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.