How Loan Apps Fool Borrowers – and How Microfinance Can Help
The Sunday Mail
Lincoln Towindo and Irene David-Arinze
THE Covid-19 pandemic has decimated highly vulnerable African economies that were already on a lifeline.
Jobs have been lost and incomes have been affected due to the resulting closures.
Restrictions on movement and face-to-face interactions have accelerated the pace of digitalization of financial services and the infiltration of some unregulated and unscrupulous financial services operators.
In a bid to survive, some vulnerable people got trapped in the web of fraudulent loan applications (apps) hosted on Google Play Store.
These predatory lending apps are disguised as platforms where one can access quick loans with no collateral except providing a Bank Verification Number (BVN), authorization request picture, contacts and files on their device.
Victims are expected to repay the loans at astronomical interest rates within three to seven days, compared to 91 to 365 days claimed on Google Play Store.
This is contrary to the Google Play store as updated in August 2019.
The policy reads as follows:
“We don’t allow apps that promote personal loans that require full repayment in 60 days or less from the date the loan was issued.”
Some of these lending apps operate without regulation by governments, are on expired licenses, and in some cases completely unlicensed.
Further investigation shows that Google Play Store has 83.07% market share in Nigeria, 84.61% market share in Zimbabwe and 90.63% market share in Kenya.
Pearl Folasade from Nigeria, who was completely frustrated that despite clearing her debt, the loan app she was using – “Kash Kash” – did not clear it, hence she racked up repayment fines late.
She showed us a series of threatening messages she had received from the company.
We assessed registration documents from three of these loan applications and documents retrieved from the Corporate Affairs Commission (CAC) in Nigeria, which showed that the founding directors were Chinese nationals.
Although Nigeria does not discriminate against foreign nationals doing business in the country, the business must be legal and licensed.
However, these companies were unlicensed and operating illegally in the country.
We reviewed Kash Kash’s operations and found some red flags.
We interviewed a source from Zenith Bank, a commercial bank in Nigeria where Kash Kash hosted its operating account as Super Car Universal Limited, about lending app activities such as exorbitant interest rates they collected from customers and the defamatory messages sent. to contacts of their customers when they have missed their repayment dates.
After our investigations, the bank conducted an internal investigation and it was discovered that the account holder did not have the required license to operate as a money lender, according to the source who spoke under cover of anonymity.
This led to Zenith Bank closing the first account, but their operations were transferred to another account named Speedy Choice, which is still operational and managed by the same people who managed the previous account.
Emails sent to Kash Kash explaining the interest rate formula went unanswered.
We spoke with a former debt collector who declined to be identified.
He said the loan company he worked for, LCredit, had a similar business model to Kash Kash and operated under the company name CAC – Cashigo, and disbursed loans to clients without collateral, with defaulters receiving threatening messages.
These customers rarely read these policies out of desperation and are unable to meet the payment date.
He said the loan app (LCredit) tested the idea of sending threatening messages as a way to collect loan repayment and it worked, which is why it was adopted by the organization.
He said he disagreed with the unethical practice of sending such messages to debtors.
We reached out to one of the people listed as a registrant on the company’s registration document, Kelechi Obi, who declined to comment as he simply replied via email saying:
“I haven’t had any dealings with them since the company was set up. I don’t know where they are.
The Chief Executive of the Federal Competition and Consumer Protection Commission in Nigeria (FCCPC), Babatunde Irukera, said he has taken steps to regulate lending apps:
“We have investigated and closed six major ones and are now looking for the smaller ones.
“We are working with the Central Bank of Nigeria and other stakeholders to develop guidelines on how they do business and also guiding them on how to calculate interest and what kind of information they can upload with consumers.
“Money lenders are an important part of society. We don’t send them back; we are trying to regulate.
In Nigeria, short-term borrowing through registered channels such as microfinance banks is restricted to those with a stable income, resulting in a wave of loan seekers who patronize these loan sharks in a country.
Lending apps and other fintech products can be used for money laundering and other forms of illicit financial flows (IFF).
According to the United Nations Conference on Trade and Development (UNCTAD) Economic Development in Africa Report 2020, Africa loses an estimated $88.6 billion a year in IFFs.
Lessons from Zimbabwe
While loan applications such as those in Nigeria are commonplace in some African countries like Kenya, there are a few in Zimbabwe.
One of these operators sends text messages on WhatsApp offering “instant” loans.
“We consider the following items: cars, machinery, televisions, refrigerators, freezers and generators as collateral.
“We have secure parking and storage for assets,” reads one of their advertisements, before promising “the best bridge financing deal.”
Patience Murai, from Bulawayo, Zimbabwe’s second capital, a civil servant, used the platform to supplement her income in 2021.
Loans offered ranged from ZWL$1,000, with an unlimited maximum amount (determined by creditworthiness).
“The loan was a godsend,” she said.
His small side business of selling skincare products to colleagues at his formal work no longer brought him extra income, after government offices were partially closed due to the pandemic.
“Repaying the loan was something else, I hadn’t realized that these short-term loans are exorbitant.”
After she missed her original repayment deadline, the lender threatened to confiscate her television, which she had offered as collateral.
She had to borrow from a friend to avoid the confiscation of her property.
Patience’s case does not seem to be as common in Zimbabwe as in Nigeria.
However, we discovered that measures have been put in place by the Zimbabwean government and regulators to prevent the penetration of these unregulated lending apps.
Over time, Zimbabwe has seen an increase in non-bank mobile money providers, which are largely operated by mobile network operators (MNOs).
These include Kashagi, which is owned by Zimbabwe’s largest MNO – Econet Wireless Zimbabwe Ltd.
Informed by this growth, the government amended the Microfinance Act in 2019 to allow only two categories of microfinance instruments, namely deposits and credit only.
The authorities have reinforced the regulation of this sector to curb the emergence of predatory operators.
According to the Minister of Information and Communication Technology, Posts and Courier Services, Dr Jenfan Muswere, to protect the integrity of the system, mobile money system operators are required to partner with established financial institutions.
He said the Reserve Bank of Zimbabwe (RBZ) monitors the cash balances of MNOs and financial institutions in real time.
“Banking institutions, in turn, are required to obtain regulatory approval before introducing mobile financial services.
“The Reserve Bank subjects mobile financial services to ongoing monitoring through on-site inspections and off-site reviews which have proven to be very effective.”
In 2019, the RBZ established the National FinTech Steering Committee to provide strategic policy direction that fosters fintech innovation and entrepreneurship.
The committee was also charged with assessing the “risks, challenges and opportunities arising from the digitization and use of fintech.”
According to a Harare-based banker, Mr. Tawanda Kaminza:
“Poor regulation of microlenders poses a huge risk to the industry. When poorly regulated, the sector faces risks such as the licensing of predatory lenders, including criminals involved in illicit financial flows.
As of December 2021, 168 credit-only microfinance institutions were registered with the RBZ.
Nigeria has over 850 licensed microfinance banks.
Judith Onyishi, managing director of Peace Micro Finance Bank, said MFBs are heavily regulated by the central bank.
“Initially, MFBs were not allowed to ask for collateral before making loans due to bad debts, but now they are forced to ask for collateral,” she said.
“Most of our clients are retirees.”
According to Onyishi, loan applications can work closely with MFBs so that they perform due diligence and credit checks on loan applicants, while applications disburse loans and a sharing plan profit is achieved.
Professor Albert Makochekanwa, a lecturer in the economics department at the University of Zimbabwe, said properly regulated microfinance institutions are crucial.
“Microfinance institutions help vulnerable people in society who cannot provide collateral for bank loans,” he said.
“Furthermore, duly registered microfinance institutions operate legally against loan sharks.
“This means they can be regulated, which reduces the risk of scams for borrowers.”
*This story was produced by The Sunday Mail in conjunction with The Cable. It was written as part of Wealth of Nations, a media skills development program run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and publisher.