Financial lessons concerning debt and default are one lesson that adulting unexpectedly teaches. As children, we were content to watch cartoons all day, eat without asking, and receive the occasional reprimand from our mother for arriving home later than expected and appearing to have just come from a coal mine.

Kenya's no-questions asked mobile loans

Although we first set out to become financially independent, we soon realized that this is not something that happens as quickly or easily as we'd want. We are suddenly expected to mature into adults, have our financial affairs in order, run a household while coping with the high cost of living, and understand how debt works.

When banks and other financial companies offer quick, no-questions-asked mobile loans, we quickly fall into their debt trap.

Young Kenyans are being drawn into the debt culture that is undermining the nation's long-term saving goal by banking institutions, Saccos and societies, microfinance organizations, shylocks running city streets, chamas, personal friends, student loans from HELB, banks-cum-Safaricom's Fuliza, and even governments with products such as the Hustler Fund.

These debt products are so common in today's market. Loans are available to anyone as young as 18, so long as they have an ID card, active mobile money accounts, and not much else.

Potential consequences for default

The loan facilities just appear to most young people—who are less financially literate—as free money being given to them. However, they either ignore the implications of defaulting or, in some cases, don't give the potential consequences adequate consideration.

Read also: What is worse than default

Looking back a few years, I can see that I was not an outlier. I fell for Tala's clever marketing ploys, alluring bonuses, affordable transaction fees, and the idea that you could complete everything online at your convenience.

After providing the necessary information, such as my phone number and ID number, downloading their app and joining up probably took me less than five minutes. I finished in less than two minutes, after which I checked my borrowing limit.

Since I didn't necessarily need the loan and the limit seemed generous, I didn't rush to accept it. After some consideration, I came to the conclusion that having extra cash never injured anyone and actually made things simpler. I quickly went ahead and submitted the loan application after persuading myself that it was the proper choice and that I would pay it back on time.

Diverse motivations for seeking debt

Surprisingly, the transaction only took a few minutes, and the repayment time was set to my initial preference of 28 days with the money being promptly sent from the institution's wallet to my M-PESA account.

People, unlike myself, have diverse motivations for seeking debt. Many people take out loans to help them pay for things like medical expenses, education costs, household goods, etc. Others even take out mortgages and loans to start their own enterprises.

However, for young individuals like myself, a loan is typically used for consumption—primarily for sherehe. However, given that the average ticket size for, instance, Fuliza is Kes314 and KCB M-PESA is Kes4,945, what do you do with that little if you don't eat it? That is what the corporations are expecting.

Naturally, a loan that is sought should be repaid within the specified timeframes, but the 28 days passed by more quickly than anticipated, and my repayment was due soon.

Read also: Cost of defaults on bankers double

That surprised me because I had assumed I would have paid off the debt by that point and also because I hadn't really done anything useful with the borrowed funds. This was a fairly true explanation of bad debt, and I quickly recognized that because I didn't have any additional money, I wouldn't be able to make the payment in time.

Infrequent calls and texts from lenders

Even though I didn't like the idea of defaulting, there wasn't much I could have done at the time. Being a student with no source of income, I took out a loan without considering why I needed one in the first place or how I would pay it back.

The thought of a default didn't seem all that horrible after speaking with several of my peers and learning that they had an experience that was comparable to mine. In the end, the only penalties would be the infrequent calls and texts from the digital lenders urging you to refund their money, as they had previously stated.

For a very long time in Kenya, those who took out minor loans were always prompt with their payments, and people were so terrified of debt that the concept of default was never even considered. Today, loans are simple to obtain and simple to default on, particularly since no one can catch you using a mobile phone, or so we prefer to believe.

My repayment deadline passed, and as promised, I began getting calls and texts that weren't exactly friendly and threatened to name me on credit reference bureaus since I hadn't followed through on our arrangement.

Moody's downgrades Kenya

However, the fact that at least 14 million accounts had been flagged by CRBs as potentially failing and that the government had already taken multiple steps to delist them did little to frighten me. Even Kenya as a country got downgraded by Moody’s and there is very little that has happened to us.

The culture of defaulting has gradually spread throughout Kenya, starting with the receivership of huge corporations, followed by the liquidation or acquisition of banks and Saccos, and finally focusing on mortgage defaulters and even auto loan defaulters.

A new generation is emerging that borrows money too quickly and has little concern about defaulting. While speaking in Embu County, President William Ruto recently urged Kenyans to return their Hustler Fund loans, which have seen over 800,000 defaulters since its establishment in November 2022.

However, a lot of young people fail to realise that these lenders all share information about defaulters among one another. This is where the Credit Reporting Bureau (CRB) and Credit Information Sharing (CIS) come in; these records are safeguarded and monitored, and if you have bad ratings, they may be used to deny you credit in the future.

Just picture what it would be like to miss out on a significant loan or face exorbitant fees due to a default on a Kes1000 mobile loan.

Dredan Njau: [email protected] & Marion Karanja: [email protected]