Digital lenders will milk you dry and get away with it, be vigilant

At about 11am in August last year, a salesperson from digital lending firm Momentum Credit approached Evaline Osumba at her shop in Kisumu as she tended to clients. She runs a supplies shop in the lakeside city.

Ms Osumba was convinced by the salesperson's pitch, and so when she needed a quick loan, she walked into the lender's branch offices in Kisumu on October 19, 2019 and applied for a loan of Sh600,000.

For collateral, she listed her prized Toyota Hilux pickup which she uses for her business supplies, registration KBJ 04J.

The firm processed her loan promptly and approved a loan amounting Sh525,000. They wired Sh490,000 to her account and the deficit was withheld as 'service fees.' The loan would accrue a monthly interest of 8.054 per cent, which translates to an annual rate of 96.65 per cent, excluding varying service charges and insurance fees. The agreed repayment period was 12 months.

For context, the average lending rate for commercial banks was 11.75 per cent per year in September, according to the last updated statistics from the Central Bank of Kenya.
However, Mrs Osumba was so happy to finally have the money in her account. Little did she know that she had just stepped into a crippling debt trap.

Within the window of the initial 45 days she was given to make her first repayment, she deposited the first sum of Sh73, 400 to the firm in November, 2019. The balance was to be repaid in similar instalments over the next 11 months. For a loan of Sh525, 000, Mrs Osumba was set to pay a whooping Sh880, 806!

Here is a breakdown of this outrageous sum: Sh536,575 as the principal amount, the interest Sh320,231 and service fees Sh24,000 (If she meets all her loan obligations in time for the 12-month duration of the loan) and an additional Sh48,000 tracking fees for her car which was the loan’s collateral.

Punitive charges

Unfortunately, Ms Osumba didn’t quite understand the stringent terms attached to the loan. For instance, she discovered later on that a bounced cheque in making her monthly payments would attract a penalty fee of Sh3,000 and an additional 10 per cent of the amount deposited.

Rescheduling her loan required a fee of 10 per cent of the instalments. So far, she has rescheduled twice. 

Further, according to the loan agreement, failure to pay a monthly instalment would mean she had defaulted. Late payment also attracted various fines. Defaulting was not an option as it would mean losing her pickup as well as deposits made.

During the interview at Nation offices in Nairobi, Mrs Osumba disclosed she has been forced to sell her house furniture and valuable electronics including her fridge in order to make her deposits in time. 

"I am in a really difficult position because each time I delay to pay an instalment for a few days, an auctioneer is sent to my doorstep to take my car. I have sold everything in my shop, and even sold my other car to repay this loan but the loan is only rising," she lamented.

Her mailed correspondence with the firm regarding payments and rescheduling portray the image of a cash-strapped borrower who is fast running out of ideas on how to get out of a debt hell-hole. A payment statement indicates she even paid as little as  Sh47 in one of the instalments just to avoid non-payment fines. 

Due to tough economic times, Mrs Osumba took a top up loan of Sh70,000 in January this year. She also wrote to the lender, Momentum Credit on January 23, requesting a restructure of the loan. This was granted and the repayment period extended to 18 months. 

In the new schedule, she would pay Sh64,423 in March, May and June of 2020, and Sh58, 021 each monthly until the last instalment on May 3, 2021.

Then Covid struck. The lender instructed borrowers to restructure their loans and sweetened the offer by providing a two-month grace period of no accrued interest. Ms Osumba accepted this offer and restructured her loan once more. She assumed the new schedule would adhere to the initial repayment terms with regard to the outstanding balance. This was not the case.

Ms Osumba states the lender denied her request to maintain the balance owed knowing very well that this latest restructure increased the repayment duration hence a higher interest amount.

Lender responds

In an email to the Nation, Momentum Credit said the restructure of the loan was meant to grant their borrowers ample time to pay the loan to reduce defaults.
 
The company stated that Ms Osumba, consented in written instructions to the terms to have her loan restructured in April 20, 2020.

"We would like to address the concerns raised by our client Evaline Awuor Osumba, which we do not take lightly. Due to the emergence and declaration of Covid-19 as a pandemic, we introduced a product where we restructured our clients' accounts to a future date to assist them in meeting the agreed loan obligations so as to avoid circumstantial defaults," read the email send to Nation by Momentum Credit. 

"The restructure process starts with a request from the client, after which he/she receives a new schedule for the loan repayment period, the amount to be paid and the due dates for payment."

"Subsequently, the client then goes ahead and consents to the restructure in writing or via email before the restructure is executed. In the above case, the due process was followed and with the client giving written instructions to proceed 20th April, 2020 and consented to the restructure. Unfortunately, due to data protection laws we are unable to share this information without prior authority from the client," it added.

The lender, however, gave no comment on whether it is using the restructure of loans to accrue more interest from the loans. 

On May 14, Momentum proceeded to restructure Ms Osumba's loan. At the time, she had an outstanding balance of Sh570, 115 which was now to be repaid over an extended period of 24 months.

When she failed to make deposits for April and May, she was shocked to discover she had been slapped with fines. The grace period was a lie.

Between the months of June and October, Mrs Osumba made deposits amounting to
Sh308,459. As of November 4, 2020, she had an outstanding balance of Sh634,959. 

Her new payment schedule elapses in May 2022. She is required to pay Sh58,278 from October 2020 to May 2022. By the end of it all, she will have paid Sh1, 541, 590, which is almost three times the amount she borrowed.

"I have been paying this loan for about a year now yet the amount keeps rising, not reducing. When I want to pay it all at once, I get quoted a balance of over Sh570, 000. I wonder where the money I have been paying has goes to.”

"People ask me why I agreed to such harsh terms in the first place. But it is not that simple because need for money will always be there. These lenders need to be regulated because a lot of people are suffering in silence," Mrs Osumba said.

Anytime she misses an instalment, she is required to driver her pick-up to the auctioneer's yard or cough up a fine of Sh20, 000. Her vehicle has been valued at Sh300, 000 by the auctioneer the firm assigned her but she claims to have bought it at about Sh1.4 million.

The Nation spoke to at least three more people who are also struggling to offset their loans after applying for quick loans from various digital lenders. Most of them took loans during the Covid-19 pandemic period.

For instance, a teacher from Migori, took a loan of Sh30, 000 from s digital lender. He was asked to repay it in , was given 84 months with monthly deposits of Sh1,400 excluding other charges such as "settlement fees" and insurance fees. Should he stick to the schedule, he will have paid in excess of Sh117, 000 at the end of the loan period, which is over three times what he borrowed.

A spokesperson for Central Bank of Kenya (CBK), the institution charged with formulating Kenya's monetary policy, said the CBK does not regulate non-deposit taking lenders.

Separately, CBK told Evaline Osumba, in a written response to her complaints about the conduct of Momentum Credit, that it does not regulate credit-only institutions and that Momentum Credit is not licensed by the body and can therefore not help her in the matter.

"We are in receipt of your letter dated October 12, 2020 raising a complaint against Momentum Credit. We write to inform you that the Central Bank of Kenya (CBK) does not license non-deposit taking microfinance institutions (credit-only entities). In this regard, Momentum Credit is not licensed as a commercial bank, a microfinance bank or any other financial institution under the regulatory preview of the CBK," CBK bank supervision Assistant Director Matu Mugo wrote in the letter.

He continued: "It is worth noting that all financial institutions licensed by the CBK are issued with a license which they are required to display conspicuously in all places of business for the public to see. CBK is therefore not in a position to intervene in this matter."

Operating with impunity

This means that digital lenders have been operating with impunity in a legal grey area where they neither answer to the CBK, which regulates formal lenders like banks, nor the Sacco Societies Regulatory Authority (SASRA), which regulates deposit taking Sacco societies.

However, following pressure from legislators and Kenyans who have fallen prey to the predatory lenders, CBK Governor Patrick Njoroge has moved in to regulate the sector.

The Central Bank of Kenya (Amendment) Bill, 2020, which was introduced to parliament in June by Bonchari MP Oroo Oyioka seeks to mandate CBK with regulating the conduct of providers of digital financial products and services and financial products and services.

The Bill gives Dr Njoroge an expanded mandate to (a) regulate and supervise the conduct of providers of digital financial products and services; (b) regulate and supervise the conduct of digital credit providers and digital credit service providers; (c) regulate and supervise the conduct of providers of financial products and services; (d) regulate and supervise the conduct of financial services.

Dr Njoroge had hoped parliament would pass the Bill before legislators headed for the December recess, but will have to wait at least until February when parliament resumes. 

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