The goal of financial literacy is to empower an individual to make both effective and sound choices about the financial resources available. While the topics covered in a financial literacy class vary, a major point of discussion is always debt management. Learning to assess which lending products are affordable and manageable based on income.
While the growth and impact of financial technology are lauded as increasing access to financial services as well as credit to the bottom tier, its effects are still being monitored and so far there is much to be said about the effects of mobile lending apps.
In Kenya the first lending app was launched five years ago; to date, there exist about 17 digital credit products whose provisions comes through mobile apps, mobile networks- sim toolkits, USSD, and websites. OKash, Opera lending app has barely been in the market two months but it now ranks as the most downloaded app in the Kenyan market.
Both Branch and Tala boast loan books of 2Billion and 3.5 Billion respectively as at beginning of 2018. Branch estimates an average of 3000 loans issued daily. This data replicates itself across the other digital credit options. So what does this mean for the pursuit of financial literacy?
While credit is still credit whether offered through formal banking institutions or through digital credit, there are reasons why digital credit is proving to be much more popular and more likely to make borrowers susceptible to credit stress. The supposed low-interest rates with short repayment periods, the minimal paperwork with some apps only requiring access to social media accounts and the non-existent joining fees or processing fees are just but a few of the major selling points. What then should be the focus of financial literacy in this fintech age?
What consumers need to know the most now may not be the fact that excessive credit is not good for your financial status, but rather we should focus on increasing consumer awareness of the relationship that they are getting into with these fintech firms.
Financial literacy should aim to highlight the below-learning points among others
Disclosure: While a good majority of these digital credit platforms have policies on the rights of the consumer and the lending firm, not many of them are made readily available and consumers do not go looking for this information. They are therefore not aware of what the firms do with their information or what the consequences of non-payment of loans are.
Annual Percentage Rate (APR): Digital credit rides on low-interest rates and short-term payment periods. What consumers do not know though is that these low-interest rates annualized equal some of the highest interest rates in the market.
Multiple borrowing: The saturation of the market with digital credit platforms and the lack of paperwork required means that there are no restrictions on the number of platforms that consumers can participate in and this plays a key role in the increased credit stress. How can consumers be made more aware of their credit limits?
Regulation: Financial Technology in Kenya and Africa as a whole are running on markets that are not regulated. Financial digital disruption is happening at a fast rate and governments are taking too long to catch up with what is happening. This means that for the most part consumers are not protected. More should be done to expose the lending policies of digital credit platforms where these policies exist.