Digital lenders escaped record loan default rates this year, defying a challenging economic environment that left commercial banks bearing the brunt of the crisis.
Non-performing loans (NPLs) in banks reached a historic 16.7 percent in August, with borrowers failing to service advances worth Sh630 billion, eroding the asset quality of commercial banks.
In contrast, digital credit providers reported much lower default rates, generally below 10 percent. Some even saw improvements in their NPLs or maintained rates similar to previous years.
Tala, one of the largest players in the digital credit market, reported NPLs of less than five percent this year, which is consistent with last year’s performance. This indicates that mobile lenders experienced a relatively stable environment despite economic headwinds.
Annstella Mumbi, general manager for Tala Kenya, attributed this resilience to stable loan pricing model. Unlike commercial banks, most digital credit providers (DCPs) kept interest rates steady, even as Central Bank rate hikes pushed bank lending rates higher.
“If you look at most DCPs, pricing has not changed. Our interest rates have not changed, if anything, we’ve actually worked on how to make loans more affordable for customers, and because of that we’ve seen a very stable [loan] book,” said Ms Mumbi.
“Kenyans are saying that their expenses right now exceed their income, so if the cost of credit goes higher, then it just means it makes it harder for customers to be able to make timely payments.” Kevin Mutiso, Chairperson of the Digital Financial Services Association of Kenya (DFSAK) and CEO of digital lender Oye, noted that DCPs serve a different market than commercial banks.
This distinction contributed to their resilience during the NPL crisis.
“The DCPs lend to the MSMEs, which have been quite resilient to the pain, and you know banks don’t lend to those parties. They lend to large corporate entities and those are the ones suffering from tough economic times,” Mr Mutiso explained.
The digital credit market also experienced an influx of new players this year. The Central Bank of Kenya (CBK) licensed 53 new lenders, a sharp increase from the 22 licensed last year, intensifying competition within the sector.
However, the market size has shown minimal growth, with industry players reporting fewer new customers and financial distress among existing ones.
“We’ve seen a significant drop in new customers. We’ve not gotten as many new customers as in previous years, and in addition to that we’ve seen some of our existing customers going through financial distress,” Mutiso said.
But competition dynamics have barely changed. According to Mr Mutiso, six companies – Tala, Mogo, M-Kopa, Watu, Zenka, and Oye – still control over 90 percent of the market.
“The new entrants are yet to make a dent in the existing marketplace; I think they’re still trying to figure out their products,” argued Mr Mutiso.
Mumbi says Tala has not felt any significant disruption in the market resulting from the additional entrants into the market, and that it has maintained its share of the market from last year.
“I do think that we still have such a huge credit deficit in the Kenyan market, so it’s not a zero-sum game. So, how I think about it is, the more the merrier because we’re able to start servicing that need more effectively,” she said.
CBK is currently processing over 600 applications for DCP licensing, and the new entrants into the market could increase next year, further heightening competition.
“Other applicants are at different stages in the process, largely awaiting the submission of requisite documentation. We urge the remaining applicants to submit the pending documentation to enable completion of the review of their applications,” CBK said in October when it announced the latest additions of 27 new DCPs into the market.
According to the SME Finance Forum, the financing gap for micro, small, and medium enterprises (MSMEs) is currently estimated at Sh2.5 trillion ($19.3 billion), highlighting the need for more digital lenders in the country.
Emergence of new solutions such as the State-led Hustler Fund and Safaricom’s Fuliza, have done little to bridge the gap, and the majority of the soft loans are still dispatched by the top digital lenders.
Banks have also this year stepped up their lending to the MSME sector, most with support from development finance institutions (DFIs) such as the International Finance Corporation (IFC) and others.
But even though the year hasn’t been as tough for the DCPs in Kenya, it has been quite hard on their customers, who are now borrowing to repay existing loans and the majority rely on soft loans to meet their daily needs.
The FinAccess survey done by the CBK and the Kenya National Bureau of Statistics (KNBS) and published in November revealed that this year, 32 percent of Kenyans are borrowing to repay loans, while nearly 60 percent use their savings to clear debt.
Debt distress has emerged as a key challenge for Kenyans, causing financial distress in almost half of Kenyans in the country, according to a survey done in January by Old Mutual Group.
