TechCabal Daily – African digital lenders anticipate high default rates
How are digital lending companies responding, especially at a time when cash is critical?
Digital lenders are filling the lack of access to credit that exists in African countries.
In Kenya alone, there are around 50 of these applications and many have come under scrutiny for predatory loans and high interest rates. But with the COVID-19 pandemic, digital lenders fear that default rates will rise.
SMEs will seek additional financing for their businesses. Unless banks simplify their processes during this time, SMEs are likely to approach digital lenders regardless of their interest rates.
But as African economies contract following lockdowns to control the virus, possible job losses and business closures could follow, affecting income and the ability of clients to repay their loans. “If things continue like this, I might be forced to shut down for a while, just to avoid incurring further losses. I don’t want to end up going to the bank for a loan, ”Brendan Booi, owner of a South African-based furniture company told Fin24.
An increase in defaults is problematic for lenders, but they know it’s something that could happen. A 2018 survey by the Consultative Group to Assist the Poor (CGAP) of borrowers in East Africa’s two main markets; Kenya and Tanzania reported high delinquency and default rates. Out of 1,000 digital borrowers, about 50% in Kenya and 56% in Tanzania said they had paid off a late loan. About 12% and 31%, respectively, said they had defaulted.