Safaricom subscribers more than doubled their borrowings from the overdraft service Fuliza in the six months to June when Kenya imposed a coronavirus-induced lockdown that led to layoffs and pay cuts.
Fuliza loans in the six months rose to Sh176 billion from Sh81 billion in the same period a year earlier, indicating a daily borrowing of Sh967 million.
The jump in the uptake of the loans emerged in a period when the economy shed more than two million jobs on the back of sluggish corporate earnings in the wake of Covid-19 economic hardships.
This increased the appetite for loans on the M-Pesa-based overdraft platform, which allows subscribers to access limited cash if their mobile wallets have no money.
“People and businesses go for overdrafts when their cash flows are hit. The economic slowdown in the first half certainly triggered demand for Fuliza loans,” said Gerald Muriuki, a research analyst at Genghis Capital.
“We have seen default rates rising and so the conventional loans have not really gone up. But given that Fuliza is integrated into M-Pesa credit, it is easier to manage the rates of default than conventional loans.”
Fuliza is underwritten by KCB Group and NCBA Group, which already had partnerships with Safaricom to offer short-term loans on the M-Pesa platform.
NCBA has said it lent Sh132 billion through Fuliza in the six months to June while KCB Group disclosed loans worth Sh44 billion on the overdraft feature.
Fuliza allows customers to complete M-Pesa transactions when they have insufficient funds.
The debt is recovered from M-Pesa balances automatically, but subscribers who do not settle their overdrafts within 30 days are barred from using their unused credit limit until they pay the outstanding amount.
The uptake of Fuliza deepened in a period that saw the economy shed 2.23 million jobs, ushering in reduced cash.
Workers on payroll or business dropped from a peak of 18.1 million in December to 15.87 million in June, reflecting significant business disruptions in the wake of the pandemic.
Young people were the hardest hit by job cuts compared to their counterparts aged above 35.
Companies started reporting falling sales ahead of Kenya imposing restrictions covering travel, mass gathering and a dusk-to-dawn curfew to curb the spread of the coronavirus.
The restrictions were imposed on March 25 and on July 6 the government announced the phased reopening of the country, lifting restrictions on travel in and out of Nairobi and Mombasa as well as allowing air travel to resume.
While the phased reopening of the country has triggered a rise in business activities, firms are yet to lift the freeze on hiring, but have gone slow on job cuts.
Activity in Kenya’s private sector grew at the fastest rate in 29 months in September, buoyed by more firms resuming operations after the easing of some restrictions, a survey showed yesterday.
The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) jumped to 56.3 in September, from 53.0 in August, its highest level since April 2018. The 50.0 mark separates growth from contraction.
“With the government easing lockdown restrictions during the third quarter of the year, firms saw a release of pent-up demand as clients largely returned to markets,” the survey report said.
NCBA and Safaricom in August raised the minimum loan size on the mobile lending platform M-Shwari four times to Sh2,000 in a move expected to reduce defaults largely by borrowers taking smaller amounts.
Those who do not qualify to borrow at least Sh2,000 on the monthly loan product have been relegated to use Fuliza, which is more expensive, but structured to lower defaults.
Borrowers pay a facility fee of 7.5 percent for the M-Shwari loans, amounting to an annualised interest rate of 90 percent.
On Fuliza, the fee is 1.083 percent daily or 395.2 percent annualised, underlining the high cost of using the short-term credit services regularly.
This means a borrower who used to part with Sh56.25 for a Sh1,000 M-Shwari loan will now be set back Sh243.68 for a Fuliza debt that lasts a month.
Fuliza loans are recovered from M-Pesa balances automatically while M-Shwari customers make their payments directly or the amounts are recovered from their accounts.
M-Shwari borrowers may have to be prompted to pay the debt and this means that they can still hold money in their M-Pesa wallet and transact even when they have an outstanding loan.
The structure of Fuliza relative to M-Shwari makes it ideal in curbing defaults.
NCBA Bank managing director John Gachora reported that ratio of defaulted M-Shwari rose up to eight percent monthly in the wake of the coronavirus compared to the previous 1.8 percent.