The borrowing landscape in Kenya is undergoing a profound transformation, marked by a notable shift towards survival loans and a simultaneous decline in investment borrowing.
Survival loans, short-term financial assistance intended to address immediate basic needs like food and rent, have become increasingly prevalent among borrowers in Kenya.
This article aims to provide a comprehensive analysis of this evolving trend and its implications for individuals, businesses, and the broader economy.
Many Kenyans lack access to stable income opportunities, pushing them to seek emergency financial assistance to meet their basic needs.
It is anticipated that Kenya’s Gini coefficient will reach 0.39 in 2024. Consequently, it is projected that 21.05 million individuals in Kenya will earn less than $2.15 per day, while 40.27 million people are expected to earn less than $3.65 per day.
Additionally, the high cost of living, especially in urban areas, outpaces income growth for many households, prompting them to rely on loans to make ends meet.
Healthcare expenses also play a significant role in driving the need for survival loans. Medical costs can be substantial in Kenya, particularly in cases of illness or medical emergencies.
For example, Starting from July 2024, Kenyans will face increased rates for the new Social Health Insurance Fund (SHIF).
As an illustration, individuals earning a gross salary of Ksh.50,000 will now contribute Ksh.1,375, compared to the previous amount of Ksh.1,200. Similarly, those with incomes exceeding Ksh.100,000 will see their contribution rise to Ksh.2,750 from the previous Ksh.1,700.
Without adequate health insurance coverage or savings, individuals may resort to borrowing to cover medical bills and related expenses.
Furthermore, Kenya’s vulnerability to climate-related shocks, such as droughts and floods, further compounds economic challenges.
According to assessments conducted by WFP’s Advanced Disaster Analysis and Mapping (ADAM), approximately 640,600 hectares of land experienced flooding in northern and northeast Kenya in 2023.
Of this total, an estimated 18,284 hectares were designated as cropland. These shocks devastated agricultural livelihoods and exacerbated food insecurity, leading households to turn to survival loans to purchase food, water, and other essentials.
The proliferation of survival loans in Kenya can trigger various economic ramifications, both at the micro and macro levels. Individually, the surge in survival loans often translates to increased indebtedness among borrowers.
High-interest rates, typical of informal lending, burden borrowers, leading to reduced disposable income and limiting their capacity to invest in productive assets or education.
In February 2024, the Central Bank of Kenya (CBK) increased the Central Bank Rate (CBR) by 50 basis points to 13%.
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This marked the highest borrowing cost seen since October 2012.Consequently, this perpetuates a cycle of poverty, hindering socio-economic mobility.
Moreover, heavy reliance on informal finance channels undermines efforts to formalize the economy. It discourages individuals from engaging with regulated financial institutions, perpetuating financial exclusion and hindering the establishment of credit histories necessary for accessing formal credit.
As a result, the overall financial ecosystem remains underdeveloped, inhibiting economic growth and stability.
On a macroeconomic scale, the prevalence of survival loans contributes to systemic issues. It exacerbates income inequality by disproportionately burdening low-income households with high-interest debt.
This reduces consumer purchasing power and dampens aggregate demand, hindering economic growth.
Furthermore, it erodes trust in the formal financial sector, undermining efforts to deepen financial inclusion and stability.
In Kenya, survival loans are sourced from a variety of platforms and services, reflecting the diverse financial landscape of the country.
One prominent source is fuliza mpesa, Kenya’s overdraft service for M-Pesa mobile money users, which allows individuals to access funds even when their account balance is insufficient.
Additionally, applications like branch loan app provide personal loans ranging from Ksh 500 to Ksh 300,000, offering a convenient solution for borrowers in need of immediate financial assistance.
The tala loan app, another popular loan app, offers a personal line of credit with a maximum loan limit of KSh 50,000, catering to the needs of individuals seeking quick and accessible financing.
With the ease of downloading these apps and completing the loan application process online, borrowers can swiftly access funds to address their pressing needs, contributing to the growing prevalence of survival loans in Kenya.
As Kenya navigates the dynamics of survival loans, understanding the underlying factors and implementing strategic interventions is crucial.
Promoting financial literacy, responsible lending, and inclusive economic policies are imperative for steering the borrowing landscape towards sustainable growth.