The value of outstanding mobile loans in Kenya shrunk by 24.93 percent in the year ended December 2023 as lenders cut back on loans to small borrowers amid concerns about rising loan defaults.
A new report by credit reference bureau TransUnion shows that the value of outstanding mobile loans fell to Sh59.56 billion in the 12 months from Sh79.6 billion recorded in the previous year.
Newly opened mobile loan accounts also fell by 45.3 percent, touching a low of 3.5 million additions in the last quarter of 2023 compared to 6.4 million fresh accounts opened in the last quarter of 2022.
The slowdown in mobile loans coincided with the escalation of loan defaults by borrowers where accounts labelled to be in distress had grown to more than a quarter by the end of last year.
Despite the slowdown, the average quarterly limit per borrower rose by 13.93 percent from Sh14,800 in the quarter that ended September 2023 to Sh16,860 in the quarter that ended December 2023, signalling the prioritisation of lending to high-value clients who mostly enjoy enhanced credit amounts.
“This could signify a strategic adjustment in lending practices or shift in the borrowing segment,” TransUnion states in its latest credit report.
The report also highlights a decline in borrower diversity from 4.2 million unique individuals to 3.35 million borrowers.
According to TransUnion, the contraction in the number of unique borrowers is a pointer to a tighter credit assessment on the part of both the lender and the customer.
“This suggests a tightening market, perhaps reflecting a deeper dive into creditworthiness or a population becoming more selective regarding borrowing,” the report adds.
TransUnion further provides a breakdown of overdraft loans by size, revealing a sharp contrast between low and high-value overdrafts where the latter describes disbursements of more than Sh6,000.
Low-value overdrafts, which are described as the lifeblood of accessible credit in the Kenyan market, fell by the volume of new accounts opened in the fourth quarter of 2023 to 8.97 million accounts from 10.88 million accounts in the quarter to September.
The value of the micro-sized overdrafts also fell to Sh6.68 billion from Sh7.94 billion in the previous quarter.
The number of unique borrowers seeking low-value overdrafts fell by 16.74 percent in December, rounding off to 8.72 million persons from 10.47 million in September. The average quarterly limit for low-value overdrafts however improved to Sh745 from Sh730 prior.
The slowdown in microloans can also be attributed to the rule where lenders are prohibited from negatively listing defaulters of principal amounts of Sh1,000 or below.
In contrast, whilst the number of accounts seeking out high-value overdrafts declined, disbursements of the big-ticket loans were up by 77.2 percent to Sh35.61 billion from Sh20.09 billion in the quarter to September 2023. The report ties the trend to an uptick in the average financial appetite of consumers or businesses utilizing the products.
At the end of December last year, mobile loans made up half or 50.61 percent of all active loan accounts in Kenya’s credit market where 15.14 million accounts held a collective balance of Sh148.7 billion.
This comes at a time when the country is transitioning its digital lending industry into a regulated environment. The Central Bank of Kenya (CBK) has so far licensed 51 Digital Credit Providers (DCPs) in the country following the passage of a law to regulate the digital lending industry following a public outcry.
The industry has however decried the pace at which the licenses are being given with more than 400 applications pending at the Central Bank.
The lobby group of the digital lenders – Digital Financial Services Association of Kenya (Desak) has called on the regulator to provide clear guidance on the details of the pre-requisite documents to help speed up the process.
CBK has received more than 480 applications for digital lending services since March 2022 and is therefore still keeping more than 429 waiting. The huge number of applicants also shows the opportunity that investors are looking at, as they seek to reap from the mobile penetration dividends that have made it easy to collect data, analyze and price the risk for borrowers in the country.
Digital loans have gained quick popularity in Kenya due to their ease of application for borrowers seeking quick cash for emergencies and survival loans. This comes at a time when borrowers are increasingly turning to survival loans to meet pressing needs such as food and rent, pointing to rising debt distress that risks increasing the stock of loan defaults towards the Sh700 billion mark.
The Kenya Bankers Association chairperson John Gachora said recently that the sector is seeing a reduced appetite for loans towards capital expenditure such as construction or expansion of businesses. Instead, those borrowing for short-term needs are the ones driving up the growth in the loan book.
The scenario, coming on the back of 12-year-high interest rates, the elevated cost of living and new or increased statutory deductions and taxes, has seen many borrowers run out of money required to foot day-to-day needs including food and bus fare.
“We are seeing more borrowing just for survival. People are borrowing to spend on short-term needs as opposed to for long-term investment,’ said Mr Gachora who is also the managing director at NCBA Group.
Banks are worried that the increased appetite for survival loans may further increase the share of non-performing loans (NPLs) in the industry. This is because such borrowers may also be owing digital lenders similar loans.
