Kenyans turn to digital loans and shylocks to survive in tough economy

Households are running to digital lenders, shylocks and family members for loans to meet pressing New Year needs, avoiding commercial banks despite a decline in interest rates.

Some have resorted to selling valuables at a throwaway price as they struggle to afford school fees, stationery, rent and food.

Thousands more are facing auctioneers after defaulting on credit obligations.

Jacinta Aseyo, a 37-year-old mother of three who works as an office assistant at an insurance firm in Nairobi, had to borrow Sh72,000 from four digital lenders, a chama and her two sisters to enrol her son in a senior school last Thursday.

“Those loan applications came through for me big time. I spent most of my December salary on a few things back home (upcountry),’’ she told the Star.

"Transport to Vihiga and back took up over 40 per cent of my pay. The little savings I had were spent on stationery, school uniforms and Christmas festivities."

The digital apps charge high rates, but Aseyo finds them convenient. While getting a loan from a commercial bank or a sacco is a process, the apps need no paperwork.

"Time was a major factor," she said. "I had a week to galvanise funds to take my son to school. I borrowed Sh46,000 from digital apps in 24 hours, on my mobile phone, seated in my house.”

When Irene Kemunto’s phone vibrates at 7am, it is not an alarm clock that wakes her up to prepare her child for school; it is a loan repayment reminder.

The 40-year-old vegetable vendor, who also runs a roadside eatery on Manyanja Road in Eastlands, Nairobi, borrowed Sh3,500 from a lending app to restock her business.

“I knew what I was getting myself into. It was the only sure last resort to keep me in business,” she says.

"I have to pay an interest of Sh400 a week. I have another Sh5,000 credit facility from a savings club, which requires me to pay Sh1,800 at the end of this month."

Collins Ombajo, a primary school teacher, has been forced to master the art of borrowing from Peter to pay Paul and borrow again to survive.

“It is not easy. It is loan after loan. The good thing is that not much documentation is needed. The salary is not enough. I just hope things get better," he says.

The financial struggles Kenyans are experiencing are well summarised in the latest financial stability survey by the Central Bank of Kenya and the Financial Sector Regulators Forum.

Released late last year, the study shows four out of every five homes are financially insecure, with many taking out pricey short-term loans to cover short-term basic needs.

The report blames shrinking revenues, unemployment and high cost of living, which have worsened since 2020 despite the country’s economy improving on paper.  

For instance, Q2 Investor Pulse by ICEA Lion Group, released late last year, shows nearly eight in 10 Kenyans living in urban areas say their income has either stagnated or declined in the past 15 months, underscoring the strain many households face amid rising living costs and slow wage growth.

The report, which tracks the spending habits of 1,000 urban consumers across Kenya, shows that household income has either stagnated or shrunk, forcing many to turn to credit for survival.

More than 50 per cent of those surveyed said their earnings remained flat, while 30 per cent noted a steep decline. Less than 10 per cent recorded improved earnings but indicated that the gains are quickly swallowed by the rising cost of living.

“Shrinking revenue, coupled with the rising cost of goods, has made life tougher for families, with one out of three respondents noting that they were spending more than before," the report reads in part.

Benjamin Muraguri, a financial adviser at Monrovia Capital, says when spending outweighs income, borrowing becomes the only option. “Those with poor financial records have no option but to bow down to market offerings.”

He added that although Kenya's financial inclusion has hit nearly 90 per cent, most household breadwinners, largely working for or operating small businesses, characterised by irregular income and limited financial documentation, are cut off from the traditional credit market.

According to the 2024 FinAccess Household Survey, four million Kenyans (roughly 14 per cent of the population) applied for loans but were denied, demonstrating a systemic challenge in Kenya’s financial landscape.

“Casual workers, who often face irregular income and limited financial documentation, accounted for 1.38 million of these rejections,’’ Financial Sector Deepening (FSD Kenya) says.

"This group includes construction workers between jobs, domestic workers paid inconsistently and seasonal agricultural labourers, who have real incomes, but incomes that don’t fit the mould preferred by traditional lenders."

According to the report, nearly 488,000 applicants were rejected due to a lack of credit history, yet one cannot build a credit history without first accessing credit.

Another 671,000 were turned away for having “savings too low”, a criterion that does not account for the economic realities of those earning Sh300 to Sh1,000 per day, where every shilling is allocated to essentials before it’s earned.

“These insights reveal the quiet determination of millions striving for a better life. Each loan denial represents a Kenyan who dared to believe in their own reliability and viewed credit as a bridge to opportunity.”

A financial inclusivity expert at the institution told the Star that CBK must do more than cutting the base lending rate if it expects to power the private sector and lower the cost of living through monetary policy intervention.

“The banking regulator must balance a focus on commercial banks and digital lenders,” the expert said.

"While cutting base lending rate eight consecutive times to the current nine per cent is welcome, that only favours a few bankable Kenyans. The majority are cut off, relying on digital loans.

“We must see it develop more policies focusing on digital lenders. Its move to kick out rogue digital lenders and shylocks in 2022 is paying off.”

Last year, digital credit providers loaned out Sh77 billion to individuals, surpassing the outstanding loan portfolio of micro-finance banks.  

The number of digital credit accounts has increased significantly from 2.3 million in 2023 to 5.5 million last year, with industry analysts attributing the growth to increased adoption of technology.

Digital lenders are leveraging transactional and communication data to identify customers, tailor credit products and strengthen credit scoring and enforcement mechanisms.

This digital-driven approach has helped minimise credit risk and positioned DCPs as an important source of quick, short-term financing for emergencies and small business working capital.

The sector's expansion follows the enactment of the Central Bank of Kenya (Amendment) Act, 2021, which empowered the CBK to regulate digital lenders for the first time.

The law, which came into effect on December 23, 2021, aims to ensure fair and transparent lending practices, while supporting the growth of the digital credit market. To operationalise it, the CBK issued the Digital Credit Providers Regulations in March, 2022.

This regulatory framework was introduced to address market conduct concerns, strengthen consumer protection and promote financial stability amid rapid digital expansion.

By bringing DCPs under formal oversight, the CBK sought to foster a more ethical, transparent and resilient credit market that can support Kenya's evolving financial landscape.

Kevin Mutiso, chairman of the Digital Financial Services Association of Kenya, said around 5.5 million Kenyans currently access loans totalling over Sh13 billion every month from 40 registered agencies.

While most borrowers take out loans primarily for consumption, Mutiso said the sector has also supported Kenyans in financing their enterprises and start-ups.

He added that the sector has adopted the use of artificial intelligence and big data from credit bureaus to identify high-risk borrowers.

Sam Omukoko, founder and managing director of Metropol Credit Bureau, says the sharing of credit information has significantly enhanced access to loans for millions of Kenyans.

He, however, expressed concern about the rise in non-performing loans in the sector, currently averaging 20 per cent.

He attributed this trend to harsh economic conditions and the fact that many Kenyans borrow for consumption rather than investment or growth.

While acknowledging the pivotal role played by digital lenders in bridging financial inclusivity, consumer protection entities want them to slash interest rates.

The Consumers Federation of Kenya says charging upwards of Sh400 on a S2,000 loan is insane. This is predatory and only pushes borrowers further in the deep, Cofek secretary general Stephen Mutoro said.

He also slammed micro-finance institutions for enticing unsuspecting Kenyans with sweet loan offers laced with exploitative contracts.

Mutoro called on the Data Protection Commissioner to come up with stronger online policing, digital victim reporting and tougher penalties for perpetrators.

Ali Hussein, chairman of the Fintech Alliance of Kenya, raised concerns regarding the protection of borrowers’ data, which has been exploited by unscrupulous players in the sector.

He also emphasised the importance of promoting borrowers’ financial wellness following reports of high levels of indebtedness caused by access to multiple loan facilities.

Microfinance lender Platinum Credit was recently ordered to pay a mobile subscriber Sh400,000 for repeatedly sending unsolicited promotional messages and calls without his consent.

The Office of the Data Protection Commissioner said the digital credit provider was found liable after the individual (Samuel Waweru) filed a complaint on November 27, 2024, accusing Platinum Credit of persistently contacting him with loan advertisements without his consent.

Legal disputes have highlighted issues like rapid debt accumulation and violations of duplum rules.

The duplum rule is a consumer protection principle that prevents lenders from charging interest once accumulated interest equals the original principal amount of a non-performing loan, capping total recoverable interest at 100 per cent of the principal. 

This rule protects borrowers from spiralling debt, encouraging early resolution and fair lending by stopping interest from exceeding the principal, though its application varies by jurisdiction and loan type.

Industry players argue that digital credit and other forms of non-bank lending fill a critical gap left by traditional banks, which view low-income borrowers as high-risk. 

“We are providing access where none existed. We are serving people who have been rejected by the mainstream banking industry,” says Dennis Mombo, the founder and CEO of Mwananchi Credit Limited.

His company is among those accused of inflating loan terms and aggressive recovery, claims which he, however, denies.

“I know we are not perfect. Every business has challenges and we continue to improve as we go. We are licensed and we operate within the confines of the law,” he told the Star.