Microlenders Raise Billions As Banks Avoid Small Customers
- Lenders, who charge borrowers annualized interest of between 18% and 200%, have tapped into a market that has become more lucrative than that of traditional banks where lending rates are capped by law at 13%.
- Most mobile microcredit services such as M-Shwari charge annualized interest rates between 46% and 90%, although the phone company and its emerging competitors sometimes call the cost of money a “fee”.
- Car & General (C&G), whose business spans chicken farming, real estate and motorcycle sales, has further expanded its business with the acquisition of a 26% stake in micro-lender Watu Credit Limited based in Mombasa for 26.8 million shillings.
Over 500 unregulated micro-lenders have swarmed Kenya’s credit market in response to increased demand for quick loans and the freeze on commercial bank loans to individuals and small businesses that followed the interest rate cap in 2016 , according to the latest industry data.
Lenders, who charge borrowers annualized interest of between 18% and 200%, have tapped into a market that has become more lucrative than that of traditional banks where lending rates are capped by law at 13%.
“This is a huge industry whose growth is inspired by M-Shwari and M-Pesa loans,” Zeph Mbugua, president of microlender MyCredit, said of the overwhelming success of the operator’s short-term credit services. of telecommunications Safaricom and its partner banks.
The list of seasoned players in this market includes Letshengo, Tala, Izwe and Branch, while new market entrants include digital lending platforms such as Nairobi Securities Exchange listed company Car & General and Mr. Mbugua’s MyCredit. .
More recently, the overwhelming success of these businesses has spawned a new category of players, who use online platforms to link lenders to borrowers for a portion of the accrued interest income.
None of the players in this market are regulated by the Central Bank of Kenya (CBK) as they do not accept deposits from the public, leaving them with the challenge of hunting down defaulting borrowers, whose whereabouts are often unknown.
“You lend your money and hope you don’t lose it,” he said, adding that now there is a copycat situation where the pioneer’s runaway success attracts new players.
Most mobile microcredit services such as M-Shwari charge annualized interest rates between 46% and 90%, although the phone company and its emerging competitors sometimes call the cost of money a “fee”.
Car & General (C&G), whose business spans chicken farming, real estate and motorcycle sales, has further expanded its business with the acquisition of a 26% stake in micro-lender Watu Credit Limited based in Mombasa for 26.8 million shillings.
C&G subsequently granted Watu a loan of 15 million shillings at an interest rate of 18 percent, indicating that the microlender charges its customers even higher interest rates.
Microlenders mainly offer short-term loans to borrowers, with terms ranging from a few days to a month, according to a survey by research firm Financial Sector Deepening (FSD). Others borrow to bet, pay school fees, and settle other loans.
While larger loans are secured by guarantees or guarantors, most of the smaller amounts are disbursed through mobile platforms, as companies use a combination of data, including historical repayments and reports from reference offices. credit to determine a borrower’s risk profile.
Some 21 microfinance firms, which are members of the Association of Microfinance Institutions (Amfi), reported a combined loan portfolio of 20.4 billion shillings last year, indicating that the entire sector could be a lot most important.
Borrowers, most of whom do not have access to loans from traditional banks, are attracted to micro-lenders who require relatively fewer documents and are quick to disburse the money.
The FSD study, however, revealed that in addition to high interest rates, the microcredit space suffers from a lack of transparency. Borrowers, for example, indicated that they had to pay fees they did not expect while others did not fully understand the costs or fees associated with the loan.
High interest rates are partly seen as a way to mitigate the impact of defaults as businesses lend to some of the riskiest people and businesses. The main reasons cited for defaults include poor business performance, job loss, lack of planning, and lack of excess income to pay off loans.
In some cases, lenders have unexpectedly withdrawn money from their clients’ accounts. While micro-lenders in Kenya are unregulated, other markets, including China, have introduced measures to address the potential exploitation of borrowers, such as excessive lending, repeat borrowing, improper collection, interest rates. unusually high interest rates and privacy violations.
Last year, China blocked microlenders in that market from granting loans to borrowers without a source of income, as companies also banned misleading consumers into over-borrowing.
The Asian country has also ordered companies to keep all their interest and fees within the maximum allowable annualized rate of 36%.