Feature: Soaring lending rates in Kenya hit hard mobile phone loan borrowers

When he had a financial problem in the past, George Aura, a security guard in Nairobi, Kenya, would turn to his friends or family members.

Aura would call at least three people explaining to them his problems before one could agree to help him. It would happen almost every month, making the father of two embarrassed.

With the introduction of mobile phone loans, however, the guard had stopped the habit some months ago.

He would now borrow loans of between 5 U.S. dollars and 19 dollars whenever he had a cash problem. Like Aura, over 50,000 other Kenyans do it every day. However, these small borrowers are now threatened by rising interest rates in Kenya.

Commercial banks have raised their lending rates hitting borrowers hard as loan interest rates hit the roof in the East African nation.

While every borrower in the country has been hit by the rising rates, small borrowers like Aura, who borrow almost every day to solve different financial problems are the worst affected.

Commercial banks interest rates in the East African nation now stand at between 19 percent and 30 percent, from a low of 15 percent over two months ago.

The banks raised their rates in response to the Central Bank's move to increase its benchmark rate to 11.5 percent from 8.5 percent in bid to tame the weakening shilling.

The move has led to surge in Treasury bills and bonds interest rates, which stand at a high of 23 percent, with banks scrambling to lend the government effectively making loans to small people like Aura expensive.

Kenya Commercial Bank, which offers mobile phone loans in partnership with leading telecom Safaricom, through a product dubbed KCB-MPesa, increased its lending rates Monday.

"Dear customer, effective Oct. 26, new loans will attract interest of six percent a month, five percent for three months and four percent for six months," the bank said.

The bank was charging interest rate of four, nine and 12 percents for one, three and six months repayment periods. This means borrowers like Aura, who borrow cash for short periods of a day to two weeks, would suffer more.

If one borrows money every month as most small income earners do, at six percent interest rate, they would pay 72 times more the end of the year. It is a steep interest rate that puts people like Aura at a disadvantage.

"What do we do? We have no choice but to continue borrowing. Problems would not stop because the interest rates have gone up," said office worker Grace Atieno, noting that the mobile phone loans had saved her the pain of exposing her financial problems to friends and family members.

The office assistant borrows at least 29 dollars every month through the mobile phone.

So popular are the mobile phone loans that Equity Bank, which offers mobile banking services through Equitel, said 74 percent of its loans are now being processed via the product.

While Commercial Bank of Africa, which runs M-Shwari, the most popular mobile banking product, in partnership with Safaricom has not increased its lending rates, analysts note it is just a matter of time as all banks raise their rates.

Barclays Bank, for instance, is charging personal loans and mortgage borrowers an interest of 24 percent, from 16.2 percent, Standard Chartered Bank increased its rate from 19.4 percent to 27 percent.

Cooperative Bank's rates rose from 19.3 percent to 24 percent while KCB's from 16 percent to 22 percent. The high interest rates, according to economic experts, would push inflation to a new high.

Ernest Manuyo, a business management lecturer in Nairobi, noted that small borrowers are normally considered high risk, thus, banks tend to charge them highly.

"They will bear the burden of the rising interest rates most. Six percent one off interest rate a month is too high. The sad thing is that people borrow every week or month, thus, paying the highest interest one can imagine," he said.

"If one borrows money every week at six percent interest rate, they will repay 24 percent interest rate and nearly 300 percent a year, which is ridiculous." Endit