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Companies flooding Kenya with apps offering high-interest loans (bloomberg.com)
105 points by kaboro on Feb 12, 2020 | hide | past | favorite | 82 comments

This sounds horrible and predatory, and it's even worse that occurs under the guise of "financial inclusion". Yes, having access to credit can be a good thing, but using big data to give loans to people who have often never been exposed to the compounding nature of high-interest loans, and who might be desperate sounds disastrous. They're not only use data to _price_ loans, but also to test messaging, timing, etc... same Silicon Valley playbook.

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).

And you're completely right. As someone that lives in Kenya and has used these apps, I can count in one hand the number of apps that I consider 'ethical.' The kinds of interest rates they charge are seriously absurd and some go as far as charging 10% interest per day that you're late paying the loan :/

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.

I grew up in a North African country (and was part of and remain involed in the tech scene there till now), and Kenya is actually viewed pretty favorably on the tech/fintech side... I think in no small part due to M-Pesa's success.

> 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.

> The kinds of interest rates they charge are seriously absurd and some go as far as charging 10% interest per day that you're late paying the loan :/

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.

The only time it makes sense to charge super high interest is if you expect lots of customers will default.

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.

It also means that many people think that your loan is worth risking beimg forever in debt for.

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?

Generally speaking most reasonable people think basic healthcare should not put people in life-changing debt. They view any entity which puts people in such debt with serious suspicion, as being a clear part of that system.

That's nice. But while places like Sweden or the US have the per-capita GDP to pay for universal health care, Kenya really doesn't. (The US has 40x the GDP per capita)

So would you rather that there wasn't even the option to go into life-changing debt, and instead death was the only outcome?

there's also a lot of well-intentioned and even purely philanthropic microfinance initiatives that end up becoming a burden on a too-large proportion of recipients too. Tiny short term loans in remote locations create admin overheads which make the exorbitant interest rates difficult to avoid. Somewhere along the line the rationale switched from 'poor people with no access to credit just need one break so they can get the equipment they need to make a living' to 'actually, regular borrowers at 15%/month are good borrowers, not bad at budgeting within their already low incomes' though, and the marketing got more aggressive

I’ve always kind of had a problem with the whole idea of describing a loan as ”predatory”. I know it’s the accepted vernacular, but it’s really a loaded term. “Predatory” removes the borrower’s agency and reduces him to a helpless gazelle, walking around the savannah one day when all of a sudden a “predator” jumps out and suddenly he has a loan! Is this really how it works? You wake up one day to find a “predatory” loan preying on you? These loans aren’t walking around attacking the general public. Yes, they’re marketed unethically. Yes, they take advantage of the borrower’s lack of financial education. Yes their repayment terms are usury and unfair. But they don’t stalk people and force them to become borrowers. I think someone should come up with a less inflammatory word for these loans. Maybe “exploitative loans?”

Venus flytraps are predators too, but they don't stalk. They lure their victims with a seemingly good deal that ends up having huge consequences.

Taking advantage of people's desperation is predatory.

Nobody’s holding a gun to their heads. This is a voluntary transaction.

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.

It takes an unfathomably myopic worldview to read this article and just wave it off as “voluntary transactions” while conveniently ignoring the several disparities of exploitative economic power on display between the people making these apps, which are CLEARLY and blatantly taking advantage of people without the financial literacy of those raised in comparatively more developed economies and the people using them.

And yet I’m not at all surprised to see it.

> financial literacy of those raised in comparatively more developed economies

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.

That's a more recent phenomenon in the US, which had usury laws in place in most states to prevent predatory lending. Payday lending was the province of the mafia in my lifetime.

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.

Wow, I learned my really depressing fact for the day. My knee jerk reaction is that usury should be outlawed entirely, though I suspect that would be harmful in other deep ways. Writing good laws is like writing bug free code I guess.

Even more depressing, credit card interest was deductible until 1986!

I don't quite understand whatever counterpoint you're making, can you help me grok your response a bit better?

I think he's trying to say that even in the developed world there are people taking out loans with ridiculous interest rates, so that this phenomenon of taking out loans you can't pay isn't exclusively a "developing world" thing. Money Mart and the like come to mind, and I'm sure there are many other loan shark companies out there that do similar things.

Ah, okay. Thank you.

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.

But it is voluntary. The power disparity doesn’t force anyone to do anything.

> Nobody’s holding a gun to their heads. This is a voluntary transaction.

By this logic would should allow heroin to be sold at 7-11's

Of course, all drugs, including heroin should be allowed to be sold at 7-11s.

I’d prefer that to the unwinnable war on drugs.

> 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.

That would only happen if there were regulation of the legalized drug. If we kept letting the same people make the same crap-quality drugs, people would keep dying.

Bayer would probably put the Zetas, or whoever is making Heroin, out of business with their six-sigma warehouse controls, meetings, and use of powerpoint.

If Bayer weren't regulated, would you still trust their product?

It depends, does the society we're imagining have a working liability system, or does money always win in the courts? FDA regulations come along with protection from liability, so you could imagine two adjustment knobs: one setting Bayer's control over the FDA through regulatory capture, and the other setting Bayer's control over the courts, through procedural loopholes and lawyers outsmarting judges. If both knobs are turned up, drugs will poison you no matter what. If the courts are less controlled than the bureaucracy, then when the bureaucracy awards protection from liability it will be making the drugs more dangerous. If the bureaucracy is less controlled than the courts then you will depend on it to hold back against the companies who know that hurting people will be pure profit if they can sneak through the approval process. If both knobs are turned down, it doesn't matter who is protecting you because you'll be protected.

> Those people are strictly better off for the existence of that option...

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".)

So exploiting people's ignorance or lack of knowledge and/or experience is ok, you say?

It really doesn't sound like they're better off based on the interest rates.

Usury Laws and such came about because it is straight up bad to have people fall into these debt cycles.

If they don’t like the interest rates, they’re free not to take out a loan. They’re strictly better off in the sense that they now have an option they didn’t have before, and they can choose whether or not to exercise the option.

If it is a dead an option... that's not better.

It's just a bad option.

The impact of having folks in a debt cycle is obviously bad.

The point is they’re not worse off for the existence of an option that they can choose not to exercise.

They are if they choose it, and even if they don't friends and family choosing it they could be worse off...

People in a debit cycle don't only impact themselves.

Like I said Usury Laws exist for reasons.

Yes, paternalism is a reason. It’s just not a very good reason.

It's not paternalism, it's good economic policy to avoid letting whole groups of people fall into such situations that easily.

... because you know better than they do what’s good for them. That’s definitional paternalism.

I mean, that's a deep philosophical question that depends on how libertarian you lean, how rational you think we are as humans, and whether people have access to perfect information.

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.

It's actually a lot worse than it sounds. There are no loan apps for iOS simply because iOS won't give you access to messages. These companies read your messages and at times call people you know to collect. https://nairobinews.nation.co.ke/news/loans-app-finds-a-chee... The interest rates are so high that I don't think they bother with credit scoring.

The article says that the lender is calling the debtor's contacts. Doesn't iOS allow apps to access the user's contact list? I definitely remember seeing "App xyz would like to access your contacts" prompts before.

How unsurprising: Silicon Valley high-flyers make money comfortably from their flashy offices, while the impoverished masses at the bottom of the pyramid, without resources and options, are exploited as usual.

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.

Their interest rate is exploitative - 15% per month. So if you borrowed $100 at the beginning of the year, you'd need to repay $280 with $180 going to interest alone. This is their policy from their own website https://talasupport.zendesk.com/hc/en-us/articles/3600218533...

No. The 15% is a flat fee. The penalty for late repayment is an additional 8%. It doesn't compound.

I understand that most of successful startups can grow big as they manage to exploit weak human nature, e.g addiction, FOMO, etc. It is used by those giants in SV. However, it is disheartening that they rebranded payday loan as fintech solution. Those in developing countries do not have long history in dealing with high interest pay day loan, unlike many payday shops found in many North America strip malls. It may be their first easy access to money without collaterals.

Opera web browser got in trouble with some of this last year. Its super shitty. I think the most I ever heard of interest rates going was near 450%? Honestly how shitty do you have to be to think that people who have to take out a loan can afford to pay you back 2, 3, or 4 times the amount they request? Its evil.

Wait a second... You mean Opera got in trouble for facilitating such activity through predatory lending web-sites it renders, or that Opera the browser company got in trouble for predatory lending?

edit: i guess i should have read the whole article... opera released a lending app.

This reminds me of the crypto currency startups that claimed crypto currency would help people in impoverished countries find financial freedom away from their local banks, when in reality these predatory companies just wanted to use poor people's desperation to sell them crypto.

I'm automatically skeptical of any vc-funded startup that claims it's going to help impoverished people, including those funded by Y Combinator.

They're going to help the impoverished founders to become millionaires.

It says it can reach those who’ve been ignored by banks, because its software generates instant credit ratings from data scraped off prospective borrowers’ phones


This makes it sound super impressive, but they really just generate a credit report from your Mpesa transaction messages (these are sent back to you via SMS)

No it sounds super disgusting. Personal data capitalism rearing its head in the third world and smaller, developing nations and the complete ethical bankruptcy of these purported interest rates is disgusting.

(Also fwiw this is the second comment of yours I had to vouch and Unflag, and I wonder who is doing this and why).

> 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.

Banks and credit card companies sell all of your transaction data for similar analytics purposes. Do a few google searches for "mortgage refinancing", then click a few blogs, and watch as you are followed by mortgage ads for months. Kenya is less formalized, so they derive the data from phones rather than a backhanded way via your payments history.

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.

I can't help but wonder if the shady companies are going to be scammed to hell and back by the more savvy of their clients. I don't know if the credit agency threats are genuine or not - I lean towards not generally given the trends western debt collectors making shit up even when it is illegal.

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.

How do they get to an 180% annualised interest rate? Tala doesn't charge interest, it charges a flat fee of around 15%. If you don't pay on time you get charged another once-off late payment penalty. It doesn't increase after that. So if you borrow $100 and repay $115, it's 15%. If you take out another loan immediately every time you end up borrowing $1200 over the year and repaying $1380. Still 15%.

What happened to the buzz around "micro loans" and giving money to people in need at fair terms?

The problem is that the actuarily "fair" price of these loans is very high because the risk of non-repayment is very high. If 25% of people don't pay back a loan, then you need an interest rate of at least 33% on the 75% who do pay you back in order to break even.

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.

If the interest rates have to be that high, maybe these loans just shouldn't be made. There's got to be a better way to "help" these people than saddling them with predatory loans.

or (c) eat the loss in order to gain market share. Thats the SV way!

It was PR

There were a lot of well meaning non-profits who thought that microcredit loans to low income people in the developing world, unfortunately some of the results didn't work out as well as they hoped.

I wonder if it plays out like a sort of pyramid scheme where the company offers enough loans to get them in trouble then they have to borrow from someone else ... now that company has exited with their profits.

There's also a screenshot indicating that borrowers are incentivised (offered a small reward) if they push these high-interest loans on others as well. Multi-level marketing meets loan sharking.

Does Kenya have a strong, nationally-ubiquitous system for individual credit ratings? If not, then the joke might end up being on the companies giving out cash and not on the people taking predatory loans.

If you'd like to help prevent people needing to use such a service, check out givedirectly.org

Non-profit that just hands out cash on a regular basis to those selected to do with as they choose with 0 conditions.

My understanding is that Kiva microloans also have very high interest rates, but haven't necessarily heard anyone critique their business model.

I dont understand why African nations dont gang up and get rid of ths whole free trade bullshit. This nonsense has given rise to so many unethical industries. Be it the charities that collect donated clothes and sell it in Africs devastating their local industries or these lending apps or the so called poverty tourism. I hope these countries can band together and get rid of this pludering behaviour.

I find usury to be one of the most pernicious, corrosive, and abhorrent tolerated behaviors in modern society. Usury was a sin until the power of debt overrode the moral authority of those who originally condemned it (https://aeon.co/essays/how-did-usury-stop-being-a-sin-and-be...).

Instead of funding these morally bankrupt and self-interested startups, let's support effective generosity. Give today:


Usury, if we define it as lending at an exorbitant interest, is not in fact tolerated. We have usury laws which criminalize interest above a certain rate. That's why these crooks are targeting Kenya. The article cites annualized rates as high as 180%, which would be criminal lending in my neck of the woods, that being Canada.

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%.

That's the whitewashed redefinition of usury. Usury is lending money with interest attached.

It's a sin for good reason, and the secular case against usury is just as strong. It's among the worst manifestations of rent-seeking, economically worthless behavior for anyone but the usurer.

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.

> Why should a credit card company get a 15-30% return on their investment each year?

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.)

>> Instead of funding these morally bankrupt and self-interested startups, let's support effective generosity. Give today:

How is that sustainable? A low interest loan would seem more reasonable. And who wants free money?

This is a long-contested debate in the field of international development. The model you propose is called microfinance, and has been attempted for decades. Here's a summary of the issue: https://blog.givewell.org/2013/01/04/cash-transfers-vs-micro...

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...

It's sustainable because the amount of money that's life changing to people in the poorer parts of the world are a moderate purchase to people in the richer parts. Additionally the benefits last way longer than just the initial purchases made with the money, by giving it directly to people instead of giving them things it's injecting cash into the local economy where it circulates multiple times going through multiple people's hands. There's studies showing this kind of direct giving and the economic activity it generates is effective at improving people's lives. The goal of GiveDirectly is charitable after all so they're not trying to extract value from the population.

> And who wants free money?

Are you trying to say people won't accept free money?

This needs to be highly illegal, globally, and enforced by the UN. Which implies that the UN needs to be made more powerful.

The IFC and World Bank appear to hail Tala (and similar organisations) as a top "fintech firm innovating in financial inclusion" [1]

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-...

Entrapping users with interest bearing loans is modern day slavery.

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