Companies flooding Kenya with apps offering high-interest loans
bloomberg.com
bloomberg.com
I grew up in a "developing" country at a time when banks started rolling out high-interest loans, and where defaulting on a loan would mean prison time. People would take out loans they knew they had no ability to repay. And sometimes it wasn't to put food on the table or pay for medical care—it was to help their kid get married, etc (it might sound silly, but sometimes upholding your family/kids honor or status can be as important as any living necessity).
On the bright side, while there are over fifty of these shady apps, most loans (including on mobile) - something around 84% of them, if I remember correctly, are still issued by banks.
But overall, another issue it raises is the reason Kenya (I'm not sure about other African countries) is really slow in innovation in the software field. Tala was one of the first loan apps to be released and it remained like that barely for months. The next thing you know, there are over a dozen of them and new ones keep getting released every year! It's mad!
The same thing happened with SportPesa, a gambling platform that later quit the Kenyan market. Once people realized SportPesa was profitable, the number of copycats went through the roof. Competition isn't a bad thing, sure, but once they really hit the mainstream, it's insane how many people would rather copy something that works than try something new themselves.
Is it though? If an idea is proven to be profitable it seems to follow that the idea is worth pursuing.
Naive libertarian question: is this an issue when the rate is clearly conveyed to the consumer, and it's the rate needed to make a profit given the high default rate and/or overhead? That interest rate should be close to the market clearing rate (ie. minimal profit), assuming it's not too difficult to get into the lending space.
That means you already know your business will end up causing lots of people to be in debt forever. If you choose to go ahead anyway, obviously people are going to think you are evil.
If I offer you a loan and you need the money to pay for medicine for your child... Is that really a trade that no one would welcome with open arms?
So would you rather that there wasn't even the option to go into life-changing debt, and instead death was the only outcome?
Even if we paternalistically shake our heads at the interest rates and the way these companies do business... they are giving people an option that did not exist before. Those people are strictly better off for the existence of that option, since they are free to turn it down.
And yet I’m not at all surprised to see it.
Wellll, we still have payday loans and the like so I wouldn't really put too much stock in the financial literacy of the developed world.
In 1980, congress passed a law that neutered state usury laws, and prompted banks to change their charters and re-domicile in places like Delaware, South Dakota and Utah, especially for credit cards. The supreme court further weakened state regulatory authority in the 90s by defining fees as interest, and thus outside of the scope of state authority.
I guess I don't recall taking the position that predatory loans was an exclusively developing world thing, but if something I said gave that impression, it's on me to be more precise with how things are phrased next time.
Comparatively speaking, more people in comparatively more developed economies tend to have more resources available to them to make informed financial decisions as individuals. I call this financial literacy.
The comment previously made was not intended to suggest these more developed economies are uniquely affected or affected somehow differently than say, for example, African nations (like the one in the article) are from predatory lending programmes.
By this logic would should allow heroin to be sold at 7-11's
This would at least eliminate many overdoses due to incredibly varying strength or contaminations, especially fentanyl.
Not if they lack the knowledge to make an informed decision regarding what is in their best interests.
(And let's not forget that they're individuals up against an industry that is happy to spend vast sums of money manipulating people's desires and perceptions, in order to grow -- or create -- its "market".)
Usury Laws and such came about because it is straight up bad to have people fall into these debt cycles.
It's just a bad option.
The impact of having folks in a debt cycle is obviously bad.
People in a debit cycle don't only impact themselves.
Like I said Usury Laws exist for reasons.
There are plenty of "voluntary transactions" that society has found necessary to either ban or at least regulate. High-interest loans are regulated in many countries, precisely because they can be predatory, but so are things like drugs. Even legal drugs are pretty heavily regulated for many reasons, including making sure consumers are aware of both the benefit and harm/side-effects that can occur.
But of course, "the company doesn’t condone" exploitative practices, and will investigate. Must be just a few bad apples spoiling an otherwise-worthy endeavour.
edit: i guess i should have read the whole article... opera released a lending app.
I'm automatically skeptical of any vc-funded startup that claims it's going to help impoverished people, including those funded by Y Combinator.
Wow...
(Also fwiw this is the second comment of yours I had to vouch and Unflag, and I wonder who is doing this and why).
I'm guessing it's the anti-spam mechanisms of the site. Any account with a low number of comments is susceptible to it.
I'm not defending this practice, just letting you know that the same thing happens whether you are rich in a developed country or poor in a developing country.
What is stopping the user from taking out loans and running off essentially? Burners may be more expensive relatively in Kenya but it could still be profitable enough to tempt someone into serial bad loan taking even if it /actually/ forced them to live on the run.
It brings to mind a darker escalation of trying to contract people out as local debt collectors but that sort of thing tends to cause even cynical and corrupt governments to shut it down quickly for threatening the monopoly on violence.
The only solutions are (a) to try to do a better job of identifying who will/won't pay you back or (b) to do more to make sure that people do pay you back.
(a) has the disadvantage that you aren't able to help a lot of people who most need the help. (b) can easily become exploitative as you increase the pressure on people who are at risk of defaulting on their loans.
Non-profit that just hands out cash on a regular basis to those selected to do with as they choose with 0 conditions.
Instead of funding these morally bankrupt and self-interested startups, let's support effective generosity. Give today:
We do tolerate fairly high interest rates. A 25% rate on a credit card might be usury to you, but not doesn't meet the legal definition, if the usury law where you live happens to be set at 60%.
This kind of lending is economic slavery. Why should a credit card company get a 15-30% return on their investment each year? How about 400%? You can use whatever clinical microeconomic language you want about risk and investment principles and rational actors and etc etc, but people now depend on credit for their basic needs. Then lenders can petition the government to garnish borrower's wages and gain eternal, guaranteed payment often on just interest. The borrower works and pays forever without even reducing the principal, and butts sit in offices redistributing wealth to themselves without adding any value to society.
It should be illegal to charge that kind of interest "investing" in the basic needs of people. The absurd prices of basic necessities in America now demand mortgages, car loans, student loans, medical debt, and credit card debt just to squeak by as a normal middle class person. Debt wasn't the solution to the price problem, but rather the cause.
That is simply not correct. Credit card companies get much, much more return on their investment. They get free money from collecting merchant fees from every transaction, and from credit card annual fees.
If we regard the "investment" as the marginal cost of setting up yet another new merchant or credit card user, the return rate is just ridiculous.
You issue a cheap, little plastic card to someone, and get $100 per year from them, plus several percent on everything they buy. And that's if they always pay their bills on time.
(They give you that $100 willingly because out of that several percent take, you kick something back to them, which ends up adding up to more than $100 over a year.)
How is that sustainable? A low interest loan would seem more reasonable. And who wants free money?
In short:
- Microfinance programs that grant small, low-interest loans aren't sustainable. Administering those programs (especially in developing countries) carries massive overhead that isn't offset by revenue from interest.
- Furthermore, there isn't strong evidence that low-interest loans actually improve their recipients' well-being on net (considering the harm that indebtedness can cause).
- Evidence (from randomly-controlled trials) shows that direct cash transfers are effective in improving recipients' well-being on a number of metrics, and that recipients do not spend them on "sin goods" like alcohol or tobacco[0].
[0] https://www.princeton.edu/haushofer/publications/Haushofer_S...
> And who wants free money?
Are you trying to say people won't accept free money?
These organisations may be more likely to give companies like Tala support than routing them out, unfortunately.
[1] https://www.european-microfinance.org/publication/financial-...