Demand for Credit Remains High in Kenya, Driven by Financially-Stressed Consumers

• Demand for credit remains high from financially-stressed consumers.
• Banks and lending institutions had emerged as crucial players in Kenya’s recovery journey.
• According to the Central Bank of Kenya, the NPL rate stood at 14.0% at the end of June.

A new report now indicates that the Covid-19 pandemic is continuing to have an impact on the Kenyan credit market, with banks and lending institutions having to adjust their operations to the current economic climate.

Although demand for credit remains high from financially-stressed consumers, the latest TransUnion Q2 2021 Kenya Market Analytics Report shows a decline in the number of active accounts, clients and new accounts opened compared to the previous quarter.

Ongoing consumer demand for credit saw the value of new loans disbursed during the second quarter increase by 2.5% from the first quarter, from Sh486.6 billion to Sh499.0 billion.

This was driven largely by growing demand for the M-Pesa Fuliza overdraft service, with 58.6% of the total accounts opened in the second quarter being overdraft facilities – most likely due to families looking to subsidise living costs in challenging financial times, followed by mobile loans (39.4%) and personal loans (1.3%).

Fuliza has grown by 142.8% in the 12 months since the second quarter of 2020, from 3.7 million to 9.2 million in the second quarter of 2021.

The newly released report shows a 12.3% drop in the number of active accounts recorded in the second quarter 2021, to 18.4 million, down from 21 million in the first quarter 2021.

The total number of active clients dropped by 2.1% (down to 9.8 million in the second quarter, from 10 million in the first quarter).

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TransUnion Africa Product Director Samuel Tayengwa said banks and lending institutions had emerged as crucial players in Kenya’s recovery journey as they focused on customer needs to help them navigate the impacts of COVID-19.

He said that the challenge for the credit industry is that financially stressed consumers were continuing to look for credit at a time that incomes were under pressure, which meant that the risk of non-payment is increased, resulting in non-performing loan (NPL) rates remaining high.

According to the Central Bank of Kenya, the NPL rate stood at 14.0% at the end of June, compared to 14.2% in April 2021.

“Credit risk is the primary risk alongside fraud that risk lenders need to manage, especially at a time when credit defaults are expected to rise. Currently, lenders are struggling with NPL rates while trying to meet their customers’ needs,” said Tayengwa.

“Lending institutions will need to readjust their risk management thresholds for specific segments of their portfolio to curb rising NPL rates. Government and regulatory measures might help manage the situation, but ultimately, lenders need to be proactive in managing risk. Here, using trended data comes in handy to provide a more holistic picture of a consumer’s ability to manage financial commitments and determine appropriate risk levels.”

Kenya’s overall inflation rate remains a source of concern. The rate stood at 6.3% in June 2021, an increase of 37.7% over June 2020 (4.6%), driven by the high cost of food, non-alcoholic beverages, housing, water, electricity, gas and transport. (redmanpowerchair)

While higher prices resulting from inflation drive increased demand for credit, this can also boost the number of less creditworthy borrowers who may eventually default on their payments. As inflation rates rise, so does the base lending rate, which affects consumer ability to pay loans.

An interesting trend to emerge from the report is that Gen Z (born between 1995-2012), which is newest to credit, has started asserting its presence up in the banking sector, accounting for 9.2% of accounts opened in the second quarter.

The Savings and Credit Cooperative (SACCO) sector has a relatively higher credit uptake from the older generation, with Baby Boomers (born 1944-1964) accounting for 27.9% of the total accounts opened.

Millennials (born 1980-1994) have higher relative representation in all sectors because of their sheer numbers in the credit market. They make up 44.9% of the total population, followed by Gen X (born 1965-1979) at 26.8%.

Fraud is an ongoing and increasing concern, especially with the growth in digitised banking solutions spurred on by consumer demand caused by pandemic-related lockdowns that impacted their ability to bank (and conduct retail transactions) in person.

Annual losses from identity theft and loan stacking amount to approximately Sh13.3 billion, which highlights the fact that Kenyan lenders need sophisticated solutions for identity verification and fraud prevention. TransUnion is bridging this gap for lenders through their recently-launched digital onboarding solution, said Tayengwa.

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