TechCabal Daily – African digital lenders are anticipating high default rates

How are digital lending companies responding, especially at a time when cash is key?

Digital lenders are closing the access to credit gap that exists in African countries. 
In Kenya alone, there are about 50 of such apps and many have come under scrutiny for predatory lending and high interest rates. But with the COVID-19 pandemic, digital lenders are worried default rates could go up.

SMEs will seek additional financing for their businesses. Unless banks simplify their processes during this period, SMEs will likely approach digital lenders regardless of their interest rates.

But as African economies shrink following lockdowns to control the virus, possible job losses and business shit downs could follow, affecting the income and ability of customers to pay back their loans. “If the situation continues like this, I might be forced to shut down for a while, just to avoid incurring further losses. I don’t want to end up going to the bank for a loan,” Brendan Booi, a South African-based, furniture business owner told Fin24.

An increase in defaults is problematic to lenders, but it’s something they know could happen. A 2018 survey by Consultative Group to Assist the Poor (CGAP) of borrowers in East Africa’s two major markets; Kenya and Tanzania, revealed high delinquency and default rates. Out of 1,000 digital borrowers, roughly 50% in Kenya and 56% in Tanzania reported that they have repaid a loan late. About 12% and 31%, respectively, said they have defaulted.

Some lenders plan to extend repayment periods for loans. Kenya banks say they will extend repayment periods by up to one year for customers who show distress, Patrick Njoroge, the Central Bank Governor said at a news conference.

Whatever the case and however digital lenders respond, one thing entrepreneurs should keep in mind is that it’s no longer business as usual.

Nigerians are once again vulnerable to another ponzi scheme

The Nigeria Deposit Insurance Company (NDIC) is reminding people to stay clear off “wonder banks”. This may be a timely call, although the NDIC is always saying this. The double impact from the recent pandemic and falling oil prices will have a negative effect on the Nigerian economy. The government plans to slash its 2020 budget by over 14% and announced a $2.7 billion stimulus package. But the Nigerian currency, the naira, has taken a knock with a 5% devaluation. Household incomes may not be able to handle the inflation pressure that may follow.

Like we witnessed during the 2016-17 recession, people are going to look for money by any means possible. They’ll try to borrow, and online platforms are their fastest options. Digital lenders are anticipating this will happen and they’re concerned about the high risk of defaults that may follow. So they’re making adjustments. Loan amounts may be capped for repeat borrowers and customer verification checks are going to get more thorough.

If these processes are too stringent for people, they will jump at the next available option: wonder banks or ponzi schemes. We’ve seen this happen before with MMM and other schemes from 2016. When these schemes crashed over three million Nigerians lost more than $49 million according to the NDIC. Somebody has probably hatched a plan to roll out such platform if COVID-19 continues to spread across the country. The number of confirmed cases in the country has jumped from three to 30 within two weeks.

But whatever new scheme emerges, it’ll likely use a different strategy than previous ones.

An early attempt was a platform called Racksterly. Although it predates the current pandemic, Racksterly modelled itself as an advertising platform. It got people to pay a certain amount with the hopes of earning more than double that amount whenever they shared certain ads on their individual social media accounts. Because it cloaked itself as an “advertising platform”, many users didn’t believe it was fraudulent. It crashed after Flutterwave and Paystack declined to process its payments.

Racksterly could be a model to other ponzi schemes should the Nigerian economy sink further. And people will jump at it, as many tend to do.

KCB Bank, one of Kenya’s biggest banks, wants to lend $284 million via mobile money to offset the worst of COVID-19 on businesses and individuals. Restrictions to curb the spread of the virus have grounded different parts of the Kenyan economy, especially the $1.5 billion a year tourism business. KCB’s funds will be disbursed through mPesa and users will be able to borrow up to $9,500 based on their credit scores. It is part of a broader call by the government for finance companies to adjust their services thanks to COVID-19.

Egyptian health tech startup, Vezeeta has launched an over-the-phone consultation service for users. The service is free and will help diagnose users suffering flu-like symptoms. It’s a timely innovation considering that people are practising social distancing to avoid getting the virus. The service is available to users in Egypt and Saudi Arabia where there are over 600 confirmed cases of COVID-19.

Tunisian bike hailing startup InTiGo has pivoted to a delivery service due to the pandemic. The country has recorded 75 confirmed cases so far and three casualties. The government has announced a lockdown that started on Sunday, March 22. This is a temporary blow to InTiGo which raised $300,000 funding in February. The company said it will continue to operate its bike hailing service between 6pm and 12am to support nurses and the police.

The coronavirus has taken a toll on the global travel industry. There are pictures and videos online of airports that are now scanty as governments impose travel restrictions to control the spread of the virus. In Nigeria, travel agencies could lose a projected ₦160.6 billion if the crisis continues, according to Nairametrics.

Meanwhile, these agencies have financial commitments to the International Air Transport Association (IATA). The National Association of Nigeria Travel Agencies (NANTA) is requesting for a bailout for its members. It is also trying to convince the IATA to extend the deadline for payment from two weeks to more than a month. The panic is not unique to Nigerian agencies. US travel agencies have requested a government bailout worth over $20 billion.

Our Nigerian Women in Tech Report examines the distribution and level of involvement of women in Nigeria’s technology and STEM fields. It will celebrate successes, look at the gaps that exist in women participation, show challenges and highlight recommendations for improvement. It features 21 women who are C-suite execs or Startup founders. It also features 7 female developers.

Be among the first to receive our Nigerian Women in Tech Report by filling in this form.