Middle class turn to salary advances as economy bites
Commercial banks in Kenya are seeing a sharp increase in the number of customers taking salary advances, highlighting the economic challenges that are forcing more Kenyans to rely on expensive short-term loans for their survival.
Payday loans, which are short-term and high-interest borrowings based on income, are being sought by individuals who urgently need immediate credit, even though they come with higher-than-normal interest rates. These loans do not require collateral and are typically equal to a portion of one’s upcoming salary.
The Kenyan economy has experienced a rise in energy bills, food costs, and high-interest rates for loans that have skyrocketed to an 11-year high. These factors, along with enhanced or new mandatory State deductions for housing, healthcare, and retirement, have eroded the purchasing power of people’s paychecks.
Many short-term advances carry annual interest rates as high as 60 percent. But customers in desperate need of money for essentials like food, electricity, cooking gas, school fees, and emergencies find these advances irresistible and practical.
Data from the Co-operative Bank of Kenya, one of the few lenders that disclose salary advances loan book, shows that its salaried customers tapped a total of Ksh51.7 billion ($471 million) in the nine months leading up to September. This represents a significant increase compared to the Ksh14.67 billion ($133 million) borrowed in the same period last year, coinciding with a rise in the number of customers using short-term loans.
We have seen healthy growth in our e-banking book, as our customers continue to embrace our lending model that speaks to their kind of needs, said Jackson Mwendo, Head of Consumer Banking at Co-op Bank.
Co-op Bank’s salary advances have grown at a faster rate than during the Covid-19 disruptions of 2020, with an increase of Ksh52.2 billion ($474 million), nearly double the previous year’s rise.
Co-op Bank allows salary advances of up to Ksh500,000 ($4,533) depending on the individual’s salary, charging a commission of 12 percent. Standard Chartered Bank of Kenya lends up to Ksh400,000 ($3,626), while Equity Bank Kenya allows advances of up to Ksh300,000 ($2,719) and prices them between 13 percent and 20.5 percent depending on the customer’s risk profile.
KCB Kenya and NCBA offer advances up to Ksh100,000 ($906) and Ksh250,000 ($2,266) respectively, with a repayment period of six months. Family Bank lends up to 50 percent of an individual’s net salary and charges a 10 percent commission.
In addition to commission charges, the advances are subject to a 20 percent excise duty on the commission amount. Insurance charges also apply, although the specific amount varies from one lender to another. Some individuals are supplementing their salary advances with other short-term borrowings, such as mobile loans, which could potentially trap them in a cycle of debt lasting several months or even years.
Several digital lenders are also reporting an increase in loans based on payslips, indicating that more workers are relying on short-term loans to meet their monthly needs.
People are feeling the pressure of inflation and taxes, making it difficult for them to cope. This year, we are seeing an increase of about 40 percent to 50 percent in the uptake of loans based on payslips, said Rakesh Kashyap, CEO of Little Pesa, a non-deposit-taking microfinance firm that provides short-term unsecured loans to salaried individuals.
We are cautious with approvals because defaults can also rise. Layoffs are becoming more common, and we have to ensure that the people we lend to are still employed or not serving notice.
Although salary advances from banks such as NCBA and KCB do not publicly disclose data, their mobile loan products show an increasing uptake of short-term loans as households grapple with the harsh economic environment.
According to KCB data up to September, the value of mobile loans surged by 77 percent to reach a record high of Ksh245.2 billion ($2.2 billion). This increase was driven by the overdraft service Fuliza and the introduction of loans with terms of up to 12 months on KCB Mobi.
The value of Fuliza personal loans rose by 69 percent to Ksh150.3 billion ($1.4 billion) compared to a 21 percent increase in the same period the previous year, indicating the growing reliance on overdrafts to meet daily expenses.
Value of mobile loans disbursed grew to an all-time high of Ksh245 billion ($2.2 billion), augmenting our efforts to support households and small businesses to bounce back stronger, said KCB.
Employers are expressing concerns as their employees allocate more than two-thirds of their monthly wages to meet statutory deductions and personal obligations, including loan repayments.
As more middle-class Kenyans struggle to make ends meet, the increasing reliance on salary advances serves as a warning sign of deeper economic challenges. High costs of living, inflation, and increased taxes are pushing individuals to seek short-term financial solutions, which may have long-term implications for their financial well-being.
