Pricing Transparency Key in Reducing Skyrocketing Loan Defaults - Money254

Nairobi, Wednesday, October 26 - Full intentional disclosure of all costs associated with loans and clear communication of loan terms to potential borrowers is at the core of improving loan repayments and access to finance.

This is according to Lorcan O Cathain, the CEO of Money254 - Kenya’s premier financial services marketplace that combines consumer education with price comparison to enable users make financial choices with confidence. 

Speaking during the inaugural annual debt collection conference on Tuesday at the Sarova Stanley Hotel, Lorcan said consumers were more likely to repay their loans if they fully understood the total costs and repayment terms from the very beginning. 

“Good collections begin before the sale, and price transparency is a vital step. Showing the true cost of the financial product before signing any documentation ensures the customer knows what exactly they are getting themselves into and builds trust between the institution and the consumer.”

Drawing insights from the over 1.8 million unique users that have used Money254 to learn about, compare and apply for financial products since its launch in April 2021, Lorcan said a bigger emphasis on consumer education will have huge benefits for both financial institutions and borrowers.

"Money254 helps consumers on two levels. Firstly, we make sure to match them to the lending category that matches their needs and then we make sure they understand the full cost implications of the products within that category. Our data has shown this to be a benefit for both users and financial institutions.”

According to the 2021 FinAccess Household Survey, cases of customers reporting unexpected or unclear charges on loans increased by up to five times across the different financial institution types between 2019 and 2021, a period that also saw the level of loan defaults skyrocket.

Nearly half of Sacco (46.3%) and Microfinance (45%) borrowers surveyed reported having been charged more than they had expected when they signed their loan agreements. Cases of unclear or unexpected charges for bank loans stood at 32%, mobile money at 9%, mobile banking at 19%, and 32% for digital app loans. 

“It’s not enough to display an itemised breakdown of the total costs for a loan. We work with partners to make it as easy as possible for the borrower to understand the implications of the loan. We provide an easy reference number - the absolute total cost as a percentage (including fees) and the monthly repayment amount - not just the interest rate. This has proven to be effective in helping customers make a choice with confidence.”

Low Trust

According to Money254, if customers perceive a lender to not be transparent in pricing, they are less likely to trust them or be loyal - leading to increased user churn at financial institutions. 

Data from the fintech startup show that one in every three customers would rather choose a more expensive lender if they believe they are more honest than the lower-priced option. A majority of Kenyans, 80%, will look for an alternative lender if they feel like they were misled.

In what has become a thorny issue for many lenders, it was revealed that 60% of borrowers will think twice about repayment if they believe a lender has reputation issues further cementing the need for transparency. 

Professional Debt Collection

The conference, convened by Debt Holding Group - an international network of professional collection agencies headquartered in the United Arab Emirates - brought together financial institutions, creditors, and stakeholders in the debt collection industry. 

With increasing concerns about unethical practices in debt collection and consumer data protection in Kenya over the last few years, there has been an effort to professionalise the industry.

“A customer who has not paid, except for those who got into contract with no intention of ever repaying, is in default because of the financial position that they are in. Debt collectors stand between the court and auctioneers and the lender retaining that customer,” said Erick Oluoch, the chairman of the Association of Debt Recovery Agents (ADRA) Kenya chapter. 

He revealed that the association was leading talks with the Central Bank of Kenya to bring the collections industry under the regulation of the CBK which will include the licensing of debt collectors, a code of conduct, and a publicly available registry of collectors. 

“No lender will hire an unlicensed collector or one with a record of violating the code of conduct.”

Debt Holding Group, which recently entered the East African market, says plans are underway to set up “The school of professional collector” to contribute to efforts of professionalising debt collection practices in Kenya. 

“We must work in a way that is friendly to all parties involved. People should not view us as enemies when we are doing our job. We should be seen as helpers and not enemies,” said Nikolay Melnikov, the CEO of Debt Holding Group.