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Digital loan providers defend pricing model

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Digital micro lending institutions have defended their pricing model after criticism of exorbitant monthly interest rates slapped on their customers.

In a statement detailing their loans assessment model, the lending firms through their lobby, the Digital Lenders Association of Kenya (DLAK), argued that their operating model had not been well conceptualized and therefore pricing of their products should not be likened with those of commercial banks.

“The digital lending model has been widely criticised because most of us have not understood how lenders operate and the environment in which they operate,” said DLAK’s spokesperson Kevin Mutiso.

Adding that, “The fact is that digital lenders operate in a totally different environment compared to commercial banks making their models very independent and therefore pricing of their products cannot be compared.”

It is not the first time the association is coming out to defend its members – some of whom are still struggling to redeem their torn reputation owing to the fact that such platforms have struggled to convince investors that they are the future of small business lending.

Often times, this burgeoning space – initially envisioned to advance access to loans to the un-banked, has been faulted for charging inflated interest rates to unsuspecting borrowers while others go an extra mile in their debt collection practices like public shaming and endless harassment to the borrower, something Mr. Mutiso says does not reflect the true picture of their dealings.

“The pricing of loans in digital micro-lending is structured in such a way that lenders can only recover all costs only after the 5th loan to the same customer. For a loan amount of Sh 2,500 for instance, a mobile lender will get revenue of Sh 375 but the cost of issuing that credit facility is very costly,” he explains.

A breakdown into a micro-lender’s ‘operating outlay’ shows that most digital lenders factor in cost of marketing capped at Sh 200, cost of funds Sh 31, CRB Verification charges at Sh250, operation cost of Sh 150 while Supporting IT, M-PESA-bank account transaction cost and cost of risk is charged at uniform fees of Sh 50, Sh 22 and Sh 500 respectively.

All these expenses, Mutiso says, will leave a lender with a Sh 1,172 “loss”. To recover that loss that, he says a customer is compelled to borrow at least five times.

An average loan amount for a mobile lender is capped at Sh 4,000 while that of a commercial bank is pegged at Sh 300,000. At a monthly interest of 15 per cent for a micro lender, the total cost of loan will be Sh 600 – while for a commercial bank, the total cost of loan over a period of 60 months will be Sh 210,000 with an interest rate of 14 per cent.

Experts have continuously pointed out that customers were usually confused about loan terms and conditions, hindering fintech firms’ potential to advance financial inclusion.

Central Bank of Kenya governor Patrick Njoroge, has also criticized such platforms, saying in May last year that they were “displaying shylock-like behavior while hiding behind nice-looking applications.”

There have been talks to further regulate the complex industry whose figures from Credit Bureau Reference Kenya (CRB), show that as of March 2019, there were over 19 million Kenyans mobile loan borrowers with 40 per cent of this number having loans from at least 6 out of 10 mobile money lending services.

It now remains to be seen the kind of regulatory settings the regulator will adopt and its impact on the sector and whether industry players will be reading from the same script, with the ultimate goal being the safety of the defenseless mwananchi.


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