Borrowing for consumption rises due to high cost of living

Kenyan currency

Lending institutions have recorded an increase in demand for loans for rent, school fees among other household demands. 

Photo credit: File | Nation Media Group

What you need to know:

  • Lenders have been forced to introduce new products to meet borrowers' demands.
  • Increased taxation has shrunk the disposable income available to households. 

Kenyans are increasingly borrowing money to spend on their daily needs instead of investments, highlighting the growing cash crunch caused by a high cost of living. 

Lending institutions such as banks, microfinance banks, saccos and digital lenders are recording an increase in demand for loans for rent, car repairs, shopping, school fees among other household demands. 

This comes at a time of increased taxation, and coupled with increasing cost of commodities such as food, electricity, fuel, cooking gas and other items, has shrunk the disposable income available to households. 

“Currently, most people are borrowing for consumption. This month, we recorded an increase in demand for school fees loans. Others are now taking loans to pay rent and buy household supplies,” says Peter Macharia, the CEO of lender Jijenge Credit Limited. 

According to Mr Macharia, lenders are now having to introduce new lending products to cater for the changing demands of borrowers.

Mr Macharia cited a sharp rise in individuals borrowing money to repair their motor vehicles. 

Costs of borrowing

This comes amid a significant increase in the cost of motor vehicle spare parts, which has made it harder for motorists to repair their vehicles. 

“We now give loans for motorists to cover their repairs. This enables customers to quickly do repairs and continue using their cars as they pay for the loan,” said Mr Macharia. 

According to the Central bank of Kenya (CBK), lending to private households by commercial banks grew by 7.3 per cent in the year to January 2024. 

Peter Macharia

Peter Macharia, the CEO of Jijenge Credit.

Photo credit: Courtesy

This comes amid increased defaults by borrowers due to the tough economic times.

According to data released this month by Credit Reference Bureaus (CRBs), some 7.65 million out of 29.72 million loan accounts were in default as at December 2023, an increase from 3.89 million loan accounts in March last year. 

TransUnion, one of the three CRBs in Kenya, attributed the increase in defaults to higher costs of borrowing.

Interest rates

This came in a year during which the pay slips of workers have been raided by the government through new tax measures, including the 1.5 per cent housing levy. 

Mr Macharia said lenders now have to be cautious when setting interest rates to retain customers.

Lower interest rates, he said, are a key consideration for customers when borrowing. 

“We have lowered our interest rates so that we retain and attract customers. This has been beneficial because borrowers now have less disposable income,” he said. 

This comes at a time CBK has introduced risk-based lending, which will see banks charge borrowers interest based on their risk profile. 

According to the Economic Survey, 2024, commercial banks and non-bank financial institutions credit to the private sector increased by 16.5 per cent to Sh2.862 trillion as at December 2023.