Tech Startups Are Flooding Kenya With Apps Offering High-Interest Loans

Lele makes beads out of brightly colored paper that she scavenges from the town dump, stringing them into bracelets that she sells for a few dollars apiece. But tourists are rare in this maize-growing hub, especially after dark, when teenagers stumble down the street, holding Sprite bottles to their nose to sniff glue. Lele considers herself lucky if she makes $5 in a night, enough for bus fare home and porridge for her family the next day.

Like almost everyone in Kenya, rich or poor, Lele has a mobile phone. Hers is a small black Android model with a cracked screen. A few times a day it buzzes with a text message sent on behalf of Tala, a tech company in Santa Monica, Calif., that says it’s empowering female entrepreneurs around the world. Each message is a reminder of how that’s gone for Lele. “You haven’t PAID A SINGLE cent of TALA LOAN,” a recent message reads. “TAKE NOTE your DETAILS are with TOUGH SKIP-TRACE & RECOVERY, PAY NOW.”

Tala has made $1 billion in microloans to people in developing countries, all using its app. It says it can reach those who’ve been ignored by banks, because its software generates instant credit ratings from data scraped off prospective borrowers’ phones. The company is part of the financial-inclusion movement, a loose coalition of tech companies, banks, and nongovernmental organizations trying to lift people out of poverty by offering them new ways to gain access to loans and other financial services.

In Kenya, the first country where digital credit has gone mainstream, borrowers are learning that with financial inclusion comes financial risk. With dozens of apps offering short-term advances similar to payday loans, word of debt’s dangers is spreading from the office towers of Nairobi to the grasslands of Maasai Mara. People who once borrowed mainly from family and friends are now being bombarded with ads for quick money and calls from debt collectors. The market is largely unregulated, and there are no caps on interest rates. Tala’s are typically 180% annualized; on some apps, they’re even higher. About 2.5 million Kenyans—1 in 10 adults—have defaulted on a digital loan. Others are trapped in a debt cycle, borrowing from one app to pay off another. Last summer newspapers reported that a 25-year-old man from a tea farming village north of Nairobi had hanged himself after defaulting on a $30 loan from an unspecified app.

Pretty much everyone I meet on a visit to Kenya has a story. A print shop owner can’t pay back a loan taken out to buy a goat to cook for a Christmas party. A policeman I ask for directions pulls out his phone and admits to defaulting on a loan himself. A cab driver says that, four months after he borrowed to buy a new battery, he’s no closer to repaying the debt. Several people get text messages from debt collectors as we speak.

Most borrowers felt the terms of their loans were unfair but took them out anyway. “It’s as if they know an African has no options,” says Stephen Omondi Juma, an electrician with a small office in Nairobi’s Kibera slum, where he also sells hats.

Lele heard about Tala from a friend in the fall of 2018. At first she felt fortunate to be approved for a 1,000-shilling (about $10) loan to buy varnish, string, and other jewelry-making supplies. A widow at 33—she says her husband was burned to death in election violence in 2008—she lives in a one-room shack in Kitale’s Kipsongo slum, next to the landfill. There’s no running water, and residents use trash bags instead of toilets. “It is so dangerous, life in our place,” she says one afternoon. She mentions fearing that her toddlers might be fed alcohol, or that someone will offer to pay her older kids for sex and infect one with HIV. She’s dressed in a baseball jersey and a denim skirt. Outside, three of her neighbors’ toddlers tussle in the dirt over a motorcycle brake rotor, while an older child angles a CD to flash sunlight in their eyes.

Lele says she repaid that first loan when it came due. Then Tala boosted her limit, and she took out another to buy more supplies and some food. By spring she was borrowing about $70 a month, almost her entire income. The trouble may have started one morning when, seeking to save money on charcoal, she skipped boiling her drinking water. She started to feel sick, wrapping herself in a blanket by day and sweating through the night, but she put off seeing a doctor, knowing she needed the money. “I say, ‘This money is for Tala,’ ” she recalls. When the pain finally prompted her to go to the hospital, she learned she had malaria and typhoid fever. For days she drifted in and out of consciousness. In moments of lucidity she worried about who would provide for her children if she died.

Then her phone rang. It was a debt collector. Her Tala loan was past due. When Lele said she was in the hospital, the caller told her she didn’t care. Lele said she had no money, and the collector told her to borrow from someone else. She threatened to report Lele to a credit bureau, potentially blacklisting her from the banking system, and said she’d track Lele down if she didn’t pay. Lele begged the woman to leave her alone.

“I don’t want to be taken to jail,” she said.
 

Lele’s story runs counter to the narrative that has made Shivani Siroya a star in Silicon Valley and financial-inclusion circles. Diminutive and soft-spoken, the 37-year-old founder of Tala is a regular on the conference circuit. At Women Deliver, TechCrunch Disrupt, and other events, she describes her mission as using the power of big data to help the 2.5 billion people around the world who lack credit scores. Someone not listening closely to her pitch might think she’s running a charity. “With something as simple as a credit score, we’re giving people the power to build their own futures,” she said in a 2016 TED Talk that’s been viewed online 1.7 million times.

Siroya has raised more than $200 million from high-profile investors such as PayPal Ventures, Revolution Growth, and GGV Capital. She’s also won recognition from the Aspen Institute, the World Economic Forum, and Echoing Green, a fellowship program that counts Michelle Obama and the founder of Teach for America as alumni. In September 2018, at the recommendation of billionaire philanthropist Melinda Gates, Wired selected Siroya as one of 25 people who will shape the future of tech.

Siroya declined to be interviewed for this article. Lauren Pruneski, a spokeswoman for Tala, said in response to emailed questions that the company doesn’t condone the practices Lele describes and that it will investigate what happened. “We are committed to the financial health of every Tala customer and firmly believe in the transformative potential of bringing digital financial services to the people who need them most,” Pruneski wrote.

Financial inclusion is an evolution of microcredit and microfinance, concepts that were in vogue in the 1990s and early 2000s. The guiding idea has always been that poor people can pull themselves out of poverty by borrowing small amounts of money. Before the widespread adoption of mobile phones, the loans were typically provided by agents working with small groups of women. Peer pressure was supposed to encourage repayment. Enthusiasm for this model peaked in 2006, with a Nobel Peace Prize for the pioneering economist Muhammad Yunus and his Grameen Bank.

Around 2009, inspired by Yunus, Siroya started talking about a microfinance venture of her own. Her idea was to crowdfund larger, more flexible investments in small businesses, with repayments tied to profits. The concept was similar to a charity called Kiva, lauded by Oprah Winfrey and Bill Clinton, that allowed Westerners to make tiny loans to entrepreneurs in Africa and Asia. Siroya imagined her startup would have both for-profit and nonprofit arms. She called it InVenture.

Not yet 30, she’d already accumulated an impressive array of credentials: degrees from Wesleyan and Columbia universities, a stint as an analyst for the United Nations Population Fund, and investment banking jobs at UBS Group AG and Citigroup Inc. Her most recent position was in the mergers department of a California-based health insurer. In her spare time she met with a revolving group of friends at coffee shops or over Skype to talk microfinance.

Siroya thought InVenture could address problems that were emerging with the microfinance model. A widely cited 2010 study had found that the approach had little impact on borrowers’ earnings, and Indian officials were blaming it for a debt crisis and the deaths by suicide of dozens of farmers. In 2011, she published a critique of the industry on the Huffington Post. “In the wrong hands, it can be a corrupt industry that exploits impoverished businesses, charging interest rates as high as 100% or more and making it all but impossible for borrowers to actually help themselves,” she wrote.

After raising $70,000 and making a few test investments in Ghana, Siroya realized it would be too labor-intensive to hunt down donors if she wanted to achieve global scale. She incorporated InVenture in 2011 as a for-profit company, with a new idea in mind: Poor people could report their income and expenses by text message, and her company would turn that into a score it would license to banks.

In 2013, Siroya caught her big break. At a dinner organized by the TED Foundation, she was approached by Chris Sacca, a venture capitalist known for his loud cowboy shirts, early bets on Twitter and Uber Technologies, and a judging role on the CNBC show Shark Tank. He loved Siroya’s idea. His only concern was whether she was too altruistic to get rich. “Once I determined she wasn’t allergic to money, it was a no-brainer,” he later told Forbes. He joined her board and led a $1.2 million fundraising round whose investors included Google. A co-founder of Dogster, a social network for dogs, was appointed chief operating officer.

When banks didn’t show much interest in Siroya’s credit scores, she decided to put some of the money toward an experiment: lending directly. The first market would be Kenya.
 

In recent years, Kenya has become a laboratory for tech companies creating financial products for developing markets, thanks largely to a single innovation. Although about two-thirds of the country’s population of 50 million lives on less than $3 a day and only 1 in 3 adults has a bank account, practically all of them have a phone running the mobile-wallet service M-Pesa. Released in 2007 by telecommunications provider Safaricom Plc, M-Pesa was one of the earliest and biggest stories in financial inclusion. Years before Americans were Venmoing each other pizza money, workers in Nairobi were using M-Pesa to send funds upcountry to their families. Today more than 75% of Kenyan adults use it, whether to get paid, cover utility bills, or buy food from street vendors.

InVenture started testing its app, initially called Mkopo Rahisi (“Easy Loan” in Swahili), in 2014. For its first loans it manually deposited about $20 into the M-Pesa accounts of almost anyone who applied, then waited to see who repaid. Users took to it right away. Back in Santa Monica, engineers rushed to automate the lending-approval process. Siroya posted positive feedback for the service online, on what she called the Wall of Love. “You are a true blessing from god,” one early customer wrote.

At first the company charged a 5% fee for a 21-day loan. Then, former employees say, its analysts decided it needed to raise the rate to make money. They tripled it to 15% and extended the term to one month—a rate equivalent to 180% annualized, 10 times what Americans usually pay on their credit cards. At that rate, someone who borrowed $100 for 12 months in a row would end up paying $180 in interest. (Tala says it now offers monthly fees as low as 7%, or 84% annualized, to its best customers.)

The former employees say the app was designed to avoid trapping people in debt. Borrowers who didn’t pay on time were charged a one-time late fee instead of more interest and were barred from taking out another loan until they’d settled up. They imagined their users would be business owners who could turn a quick profit—a woman who would borrow $10 to stock up on tomatoes for her vegetable stand, say, then sell them and pay back $11.50 the next month.

The application process required users to permit data such as text messages, location data, contacts, and call logs to be downloaded so the app could generate a credit score. In her TED Talk, Siroya said it could even take into account whether someone spoke often to their friends or if their location data showed they went to work regularly. The user agreement specified that the company retained ownership of the data, whether or not the loan was approved.

That data was a big part of InVenture’s appeal in Silicon Valley. According to the Forbes account, Sacca, the venture capitalist, told Siroya at a 2015 meeting that she’d figured out an even better way of gathering data on users than Uber co-founder Travis Kalanick. “This is freaking big,” Sacca said. “It’s time to move from the dreamy hypothesis phase to wanting to fan the flames.” That September he helped Siroya raise an additional $10 million from investors. (Sacca left Tala’s board in 2018. He didn’t respond to requests for comment. His email auto reply said he’d retired from investing and was busy “working on saving democracy, healing the climate, and reforming the criminal justice system.”)

InVenture was rebranded as Tala in 2016, by which time it had the fifth-most-downloaded app in Kenya. It started staffing up, hiring product managers from other startups, and adding the data scientist credited with developing surge pricing for Uber. It also opened offices in Tanzania and the Philippines.

At the same time, some people working on the Kenya operation were seeing cause for concern. Many borrowers were taking out a new loan within minutes of repaying their last one, and it was evident not everyone was using the money to stock up their food stalls. A former Tala data scientist says one of the top places borrowers spent money was a sports-gambling app. Still, the company chose not to further limit who could take out loans because it didn’t want to slow its growth, according to a former top executive. (Pruneski denies that sports gambling accounts for such a large portion of borrowing and says Tala’s algorithm is designed to discourage this behavior.)

There was also competition to worry about. A year or so before Siroya introduced her app, Safaricom had teamed up with a bank in Nairobi to offer one-month loans to M-Pesa users. Then a co-founder of Kiva started Branch International Ltd. And the Norwegian makers of the Opera web browser came out with OKash, which seamlessly downloaded applicants’ contacts, then used the lists to shame delinquent borrowers by informing friends and family of the debt. (An Opera spokesman says it stopped the practice last year.) There are now more than 50 loan apps targeting Kenyans, and a study published last year by MicroSave Consulting found that two-thirds of the loans issued by nonbank lenders are delinquent. The profusion of apps has made it possible for borrowers to juggle loans for months on end. Instead of repaying Tala with their profits or savings, they can do it with a loan from another app, then immediately qualify for a larger Tala loan.

David Saitoti, a 34-year-old substitute teacher and taxi driver in Nairobi, says he borrows and repays loans from at least five apps each month. When I meet him, he’s living in a small studio without a sink or a shower, supporting himself and his family—a wife and two sons who live in a village near the Tanzanian border—on only $10 a day. He can’t remember exactly why he started borrowing, and now he can’t see a way to repay the debts. “It’s like bait,” he says, his finger worrying at a hole in the shoulder of his beige sweater. “The more you take, the more they give.”

Saitoti’s Tala app lists him as a “gold” customer, with an outstanding balance of $320 and a record of 28 consecutive repaid loans. He estimates that he spends a week’s income each month on interest. Twice he’s had to sell goats to repay his loans, culling his herd, which represents his savings, to three. “At the end of the day,” he says, “you are the loser because of the interest rate.”

Some borrowers eventually turn to neighborhood moneylenders, loan sharks who charge even higher rates. One of them, who operates from a cubby in a warrenlike mall in Kitale, tells me that, despite the companies’ claims to be providing an alternative to people like him, they’re driving business his way. “Many people go to apps,” he says. “Then some come here to have some money to pay the apps.”
 

On the top floor of a yellow-and-red office building in Nairobi, about 70 people wearing headsets cajole and harangue borrowers over the phone from morning to night. This is Tala’s debt-collection office. The collectors are Kenyans, many of them young women.

Tala’s policy requires them to be honest and polite. But in interviews, five current and former collectors describe feeling intense pressure to perform, which they say led them to use dishonest tactics. The company sets quotas of millions of shillings in repayments a month, they say. Those who fail to hit their marks can be fired. Until recently the collectors’ names and progress toward their targets were displayed on a big-screen TV on the wall.

Manipulating borrowers is easy, they say, because most are naive about the financial system. Some describe using login credentials stolen from Kenya’s National Hospital Insurance Fund (NHIF) to learn borrowers’ work addresses and the names of their children. They then threaten to show up at their offices to shame them, or to visit their homes and seize their possessions. How will little Johnny like it, they might ask, when he sees us taking your television?

Another effective tactic was telling debtors they’d be immediately approved for a larger loan if they borrowed elsewhere to repay Tala—a lie, given that the borrowers were already late. One collector recalls helping a customer sweet-talk someone into advancing her the money. When the promised loan from Tala didn’t come through, the customer was arrested for fraud and jailed. The collector says she went to church to pray for forgiveness.

Pruneski says Tala doesn’t condone threats or trickery, and that a recent audit led it to fire some of its collectors for breaking rules. She adds that the company blocks the NHIF’s website and says the collector’s story about the arrest is unlikely, because defaulting isn’t a crime.

On Jan. 22, after Bloomberg Businessweek sent Tala a list of questions, the company published a blog post saying it was aware that debt was becoming an issue for some Kenyans. It called for regulators and credit bureaus to create a real-time database to prevent borrowers from using too many apps at once. It also said its business succeeds only if customers are able to repay, and that it was making changes “to ensure that we are only lending to customers who can reasonably afford loans.” Tala said it hopes “others will join us in learning from recent challenges and building a stronger, safer industry.”

App-based lending has become synonymous in Kenya with predatory practices, much like payday lending in the U.S. About 2.5 million people have been reported to credit reference bureaus by digital lenders. Many banks won’t lend to defaulters, no matter how small their infractions, and most government jobs require that applicants have a clean credit history. Instead of being financially included, they’re effectively blacklisted.

Kenyan officials are starting to realize lending apps need regulation. In a speech last June, Patrick Njoroge, governor of Kenya’s central bank, called the companies loan sharks “hiding behind nice-looking applications.” Gideon Keter, the National Assembly member who represents youth interests, has drafted a bill directing the central bank to regulate the apps. He was motivated by seeing constituents blowing borrowed money on gambling apps while their children went to bed hungry. “These mobile loan apps have commercialized poverty,” Keter says. “They are thinking of profits only.” The bill is currently awaiting a vote; parliamentary action is likely months or more away.

Former Tala employees, even those critical of Siroya, are adamant that she wants to help people. But in international development, good intentions are rarely enough. Tala’s problems in Kenya are the same ones she observed in microfinance a decade ago. Lenders end up charging high rates to cover the losses from people who don’t pay. The higher the rates, the more people struggle to pay, and the more indebted they become.

Tala’s troves of data and sophisticated lending algorithms were supposed to end the cycle. Instead, they’ve just allowed the company to make the loans more quickly, on a larger scale. “There was a lot of hope and excitement that digital credit would outperform microfinance in terms of improving peoples’ lives,” says Carson Christiano, executive director of the Center for Effective Global Action at the University of California at Berkeley, which is studying the impact of mobile loans. “It hasn’t delivered on that.”

It does, though, seem to be delivering for Tala. Last year its Santa Monica operation moved into larger offices. In August, as the company crossed $1 billion in loans made to 4 million customers on three continents, it announced that it had raised an additional $110 million, saying it would use the money to expand in India and hire employees in Kenya and Mexico.

Patricia Lele is still hoping to repay Tala and clear her name. She hasn’t been selling many bracelets, but she still tracks when trucks arrive at the dump to discard the bright green Safaricom scratch cards that make the best material for her beads. Far from being upset at Tala, she says, she’d like to get new loans to send her children to school or to buy a small plot of land away from the dangers of Kipsongo. It bothers her that she didn’t get a chance to show Tala how thrifty and responsible she is. If only the app would have trusted her to make more affordable payments over more time, she’s sure she would have made them.

“Small, small, small,” she says, counting out imaginary coins with her hands. —With David Herbling

©2020 Bloomberg L.P.