Kenya’s Fuliza surpasses Silicon Valley-backed loan apps

Three years since it was launched, Kenya’s top telecom Safaricom Plc’s Fuliza mobile overdraft service is challenging the country’s popular loan apps. Through the app, users can acquire risky loans by overdrawing on M-Pesa, a money wallet, which allows its users to pay bills, transfer, receive, and withdraw money using their phones.

As of now, only 18.3% of Kenyans are using Fuliza. Just two years ago, the number of people who used loan apps dropped by 6.2% to 2.1%. In the most recent FinAccess Household Survey, credit unions, banks, and microfinance institutions all saw a big drop in the number of people using digital loan apps. According to the report, this could be because formal digital credit products like Fuliza and unfair debt collection practices by the digital loan apps may be to blame for this rise in debt.

Apps may not have wanted to lend to customers they thought were risky because of a rule by the CBK that said they couldn’t share the personal information of people who didn’t pay back their loans with credit reference bureaus (CRBs).

During the peak of COVID-19, there was a lot of uncertainty about how the CBK was going to regulate apps. This may have kept them from giving new borrowers loans. A bill about the regulation of digital lenders was put before Kenya’s parliament. This month, it became law.

Fuliza appears to have closed a gap in the mobile loan market that had previously been created by regulatory restrictions, and top performers such as Silicon Valley-backed Branch and PayPal-backed Tala have seen increased competition in Kenya.

Safaricom’s 2020/21 financial year saw the carrier provide $3.1 billion in Fuliza credit, a 43% rise from the previous year. Every day, Fuliza extends an estimated $12 million in credit to Kenyans. It has a total of 23.8 million M-Pesa clients under its Safaricom brand.

It’s easier to get a loan from a loan app or a place like Fuliza than from a bank, which has a long approval process and usually requires a lot of collateral. There may also be a reason why Kenya’s formal financial inclusion rate rose from 26.7 percent in 2006 to 83.7 percent in 2021.

As a result, lending apps have been able to help people who aren’t able to get loans from traditional banks. However, they have been operating in an unregulated environment for years until recently, when the president signed a law giving the Central Bank of Kenya (CBK) the power to licence and supervise them.

Predatory pricing is possible because there isn’t enough regulation. Some apps charge annual interest rates of more than 800%, leaving many borrowers broke.

There is a debt crisis going on at the moment

Most people who took out loans from lending apps were unable to pay them back, according to FinAccess’ analysis.  People who took out a loan from a mobile banking service like Fuliza, a digital apps loan, or from a family member or friend were the most likely to have defaulted on the loan, said the report.

People were worried about the high cost of getting and keeping loans because of the high-interest rates that mobile lenders charge. Unexpected charges, mostly levied when people don’t pay, and a lack of information about prices and other costs before they sign up were also cited as problems.

Competition authorities across the country have agreed to force all digital lenders to publish their entire costs and penalties every four months as a way of combating the issue of unadvertised charges beginning in June 2019.

In addition, under the new law, lenders are now required to apply for CBK licences, whereas before they just had to register to begin business.

They also have to keep their customers’ information private and not give it to other people, like debt collectors. It protects people from rogue digital lenders who use debt shaming tactics when they try to get money from people who owe them money. The licences of people who don’t follow the rules will be taken away.