The default rate on popular digital loans surged to highs of up to 40 percent in the year ending December 2024, according to a report by the sector lobby. This sharp increase has put immense pressure on digital lenders.
In contrast, the default rate on commercial bank loans stood at 16.4 percent as of December 2024, a slight drop from 16.5 percent in October and 16.7 percent in September.
The Digital Financial Services Association of Kenya (DFSAK) has announced plans to focus on writing off unpaid principal loans this year. This move aims to reduce exposure to non-performing loans (NPLs) while leveraging tax benefits from bad debt allowances.
“This year, we want to focus on the bad debts allowable to enable us to reasonably write off unpaid principal for tax purposes. This conversation is well underway,” DFSAK chairman Kevin Mutiso stated in the industry’s annual report.
The association estimates that digital lenders disbursed an average of KSh 15 billion per month in 2024, reaching over eight million Kenyans. This places the total annual disbursement at approximately KSh 180 billion. Based on the reported default rate, between KSh 54 billion and KSh 72 billion may have gone unpaid.
Digital lenders have expressed optimism over continued regulatory changes, including amendments to the Business Laws (Amendment) Act 2024. This law expanded the definition of a digital credit provider (DCP) to include non-deposit-taking credit institutions.
The Central Bank of Kenya (CBK) has also tightened oversight of digital lenders under the CBK (Amendment) Act 2021, requiring all digital credit providers to obtain licensing.
The industry lobby acknowledged progress following the enactment of the law but noted there were “a few unforeseen issues” without elaborating further.
In October last year, CBK licensed twenty-seven additional digital credit providers, bringing the total number of approved DCPs to eighty-five. Since March 2022, at least seven hundred and thirty applications have been submitted.
“Other applicants are at different stages in the process, largely awaiting the submission of requisite documentation. We urge the remaining applicants to submit the pending documentation to enable completion of the review of their applications,” CBK stated.
The licensing process was introduced amid growing public concerns over predatory lending practices, including high interest rates, unethical debt collection methods, and the misuse of borrowers’ personal data.
The surge in defaults on both commercial bank and digital loans occurred in a year marked by high interest rates. In 2024, CBK repeatedly raised its benchmark rate to counter inflationary pressures and stabilize the exchange rate.
As a result, the elevated interest rates made it harder for businesses and households to access new credit. At the same time, many existing borrowers struggled to keep up with repayments as financial institutions adjusted their lending rates upwards.
