How Covid shocks hooked more Kenyans to survival loans

Isolated human legs tied to chain ball in debt concept. [Getty Images]

Thousands of Kenyans drive to work but in cars financed by loans and sometimes fed by a mobile overdraft facility, Fuliza.

In the event of delays or detection of traffic jams, the temptation to drive the car even on a debt-financed highway that attracts toll charges is high.

They live on borrowed means. But what to do with these debts that have become like an irritable pimple on the behind?

For many, Covid-19 has taken a bad situation and made it worse.

They lost their jobs, then the cars. Others have lost their homes and many more have lost hope, with the appetite for loans now spilling onto the dining table.

In such a mess, those who can still borrow to repay are considered to be doing just fine. They live in a house built by precariously balancing playing cards.

Their consolation, they say, is that even their government is living on borrowed means and now plans to spend 6 shillings out of every 10 shillings collected in tax to repay the loans in the fiscal year beginning next month.

The economic fallout from the coronavirus has led to a record 4.6 million personal and household loan accounts opened in two years ending December 2021, according to data from the Central Bank of Kenya (CBK).

About 3.03 million personal and household loan accounts were opened in 2020 when Covid-19 disruptions such as closures and layoffs were at their peak.

1.56 million additional accounts were opened last year, bringing the total value of personal and household loans to 902.72 billion shillings, an increase of 157.7 billion shillings or 21% in two years .

The 4.6 million additional loan accounts translates to a 58.5% jump in two years and brought personal and household accounts to 12.46 million accounts.

The rise in personal loan accounts, which were nearly four times the 1.12 million that had been opened in the two years before the pandemic, sums up the agony of breadwinners who have found debt to be the only answer to the many questions that the economy posed to them.

Thousands of people who had been hit by pay cuts or total job losses, but locked in cities and towns by state restrictions, fell into debt as they joined the banks to guess when the pandemic was going to end – or at least subside.

Personal loan accounts accounted for 95.7% of all loan accounts in the economy, showing the appetite for survival loans in an economy that had cut 737,500 jobs in 2020.

Takes time to erase

The economic fallout from Covid-19 may be easing, but personal debt may take longer to clear, as may government debt, which hit 8.4 trillion shillings in March. As the cost of living soars and incomes stagnate, households are increasingly turning to a new round of borrowing.

But the leeway to absorb additional debt is shrinking. In fact, for many families, they had to sell some of their assets to pay off their debts. Everything has its breaking point.

The latest CBK credit survey shows that while 59% of banks saw an increase in demand for personal and household loans in the quarter ending December last year, the rise in demand was noted by 63% of banks in the first quarter of 2022.

This means that more and more people are still looking for loans. Still, 81% of bank chief executives told the CBK they intended to step up recovery efforts in this area to stem the rise in defaults.

But the rising cost of living has put borrowers in a tough spot, especially with official data showing last year’s inflation handed workers the worst inflation-adjusted pay cut in a decade. .

Government data shows real wages – a measure of income after taking into account the cost of the goods and services people buy – fell 3.83% last year to add to the 1.4 % registered in 2020.

Inflation-adjusted pay cuts have strained household budgets and made it difficult to repay loans, especially as the latest rise in the cost of living threatens to exceed the upper target of 7.5 % desired by the State.

Staples such as cooking oil, fuel, cooking gas, wheat flour and maize soil have all seen significant increases, making it difficult for households to manage balanced budgets.

Many people have now turned to mobile loans to make ends meet, further dooming them to a debt trap.

Kenyans, for example, borrowed 9.67 billion shillings a week through Safaricom’s Fuliza overdraft service in the year ending March 2022, according to data from the telecom operator.

Safaricom revealed that the value of disbursements through the service reached 502.6 billion shillings in the fiscal year ending March 2022, compared to 351.2 billion shillings that were disbursed in the previous fiscal year. The latest overdrafts translate into weekly borrowings of 9.7 billion shillings between April last year and March this year, an increase of 43.1% from 6.75 shillings in the similar period previous of 2020/2021.

During the review period, an additional million customers joined the service to bring Fuliza’s total daily active user count to 6.9 million.

Salary advance borrowing from the Co-operative Bank of Kenya averaged 164 million shillings a day last year, underscoring the difficult balancing act faced by salaried employees.

The lender revealed that payday advances, issued under its product dubbed e-flexi, rose to 59.91 billion shillings last year from 50.28 billion shillings the year before. This means that workers received an average of 164 million shillings a day in wage advances, compared to 138 million shillings in 2020.

The rising value of short-term loans indicates the growing number of people who are now forced to resort to survival loans, and many of them cheat the system by borrowing from one lender to pay off another.

Main Drivers

The situation is consistent with a CBK and Financial Sector Deepening (FSD) survey in Kenya which showed that the livelihoods of 73.6% of households had deteriorated in 2021 compared to 2019.

“The main drivers of deterioration were the inability to cope with shocks and challenges in managing their daily needs,” said the FinAccess 2021 household survey. “Further analysis shows that 73.6% noted that their life had deteriorated in 2021 compared to 51% in 2019, supporting their argument on the adverse effects of the Covid-19 pandemic on the socio-economic well-being of households.

The survey showed that respondents’ top priority in the 12 months leading up to the survey was putting food on the table over investing in education, as was the case in 2019.

The economic situation saw 43.3% of households dip into their savings to survive, 40.6% cut non-food budget, 38.9% cut food expenditure, 22.1% sell assets while 29.6% turned to debt.

Many Kenyans are yet to recover from the shocks of Covid-19, according to data captured by the World Bank in Kenya’s latest economic update. The World Bank notes that cutting the food and non-food budget remains one of the most frequently used tactics by households, with around a quarter of households finding it useful, alongside resorting to debt.

“Continued reliance on coping mechanisms suggests that households are still lacking disposable income, for example, credit use remains at its highest level since the start of the pandemic (27% of households),” the Bank says. world.

The report observes that food insecurity continues to affect a third of households.

The share of households unable to access staple foods rose to 36%, with half of the affected population citing a sharp rise in prices.

Garland K. Long