A Digital Credit Revolution: Insights from Borrowers in Kenya and Tanzania

Since digital credit products launched in East Africa—first in Kenya and later in Tanzania—members of the financial inclusion community have alternately voiced optimism and concern about how the market is evolving and its potential effects on the lives of poor people. To identify who is using digital credit, the purposes for which it is used, and the risks borrowers experience, CGAP, FSD Kenya, and FSD Tanzania undertook the first large-scale surveys dedicated to these topics. 

The surveys, which included more than 3,000 Kenyans and 4,500 Tanzanians, revealed that more than a third of mobile phone owners in Kenya and a fifth in Tanzania have used digital credit—indicating use has spread quickly. These digital borrowers tend to be young, urban, men. And they borrow actively—more than half of digital borrowers in each country had a digital loan outstanding at the time of the survey.

Digital loans are primarily used for household purposes, followed by business purposes and, in Tanzania, airtime purchases. They are only rarely used for medical needs or emergencies (less than 10 percent of digital borrowers in each country) or any other type of emergency (less than 2 percent in each country).

The surveys indicate some reasons for concern. About half of digital borrowers in each country reported having repaid a loan late at some point. In Tanzania, 31 percent reported having defaulted, as did 12 percent in Kenya. Twenty percent of digital borrowers in Kenya and 9 percent in Tanzania reported reducing food purchases to repay a loan. And a significant minority in each market reported poor transparency—such as not understanding the loan costs or terms—which correlates with higher levels of late repayment and default.

The surveys suggest areas of consideration for providers, policy makers, investors, and donors to ensure responsible market development which maximizes benefits and minimizes risks to consumers. Providers can enable customers with strong repayment history to graduate to larger, longer-term, lower-cost loans that can be used for more productive purposes. Regulators need monitoring mechanisms for transparency and consumer protection and may need to update credit reporting requirements to adequately capture the speed of digital loans. Investors can guide their investees toward responsible conduct, while donors should support market facilitators and regulators to develop regulatory and supervisory frameworks that adequately address existing and emerging risks.