Effective loan collections for lenders in Kenya

A borrower takes a loan to expand their biashara, maybe a small shop in Gikomba or a boda boda business. At first, things go well, sales are steady, customers keep coming, and the business grows. Then, out of nowhere, prices shoot up, customers start buying less, and suddenly, that loan repayment feels impossible. Now, imagine being the lender, trying to collect that debt without pushing the borrower further into financial distress or running into legal headaches. That’s the daily reality of loan collections in Kenya.

Loan defaults are a major concern for financial institutions. The Central Bank of Kenya (CBK) reported that the country’s non-performing loan (NPL) ratio hit 14.5% in 2023, meaning a significant number of loans go unpaid. Digital lenders, SACCOs, and even traditional banks are feeling the pinch as economic pressures drive more borrowers into default. While lenders need to recover their money to stay in business, harsh collection methods such as constant calls, threats, or blacklisting, can backfire, leading to reputational damage and regulatory scrutiny.

The Kenyan lending space is unique. Mobile loans are a good opportunity for millions, yet they also come with high default rates. Some borrowers juggle multiple loans from different lenders, playing a risky game of borrowing from one to pay another. Others default simply because they can, knowing that legal enforcement is weak. Then there’s the challenge of data. Many lenders don’t have a clear picture of their borrowers’ financial health, making it harder to assess risk before lending or recover funds effectively.

Also read: Top 5 loan apps for 5000 Ksh in Kenya

Challenges in loan collections in Kenya

Lenders face several obstacles in their debt recovery efforts, including:

High default rates

Many borrowers, particularly in the microfinance and digital lending space, default due to financial instability or over-indebtedness. The rising cost of living, unpredictable income streams, and job losses mean that even borrowers with good intentions sometimes struggle to meet their repayment obligations.

Regulatory constraints

The Central Bank of Kenya (CBK) and other regulatory bodies impose strict rules on debt collection practices, limiting aggressive recovery methods. This includes restrictions on debt shaming, continuous harassment, and unregulated third-party collection agencies. While these measures protect consumers, they also make it harder for lenders to enforce repayment.

Borrower behavior

Some borrowers deliberately avoid repayments, change contact details, or exploit regulatory protections to delay payments. There are cases where borrowers, knowing they cannot be publicly shamed or blacklisted without due process, take advantage of these protections to evade lenders for as long as possible.

Legal complexities

The legal process for recovering debts through the courts is slow and expensive, making enforcement difficult. Lawsuits for loan recovery can drag on for years, making it impractical for lenders dealing with large volumes of small-ticket loans to seek legal redress.

Limited data sharing

The absence of a comprehensive credit reporting system means lenders struggle to assess borrower risk accurately. While Kenya has a credit reference bureau (CRB), not all lenders contribute data, leading to gaps in borrower histories. This allows some borrowers to take multiple loans from different lenders without a clear repayment history being tracked.

To maneuver these challenges, lenders need a smarter, borrower-focused collection strategy that employs technology, data, and clear communication. Here’s how to do it.

Consistent and strategic communication

A well-thought-out communication strategy can significantly improve loan recovery rates. Many borrowers avoid payments due to fear, lack of awareness, or a lack of structured repayment plans. Engaging them through effective and consistent communication can make a huge difference.

Use an omnichannel approach: Relying only on phone calls is outdated. Kenyans are highly mobile, and digital communication channels such as SMS, WhatsApp, email, and in-app notifications should be integrated into debt recovery strategies.

Timely follow-ups: Sending reminders before the due date and follow-ups immediately after missed payments can encourage borrowers to act promptly.

Personalized engagement: Rather than generic messages, tailor communication to reflect individual borrower circumstances. A borrower struggling due to job loss, for example, should receive a different message from someone who missed a payment due to forgetfulness.

Also read: How to get started as a lender in Kenya

Offer easy and flexible payment options

Kenya has a highly developed mobile money ecosystem, making digital payments a convenient option. Lenders should leverage these systems to make repayments seamless.

Mobile money integration: Services like M-Pesa, Airtel Money, and PesaLink should be embedded into payment systems to allow instant transactions.

Automated deductions: Setting up standing orders or direct-debit options can reduce the risk of missed payments. Loan management platforms like Lendsqr provide lenders with direct debit payment option for easy loan recovery.

Self-service repayment platforms: Providing borrowers with mobile apps or USSD codes to check balances and make payments can enhance repayment convenience.

Show empathy and offer restructured repayment plans

Economic downturns, medical emergencies, and job losses can affect borrowers’ ability to pay on time. Rather than taking a punitive approach, lenders who show empathy and flexibility can recover more debts in the long run.

Loan restructuring options: Offering extended repayment periods or reduced interest rates for struggling borrowers can improve recovery rates.

Hardship programs: Temporary payment relief or grace periods during crises can encourage cooperation from borrowers who intend to repay but need more time.

Collaborative problem-solving: Engaging borrowers in discussions about their financial situations and working out suitable solutions fosters trust and long-term repayment commitments.

Centralize and automate debt collection data

Disorganized and fragmented borrower data can lead to inefficiencies and lost revenue. Many lenders still rely on outdated spreadsheets and manual tracking, making it difficult to have a holistic view of borrower behavior and risks.

Single data repository: Using loan management systems like Lendsqr’s lending technology that centralizes borrower information ensures real-time visibility into repayment patterns, previous interactions, and outstanding balances.

Automated alerts and tracking: AI-driven systems can flag high-risk borrowers, generate repayment reminders, and track defaulters efficiently.

Data-driven decisions: Analytics tools can provide insights into borrower segments, allowing lenders to customize collection strategies based on payment behavior.

Also read: Credit bureaus, credit scoring, and payments gateways for lenders in Kenya

Prioritize high-value borrowers and dispute resolution

Not all debts are equal. Some defaulters require more attention than others, and a smart debt collection strategy should prioritize high-value accounts while addressing borrower disputes efficiently.

Segment borrowers based on risk: Assign more resources to recover high-value loans while automated processes for smaller debts.

Dispute resolution mechanisms: Some borrowers fail to pay due to discrepancies in loan balances, interest charges, or unclear contract terms. Having a dedicated dispute resolution team can speed up settlements and improve repayments.

Technology-driven efficiency: Automating routine tasks like sending notices, updating records, and handling basic inquiries allows staff to focus on high-impact recovery efforts.

Also read: Who regulates lending in Kenya?

Get borrowers to pay without the drama

Collecting loans in Kenya isn’t just about getting borrowers to pay up. It’s about doing it in a way that keeps the business running while maintaining trust. Harsh tactics can backfire, but ignoring defaults isn’t an option either. The sweet spot? Smart, tech-driven collections combined with clear communication and a bit of flexibility.

Lenders who make it easier for borrowers to repay, whether through mobile payments, personalized reminders, or flexible plans, stand a better chance of recovering their money. For those looking to take things up a notch, Lendsqr helps lenders automate collections, track repayments, and keep everything organized. In the end, it’s about working smarter, not harder.