A digital mobile overdraft facility dubbed Fuliza, by Kenya’s largest telephone company Safaricom Plc, is giving the country’s popular lending apps a run for their money just three years after its launch.
Fuliza allows Safaricom customers to access unsecured credit by overdrafting on M-Pesa – the telecommunications company’s mobile money wallet that allows its users to pay bills, send, receive and withdraw money via their phone.
Adoption of Fuliza is currently at 18.3% across the country while that of loan applications has declined by 6.2 percentage points to 2.1% in the past two years, according to a study by the the country’s monetary authority, the Central Bank of Kenya (CBK) in collaboration with Kenya. The National Bureau of Statistics (KNBS) and the Financial Sector Deepening Trust (FSD) Kenya show.
The latest biannual report from the FinAccess Household Survey shows that digital lending apps have seen the largest decline in usage compared to other financial products and services from credit unions, banks, and microfinance institutions.
âThis may be explained by competition from formal digital lending products like Fuliza, (and) unfair debt collection practices by digital lending apps,â the report said.
The report also says that a CBK directive prohibiting unlicensed digital lenders from sharing the personal information of defaulting debtors with credit bureaus (CRBs) may have deterred apps from lending to customers deemed risky.
In addition, the uncertainty surrounding the regulation of applications by the CBK during the peak of Covid-19 may have prevented it from extending credit to new borrowers. A digital lender regulation bill was introduced in Kenya’s legislature and was signed into law this month.
The Digital Lenders Association of Kenya, which represents around 25 of the more than 100 digital lenders operating in Kenya, told TechCrunch in a previous interview that its members typically make loans worth $ 40 million each month, a amount which was however halved during Covid.
Fuliza, which is officially registered and licensed, operates in partnership with two local banks – KCB and NCBA. The product appears to have filled the regulatory void in mobile lending, and has now stepped up competition for mobile lending applications like the Silicon Valley-backed branch, launched in Kenya in 2015, and pay-pal-backed Tala, who set up operations in the country in 2014 – one of the first digital lenders to enter the East African country.
According to a Safaricom report, the phone company extended $ 3.1 billion in Fuliza credit in fiscal year 2020/21, a 43% increase from the previous year. This translates into an estimated $ 12 million credit that Fuliza gives to Kenyans every day. Safaricom has 23.8 million M-Pesa customers.
The genesis of mobile lending in Kenya dates back to 2012, when Safaricom launched M-Shwari, a mobile savings and lending product, which still works in partnership with NCBA Bank. Since then, Kenya has seen a flurry of digital and microcredit applications, numbering in the hundreds.
Loan apps and facilities like Fuliza offer instant, unsecured credit, eclipsing conventional banking facility loans, which go through lengthy approval processes, most requiring substantial collateral. These fintech innovations may also be one of the reasons that Kenya’s formal financial inclusion is 83.7% in 2021 compared to 26.7% in 2006.
However, while loan applications provided credit relief to people excluded from formal banking, they operated in an unregulated environment for years until a fortnight ago, when the president signed a new law. giving the CBK the power to authorize and supervise their operations. .
The lack of regulation has left gaps for predatory pricing, with some of the apps charging annualized interest rates exceeding 800%, leaving many borrowers impoverished.
The FinAccess report indicates that half (50.9%) of those surveyed had failed to repay loans from loan applications.
âThe top three credit providers for whom a majority of respondents said they defaulted on a credit facility are; mobile bank loan (including Fuliza), digital app loan, and family / friend / neighbor loan, âthe report says.
Among the main concerns of borrowers was the high cost of accessing and maintaining loans due to the exorbitant interest rates of mobile lenders. Unexpected fees, mostly imposed after default of repayment, and a lack of transparency in pricing and other fees up front were also cited as issues of concern.
To address the hidden fees issue, the country’s competition authority has announced that it will require starting June next year that all digital lenders disclose their full fees and penalties every four months.
Also, with the newly enacted law, lenders are forced to apply for licenses from CBK, compared to before, when they only had to register to create operations.
They are also responsible for respecting customer confidentiality and not sharing data with third parties, usually debt collectors. This latter requirement, in particular, protects borrowers from dishonest digital lenders who use debt shame tactics when collecting money owed to them by borrowers. Failure to comply will result in revocation of licenses.