Digital Credit Revolution and Customer Over-indebtedness in the Informal Economy in Nairobi Kenya

Abstract

The researcher set out to evaluate the relationship between digital credit revolution and customer over-indebtedness within the informal economy in Nairobi Kenya. From literature, it is evident that Kenya is witnessing a rapid expansion of short-term digital lenders (credit revolution) mainly driven by a segment of youthful users. This proliferation has led to many people borrowing more loans than they can repay (over-indebted). Guided by literature, the researcher identified five main constructs to be studied, mapped out a conceptual framework and identified the key hypotheses to be tested. The study used survey research design. Stratified sampling was used to obtain the 389 respondents who were digital loan users in the informal sector. Pearson correlation coefficient was used to determine the correlations of variables while Binary Logit Analysis Model, Linear Probability Model and Linear Regression Model were used in the hypothesis testing. Wald test and the F-test statistic were used to determine the significance of each construct. Data analysis was done using SPSS version 25. The findings solidified the propositions of the three theories that were relied on in the study: Diffusion of Innovation Theory (DIT), Theory of Reasoned Action (TRA) and the Unified Theory of Acceptance and Use of Technology (UTAUT). These theories were key in researcher’s understanding of respondents technology adoption behaviors, modelling key constructs of the study, showcasing the degree of respondent’s perceived risk and identifying the most relevant determinants to be tested within each construct. The study findings showed that the respondents did not bother about the costs or the repercussions of excessive borrowing but ease of access and convenience were the main drivers on their usage. This was consistent with the postulates of the UTAUT theory. The correlation analysis showed that respondents who had taken digital loans in the recent past (within 30 days), those who did not have bank accounts, and those who confirmed to have taken digital loans just because it was accessible, all had positive and significant correlation to over-indebtedness. Those who feared getting into debt and are risk averse, had significant and negative correlation to customer over indebtedness. Academic qualification, family status and average monthly income all had positive significant correlation to customer over-indebtedness. In all the four hypotheses of the study, the null hypotheses were rejected. The research findings confirmed that there was significant effect of digital credit revolution on customer over-indebtedness. Customer characteristics and regulatory controls came out as strong control variables that significantly altered the predictive nature of the models when introduced hence these control variables needed to be held constant for more accurate results. Using both test models, all the five determinants of digital credit revolution were significant on predicting customer over-indebtedness but only one factor remained significant once the control variables were introduced. Culture was used as an instrumental variable. From regulatory perspective, the researcher concluded that there was need to re-look the role of regulation in curbing customer over-indebtedness. The study findings showed that most over-indebted respondents had good understanding of the digital loans landscape, understood the laws regulating lending and knew the consequences of defaulting. Most borrowed just because the loans were available. The researcher concluded that introducing punitive terms and even charging high interest rates could not deter this population from borrowing excessively. Training programs on prudent financial behavior and financial empowerment would help. The findings can be used by policy makers, key among them the managers of the newly launched Hustler Fund in Kenya and the office of the Data Commissioner. Since hustler fund targets the same population of this study, the findings contribute significantly to the body of knowledge required by the drafters. For the digital credit providers who are struggling with huge default rates, this research found out that the respondents who confirmed to have access to flexible repayment terms had significant negative correlation to over indebtedness - this could be one of the major strategies that the struggling lenders could use to increase their repayment rates.