Micro-lenders should work with regulators

Recently, there has been much publicity about the 1.5 million Kenyans who have been negatively listed on the Credit Reference Bureau (CRB) as a result of borrowing from micro-lenders.

— by Kevin Mutiso

However, it is not all gloom and doom. I believe that this is a good thing for the Kenyan economy. Why? Micro lending is a complex calculation of risk, where a micro-lender has to figure out how much to lend to someone with very little data and therefore the more the customers borrow, the better a micro-lender becomes at predicting the users credit worthiness.

The target market for micro-lenders is primarily customers who have never taken a loan before in their lives because they either lack a credit history since they are under banked, and they lack collateral to access credit from financial institutions. These micro-lenders therefore provide the first official credit experience to the majority of the under banked Kenyans. There, however, should be measures in place to curtail irresponsible borrowing. The menace of over indebtedness has to be managed by the micro-lenders. Micro-lenders need to educate their clients on the importance of borrowing to better themselves and the lives of those around them, however, there is always a downside to any situation.

You will find that most of the borrowers use the loans as working capital and they pay back immediately they make more money and this raises their loan limits. The next time they borrow, they are eligible for a bigger loan and this enables them to either buy more stock or expand their businesses. For example, if Rosaline downloads SHIKA and gets her first official loan of Sh1,000 and pays it back in 28 days, the next time she borrows her loan limit usually goes up by 100% and every time after that her limit is raised.

Unfortunately at the same time, Ephantus takes a Sh1,000 loan to make a bet on a betting platform, loses all his money, is unable to pay back the loan and is consequently blacklisted on the credit reference bureau. His story is what is currently trending and majority of those blacklisted are the users who default due to such reasons. There are close to nine million micro-borrowers who have built businesses and have taken their families out of poverty, but at the same time, there about 1.5 million people in Kenya who have been listed negatively for defaulting.

Blacklisting is being used as it is intended. The blacklist is telling every other lender, that Ephantus should not be given a loan because there is a high chance that he will default, and will end up worsening his financial state. This is one of the key reasons why the blacklist exists, so instead of demonizing its existence, it should be seen as a tool to drastically reduce over-indebtedness and irresponsible borrowing.

In addition micro-lenders should educate and help those on the Blacklist on ways to move from that state and become financially literate. With time, users who borrow these loans to better their lives will soon be able to go into banks and get better working capital to expand their businesses and make their way into financial freedom.

Micro-lenders should however be ready to work with regulators to ensure that measures are put in place to ensure over-indebtedness becomes a thing of the past.