CBK approves the Lipa na M-Pesa interest-free Loan program

The Central Bank of Kenya (CBK) initially blocked the product that is anticipated to upend the mobile loans market but has now approved a Safaricom-backed zero-interest credit service for the purchase of goods up to Sh100,000.

The Faraja product will be released later this month, capping off nearly a year of regulatory approval delays.

It is owned by EDOMx Ltd, a financial technology company with offices in Kenya, and its partners are listed as Safaricom and Equity Bank.

The CBK’s approval follows EDOMx’s March clearance as a provider of digital credit under regulations released last year that permit the central bank to regulate fintech to prevent predatory lending and invasion of consumer privacy.

Prior to the expiration of a September deadline that called for the digital lenders to obtain a CBK permit for operation, the product was scheduled to launch on July 6 of last year.

However, the day before the product’s launch, the CBK called and made it very clear that the product was undergoing regulatory review and was waiting for approval.

Due to this, Safaricom hastily removed the Faraja terms and conditions from its websites, forcing EDOMx to cancel the launch.

In a market where short-term loans have high fees and interest rates that can reach 400 percent annually, Faraja will enable customers to purchase goods and services from selected retailers like Naivas on credit for as little as Sh20 to a maximum of Sh100,000.

According to EDOMx founder and CEO Julian Kyula, during the Faraja pilot phase, over 90,000 customers signed up, of whom about 28,000 qualified and spent about Sh50 million on goods.

“We have built something that I believe is exciting. Now that the licence is out, you will see us in the market before the end of June. We are beginning an evolution. We will keep signing up more stores, customers and merchants,” said Mr Kyula.

According to him, Equity will supply the funds necessary to instantly settle customer transactions made using Lipa na M-Pesa by Safaricom.

James Mwangi, the chief executive of Equity Group, is anticipated to reveal how much financing the lender will offer for the product that EDOMx intends to market in additional African countries.

The product’s business case assumes that customers will purchase the goods on credit and that EDOMx will pay the sellers instantly and at a reduced rate.

The difference between the discounted product prices and market rate costs will then be collected from the customer by EDOMx within 30 days.

Expenses related to hiring debt collectors will also be borne by defaulters. A defaulter’s Faraja account will be suspended or terminated by Safaricom.

“If we get, say, seven or 10 percent discount (from merchants), why should I charge customers interest? We have seen good repayment during the pilot phase, and we hope to see this trend continue,” said Mr Kyula.

Numerous businesses, such as Citi Walk, a shoe store, and the Naivas Supermarket have already signed up to be merchants.

Because transfers from the Faraja account can only be used for goods payments through Lipa na M-Pesa, subscribers to Faraja are unable to send money to other users like those of Fuliza, another overdraft service offered by Safaricom.

Lipa na M-Pesa charges, which vary in price from Sh23 to Sh210 depending on the size of the transaction, are how Safaricom will be paid.

In the case of payments made by drivers at gas stations, the fees are either fully covered by the sellers or buyers or co-shared with the customers.

Similar to the currently available Lipa Later service, Faraja allows customers to purchase items directly from a list of chosen merchants without having to pay for them in full up front or in instalments.

It will function similarly to a digital credit card, allowing users to make purchases with a credit limit of up to Sh100,000 and repay the balance at a later time based on their credit score.

According to Mr. Kyula, the CBK put a hold on the launch because it was in the process of enforcing the law that regulates digital lenders. This law was passed in December 2021, and businesses had until September of the previous year to comply.

“CBK told us it was going to be beneficial for us to apply for the digital credit licence first before proceeding with the two products. We evaluated and made the application,” he said.

As it gets ready to test Faraja in the US, Mr. Kyula claimed that EDOMx used this window to improve the product, market segmentation, customer scoring, and even sign an agreement with Visa.

The company intends to launch a physical card in the US in collaboration with banks and Visa that users can use to make purchases and have the funds subtracted later.