Though the digital loan industry is still in its diapers, the unprecedented growth of it is a concern to many stakeholders within the financial industry. In fact, the emerging apprehensions arising out of the process of lending, distribution, and use of the digital loans have become a cause for consumerism and consumer advocacy within this new emerging product category. Of great apprehension are issues relating to regulation, consumer privacy, and loan processing among others. With this regard, a survey was carried out in Nairobi County, Kenya with over 500 questionnaires being sent through email to respondents who fall within the middle-class category. A convenience sampling method was adopted for the study, and 243 were answered and returned. A further analysis was done given the objective of the study was to examine consumer and ethical concerns arising out of sale and marketing of digital loans. This chapter examines consumer issues arising out of the digital loan applications and addresses what the industry needs to do. It recommends the way forward in dealing with these issues.
TopIntroduction
Africa is seen as the continent with the fastest growing middle class in the world (Deloitte and Touche, 2012) and a place to invest in with such phrases such as “African rising” becoming a clarion call to woo investors within the precincts of the continent. With over a billion people most of them within the dynamic youth bracket and an ever surging middle class, Africa is no longer “the dark continent” but a land filled with opportunities for all and sundry to come in. The Africa Development Bank in its bid to demystify the “middle class” within the continent has then classified the segment of the market as anybody with an annual income exceeding $3,900 per year or who spends between $2 and $20 a day (AfDB, 2011; Banerjee and Duflo, 2008). In relative terms, the middle class can be defined as those individuals or households that fall between the 20th and 80th percentile of the consumption distribution (Birdsall, 2010) and the population earning $2-$13 a day threshold (World Bank, 2008). In Kenya the middle class is then construed as anyone among the population spending between Ksh. 23,670 ($236.7 dollars and Ksh. 199,999 per month ($1999) (KNBS, 2011).
Figure 1. Middle class pay as you earn (PAYE) to the Kenyan economy
It is in line with borrowing that Scott III and Pressman (2011) are concerned that that no group is more affected by rising consumer debt levels than the middle class. This segment of the population has become a darling to the financial world. This is because to the banking sector, the middle class is perceived as a cash cow and the nascent digital loan products are keen to create new products for them. Generally the middle class have access to high levels of consumer credit because banks have faith they will pay their debts and target these households with pre-approved lines of credit (Scott III & Pressman 2011).
Nairobi’s population is estimated to have grown to 4,556,381 people from 3,138,369 at the last official population taken in 2009 (World Population Review, 2019). Out of this population Institute of Economic Affairs (2015) estimates that 30.1% of those who live in Nairobi, fall within the middle income group. Its appetite for the easy loans to fund their lifestyle has forced financial institutions to come with products to fill this void especially within the digital financial apps segment.
Figure 2. Percentage of the middle class residing in major towns in Kenya
Banks are fond of the middle income group because in difficult times (job loss, illness, divorce), they can easily resort to consumer debt to fill the gap between the lost income and necessary household expenses (Scott III & Pressman 2011), a profitable catch to those in financial sector. Their contribution to the to the Kenyan GDP is estimated to be at 20% (IEA 2015) and about 44.9% of the Kenyan population, or around 17.3 million Kenyans, are in the middle class, up from 24% in 2011 (AfDB 2013; Business Today, 2015; Horn Affairs, 2015; KNBS, 2011).
Figure 3. Middle class differentiation in Africa source
Commercially, banks have to turn to the middle class because the wealthy apparently rarely accumulate significant consumer debt and they normally have savings to weather difficult economic times (Scott III & Pressman, 2011). Hurwitz and Luiz (2007) subsequently admits the rapidly emerging African elite and urban middle class, have altered the economic landscape and left companies fighting for a piece of this new market. It is this segment of the market that is being perceived to be a fertile ground for loans given their craving for easy and quick loans. Scott III and Pressman (2011) conclude that since the poor have less access to consumer credit, banks do not consider them as the debt becomes problematic to them when it is accumulated to large amounts.