⋅ A new setup of reporting to the credit bureaus by digital lenders, including Zenka, through the Credit Information Sharing Association of Kenya (CIS)
⋅ Mintos allows Zenka to continue extending loans on the platform for more than 180 days while the company resumes debt collection
⋅ Zenka’s Mintos Risk Score has been updated
Until April 2020, all lenders in Kenya – including banks and digital lenders – had been reporting directly to Credit Reference Bureaus (CRBs), which are supervised by the Central Bank of Kenya. On 14 April 2020 the Central Bank of Kenya (CBK) issued a statement which provided a new framework for the exchange of borrowers’ credit information between commercial banks, microfinance banks, and other credit information providers, such as digital lenders and their customers. It states that borrowers’ information regarding certain loans would no longer be submitted to CRBs for consideration. Moreover, the CBK suspended reporting to the CRBs by banks and microfinance institutions until 30 September 2020. Additionally, with immediate effect, the CBK effectively withdrew the approvals granted to digital lenders, including Zenka, that allowed them to submit reports to CRBs. The above regulation was the result of special measures taken by the government and the CBK to alleviate the economic impact of the coronavirus pandemic on Kenyan citizens.
The CBK restored reporting to CRBs for banks and other deposit-taking financial institutions in October 2020, but digital lenders were still unable to do so. Representatives from the digital lending industry, including Zenka, initiated the process of restoring reporting to the CRBs with the assistance of the Credit Information Sharing Association of Kenya (CIS Kenya). CIS Kenya now awaits formal approval by the Central Bank of Kenya to resume reporting for digital lenders. Zenka has already been assessed and approved for the reporting by CIS Kenya itself.
In spite of these efforts, the CBK withdrawal of the permission of reporting to CRB (mentioned previously) has a crucial influence on borrowers and their repayment behaviors and did not provide the necessary grounds for digital lenders to initiate debt collection processes during the time when reporting on delayed loans was not possible. This resulted in Zenka having a part of its loan portfolio extended beyond the regular extension period, as a means of keeping record of all issued loans and their borrowers until the time when debt collection would resume.
That in turn meant that investors on Mintos, who invested in loans issued by Zenka, might have had loans exceeding the regular extension period. Considering that the maximum period for extensions of loans placed on Mintos is 180 days, Zenka has been re-buying these loans from investors on Mintos when an investor has opted to finish the investment and asked for a rebuy. Investors continue to have this possibility. Now that the reporting lines are soon to be re-established and debt collection will then resume, Mintos will allow Zenka to continue extending loans on the platform for more than 180 days, while the company gradually reduces the overall amount of existing extensions.
In the meantime, Zenka implemented a new scoring system, which removed the need for client data to be taken from institutions such as the Credit Reference Bureaus when gauging a potential borrower’s suitability. Instead, the scoring system takes into account data taken from local mobile wallet providers, for example M-Pesa. Given that 50% of all payments in Kenya are mobile payments made from a mobile wallet, taking data in this way gives a more accurate portrayal of the client’s true financial status. To help understand borrowers’ behavior, the scoring model was introduced in April 2020, and adjusted in September 2020.
Zenka on Mintos
On 3 November 2020 Zenka had €2.66 million loans that were extended for 180 or more days on Mintos. In the following 12 weeks Zenka has repurchased €890 000 and decreased this amount down to €1.77 million, as of 25 January 2021. Zenka is making weekly payments and so far hasn’t missed any settlement payments for funds to be transferred to investors on Mintos. The Zenka outstanding investments (including loans offered as Forward Flow) make €5.98 million, as of 25 January 2021.
While considering the reporting changes in Kenya for non-performing loans, Zenka chose extensions as a precautionary measure until they will be able to restart the usual recovery practice. However, there may be a significant impact on the likelihood of recovery and an increase in the non-performing share of the company’s portfolio. With this in mind, Mintos downgraded the Loan Portfolio Performance subscore for loans issued by Zenka, from 5 to 4. The increased share of non-performing loans means more cash flow obstructions and higher risk of a negative liquidity event, with a negative effect on the company’s profitability position and capitalization. As a result, the Loan Servicer Efficiency and Buyback Strength subscores for loans issued by Zenka are downgraded from 7 to 6 and from 6 to 4, respectively. Downgrades of subscores are the reason for the Mintos Risk Score downgrade, from 5 to 4.
Zenka Finance is a fintech company set up in December 2018 to provide innovative personal flexible loan products. Zenka’s typical clients are based in the area of Kenya’s capital Nairobi, run their own business, or are employed in the public/private sectors and living in the Nairobi region in Kenya. Some of Zenka’s and Mintos’s equity investors overlap.