This archive report was first published on 17 September 2019.
Kenya's banking sector is facing a growing crisis as borrowers default on 21% of mobile bank loans, a trend that has exposed the default risks of extending credit through cell phones.
According to a new report by the Kenya Bankers Association, the default rate for digital loans is more than double the average ratio of non-performing loans for conventional borrowing, which has stood at 10.2% over the past three years.
The report, released last week, found that 21% of digital loans were not repaid between 2015 and 2018, compared to 10% for customers who take regular loans.
Many Kenyans have found themselves in a vicious cycle of debt, with some borrowing from multiple firms to settle loans owed to rival digital lenders, ultimately leading to being negatively listed on Credit Reference Bureaux (CRBs).
As of last year, 2.7 million people out of a population of around 45 million had been negatively listed with CRBs, according to a study by Microsave, a consultancy that advises lenders on sustainable financial services.
The bulk of the defaulters borrowed loans below Sh1,000, mostly through mobile phones, and the defaults come at a time when the banking sector is battling a rise in distressed borrowers as Kenya's economy slows down.
Kenya's economic growth slowed in the first quarter of this year compared with the same period last year, due to dry weather that adversely affected the farming sub-sector.
Non-performing loans in the banking industry have increased to double digits for the first time since 2007, as banks aggressively seize defaulters' assets.
According to Stephen Kang'ethe, an auctioneer with Nairobi-based Dalali Traders, more and more people are defaulting and banks are having no option but putting their property up for auction.
Commercial Banks have also become aggressive in seeking to recoup the defaulted money, hence the rise in auctions, he added.
