Middle class turn to salary advances as economy bites

Commercial banks have registered a surge in the number of customers tapping salary advances, pointing to the economic fallout that has pushed more Kenyans to expensive short-term payday loans for survival.

Payday loans are short-term, high-interest borrowings based on income and issuers take advantage of the urgent need for immediate credit by charging a higher-than-normal interest rate. The principal of the loan is generally equal to a part of one’s upcoming salary and requires no collateral.

The economy has witnessed a rise in energy bills, food costs, and 11-year high-interest rates for loans, all chasing after a pay cheque whose power has been weakened by enhanced or new compulsory State deductions to fund housing, healthcare and safeguard retirement.

Many short-term advances are priced at annualised rates of as high as 60 percent, but customers with pressing needs such as food, electricity, cooking gas, school fees as well as other emergencies are finding the advances useful and irresistible.

Data from the Co-operative Bank of Kenya, which is among the few lenders that disclose salary advances loan book, shows its salaried customers tapped Sh51.7 billion in the nine months ended September.

The Sh51.67 billion advance is a 3.5 times jump from the Sh14.67 billion that was tapped in a similar period last year and has coincided with an increase in the number of customers using short-term loans.

“We have seen healthy growth in our e-banking book, as our customers continue to embrace our lending model that speaks to their kind of needs,” said Jackson Mwendo, head of consumer banking at Co-op Bank.

“The product has been expanded beyond salaried customers to also include our business clients, who now access the facility on the basis of business turnovers and not collateral securities or guarantors.”

The rise in salary advances is faster than that witnessed by Co-op Bank during the Covid-19 disruptions of 2020 when the figure rose by Sh52.2 billion, a near double rise.

Co-op Bank allows salary advances of up to Sh500,000 depending on one’s salary and charges a commission of 12 percent. Standard Chartered Bank of Kenya lends up to Sh400,000.

Equity Bank Kenya allows salary advances of up to Sh300,000 and prices the product at between 13 percent and 20.5 percent depending on the customer’s risk profile.

Customers tapping salary advances from KCB Kenya and NCBA access up to Sh100,000 and Sh250,000 respectively and are supposed to repay within six months. Family Bank lends up to 50 percent of one’s net salary and charges a 10 percent commission.

The salary advances also come with a 20 percent excise duty on the commission amount and an insurance charge that varies from one lender to another. Some workers are supplementing the salary advances with other short-term borrowings such as mobile loans, setting themselves up for a debt trap that could take several months or years to clear.

Several digital lenders are also reporting a rise in loans pegged on payslips, an indication that more workers are turning to short-term loans to meet their monthly needs.

“People are feeling the pressure of inflation and taxes so they are finding it difficult to cope. This year, we are seeing an increase of about 40 percent to 50 percent in the uptake of loans pegged on the payslip,” said Rakesh Kashyap, the chief executive of Little Pesa, a non-deposit-taking micro-finance firm that provides short-term unsecured loans to salaried people.

“We are careful with approvals because defaults can also go up. Layoffs are becoming so many and we have to be sure the people we lend to are still in employment or not serving notice.”

Banks such as NCBA and KCB do not make public data on salary advances but their disclosures on the mobile loan products show a rising uptake on these short-term loans as households reel under the tough economic environment.

KCB data up to September shows the value of mobile loans tapped rose by 77 percent to a high of Sh245.2 billion, driven by overdraft service Fuliza and the introduction of loans of up to 12 months on KCB Mobi.

The value of Fuliza personal loans surged by 69 percent to Sh150.3 billion compared with a 21 percent rise in a similar period last year, pointing to the increased use of the overdraft to meet daily needs.

“Value of mobile loans disbursed grew to an all-time high of Sh245 billion, augmenting our efforts to support households and small businesses to bounce back stronger,” says KCB.

Employers complain staff part with more than two-thirds of monthly pay to meet statutory deductions and own obligations such as loans.