This archive report was first published on 8 January 2022.
Hooked on Digital Loans? A Financial Expert's Advice ¶
As the economic situation in Kenya continues to be challenging, many people have turned to digital lenders for quick loans. However, a recent survey by the Central Bank of Kenya has revealed that many Kenyans are not knowledgeable about how interest rates work on digital loans, leading to a perpetual borrowing cycle.
According to the 2021 FinAccess Household Survey, conducted by the Central Bank of Kenya, Kenya National Bureau of Statistics, and Financial Sector Deepening Kenya, among other partners, about 49.3% of respondents were able to accurately compute 10% interest on a Sh10,000 loan, while 32.4% gave the wrong answer.
Elizabeth Irungu, a financial expert, notes that the calculation of interest rates is often not clear to many Kenyans, who are only sold the idea of accessing a loan without being told the cost of borrowing. She explains that if a lender's interest rate is 1% daily, it translates to 365% per year, which is a 'killer loan' that nobody should borrow.
Irungu advises that if one is broke, they should examine their source of debt and plan ahead of time. She also notes that emergencies are likely to happen, and that is what happened last year, and that by planning life, we know that emergencies will come, so we are told to always save for that rainy day.
She adds that even when one is not making more money, they can still save for rainy day by cutting their expenses. The survey cited lack of enough money (54.6%) as the leading reason behind those not saving, followed by irregular income (18.4%) and 7.4% who simply preferred not to save.
Irungu notes that the biggest cost that any household in Kenya has is food, which can force many to borrow when they have no income as this is a basic need. However, one can still shop prudently with less. For example, one can have a conversation with your children on expected lifestyle changes and shopping in fresh market produce like Marikiti unlike buying packaged food.
She observes that it is unfortunate that for a country that is so productive, many of us are using half of our money to put food on the table. A lot needs to be done in terms of policy and government intervention, to reduce the fact that so many Kenyans are using almost half of everything on food.
