November 27th, 2024

The Covid-19 pandemic left a significant mark on various sectors, and Kenya’s credit market is no exception. As the pandemic triggered economic slowdown, credit conditions tightened drastically, causing notable shifts in borrowing behaviors and lending practices.

A contraction in credit markets

During the pandemic, despite an increasing number of adults needing credit, the total value of loans disbursed witnessed a sharp decline. From 2019 to 2021, the share of adults who either attempted to borrow or were currently borrowing rose from 52% to 56%. Yet, the total value of loans disbursed from all lenders fell by a staggering 30%. Bank lending was particularly hard-hit, with total lending to adults plummeting by 50% (KSh 346 billion). This reduction was primarily in loans to business owners, while lending to employed adults remained steady at around KSh 260 billion during the same period.

Shifts in lending dynamics

The contraction was not limited to banks alone. Other formal financial institutions, including SACCOs and Microfinance Institutions (MFIs), also reduced their lending, though to a lesser extent. Total disbursements from these institutions declined by 25%. Interestingly, while their overall lending decreased, the importance of SACCOs and MFIs to business owners grew. In 2019, the ratio of bank to SACCOs/MFI loan disbursements to business owners was 7:1. By 2021, this ratio had shifted to an equal 1:1.

The role of social networks

As formal institutions became less likely to provide financing, many Kenyans turned to their social networks to meet liquidity needs. Loans from friends, family members, and neighbors increased by Ksh 31 billion, rising from Ksh 86 billion in 2019 to Ksh 117 billion in 2021. This trend was especially notable among the poorest 40% and richest 20% of households.

The digital lending boom

Digital lending options surged, uncovering a massive demand for short-term liquidity. By 2021, nearly 60% of loans disbursed to Kenyan adults were mediated through digital technologies. Informal or relational agreements accounted for 37%, and less than 5% were traditional loans from financial institutions.

One standout in the digital lending space was Fuliza. Launched in early 2019, Fuliza quickly became popular, accounting for 50% of all loans disbursed in 2021. Nearly 1 in 5 adults used Fuliza, typically borrowing Ksh 500 around nine times a year. This rapid adoption suggests Fuliza partially displaced traditional practices like taking goods on credit from shopkeepers (informal buy now, pay later) and other digital lending options like mobile banking services and fintech apps. The share of low-value credit (under KSh 2,500) from shopkeepers fell from 34% to 23%, while digital loans (including Fuliza) rose from 12% to 24% between 2019 and 2021, suggesting that Fuliza may be substituting for shopkeeper credit.

Rising debt and financial stress

The pandemic also saw a rise in indebtedness among Kenyan adults. Between 2019 and 2021, the share of adults with outstanding debt increased by 22%, meaning that nearly 50% of adults were carrying debt in 2021. Concurrently, the proportion of adults reporting that they had to reduce food spending to repay a loan rose from 18% to 22%. This increase was particularly pronounced among the richest 20% of households, where the share jumped from 15% to 25%.

Conclusion

The Covid-19 pandemic has significantly transformed Kenya’s credit landscape. Formal lending institutions pulled back, and many Kenyans turned to social networks and digital lending platforms like Fuliza to meet their needs. As more adults carry debt and face repayment challenges, it is crucial to monitor these trends and address the underlying issues to foster financial stability and resilience. The shift in lending patterns underscores the need for innovative financial solutions to support individuals and businesses in navigating economic uncertainties.

 

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Click here for the full report – The Credit Landscape in Kenya – Evidence from FinAccess

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