaving them struggling with the tough economy and high interest rates.

Many Kenyans have shared that they’ve fallen into a refinancing trap uglier than the government’s own debt struggles. Some have found themselves stuck in a cycle of borrowing from one lender to pay off another.

It is certainly true that most Kenyans who have rushed to any digital credit platform to borrow money didn’t do it for the sake of investment but rather to splash on day-to-day needs, emergencies and at times entertainment.

A past study conducted by Financial Sector Deepening Kenya (FSD-Kenya) revealed that the average borrowers are not necessarily hoi polloi. It showed that many are mostly men, young and educated, with a handful running their own businesses.

Mobile loans can be a helpful safety net during financial emergencies, especially for Kenyans previously excluded from traditional loans. Below are excerpts from an online discussion about mobile loans.

“They help when doing business but getting out is quite a hassle. You pay and borrow. It becomes a cycle,” said one user.

“Mobile loans are good. They are for short-term investments. I’m in business, then a deal comes that requires Sh. 18,000 capital and the returns are like Sh. 30,000 in 2 days. I take the mobile loan, take the deal, get the returns, and pay back the loan (with interest) Sh. 21,000 and remain with 9,000 profit,” said another user.

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Clearly, there are two opposing sides: one group criticizes mobile loans, while the other defends them as a way to access more funds.

It’s crucial to set boundaries and know when it’s appropriate to borrow and when to steer clear. There are serious risks and drawbacks associated with mobile loans but the profits can also be there if the math and timing is done right.

A few of the emerging concerns Kenyans raised about mobile loans were the high interest rates, penalties on default and probability of CRB listing.

The narrow crossing for mobile loans boils down to the financial choices and habits we make as individuals. They are not a healthy way of money management and can put you in more trouble than you started with.

Here are some tips to help you stop the vicious cyclical dependence on mobile loans:

1. Assess your current financial situation: List all your debts, expenses and income sources. Compare all and find a way to make things work favourably.
2. Cut down on unnecessary expenses: Tone down on spending habits and eliminate any uncalled-for expenses.
3. Increase your income streams: Having more sources of income will help you reduce the overdependence on mobile loans. Note that you should be careful to avoid falling for scams/schemes promising quick and easy money.
4. Build an emergency fund: Avoid borrowing expensive short-term mobile loans in case of an emergency by setting aside money (not savings) to cover unexpected bills.