Home Companies Defaulters risk auction in Lipa na M-Pesa loan

Defaulters risk auction in Lipa na M-Pesa loan

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Safaricom will deploy debt collectors to pursue unpaid loans in its planned zero-interest credit service that will allow millions of its customers to shop for goods worth up to Sh100,000 and pay later.

The involvement of debt collection agencies could set up thousands of borrowers for property seizures.

This marks the first time Safaricom will be deploying debt collectors for its credit products that include M-Shwari and Fuliza in a market where mobile loans have a high ratio of defaults.

Safaricom has relied on the threat of blacklisting defaulters with credit reference bureaus (CRBs) to recover unpaid loans and curb defaults.

Borrowers reported to one of Kenya’s three CRBs jeopardize their chances of being given more credit.

Involving debt collectors in the newest mobile loan product signals Safaricom is stepping up efforts to enhance repayment.

“At any time after an event of default has occurred which is continuing, we may, without prejudice to any other right or remedy granted to us under any law… take reasonable measures including engaging an independent debt-collection agency, to recover the amount in default (and/or) submit information concerning the event of default to Credit Reference Bureaus, subject to applicable laws,” the telco says in a statement.

The findings of a recent household survey by the Central Bank of Kenya (CBK), FSD Kenya and the Kenya National Bureau of Statistics (KNBS) show that 50.9 percent of the respondents have defaulted on mobile loans.

The mounting defaults emerged in a period digital lenders have flooded Kenya with high-interest rates that rise up to 520 percent per year.

The survey defined a loan default as including missing a scheduled repayment, paying late and not making any payment at all.

Mobile banking and digital loans are issued without collateral, making them vulnerable to default by borrowers.

They are also often taken as an emergency measure by cash-strapped individuals or enterprises, hence the higher risk of default.

Many Kenyans now find they can get loans in minutes, with the lenders relying heavily on algorithms that build a financial profile of customers in the quest to minimise the risk of default.

Using algorithms, the apps assess the creditworthiness of borrowers by scanning personal data on their phones, including contacts, mobile money transactions, their social media footprint and web history.

Users of the interest-free product to be known as Faraja will buy goods and services from as low as Sh200 to a maximum of Sh100,000 and pay the same amount without any extra fees witnessed on other credit products.

Unlike Fuliza, subscribers cannot send money to other users because transfers from the Faraja account can only be used for goods payments through Lipa na M-Pesa.

Safaricom will earn its fees through Lipa na M-Pesa charges, which range between Sh23 and Sh210 depending on the transaction amounts.

The fees are paid either fully by the merchants or buyers or co-shared with consumers, which applies for settlements made by motorists at fuel stations.

Defaulters will also shoulder costs linked to the hiring of debt collectors. Safaricom will suspend or shut down a defaulter’s Faraja account.

Faraja is slightly similar to the Lipa Later service currently in the market, only that this time, shoppers will walk away with the goods from a list of selected merchants without being required to pay upfront in installments.

It will work like a digital credit card where a user will have a credit limit of up to Sh100,000, depending on their credit score, to make purchases against and then repay at a later date.

“You will only be required to repay the outstanding facility amount as advanced to you by us (in whole or in part) using the designated Paybill number or such other channels as provided by us from time to time,” Safaricom says in a statement on its Website.

Faraja promises to be a game-changer in the mobile loans market and is set to undercut the costlier credit products, including its own Fuliza, KCB-M-Pesa, M-Shwari as well as digital credit providers such as Tala, Branch and Zenka.

Safaricom and Equity are looking at making money from the surge in Lipa na M-Pesa transactions at select stores. Already dozens of outlets have signed up to be merchants, including Naivas Supermarket, Goodlife Pharmacy and City Walk, a shoe-selling store.

Lipa na M-Pesa was launched by Safaricom in June 2013 and has aggressively recruited merchants across the country, including large and small businesses such as fuel stations, supermarkets, corner shops and eateries.

This has seen it overtake the card payments – run by banks and their global payments technology partners such as Visa and Mastercard — that have largely focused on serving formal retailers.

The Faraja product is owned by Edomx Ltd, a Kenya-based financial technology firm.