The Deep Roots of Kenya’s Unrest

Take the case of microloans. In Ukunda, a coastal town in southern Kenya, the chances of getting a steady job are slim. Samuel, a 29-year-old single man, decided to try his luck in the boda boda, or motorbike taxi, business. After saving for four months, he was able to make a 10 percent down payment on a bike—a $1,058 Chinese-made Haojin 125-A—in July 2022. The rest required taking out a high-cost loan from a private financial technology lender: He was charged a $170 processing fee, and the 12-month loan had a monthly interest rate of 4 percent, translating to 48 percent per year. This added up to more than $450 in interest alone.

With his driving work bringing in $4 to $8 a day, Samuel couldn’t afford to miss a beat over the course of the year. In addition to his weekly loan payments of $29, he had to pay for rent, food, phone service, and gas, as well as send money home to his family. Samuel was just able to scrape by, and last summer, he received the title to the motorbike.

Many Kenyans who take out loans like this aren’t so lucky. Juma, a 34-year-old father of three, bought the same kind of motorbike using the same lender as Samuel in February 2023. (Both Samuel and Juma asked not to use their full names.) Due to his higher cost of living, Juma had to take out an 18-month loan with a monthly interest rate of 6.6 percent, translating to 79.2 percent per year. The total cost of the loan nearly doubled the price of the bike. Given his family’s many financial pressures, Juma quickly faced the risk of missing payments and losing his vehicle.

This is a predicament that many poor Kenyans face, as microloans from private companies have become increasingly popular in recent years. At a time when youth unemployment is high—67 percent, according to the Federation of Kenya Employers—these loans are an easy but risky way to buy entry into a small business that can be used to make ends meet. The frustration with the system, including predatory microloans, is what pushes young people—who have been affected greatly by the rise of the cost of living since the COVID-19 pandemic—into the streets.

Across the global south, the path to economic security is littered with such lending traps. Rather than empowering individuals, as many philanthropists and investors once hoped, these practices have turned predatory. When microloans first became popular in the 1990s, the idea was to lend small sums of money at low interest rates. But these days, most microcredit that is widely accessible takes the form of short-term, high-interest loans from private fintech lenders. Predatory lenders argue that their rates are justified by the risk that they take on by lending to individuals with no financial stability, but they regularly land participants deeply in the red.

This wasn’t inevitable. Both the Kenyan government and the international community have the tools to crack down on predatory lending. The right policies can ensure that microfinance lives up to its original intent: to protect the people who could drive economic development if only they were given a fair chance to succeed.

Drivers outside of their compound in Mkwakwani in the Ukunda area on Jan. 25. Sabine Skiba photo for Foreign Policy

The Kenyan government has done little to protect those trapped in predatory lending schemes. The closest that the government came to reining in these companies was in March 2022, when it passed a law to better regulate digital lending markets. This law tasked the Central Bank of Kenya with controlling the industry and introduced a framework to standardize the licensing and registration of digital lenders and their products. It also introduced important consumer protections, including those related to transparency, consumer privacy, and data protection.

Although it was a step in the right direction, this law did not curb predatory digital lending practices because it did not regulate interest rates or excessive fees. This failure to introduce concrete steps to prevent usury is a problem not only for individual Kenyans, but also for the country’s mid- to long-term growth and stability.

The impact of these practices goes beyond borrowers’—or even a country’s—bank balances. Predatory lending keeps people trapped in what historians Kevin Donovan and Emma Park call the “zero balance economy”—a state of living under the constant threat of not being able to pay for basic needs—which in turn affects individuals’ opportunities to pursue education, get married, have families, and take care of their health.

The Watu office in Ukunda, Kenya, on Jan. 25. Nina Berman photo for Foreign Policy

Furthermore, officials from the Central Bank of Kenya said recently that a loophole in the 2022 law has allowed lenders to operate without licenses and proper oversight. These include five of the top lenders providing vehicle and asset financing. As of May, the Kenyan Parliament’s Finance and National Planning Committee was conducting a probe into these firms’ operations.

The government has, however, sought to offer an alternative to private lending. In his 2022 campaign, now-President William Ruto promised to help young, ambitious, and underemployed Kenyans. Soon after entering office, Ruto launched the “Hustler Fund,” which promised to invigorate the economy from below by offering around $376 million in loans each year to a range of individuals and small- and medium-sized businesses at varying interest rates.

Some analysts have declared Ruto’s initiative a success and predict that it will incentivize the private sector to lower its rates. Others have called out the fund’s limited success as an economic stimulus, especially for its target audience, Kenyan youth.

The full impact of Ruto’s scheme on Kenya’s economy is not yet known. But due to restrictive terms—including short repayment periods and the requirement to operate a formally registered business—the individual microenterprise loans that it offers are not viable alternatives to private loans for many young people and other entrepreneurs. The scheme reports that it has only funded about 54,000 small enterprises with around $1.39 million in total lending. Most borrowers opt instead for the personal loan program instead, which has disbursed around $410 million to more than 23 million Kenyans, who primarily use the money for emergencies or household purposes.

For Samuel and Juma, the enterprise loan available through Ruto’s scheme would not have been an option: Although it has only a 7 percent interest rate per year (with a 1.5 percent default rate), it has to be paid back within six months, leading to higher monthly payments than either man could have afforded.

Instead, like most Kenyans seeking a microloan for a small business, Samuel and Juma opted to borrow from a private lender with longer loan periods but significantly higher interest rates. Both men went to Watu Credit, a fintech company founded in 2015, which self-reports that it has provided “over 1 million loans” in seven African countries. Samuel and Juma would have found similar terms at Mogo Kenya, the other major lender for motorbike loans in their region.

Watu and Mogo were among the five companies that the Central Bank of Kenya singled out in late 2023 for operating without licenses. Both firms have some version of “financial literacy” tools and training for their clients, but the impact of these programs is unclear. (Neither company responded to requests for comment before publication.)

Motorcycles transport passengers in Maweni, Kenya, on Jan. 25. Sabine Skiba photo for Foreign Policy

Domestic legislation to protect citizens from such schemes has worked elsewhere: In the United States, for example, 45 states and Washington, D.C., have introduced anti-predatory lending laws that cap rates at a set number. These laws restrict loan terms that pose a significant risk and could lead to defaulting on the loan—including balloon payments, prepayment penalties, and inflated fees—as well as underwriting processes that do not ensure borrowers can afford to pay back their loans. According to a study drawing on data from 2004 to 2008, U.S. states with more restrictive laws were able to lower default rates on mortgages by between 3.8 and 18 percent compared with states that did not have robust anti-predatory lending laws.

Strong financial regulatory bodies are also important at the domestic level. Recently, anti-predatory lending initiatives in the United States achieved a major success when the Supreme Court ruled against payday lenders that sought to challenge the Consumer Financial Protection Bureau’s authority to crack down on predatory lending.

On the international level, institutions such as the World Bank and U.S. International Development Finance Corp. should take a more active role in ensuring that private sector loans do not undermine their development goals. The World Bank’s International Finance Corp., for instance, has committed billions of dollars to microfinance and small-business lenders. Although it has funded specific projects that target high-risk microfinance, it needs to do more to confirm that the lenders it funds do not engage in predatory practices (as they have been accused of doing in Cambodia).

One way of doing this would be to partner with local and international stakeholders to promote ethical lending standards. The World Bank could draw inspiration from measures that a number of countries have already introduced, including requirements that lenders identify vulnerable customers, ensure a borrower’s financial status, engage in timely communication with borrowers, and provide forbearance when appropriate.

At a time when major economists, such as Nobel laureate Joseph E. Stiglitz, are calling for a reimagining of global economic architecture to better support poorer countries, prioritizing addressing predatory microfinance could be an important step in the World Bank reforming its approach to economic justice.

Comparable to international debt schemes, predatory lending keeps individuals trapped in systemic precarity. International and national anti-usury laws could provide the necessary protection that would enable Kenya’s economy to grow more sustainably and its society to take steps toward equitable stability.

Until then, Kenyans like Samuel and Juma are trapped without options. They have cast their fortunes with the lenders—or, in other words, with the market. It is high time for local and international stakeholders to start repaying their trust with action. Rather than increasing taxes on the poor, they need to create fair conditions that enable citizens to succeed.