By Dr. Charity Njoka (PhD) CPA
A Review from Lenders and Borrowers’ Perspective
Kenya has been lauded for its mobile money innovations that have enabled diversity in credit facilities. Over time, Mobile money has evolved into a broader suite of Digital Financial Solutions (DFS) that have transformed the financial landscape in sub-Saharan Africa. While early evidence of mobile money facilities registered 2% of the Kenyan population being lifted out of poverty, the 2024 FinAccess Household Survey reports financial health deterioration of Kenyans. This is notwithstanding the regulatory interventions by the Central Bank of Kenya and other government agencies to regulate and register digital credit financiers that have viciously pushed their products to borrowers. Are the regulatory interventions too little or too late? Why are the borrowers inclined to DFS despite the high costs and risk of being listed by Credit Reference Bureaus? This article interrogates the questions raised to provide insight to parties in the DFS space.
I encountered this dilemma firsthand during a routine shopping trip. The supermarket teller cajoled me when I offered to offload part of the shopping that had surpassed my M-Pesa balance with the words, “Madam, take your time and ‘Fuliza’, you don’t have to return the goods’
This was no shocker considering that my cousin in his mid-30s had boasted of having kes 5,000 at his disposal, which was his Fuliza limit! Unveiled by Safaricom, the largest telecommunications and finance firm in Kenya at the beginning of 2019, Fuliza is described as an overdraft facility: if you run out of mobile money but are trying to make a purchase, Fuliza will offer you an advance and charge you a daily rate until you repay.
But what irked me a few months later was a call from some digital credit provider. Apparently, my cousin had taken a loan and had defaulted, and the lender was on a mission to recover their money. The aggressive debt collection practices not only created financial and psychological distress for borrowers but also for borrowers’ family, friends and relatives, provided they were on the borrowers’ phone contacts. The harassment and the public shaming of defaulters to recover the loan, including naming them on social media, sending fake notifications of lawsuits purportedly filed, among other similar activities, saw the Kenyan government flagging 40 digital lenders in 2023.
How did we get here in the first place?
The failure by traditional banking services to meet the needs of women and youth has been hailed as one of the reasons for the complex ecosystem of formal and informal financial service providers that have led to the exploitation of the underserved population. Lenders, from licensed microfinance institutions to unregulated digital lending platforms and informal money lenders, have employed practices designed to maximise profit extraction rather than support borrower success. It is no wonder that a predatory loan can carry interest rates exceeding 100% annually when all fees are calculated. What appears as a reasonable monthly rate of 5-10% quickly compounds into unsustainable debt burdens, especially when combined with processing fees, penalty charges, and insurance requirements (if any), that borrowers often do not fully understand. The speed and apparent simplicity of loan approval processes obscure the complexity of repayment obligations and the severe consequences of default.
Safaricom is the mother of digital credit in Kenya. In its endeavour to develop new services, Safaricom noticed that people were storing money in M-Pesa accounts, despite the service not being regulated as a savings account. Since Safaricom was and still is not a bank, and could not use those individual savings as a collective sum for lending, it layered new banking services on M-Pesa, turning Kenyans’ existing but inert digital savings into value in motion. 2012 M-Shwari was launched in a joint offering with the Commercial Bank of Africa, now NCBA. Initially, M-Shwari was sold as a savings and lending product. Still, with time, it transitioned to a financial inclusion tool with the help of a leading Financial Inclusion NGO, Financial Sector Deepening (FSD).
Have we realised Financial Inclusion?
According to the FinAccess Household Survey 2024, 35 per cent of Kenyans were registered for mobile banking, 24 per cent used the service to save, and 16 per cent to borrow. The most common loan types in Kenya—mobile overdraft and loans by mobile network operators—are primarily used for consumption, whereas digital bank loans tend to be used by businesses. Most digital consumer loans are short-term and might run for only 2 to 3 days, but they are deemed an expensive option due to the high interest rates.
Financial services that have emerged in Kenya can be classified into three;
1. Everyday payments: E-float is commonly used for routine transactions such as electricity bills or taxi fares.
2. Loans and savings: Digital lending apps like Tala and Branch offer microloans using alternative credit scoring based on phone usage and transaction histories.
3. Government programmes: Financial products like the Hustler Fund (joint savings and loan product), which are incentivised and subsidised by the government, are made accessible through various networks to support households and micro, small, and medium-sized enterprises (MSMEs). 29 per cent of Kenyans took up the Hustler Fund product in 2024 (FinAccess Household Survey 2024)
Regulations of Digital Credit
As M-Shwari loans grew in leaps and bounds, so did other digital credit platforms, KCB M-Pesa, Tala, M-KOPA, Zenka, to name a few. It was free until March 18, 2022, when the Central Bank of Kenya (Amendment) Act, 2021, became effective. The Central Bank of Kenya (Digital Credit Providers) Regulations 2022 aim to address public concerns about the recent significant growth of digital lending, particularly through mobile phones. These concerns are related to the predatory practices of previously unregulated Digital Credit Providers (DCPs), specifically their high costs, unethical debt collection practices, and misuse of personal information. The Regulations govern DCP licensing, governance, and lending practices, among other things. As of June 2025, the number of regulated DCPs stands at 126. The Central Bank of Kenya (Digital Credit Providers) Regulations 2022 aim to address public concerns about the recent significant growth of digital lending, particularly through mobile phones. These concerns are related to the predatory practices of previously unregulated DCPs, specifically their high costs, unethical debt collection practices, and misuse of personal information.
Emerging Challenges of Digital Credit
While solving the financial challenges of the borrower, digital credit has created distrust among friends and family members. Borrowers in a bind often depend upon family for help repaying, which represents another way intimacy is enrolled into the logics of financial debt. Even with high mobile phone penetration, the increased access to DFS has not automatically translated into a positive impact. Challenges related to low financial literacy and limited digital literacy skills persist for large segments of the Kenyan population. Financial health in Kenya declined between 2016 and 2024. Only 18.3 per cent of the Kenyan adult population in 2024 could manage day-to-day expenditures, cope with risks and shocks, and invest in livelihoods and the future, compared to 39 per cent in 2016. Many borrowers have faced adverse outcomes, including predatory lending with hidden or excessive costs; over-indebtedness; negative listing by credit bureaus; data privacy violations; and exposure to fraud and scams.
DFS have contributed to increased over-indebtedness, defaults and negative listings at credit bureaus. About 51% of respondents to the FinAccess Household Survey in 2019 had to sell assets, borrow or reduce food expenditure due to loan repayments. About a third of digital borrowers in Kenya had multiple digital loans from different providers, and 46.3% defaulted on their digital app loan (50.9% on mobile banking loans), according to the FinAccess Household Survey 2021. For comparison, the default rate at microfinance institutions stood at 30.8%; at banks, 22.1% (KIPPRA, 2023).
There is also an observable trend of increasing exposure to gambling opportunities among young adults, which may be partly attributable to their increased utilisation of digital loan products. According to the FinAccess Household Survey 2024, 8 to 11 per cent of respondents reported active involvement in gambling, with a higher prevalence observed among educated youth in urban areas. Financial literacy alone may not curb risky behaviours like gambling. Some literate youths are likelier to gamble, driven by risk preferences, behavioural biases, and easy access to digital loans. This highlights the need for complementary measures such as platform regulation, behavioural nudges and risk-focused financial education.
Conclusion
The evolution of the DFS industry in Kenya shows the unmatched potential of digital finance to foster financial inclusion by filling gaps where conventional financial services fail to reach. Still, it also shows the need for prudential regulations to make the digital finance revolution beneficial for the average citizen. Financial sector development should not be viewed as an end but as a strategic means to enhance financial health and improve livelihoods.
Board Member- AWAK
Researcher & Lecturer of Finance and Accounting
