The Myth of Financial Inclusion through FinTech: Focusing on the Digital Credit Industry in Kenya

Digital credit, a type of mobile loan service, has achieved remarkable success in Kenya. The advocates of digital credit argue that its unique characteristics are expected to give new opportunities to those who have been excluded from formal loan services due to their vulnerable socio-economic status. However, it has been questioned whether digital credit has had a positive impact on Kenyan households in terms of expanding financial inclusion. This thesis draws on insights from two different types of digital credit services, mobile banking loans (MBL) and Fin-Tech loans (FTL), which yield different results. Both digital credit services are indiscriminately provided to rural residents. Yet, the access to MBL is more influenced by the socio-economic characteristics of the borrowers than that of FTL. Female and low-income groups are less likely to use MBL, in contrast, the use of FTL is less affected by the variables of sex and the level of income, meaning that people who are female or of low-income could access FTL just as male and high-income classes could. However, it should be noted that easy access to loans is not always a good sign. FTL services could make the borrowers use excessive borrowing, leading to late-repayment or even default. In reality, it has been reported that a large number of digital credit borrowers in Kenya have been struggling with various problems, especially with high levels of default. Therefore, this thesis uses mixed methods combining OLS regression analysis and semi-structured interviews with digital credit borrowers in Nairobi’s slum areas, exploring the main drivers of high default rates on digital credit. According to the quantitative results, the use of digital credit itself influences default more than other factors such as consumers’ income level. It demonstrates that the use of digital credit itself has a greater effect on the likelihood of default than borrowers’ characteristics. Also, the study qualitatively identifies the characteristics of digital credit, such as high interest rates, short repayment periods, and the inducement of over-borrowing, which have made it harder for borrowers to repay the loans. In addition to high default rates, this thesis sought to identify the consumer protection issues currently facing Kenyan borrowers. Through key informant interviews (KIIs) with officials of MBLs and semi-structured interviews with consumers of digital credit, I conclude that the Kenyan digital credit environment is rife with consumer protection risks. Customers have been harmed by the problems of digital credit products; the characteristics of digital credit, such as high interest rates, aggressive business practices that encourage consumers to borrow continuously, and the existence of unlicensed lenders, may increase risks. There are instances of improper debt collection by digital credit lenders following default. In addition, the interviews reveal that there are problems with transparency because of violations of data privacy and deceptive marketing. To address these concerns regarding consumer protection, the Central Bank of Kenya Amendment Bill 2021 was introduced in December 2021. This is significant as it is the first serious attempt to regulate the digital credit market. However, based on the findings of this study, it appears that the new bill has limitations when it comes to addressing various consumer protection risks which I identify through the interviews. Moreover, certain provisions of the bill may endanger both borrowers and lenders. In conclusion, this thesis empirically explores the impact of digital credit on Kenyan households from multiple perspectives by listening to various stakeholders, digital credit borrowers and lenders, and by constructing a picture of the entire digital credit business using a mixed methods approach, and thus contributes to filling the knowledge gap. The results disprove the myth of digital credit's benefits and demonstrate the need for improved regulation and additional research