I Defaulted on 5 Digital Loans and this Happened

The rise of micro-lending providers who use mobile services to extend small unsecured loans to the public has seen Kenyans all but ditch traditional lenders in favor of these technology powered credit providers. Unfortunately, in spite of all these players and the ease of access they bring, their efforts have not translated into real benefits for the Kenyan consumer.

I set out to conduct a social experiment taking out small loans on 5 of the biggest providers. To their credit, access to credit is greatly enhanced. Their services are really simple and fast, I got all the loans on the same day, each subject to their respective terms and conditions on default, loan recovery and submission of personal details to the Credit Reference Bureau (CRB) upon delinquency. The purpose of the experiment was to find out how the lenders handle default, their follow up procedures with the consumer and if they eventually report to the CRB.

The default period lasted 1 to 2 months within which some contacted me personally, others rolled over the credit with additional interest and others handed over personal details to loan recovery agents to contact me on their behalf. Almost all threatened to register my default with the CRB. We exhausted all grace periods and then went ahead to purchase personal CRB reports and to our surprise, only one lender had forwarded the information as stipulated in their terms and conditions. (All the loans were later paid back)

My experience is a big tell on the psychology of digital lenders. It reveals that digital lenders have adopted a silo approach. Each believing that the consumer, though leveraged, will honour their obligation thus continuously advancing credit to consumers with existing credit on other platforms. Many people have found themselves in an unending credit cycle where they borrow from one lender to pay the other reaping no real value and sinking deeper into debt.

The multiplier effect of these ever-increasing digital credit platforms could be a toxic credit market with the persons they seek to impact being the ultimate losers. A recent survey by FSD Kenya, the Central Bank of Kenya (CBK), Kenya National Bureau of Statistics (KNBS) and Consultative Group to Assist the Poor (CGAP) has raised concerns over indebtedness and the leverage burden many Kenyans now face. A subsequent article in a local business daily inferred that Kenyans had become prisoners of digital loans.

Default should not be a problem to financial service providers given that such credit activity is reported to Credit Reference Bureaus (CRBs) for cross referencing, eliminating default risk in the market and creating efficiency through information symmetry. But are lenders reporting back to the CRBs? Most are not.

I can understand why digital lenders would hesitate to share such information. Digital loans are unsecured and rely on consumer data to determine credit limits. Digital lenders have spent time and resources in complex, information-crunching algorithms that turn data into collateral. Sharing such data through reporting delinquency to a CRB may be perceived as equal to sharing the insights their algorithms generate. Anyone can access the now enriched credit score from the CRB whether they’ve invested in data science or not. In addition, digital lenders do not rely on the CRBs as much. They are of little use if not obsolete since algorithms are more accurate in generating credit scores than historical time series data and the prohibitive costs also make the potential for a more symbiotic relationship more elusive.

However, failure to contribute to the CRB creates blind spots in the entire ecosystem. Lenders, especially traditional banks, cannot accurately determine credit status thus appropriately price risk. A ‘radioactive’ consumer turned down by digital lenders can still access bank credit holding all factors constant. This exposes the market to increased default, non-performing loans and high interest rates to price in risk. In addition, it could lead to high costs of acquiring and disposing subscribers, eversion by lenders and further roll back accrued financial inclusion gains. More importantly, exacerbate the conditions credit is seeking to alleviate in the lives of the consumers. This behavior also does not help digital loans subscribers access better financial products in formal banking sector through creation of a credit history with the CRB.

To win the less leveraged consumer and draw unique subscribers, traditional banks have to develop better filters and new tools that do not rely only on the customers’ honesty in disclosing their level of debt. They have to ‘divine’ creditworthiness. However, both traditional and digital lenders need to be creative in developing unique and diversified products that have a positive impact and generate real value for the consumer especially by increasing streams of income to guarantee repayment. Subscribers will stick to real value.

Financial providers should also offer ethical financial education to equip consumers with the values and knowledge to make them better utilizers of credit and stewards of income. In the end, shaping character and empowering with knowledge is what will drive down risk and increase sustainability.