Digital lenders now claim that they are only able to turn a profit after extending a minimum five loans to the same customer in their defence of their criticized loan pricing regime.
In a statement issued Wednesday, the lender’s claim their loan offers are not directly comparable to regular banking loans as players take on added risks.
According to its own analysis, the pricing of loans issued on the mobile only lending platforms are structured in a manner that lenders can only recover all costs after extending five similar loans to the same customer.
For instance, out of a loan of Ksh.2,500, the lenders say they will get revenues of Ksh.375 after taking out costs.
“A micro-lender must factor in cost of marketing Ksh.200, Cost of funds Ksh.31, CRB Verification Ksh.250, Operation cost Ksh.150 while Supporting IT, M-PESA-bank account transaction cost and cost of risk will take up Ksh.50, Ksh.22 and Ksh.500 respectively. All these expenses will leave a lender with a Ksh.1,172 loss. To reverse this loss and make a profit, one customer must borrow at least five times,” the lenders represented by the Digital Lenders Association of Kenya (DLAK) noted.
“This brief analysis is just one way of showing that mobile loans cannot just be compared with those offered over the bank counter. As a matter of fact, the two models have been structured to complement each other and when we learn to embrace their strategic roles the country can boost access to flexible and affordable financial services and products,” Mutiso added,” DLAK spokesperson Kevin Mutiso added.
The lenders state their services are meant to support borrowers on a short-term basis only, leaving commercial bank loans as the comparatively better option for cheap credit.
The digital lenders however insist their services are still integral to the country’s financial sector by comparing themselves to car hailing services or hotel rooms.
“These are not services that you use every day but on demand. It is often rare to find people compare the price of a hotel room to a flat that is rented. You do not stay in hotel rooms every day for a year or forever because it is not an affordable option for many people,” DLAK adds.
“Even though hotel nights are more expensive than rental costs in a flat, people are comfortable with the arrangement because they have understood that you only need to stay in a hotel when you travel or in a business that demand you to book a hotel for a night or two. These are just but a few instances that will require one to subscribe to hotel room services.”
The remarks come even as thousands of Kenyans continue to regularly rely on the expensive and financial burdening loans issued by the lenders on an everyday basis.
Digital lenders for instance charge interest on loans on a monthly basis against annually priced bank loans.
This leaves digital loans priced multiple times higher than traditional banking loans on the basis of the annual percentage rate (APR).
Concerns on digital lenders have further been exacerbated as hundreds of Kenyans now run multiple applications using proceeds on one to pay debt on another to end in a merry-go round of never-ending debt burden.
Central Bank of Kenya (CBK) Governor Patrick Njoroge has led the charge against the existence of the unregulated lender’s likening them to blood suckling fleas.
Speaking at the end of April, the Governor was more so infuriated by the means used in recovering issued credit which has seen public uproar as Kenyans callout draconian practices including the sharing of personal information to listed mobile contacts.
“I think the expectation that just because somebody is lending using a mobile phone they can do whatever they like… maybe they can go to the Wild West, which is where they belong not in a proper economy,” Dr. Njoroge said on April 30.
The CBK is now seeking to force the digital lenders into being regulated through ammendments to the Central Bank Act.
The review of the Act is set to bring the lenders under the wing of the CBK enabling the reserve bank to dictate the platforms operating standards as it does to banks.
CBK has previously slammed the contribution of the digital lenders to the wider economy terming it negligible.
“These are little fleas. Their output in terms of credit is less than 0.14 percent, that’s less than the smallest bank around but in terms of noise and pain to Kenyans they are at 90 percent,” added Dr. Njoroge.
The Central Bank (Ammendment) Bill is expected to be tabled to the floor of the National Assembly for its first reading shortly.
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