Effect of Digital Credit on the Financial Health of Youth Borrowers in Kibera, Nairobi County

Abstract

The increased advancements in technological integration within the financial sector has led to development of new credit platforms which improve access to borrowing among the youth. Further, with proliferation of digital lending platforms which provide unsecured loans has led to a debt chokehold among the youth. This has resulted in poor financial health among the youth. Hence it’s vital to understand how various digital credit platforms have contributed to financial health of borrowers and help in advancing policy and practical solutions. The general objective of the study was to analyze the effect of digital credit on the financial health of youth borrowers in Kibera, Nairobi County. The specific objectives are: To evaluate the effect of mobile network operator facilitated digital credit on the financial health of youth borrowers in Kibera, Nairobi County; To evaluate the effect of commercial bank-based digital credit on the financial health of youth borrowers in Kibera, Nairobi County and; To evaluate the effect of fintech based digital credit on the financial health of youth borrowers in Kibera, Nairobi County. The study employed a correlational research design. A correlational research design investigated relationships between variables without the researcher controlling or manipulating any of them. It helps reflects the strength and/or direction of the relationship between two (or more) variables. The direction of a correlation can be either positive or negative. Within a correlational research design, the research primarily focused on determining causal relationships amongst identified variables. The population of interest for this study was youth borrowers who live and work in Kibera, Nairobi County. The sampling frame for this study was active users of digital credit who are between 18 and 35 years, residing in Kibera. The list was obtained from the Independent Electoral and Boundaries Commission’s (IEBC) voter register for Kibera Ward. A stratified sampling technique was used to select the respondents. The sample size was 399 respondents. Data was collected using structured questionnaires. SPSS was used to aid in the data analysis. A descriptive statistical technique of analysis was used and shall entail the determination of the mean and frequency distribution of the datasets. Further inferential analysis was conducted using both correlation and regression analysis. The data was presented in tables and figures. The study was able to obtain an 88 percent response rate, signifying high degree of accessibility of the youth in the area. Of these, most were male, while only 107 of the responses were from female respondents. The first objective specified investigating the effect of mobile-facilitated digital credit on youth borrower’s financial health and the analysis determined that mobile network-operated digital credit has a positive and significant effect on youth’s financial health. Most of the respondents agreed that they routinely access mobile network provided digital credit since it has minimal collateral requirement and for its automation properties. Regarding the first objective, this study concludes that mobile network operator facilitated digital credit has a significant and positive effect on the borrower’s financial health. The study concludes that mobile operator facilitated loans are fast and easily accessible which increases their effectiveness to the user. The second study objective sought after the impact of bank-facilitated digital credit on youth borrower’s financial health and the analysis determined that bank-facilitated digital credit has a positive effect on the financial health of youth in Kibera Ward. Most of the respondents were in agreement that bank facilitated digital credit is popular for its ability to provide savings function and for their ability to use transaction history to build credit limits. The study concludes that bank facilitated digital credit enhances user’s financial health by providing complementary savings and money transfer roles guaranteed under formal banks. The study also concludes that the interoperability of digital bank credit has increased access of digital loans to users with different kinds of mobile phones. The third objective of the study was on the effect of fintech facilitated digital credit on youth borrower’s financial health and the analysis determined that fintech-facilitated digital credit has a positive and significant effect on the financial health of youth in Kibera Ward as signified by the high degree of agreement on the investigated statements. The analysis revealed that fintech credits are easy to access and utilize, and due to their proliferation, provide borrowers with multiple options from which to select from. The results indicated that fintech facilitated digital credit had a positive and significant effect on the financial health of the user. The study concludes that fintech credit has little to no formality which improves their affordability and accessibility to users. The study also determined that there is a high degree of market maturity and demand for fintech financing models which increases their ease of access. The study recommends that mobile money operators that provide digital loans reduce their operation rates considering they have high interest rates for the small loans they offer. The study also calls for the development of progressive peer to peer regulations that would improve the penetration of these loan devices that have been identified as key to young entrepreneurs. The study recommends improved client assessment to increase borrower’s ability to access funds without long-term history as this characterizes most youth borrowers. The study also finds that some of the bank facilitated digital credits lack interoperability features and the study recommends that the firms make attempts to guarantee interoperability between devices as this would significantly improve access for borrowers with older phones. This study recommends for a quantitative analysis of the impact that digital credit has had on the Kenyan economy as a whole as this would help direct towards policy development for the betterment of the general marketplace.