CBK allows interest-free Lipa na M-Pesa loans plan

The Central Bank of Kenya (CBK) has finally liquidated an interest-free credit service backed by Safaricom for purchasing goods worth up to Sh100,000, after initially blocking the product expected to disrupt the mobile loan market.

The product, called Farga, will be launched later this month, ending nearly a year waiting for regulatory approval.

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

The CBK approval comes after EDOMx was approved as a digital credit provider in March under regulations published last year that allow the central bank to regulate financial technology to curb predatory lending and infringement of consumer privacy.

The product was scheduled to launch on July 6 last year, before the September deadline that required digital lenders to obtain permission from the Central Bank of Kuwait to operate passed.

But a call from the Central Bank of Kuwait came in the afternoon before its launch, with clear directions that the product was under regulatory review and awaiting approval.

This forced EDOMx to cancel the launch and Safaricom hastily pulled from their websites the terms and conditions for Faraga.

Faraja will allow customers to buy goods and services starting at Sh20 to a maximum of Sh100,000 with select retailers like Naivas on credit and pay the same amount later, paving the way for market turmoil as short-term loans come with fees and interest rates of up to 400 percent on a basis annual.

Julian Keola, Founder and CEO of EDOMx, told The daily business More than 90,000 customers registered and about 28,000 qualified and purchased goods worth about Sh50 million during the trial phase of Faraga.

“We’ve built something that I think is exciting. Now that the license is up, you’ll see us on the market before the end of June. We’re starting to develop. We’ll continue to sign up more stores, customers and merchants,” said Mr. Keola.

He said the shares would provide funds to instantly settle customer transactions through Safaricom’s Lipa na M-Pesa service.

Equity Group CEO James Mwangi is expected to announce the amount of financial support the lender will provide for the product that EDOMx hopes to expand to other markets in Africa.

The business case for the product is that customers will buy goods on credit and EDOMx will pay the sellers immediately at a discount.

EDOMx will then refund the customer within 30 days, earning the difference between discounted product prices and market price costs.

The defaulters will also bear the costs associated with hiring debt collectors. Safaricom will suspend or close Farga’s account in default.

“If we get, say, a seven or 10 percent discount (from merchants), why am I charging customers interest? We’ve seen good payouts during the pilot phase and hopefully we’ll see that trend continue,” Mr. Keola said.

Dozens of shops have already signed up to be merchants, including Naivas supermarket, Goodlife Pharmacy and Citi Walk, a shoe store.

Unlike Safaricom’s Fuliza overdraft, Faraja subscribers cannot send money to other users because transfers from Faraja’s account can only be used for goods payments through Lipa na M-Pesa.

Safaricom will earn its fees through Lipa na M-Pesa fees, which range from Sh23 to Sh210 depending on the transaction amounts.

Tolls are paid in full either by dealers or buyers or shared with consumers, which is the case for settlements made by motorists at gas stations.

Faraj is a bit like the Lipa Later service currently on the market, except this time, shoppers will walk away with goods from a list of select merchants without being required to pay up front in instalments.

It will work like a digital credit card where the user will have a credit limit of Sh100,000, depending on their credit score, to make purchases and then pay later.

Keola said the CBK froze the launch because it was in the middle of implementing a law regulating digital lenders, which was passed in December 2021 and companies had until September last year to comply.

“The Central Bank of Kuwait told us that it would be beneficial for us to apply for a digital credit license first before we proceed with the two products. We have evaluated and submitted the application.

Mr. Keola said EDOMx used this window to improve the product, improve market segmentation, enroll customers, and even sign an agreement with Visa as it prepared to test Farga in the US.

In the US, the company plans to partner with banks and Visa in launching a physical card that customers use to shop and have money deducted later.

→ (email protected)