Shivani Siroya knew that her startup Tala was going to be a success when an early customer told her, “This is the Kenya we want.” Over the past 9 years since the company was founded, it has served 4 million customers and raised $200 million in external capital. Its website is full of customer testimonials. “Tala told me to always dream big and I’m dreaming it. Very soon, I’ll call for [a] celebration when we are opening our bakery because I believe with Tala, I’m going far,” said pastry chef Baraka Vola in a testimonial video. He, like many digital credit customers, borrowed a small sum at first and was able to increase his limits by paying back his loans. Customers in Kenya can borrow up the 30,000 Ksh (around $280).
Siroya also dreamt big. She is a visionary who was among the first innovators to see the rise of cellphones and mobile money across emerging markets as a powerful tool for financial inclusion. And like many visionaries, the company that she created has made ripples in the market that extend far beyond Tala. According to a study carried out by FSD Kenya in partnership with the Central Bank of Kenya, the Kenya National Bureau of Statistics, and CGAP (The Consultative Group to Assist the Poor), 27% of Kenyans have taken out a digital loan. At the time of the survey, 63% of borrowers had taken a loan out in the last 90 days. An article in the Boston Review, Perpetual Debt in the Silicon Savannah, put these stats into more stark language, “One Kenyan argued the apps are enslaving people—from the working poor to the salaried classes—by making claims on their future labor,” read the article.
And that was before COVID-19 decimated the global economy, hitting informal workers and the self-employed with no safety net the hardest. A study by BFA and FSD in Kenya found that nearly 35% of urban respondents to an in-depth study rated the disruption to their lives cause by COVID-19 a 10-out-of-10. That means that individuals have lost their jobs and customers, are using their business capital for basic personal needs, have taken in more dependents, and are going to bed hungry. Around 20% of respondents turned to debt to cope. One woman who was profiled had digital loans outstanding on 3 platforms in addition to the more traditional forms of credit; credit from shopkeepers and loans from friends and family. She could not go to work because of the lockdown, is sick with malaria, and has a baby on the way. It’s hard to see how she will be able to get out of debt any time soon.
It is too simplistic to hail digital loans as the silver bullet for financial inclusion just like its too simplistic to demonize them. “Credit is liquidity,” said Siroya, “It can be used for day to day expenses. It can be used for emergencies, and it can be used for opportunities, [like] long term assets. You can’t fault a customer for using it for all three.” Credit gives consumers a continuity of income, something that is incredibly important for people living in or on the borders of poverty. While you may be shocked that 63% of Kenyans using digital credit had taken out a loan in the last 90 days, how different is it really then the 7 out of 10 Americans that use a credit card?
One may argue that it’s not the prevalence of digital credit provided by companies like Tala that is the problem; it is the cost of that credit. Bloomberg Businessweek reported that Tala’s rates are typically 180% annualized. But, according to Siroya, Tala doesn’t charge interest on their loans, but instead charges a flat fee which is on average 15% of the amount borrowed. In order for a borrower to pay 180% annualized interest to Tala, they would have to borrow 12 months in a row. Siroya shared that since loans are “dynamically priced based on your creditworthiness and your tenor with Tala,” it is unlikely that a customer taking 12 loans in a year with a good repayment history would be paying the 15% fee each month. These loans are still expensive, but determining whether no access to credit or access to expensive credit is better can only be done on a case-by-case basis.
Digital credit is complicated. Each story of a small business owner who used a loan to grow their business can be met by someone who just couldn’t afford the interest and got stuck in an endless cycle of debt. COVID-19 could have thrown even more customers off the good path and into perpetual debt, but Tala is taking customer-centric steps to make sure that that doesn’t happen. They created the “Rebuild Fund” which offers 0% interest rate loans for 6-months to customers who plan to use that money to help their communities by delivering health care, education, preventative services, and food during the crisis. For borrowers of its conventional products, Tala put together flexible repayment plans.
The COVID-related economic shutdown could have also been the end of Tala by creating untenable rates of defaults and late payments, but Siroya shared that after an initial period of higher default rates, things stabilized. “We think that in some ways the customer base that we serve, because they are the underserved and they are already facing very volatile lives, know how to get through these circumstances,” said Siroya who added that they were seeing their customers recover more quickly than the prime segment in the U.S.
In the long run, the best thing that could have come out of this crisis is the fact that Tala is now looking to develop savings and insurance products. As COVID-19 has revealed, in an increasingly volatile world, credit becomes even riskier and safety net financial products more important. If Siroya’s visionary leadership can make savings and insurance as accessible and popular as Tala has made credit, then a meaningful transformation in financial inclusion may well be underway in Kenya.