Why Digital Lenders Charge Different Interests for Same Amount of Loan

  • File image of a man using a phone
    File image of a man using a phone
  • Digital lending has become one of the most convenient credit access facilitations in Kenya in the 21st century, whereby you download an application from google play store in a minute, register then request for a loan instantly without visiting a bank physically to get the loan as was the norm.

    The latest FinAccess survey conducted between October and November of 2018 found that 13.6 percent of adults (18+) nationally (3.42 million adults) had used a digital (mobile banking or app) loan in the year prior to the interview. 

    To put this into context, consider that 9 percent of adults reported using a traditional loan from a bank or non-bank financial intermediary, and 45 percent of adults reported using a loan from informal sources such as friends or a community savings group in the past year.

    However, the amount in cash of the loans offered to individuals could be the same but the repayment given the same repayment period could differ due to the different rates offered by the lender.

    A businesswoman checking messages on a smart phone
    A businesswoman checking messages on a smart phone

    The reason for this is because these lenders have developed complex artificial intelligence systems to determine scoring models for risk-based pricing for each individual. 

    Some of the background studies that are analyzed by these artificial intelligence systems are the willingness to repay a loan symbolized by the customer behaviour of the number of loans previously taken and the nature of repayment behaviour exhibited by the client.

    Those clients that repay loans on time and borrow loans only when need be are called lower risk clients - they are likely to get better interest rates than the higher risk clients who have a history of defaulting loans.

    Some of the means by which the digital creditors get this information is not clear to the prospective clients because they agree on some of the terms and conditions offered without realizing that they are giving away personal data.

    Often a dialogue box will appear on the borrower's screen, requesting them to accept that data such as M-Pesa data or mobile phone data such as contact list and the client clicks to agree to avail such data to the lender.

    This is how they gain information about the prospective client, and that is allowed by the Data Protection Act of 2019.

    Upon failure to service a loan in the time offered by the digital lender, they are eligible to list defaulters with the Credit Reference Bureau(CRB) which lists both the negative and positive lists.

    This happens when a creditor defaults payments for 90 days for banks and 30 days for digital money lenders.

    In case anyone is listed with CRB for defaulting on loan repayment, all they need to do is pay back the loan amount, then the lender will clear them.

    However, there is a Ksh2,200 fee paid to CRB is to get the clearance certificate, which is not a fine imposed on the defaulters.

    A woman smiles while looking at her phone
    A woman smiles while looking at her phone