Financial inclusion has been touted as one of Kenya’s great success stories over the past decade. The successful rollout of digital financial services has led to an unprecedented increase in the number of people enjoying access to formal financial services. Today, Kenya is home to more digital financial services deployments than most countries in the world.
According to the 2023 FinAccess Survey by the Central Bank of Kenya, FSD and the Kenya National Bureau of Statistics, formal financial inclusion had increased from 27 per cent of Kenya’s population in 2006 to 84 per cent. Kenyans utilise digital credit to meet everyday household needs and address emergency expenses, while small enterprises use these loans to scale or manage their daily cash flows.
While this accelerated financial inclusion has enhanced the resilience of communities by providing people with new tools to access financial services, the rosy picture has been bloated with the revelation that millions of borrowers have been trapped in a web of debt. As a result, a substantial number of them have found themselves negatively listed by Credit Reference Bureaus.
Today, the digital financial landscape is rife with tales of millions of Kenyans drowning in short-term debt, often stemming from loans that should never have been approved in the first place. This is worrying, especially considering that the financial sector in Kenya has, in recent years, mainstreamed the credit market to enhance credit uptake through the introduction of risk-based lending mechanisms.
Despite these measures, accusations have been levelled against lenders, especially non-bank digital lenders, for engaging in predatory practices, targeting vulnerable Kenyans by offering loans with exorbitant interest rates, opaque terms and debt shaming. The allegations are that lenders approve these loans with little regard for the borrower’s ability to repay, facilitating a cycle of debt where these individuals borrow from one lender to repay another.
This raises a crucial question: should the responsibility for preventing irresponsible borrowing solely lie with individuals, or do lenders have an ethical and practical obligation to act as gatekeepers? The answer is that there is a shared responsibility between the credit providers and the borrowers.
First, financial institutions can mitigate these risks by establishing responsible lending guidelines and conducting thorough assessments of borrowers' creditworthiness using multiple data touchpoints.
Secondly, there is a need for consumer protection anchored on regulation. Self-regulation, although desirable, has proven ineffective in containing non-regulated financial players.
Thirdly, lenders should blend digital credit with savings and insurance products as part of building a comprehensive financial ecosystem. This approach would foster a culture of financial responsibility and promote savings. This can be achieved by financial institutions remodelling their approach to analysing customer behaviour to accommodate a wider, more complex data set to truly make effective lending decisions.
As a recourse to some of these challenges, lenders need to invest in financial literacy initiatives geared towards equipping borrowers with the necessary knowledge on how to effectively manage their finances.
This includes the requirement for them to understand the terms and conditions of their credit facilities and how the same affects their credit score. By doing this, they will set them up on a journey towards responsible borrowing.
As the global financial industry continues to embrace digital lending options, financial institutions are called upon to embrace their role as gatekeepers, ensuring access to credit while safeguarding individuals from the perils of irresponsible borrowing. This ethical imperative not only benefits borrowers but also strengthens the entire financial ecosystem for posterity.
Managing director, KCB Bank Kenya
