A look at digital credit in Kenya and why access alone is not enough

SAN FRANCISCO — In addition to working at a hospital in Nairobi, Kenya, Grace is a clothing entrepreneur. She uses a mobile app to take out loans that help her keep the business running.

“My customers usually don’t pay for the clothes immediately, so I usually borrow to ensure I can go to the market and buy goods for sale as I wait for payment,” Grace said, who used a loan from Tala to start her clothing business which provides her with additional income outside her work at the hospital.

Grace is one of the customers featured in Tala’s new impact report, Based in Los Angeles, California, this mobile technology startup uses algorithms to build their customers’ financial profiles.

Financial technology companies such as Tala are expanding from Kenya, which has been a testing ground for the growing digital lending sector, to countries across Africa, Latin America, and Asia. This sector has faced criticism recently, driven by concerns that without effective regulation, these efforts to extend credit to borrowers could undermine the gains of mobile payments.

The impact report from Tala offers important insights for the growing number of companies leveraging mobile phones and data analytics to extend digital credit to customers in emerging markets. It showcases the impacts these loans can have as well as the reason that access alone is not enough.

The takeaways

The three main takeaways of the study are that Tala credit helps customers deal with unexpected emergencies, allows them to finance their small businesses, and also helps decrease stress, said Shannon Yates, data analytics lead at Tala.

“The purpose of this study was primarily for internal product development and customer understanding,” she said. “We have decided to make it public because there aren't many companies who are producing this style of research.”

The survey draws on data from 795 randomly selected Tala customers, the majority of whom are well educated, between 25-34 years of age, and earning $2-$19 a day.

Fifteen percent of customers say they used Tala to start a side business, which the Tala team talks about as side hustles. For example, Grace, whose last name was withheld for privacy, said a Tala loan of 3,000 Kenyan shillings ($30) helped her buy sweaters to resell.

Grace is among the 70 percent of entrepreneurs who say they use Tala loans to deal with uneven income and expenses.

Only 15 percent say that business expansion is the main reason they use Tala, likely due to the fact that these loans are short-term credit products that typically range from 2,000-10,000 Kenyan shillings, or $20-$100. The company is now considering ways to offer larger value loans.

Tala also learned that some customers do repeat borrowing even if they don’t have a need for credit, in order to build their credit limit, so they can get a big loan when they need it.

“Why do I borrow each month? I want to be a gold member.” Grace said, referring to bronze, silver, and gold loan categories on the Tala app, with gold allowing users to borrow 10,000-50,000 Kenyan shillings. “Why? Well, let’s say I need 50,000... I don't have [a] specific plan but I just want to know if I need such a sum of money, that I'll be able to get it.”

Still, 95 percent of customers did not fully understand that Tala reports positive credit performance on their app to credit reporting bureaus.

“A lot of people see credit as something to be fearful of, even though they need to rely on it because they are cash-strapped, so we want to reinforce the concept that they can leverage credit to benefit them in the long run even if not immediately,” Yates said.

Building financial literacy

Another key finding of the report was that access alone is not enough. Customers new to credit need support from providers such as Tala to understand the terms of these loans, as well as their benefits and consequences, Yates explained. Part of the motivation for publishing this report was so other digital credit providers might consider how to address financial literacy in addition to credit delivery.

“What we’re doing is actually not focused just on the product, but we’re actually focused on changing systems,” Shivani Siroya, the founder and CEO of Tala, said at Devex World. “We think of it as: ‘How do we change the system?’ And as a result of that, we will then bring products to the market.”  

Based on these findings, Tala is piloting a few different options, Yates said. For example, within the app there are new reminders, like the importance of paying bills on time, or the risk of taking on too much debt before the holidays, and the team is testing which messages seem to resonate with their customer base. The company has also launched a conversation they call “Q&A Friday” on their Facebook page so they can respond to customer questions in a public forum.

“In the coming years, Tala is excited to create a unique process to bring well-designed products to underserved users in frontier markets,” Quang Tran, director of the product impact and insights team at Tala, said in a blog post published along with the impact report. “And we want to do it at scale.”

Tran, who was formerly the product team lead, conducted the study in Kenya together with Yates and when the results came in, Tala launched this new research division, which Tran now leads. The team has three specific goals: researching user problems to inform product design, ensuring Tala solutions are effective and intuitive, and ensuring that everyone at the company understands the user perspective. Tran explains that the division combines the tools of ethnography, empathy, and technology in order to improve their products.

Kenya was Tala’s first market. When it prepared to launch there in 2013, there were no pure digital lenders operating in the country, the impact report explains. But now the majority of Tala customers in Kenya have relatively high access to credit.

While this is mostly good news, with only 2 percent of Tala customers in Kenya using “shylocks,” or loan sharks, which can be exploitative money lenders, there are also concerns about risks including over-indebtedness in a market where digital lending has gone mainstream.

Tala now operates in Kenya, Tanzania, Mexico, and the Philippines, with a pilot India. Last week, the company announced an investment from PayPal, building on its $65 million Series C funding round, which will help the company expand its global reach.