Safaricom subscribers doubled their borrowings from the overdraft service Fuliza in the last six months to June after when the government placed a coronavirus-induced lockdown that led to layoffs and pay cuts.
The Fuliza loans rose to Sh176 billion from Sh81 billion in the same period last year, showing a daily borrowing of Sh967 million.
The increase in the loan uptake emerged at the time when Kenya’s economy shed more than two million jobs in the wake of Covid-19 economic hardships.
Fuliza, is an M-Pesa-based overdraft platform, which allows subscribers to access limited cash if their mobile wallets have no money.
Fuliza allows customers to complete M-Pesa transactions when they have insufficient funds.
The debt is recovered from M-Pesa balances automatically, but subscribers who do not settle their overdrafts within 30 days are barred from using their unused credit limit until they pay the outstanding amount.
“People and businesses go for overdrafts when their cash flows are hit. The economic slowdown in the first half certainly triggered the demand for Fuliza loans,” said Gerald Muriuki, a research analyst at Genghis Capital as reported by Business Daily.
“We have seen default rates rising and so the conventional loans have not really gone up. But given that Fuliza is integrated into M-Pesa credit, it is easier to manage the rates of default than conventional loans.”
Fuliza is underwritten by NCBA Group and KCB Group which partnered with Safaricom to offer short-term loans on the M-Pesa platform.
According to NCBA, it gave out Sh132 billion through the platform in the last six months to June while KCB lent Sh44 billion on the overdraft feature.
In August, NCBA and Safaricom raised the minimum loan size on M-Shwari four tomes to Sh2,000 to reduce defaults largely by borrowers taking smaller amounts.
Those who don’t qualify to borrow at least Sh2,000 on the monthly loan product are relegated to use Fuliza, which is more expensive but structured to lower defaults.
Borrowers pay a facility fee of 7.5 percent for the M-Shwari loans that amount to an annual interest of 90 percent.
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But on Fuliza, the fee is 1.083 percent daily or 395.2 percent annually, to underline the high cost of using the short-term credit services regularly.
This implies that borrowers who used to pay 56.25 interest for an Sh1000 M-Shwari loan will now pay Sh243.68 interest for a Fuliza debt that lasts a month.
This structure of Fuliza relative to M-Shwari makes it more effective in curbing defaults.
NCBA Bank managing director John Gachora said that the ratio of defaulted M-Shwari rose up to eight percent monthly in the wake of the coronavirus compared to the previous 1.8 percent.
