Faraja’s zero-interest BNPL model might be risky for Kenyans despite its potential benefits

The recent endorsement of Faraja – a buy now pay later (BNPL) product owned by EDOMx Ltd in collaboration with Safaricom and Equity Bank – in Kenya comes with mixed feelings. Although it enters a space saturated with rivals like Lipa Later, it offers a unique feature. Unlike the typical BNPL tradition of having to pay an upfront fee for an item, Faraja promises to allow customers to buy a product without a downpayment. 

This unique selling proposition (USP) will not only make Faraja a formidable foe in Kenya’s growing market, but it may also trigger citizens into a spending spree. Kenya is in a precarious situation. Thanks to harsh economic conditions, the cost of living has soared in recent months. An ongoing drought, the nastiest in 40 years, has made matters worse. 

According to data from the Kenya National Bureau of Statistics (KNBS), the inflation rate for May 2023 was 8%. The KNBS attributes this to the increase of commodities in the following categories: “Food and Non-alcoholic Beverages (10.2%); and Housing, Water, Electricity, Gas and other fuels (9.7%); and Transport (10.1%).”  

This trend was expected following President William Ruto’s announcement in 2022 that the subsidy on petrol, electricity, and maize meal was gone. His reason was that the policy largely favored “those in influential positions and cartels.” Although he claimed this measure would strengthen Kenya’s economy in the long-term, citizens have watched their purchasing power dwindle. 

Unsurprisingly, many Kenyans took to the streets to protest the rising cost of living which, to them, was a by-product of the subsidy removal. More than 200 protesters were arrested with 12 deaths confirmed during a demonstration on the 21st of March this year. Another protest challenging the proposed Finance Bill which, if implemented will introduce more taxes, took place yesterday. 11 people were detained.  

Kenya’s failure to pay the salaries of civil servants and state pensions promptly dominated headlines between March and May this year. That’s because the government has recently channeled a huge chunk of the country’s revenue to debt repayment. Although the current Ruto-led administration blamed the previous president, Uhuru Kenyatta for the economic hardship being faced, the blame game doesn’t exactly improve the situation. 

Read also: Is buy now pay later a solid business model for Nigerian fintech startups?

Faraja is a mix of positive and negative for Kenyans

Faraja was scheduled for a July 2022 launch until the Central Bank of Kenya blocked the product’s release, claiming it had not passed the regulatory review. As such, Safaricom had to shelve the launch. It did remain optimistic, though. Early this year, Peter Ndegwa – Safaricom CEO – said Faraja would gain approval pretty soon.

“I am sure it will show up. We needed to change a few things. We will bring it back. It needs to be approved normally just in the same way CBK approves (other products). It is a use case that customers want. You will see it come back,” he shared with Business Daily.

With reduced purchasing power thanks to inflationary pressures, Faraja could be the average citizen’s next resort for buying goods on credit. What’s more, they don’t need to bother about any upfront payment since Equity – a financial institution in collaboration with Safaricom and EDOMx – will finance the purchase using the Lipa na M-Pesa, a cashless payment service owned by Safaricom.

By eliminating the interest that typically accompanies BNPL transactions, it’s typical to question how EDOMx plans to profit from this business. Here’s how this will work. Using the funds from Equity, EDOMX, will pay for goods bought by customers at a discounted rate agreed upon by the merchant. Faraja users will have 30 days to repay their debt using the actual market cost for the product and not the discounted cost. As such, EDOMx will earn the difference as profit. 

Justifying Faraja’s adoption of this method, Julian Kyula – EDOMx founder and CEO said “If we get, say, seven or 10 percent discount (from merchants), why should I charge customers interest? We have seen good repayment during the pilot phase and we hope to see this trend continue.” 

The only fee that customers will pay before completing the payment is the Lipa na M-Pesa charge which could be low as Sh23 or high as Sh210 based on the transaction amount. This goes to Safaricom. 

Despite the juicy zero-interest feature, the current economic situation may cause many people to depend heavily on this credit facility and incur more debt than they can afford to pay. For context, Faraji offers up to Sh100,000 depending on users’ credit rating. 

Regarding loan default, Faraja claims it will use debt collectors whose hiring costs defaults will be mandated to pay. Safaricom would also suspend or deactivate the Faraja account as an added measure.

It’s unclear when Kenya’s economic woes will subside and the current Finance Bill controversy doesn’t help matters. As such, a zero-interest credit provider could be beneficial or dangerous depending on how buyers play their cards.