Loan cycle trap among the Kenyan youths

The rise of Mobile Digital Lenders in Kenya has been both a blessing and a curse to the Kenyan citizens. We currently have more than 240+ mobile digital lenders and the numbers keep growing rapidly! Why do we say that Mobile Digital lenders are a curse when they are supposed to be an uplifting story for financial inclusion in Kenya? Well, it’s simply because the allure of using mobile phones as a tool for financial services is laying debt traps for many borrowers, with most stuck in a vicious cycle of borrowing from one digital lender in order to pay another. Rather than leave the users better off, the many mobile digital lenders might have just pushed them into financial bondage.

76% of the people surveyed have taken digital mobile loans with the age group of 26–35 years forming a larger proportion of people who take loans. On average, a typical digital borrower grew their monthly loan amount from Kshs 3,000 in Jan to Kshs 13,000 by December 2018.

“…Many Kenyans are now caught in several mobile loans to service forcing them to jump from one service provider to another…” said Financial Sector Deepening Kenya (FSD- Kenya).

For instance, 30% of the people surveyed use Fuliza to repay their MFI loans. On average the Fuliza transactions used to clear MFI loans range between Kshs 7000- Kshs 9000 between January and May 2019.

Lack of transparency in loan terms and conditions appears to be one factor contributing to these borrowing patterns and high rates of late repayment and default. A significant percentage of digital borrowers in Kenya say they did not fully understand the costs and fees associated with their loans and incurred unexpected fees. Lack of transparency makes it harder for customers to make good borrowing decisions, which in turn affects their ability to repay debts.

What can we do to make sure that Fin-tech in Kenya truly plays its role in uplifting the people of Kenya? Financial education to its users should be the first step. All Kenya citizens should be able to understand basic personal finance in order to empower them to be better money managers in their households and be able to choose financial services that are beneficial to them and their families.

Bringing safety and sanity back into the digital mobile lending space is Patascores’ main focus. Empowering the users through financial awareness and financial education as the first step to financial freedom and wealth creation. Here are some easy steps to follow to help you reduce/ manage debt;

GET OUT OF DEBT — STEP BY STEP

Make sacrifices in the short term and charge down your debt. These steps can be helpful:

STEP 1: Face the problem.

• Know how much you owe; Being financially aware is the rule of thumb when it comes to debt management. Evaluate your finances and get a clear picture of who you owe money and how much that is.

STEP 2: Share your problem!

• Having a concrete circle where you can get solid advice on some of your problems will go a long way. Look for a friend, family member, mentor or financial adviser to share your current status with who will positively help and guide you through financial planning to get you out of debt. Alternatively, visit the Patascore Blog and get some easy relate-able steps on how to manage and pay off your debts.

STEP 3: Adjust your budget

• Do you know how much you spend monthly on expenses? Try out the Patascore App and get a clear financial picture of your spending habits so that you can clearly see the areas that need to be improved on as you create your budget. Once you have adjusted your budget, you can then draft a plan of how to use the extra money ie. repaying your debt. You will always find there are one or two places you can cut down a little.

STEP 4: Create strategies to deal with your debt

• You have to work out which debt poses the biggest threat. This is often not the biggest debt you have, but the one with the highest interest rate. You need to charge that one down the fastest!

STEP 5: No new debt!

• While you are charging down your debt, learn how to stop yourself from incurring any new debts. Loan stacking will put you in a financial fix. Once you learn how to be a responsible borrower and only take loans for necessary circumstances, your chances of being finally stressed will reduce drastically.