Solar equipment provider M-Kopa has revealed a Sh5.22 billion cost to track down defaulters, reflecting the challenge of maintaining a pay-as-you-go model that mostly targets the poor in rural areas.
In a tax dispute, M-Kopa has unveiled the invoice required to track down and coerce 47,625 customers it considers to be hard-liners for refusing to pay Sh308.5 million for lighting kits provided on credit.
The kit includes a solar panel, multi-device charger, lights, radio, pay-as-you-go SIM card and in some cases a TV.
The fintech company successfully lobbied the Tax Court to allow it to write off millions on the basis that it would require 16 times the defaulted credit to recover the credit.
In the dispute with the Kenya Revenue Authority (KRA) before the Tax Appeals Court, M-Kopa lifted the lid on the hurdles it faced in recovering its debts, including having to deal with clients who never responded to constant calls and texts and were unfazed by the risks and threats of listing At the credit reference bureaus (CRBs).
The M-Kopa lawsuit exposes the risks of offering goods to a risky segment of the population at a time when the “buy now, pay later” (BNPL) lending model, where consumers pay for their purchases in installments, is gaining momentum.
The KRA rejected M-Kopa’s offer to write off Sh308,512,947, describing the fintech as not interested in pursuing credit in the tax evasion scheme. The Tax Court backed M-Kopa after it gutted the bill required to track down 47,625 customers, file a refund or agree to an out-of-court settlement.
The African financing platform, which has now expanded its products to include electric bicycles and health insurance, has identified three options to recover the Sh308.5 million.
The first option is to hire a private investigator to track down defaulters of Sh20,000 for each of the 47,625 bad clients, saving on accommodation, transportation and professional fees – taking the bill to Sh952.5 million. If going after the defaulters fails to bring about recovery, the fintech company believes it will pursue a court route that would set it back Sh109,640 for each of the defaulters or Sh5.22 billion.
The third and least expensive option is to push for an out-of-court settlement at a cost of Sh37,260 for each of the defaulters or Sh1.77 billion.
Hardcore delinquenters, or those who haven’t paid their credit for 120 consecutive days, make up just three percent of M-Kopa’s total customers, the fintech company says, arguing that it is uneconomical to aggressively pursue them.
Initially, M-Kopa rode on the backs of the majority of Kenyans in rural areas not connected to the national electricity grid, supplying the market with products such as lighting, radio, television and phone chargers.
But increased network connections made many of its customers dump their products and refuse to settle credit offered through BNPL’s lending model, leading to defaults.
The customer is required to make an initial payment or deposit of Sh3,500 followed by installment payments of a minimum of Sh40 per day through an instant pay SIM card. Those who fail to make the daily payment are turned off, presenting a minor inconvenience to defaulters.
Founded in 2012, M-Kopa has become a household name in Kenya, enabling more than four million people to buy TVs and smartphones through its BNPL lending model. In 2022, M-Kopa expanded its BNPL model to include electric vehicles, and has become the backbone of the sector in a short period of time, offering electric bikes on credit to thousands who make an initial payment of Sh25,000.
Regarding its solar business, M-Kopa said it decided to write off the debt after hard-to-reach customers refused to answer calls or texts and remained unaffected by being blacklisted by CRBs.
“It is also important to note that customers in default are largely uncooperative, typically do not respond to phone calls from customer service agents trying to collect debts from them, and do not provide their locations,” M-Cuba said.
The tax dispute also reveals the challenges faced by solar financing companies like M-Kopa after extending the power grid to remote areas of the country through the last-mile connectivity programme.
KRA has reduced the amount of debt that M-Kopa wrote off for the 2016 financial year from Sh308,512,947 to Sh193,736,915, arguing that it had not taken necessary steps to recover the debt. KRA considered that the high amount of bad debts that were written off led to a reduction in the company’s tax liability.
However, the five-bench court ruled in favor of M-Kopa, arguing that the company had shown that the cost of recovering the loan far outweighed the bad debts.
“In light of the above, the court is satisfied that the appellant has reasonably demonstrated that all reasonable steps were taken to collect the debts during the 2016 income year, and has confirmed their uncollectibility,” the court said in its March ruling. 8, 2024.
“Furthermore, it has shown and demonstrated that the cost of continuing to pursue said debts through other means including third party agents, will far outweigh and exceed the amount of doubtful debts likely to be collected through such an additional venture,” the court added. Chaired by Robert Mutuma.
M-Kopa, which works closely with telecommunications company Safaricom to facilitate the payment, also admitted that it had been unable to locate customers or recover the devices.
M-Kopa also showcased its Bad Debt Provision Policy and the detailed steps it has taken in following up on debtors from daily monitoring through regular calls and SMS, reporting, blocking, recourse to CRB, incentives to return instruments to recover deposit.
The court said the company also demonstrated that, wherever possible, it tracked defaulting customers through the Safaricom SIM card and base stations although it was curtailed due to the lack of GPS in the kits.
M-Kopa, co-founded by Nick Hughes who helped create M-Pesa, has received billions of shillings from banks and equity investors to fuel its growth.
Last year, M-Kopa signed a total of $255 million (Sh32.9 billion) in new debt and equity from Standard Bank and Sumitomo Corporation among others to fund its expansion into sub-Saharan Africa.
Standard Bank led and arranged $200 million (Sh25.8 billion) in sustainability-linked debt financing, while Sumitomo pumped $36.5 million (Sh4.7 billion) into new equity investments, M Cuba said.
Other participants in the fundraising include UK-based investment firm Lightrock.
M-Kopa claims to have given millions of customers access to more than $1 billion (Sh129 billion) to purchase items such as smartphones, solar energy systems and health insurance.