Digital credit in Kenya has become a tool for households and small businesses to manage their day-to-day expenses, but concerns have been raised regarding rising household debt levels and defaults.  In this project, IPA will collaborate with the Digital Lenders Association of Kenya (DLAK) to analyze credit data with a new information sharing system and measure the system’s effects on issues such as multiple lending, loan screening, and defaults. The study coincides with the COVID-19 crisis and will also measure its effect on repayment rates and borrowers’ household and economic activities.

Policy Issue 

The popularity of mobile money in Kenya has also led to the widespread use of digital credit: 86 percent of all consumer loans between 2016 and 2018 were issued digitally. In recent years, over 50 new financial technology companies have entered the market, in addition to the banks and mobile network operators that currently dominate the landscape. Accompanying these new tools and market actors are large numbers of people unable to repay loans: 2.2 million Kenyans had loans in default in the 2016-2018 period, half with balances under USD$10.1 Past studies have found that increasing coordination and screening ability among lenders through information-sharing platforms can lead to more loans, better repayment and fewer defaults.2 Information sharing may also help to prevent situations where borrowers take out similar loans from multiple lenders, and shed light on the prevalence of borrowers who deliberately stop repaying despite being able to afford their payments (known as “strategic default”). Harnessing the wealth of data available to digital lenders in Kenya to create similar information-sharing platforms could lead to better repayment rates and portfolio performance.

Context of the Evaluation 

The 2019 FinAccess survey in Kenya found that 83 percent of people have access to formal financial services—up from 27 percent in 2006. In recent years, mobile money has also emerged as the preferred tool for Kenyans to manage weekly transactions, reflecting a preference for convenience and ease of access among consumers across income segments.3 FSD Kenya also found that one in four adults reported having taken out a digital loan, with many using it primarily for working capital in their businesses or to cover day-to-day needs.4 Continuing to provide capital without harming household incomes and ensuring system sustainability is a challenge for lenders in Kenya; over half of borrowers reported repaying digital loans with their savings or by reducing food purchases when business slowed down or they lost a source of income.5

This project coincides with the COVID-19 pandemic, during which digital credit users’ difficulty making repayments are likely to intensify dramatically. Understanding the impacts of COVID-19 on different types of borrowers is critical for policymakers and credit providers to design responses that protect affected borrowers while limiting risks to providers.

Details of the Intervention 

Note: This is not arandomized controlled trial.

In this study, IPA and the Digital Lenders Association of Kenya (DLAK) will combine administrative data from digital lenders and a survey of borrowers for two objectives:

  1. Effects of Information Sharing: To improve upon the providers’ lending capability, IPA will monitor usage of DLAK’s information-sharing platform, how historical loan information is assessed, and its effects on multiple lending and loan repayments going forward. On the side of borrowers, the research team will monitor borrower responses to DLAK’s disclosure of information-sharing and identify borrower patterns that may indicate strategic defaults using SMS messages.
  2. Impacts of COVID-19: This study will also measure the impact of the 2020 pandemic and accompanying economic crisis on repayment rates and borrowers’ household and economic activities. In addition, the team will explore some of the lenders’ policies towards borrowers who missed their payments during the lockdown.

The study will take advantage of the staggered entry of lenders into the platform to test the various hypotheses that are of interest to DLAK and the research team.

Results and Policy Lessons 

Project ongoing; results forthcoming.