Rise of Bad Credit and Loan Apps

Loan Apps have become increasingly accessible, flexible, and efficient in granting loans. For the same reasons, banks have tapped into mobile money lending apps but their loaning process is more rigid and this has shifted more customers to the alternative apps.

Unfortunately, even though the banks have made it easier for their customers to access loans through their mobile phones (after thorough review of their credit history), there are rising credit risks or instances of bad credit. As a result, it has slowed down loan access and availability. For instance, in Kenya loan defaulters rose to 42.4 percent in 2016 which slowed credit uptake.

Loan Apps rose as a result of more people needing access to cash faster without having to undergo the long processing periods that were traditionally applied by banks.

Bad Credit

Bad credit comes as a result of individual borrowers failing to service loans; this is attributed to the fact that household incomes have reduced due to the limited labor market.

In 2017, bad credit rose to an all-time high in Kenya which recorded Kshs207 billion worth of bad loans. This rise was caused by loan app companies and bank-based loan apps enforcing more stringent loan classifications, company layoffs and business cash-flow constraints.

According to IMF, Kenyan banks do not have enough cash set aside to protect themselves against bad debts despite the steady rise of bad credit and loan defaults.  The IMF added that even though Kenyan banks are making a profit and are well capitalized, they have failed to provision for bad loans which is risky.

Failure of provision for bad loans assists banks to record better profits even though they are in danger of financial difficulty or collapse in case the borrowers fail to pay their debts.

Role of Fintechs

The financial sector faces a challenging environment but fintechs have played a major role in ensuring that they improve their services and maintain profits.

In cases like the rise of non-performing loans, fintech companies have managed to develop software solutions that guarantee the return on investment by ensuring that the banks get back the money owed by the borrowers.

For instance, NLS Banking Solutions has developed a solution that supports and addresses loan processing needs by providing a robust credit scoring engine and archiving documents related to the loan application. Furthermore, it conducts lead management, loan origination, disbursement, collection, defaulter reporting, and collateral management.

The company also provides a solution that creates, follows, collects, reports and closes pending debt collections. This allows banks to manage various debt management activities easily. In addition, customers are managed closely through customer segmentation and an integrated approach is offered to credit management, collections and sales. This has helped their customers reduce error risk, lower audit costs and helps them manage customer relationships