It has become almost a culture among Kenyans that whenever one is in a difficult situation that needs money to resolve, and they don’t have it with them at the time, they turn around. to digital lenders.

Sometimes these digital platforms have been used to fund unnecessary expenses like cravings or unforeseen expenses like when you realize that they are over budget in a supermarket.

Despite the usefulness of these platforms, they have become a source of perpetual debts on people’s incomes which are too difficult for some to get rid of.

Given the tough economic times, made worse by the Covid-19 pandemic, it’s hard to resist the appeal of these digital lenders.

Yet as people flock to these platforms for loans, a latest survey released by the Central Bank of Kenya shows that people are unaware of how their interest rates work.

Interest calculation

As documented in the FinAccess 2021 household survey of December 2021, Kenyans are not aware of the calculation of interest attached to the amount they borrow.

The survey tested respondents’ ability to accurately calculate 10 percent interest on a 10,000 shillings loan.

“About 49.3 percent of those surveyed got the right interest rate, while 32.4 percent gave the wrong answer,” reads the report by the Central Bank of Kenya, the National Office. Kenya Statistics and Financial Sector Deepening Kenya (FSD) among other partners.

Additionally, respondents received a typical message on their mobile phone indicating the value of the transaction and the associated costs as a short message service (SMS) test commonly used by digital loan providers.

Among the respondents, six in 10 were able to read correctly.

Perpetual borrowing cycle

How to get out of this cycle is a labyrinth for many especially those who have no source of income.

“When I look at the situation first, I would say stop any further borrowing because what we’ve seen is a perpetual loan where you borrow Peter to pay John and that kind of hope from platform to platform. the other, “says Elizabeth Irungu, a financial expert.

Irungu, in an interview with The Standard’s sister platform, KTN News, said when the pandemic hit most people lost their income and small businesses were hit. These people literally weren’t working, but they have expenses like food and rent.

“What has happened is that a lot of people may have taken attractive, cheap and easy to access loans and then got into debt,” she explains.

Irungu says you have to be aware when borrowing.

“For many Kenyans, the cost of borrowing is unclear. They only sell you Sh10,000 or Sh5,000 access. They don’t say at what price you get the credit, ”she notes.

Irungu says that if one had to do the math before borrowing, they would rather look for alternatives. For example, she explains, if a lender’s interest rate is 1% per day, it translates to 365% per year.

Killer loan

“Your eyes will pop. By only mentioning 365 percent you will escape this because you know that for every Sh100 you borrow, you are going to pay off an additional Sh365. It’s a deadly loan. No one should borrow this. You prefer to look for alternative means, ”she emphasizes.

If you’re broke, she says, you should examine the source of your debt.

Plus, plan ahead, she adds.

“Emergencies are likely to happen, and that’s what happened last year. Neither of us anticipated the pandemic, but as we plan for life we ​​know emergencies will arise, so we’re told to always save for that rainy day. ”

Irungu says that using digital portals that can help you get money fast was actually a trap. She says during the pandemic, as noted in the survey, many borrowed because the situation was dire as they had to feed their children or meet other urgent needs.

Soon they become trapped in debt.

Although the government insisted that these people not be registered with the Central Referral Bureau, she adds that the truth is that those who borrowed are still debtors because those who lend them will always have to get their money back.

“You will (still) have to pay off that loan you took out over the phone when you weren’t even thinking properly,” she warns.

Irungu says that even when they don’t make more money, they can still save for rainy days by cutting back on spending. The survey cited lack of money (54.6 percent) as the main reason for those not saving, followed by irregular income (18.4 percent) and 7.4 percent who simply did preferred not to spare.

She notes that according to the survey, there are individuals who have changed their spending following the economic shock.

“Although the survey did not ask any questions, I think some of them may have moved from expensive houses to the village or from one estate to another to cut costs,” says- she. “Anything you cut, even if it’s Sh100, start keeping it aside.”

She adds, “Don’t say you’ll start saving and investing when you have a lot. Start small. It’s discipline.

Irungu notes that the highest cost of a household in Kenya is food, which can force many of them to borrow when they have no income, as it is a basic need.

However, you can always buy wisely with less.

For example, you can have a conversation with your kids about expected lifestyle changes and buy fresh market produce like Marikiti as opposed to buying packaged food.

“Marikiti is cheaper,” she notes.

We can go ahead and create a vegetable garden to reduce the cost of purchasing food.

“It is unfortunate that for such a productive country, many of us use half of our money to put food on the table. There is a lot to be done in terms of policy and government intervention, to reduce the fact that so many Kenyans use almost half of everything for food, ”she observes.

But even for those who save, the survey indicates that most of it goes towards meeting daily household needs, which shows how expensive it is and can lead to borrowing.

According to the survey, the reasons for saving are daily household needs, followed by emergencies such as a funeral or medical and educational needs.

Retirement comes in fourth position.

“The most cited factors impacting saving among Kenyans were the lack of regular income and enough money to save at 42.3% and 38.3% respectively in 2021.

Since the survey mainly covered the Covid-19 period, the responses could easily be influenced by the perception of a difficult economic period and job losses due to the Covid-19 shock, ”the survey indicates.