Solar power kits provider M-Kopa has revealed a Sh5.22 billion cost of tracing defaulters, reflecting the challenge of sustaining its pay-as-you-go service model that targets mostly the poor in rural areas.
In a tax dispute, M-Kopa disclosed the bill required to trace and force 47,625 customers it regards as hardcore for having refused to pay Sh308.5 million for lighting kits supplied on credit.
A kit includes a solar panel, multi-device charger, lights, radio and a pay-as-you-go SIM card and in some cases a TV.
The fintech successfully lobbied a tax tribunal to allow it to write off the millions on grounds that it would require 16 times the defaulted credit to recover the credit.
In the dispute with the Kenya Revenue Authority (KRA) before the Tax Appeals Tribunal, M-Kopa lifted the lid on the hurdles it faces in recovering its debts, including having to deal with customers who never respond to persistent calls and text messages and were unfazed by the risk and threats of being listed at the credit reference bureaus (CRBs).
M-Kopa’s suit reveals the risk of offering goods to a risky segment of the population in a time when the buy-now-pay-later (BNPL) lending model, where consumers pay off a purchase in instalments, is gaining traction.
The KRA had declined M-Kopa’s bid to write off the Sh308,512,947, terming the fintech uninterested in pursuing the credit in a tax avoidance scheme. The tax tribunal supported M-Kopa after it broke down the bill required to track 47,625 customers, press a recovery suit or agree on an out-of-court settlement.
The African financing platform, which has now broadened its products to include electric bikes and health insurance, lined up three options for recovering the Sh308.5 million.
The first option is hiring a private investigator to trace the hardcore defaulters at Sh20,000 for each of the 47,625 bad customers, catering for accommodation, transport and profession fees—pushing the bill to Sh952.5 million. If pursuit of the defaulters fails to yield recovery, the fintech reckons it would follow a litigation path that would set it back Sh109,640 for each of the defaulters or Sh5.22 billion.
A third and less costly option is pushing for an out-of-court settlement at a cost of Sh37,260 for each of the defaulters or Sh1.77 billion.
The hardcore defaulters, or those who had not paid their credit for 120 consecutive days, make only three percent of M-Kopa’s total customers, says the fintech, arguing it is uneconomical for their aggressive pursuit.
Initially, M-Kopa rode on the back of a majority of Kenyans in rural areas not connected to the national electricity grid, watering the market for supply of products like lighting, radio, TV and phone-charging devices.
But increased connections to the grid has seen many of its customers dump its product and refuse to settle credit provided via the BNPL lending model, triggering defaults.
A customer is required to make an initial payment or deposit of Sh3,500 followed by instalment payments of as little as Sh40 daily through a pay-as-you-go SIM card. Those who fail to make the daily payment are switched off, a small inconvenience to the defaulters.
Founded in 2012, M-Kopa has been a household name in Kenya, enabling over four million people to buy TVs and smartphones through its BNPL lending model. In 2022, M-Kopa extended its BNPL model to EVs, and has become the backbone of the sector in a short span of time, offering electric bikes on credit to thousands who make an initial payment of Sh25,000.
On the solar business, M-Kopa said it resolved to write off the debt after the hard-to-reach customers refused to respond to either calls or text messages and remained unmoved on their blacklisting by CRBs.
“It is also important to take note that defaulting customers are highly uncooperative, and they usually do not respond to phone calls from customer care agents trying to collect the debt from them, nor would they provide their location,” said M-Kopa.
The tax dispute also reveals the challenges of solar-financing companies like M-Kopa after the power grid was extended to the remote parts of the country through the last mile connectivity programme.
The KRA had reduced the amount of debt that M-Kopa had written off for the financial year 2016 from Sh308,512,947 to Sh193,736,915, arguing that it did not take the necessary steps to recover the debts. A higher amount of bad debts written off, the KRA reasoned, reduced the firm’s tax liability.
However, the five-bench tribunal ruled in favour of M-Kopa, arguing that the firm had shown the cost of recovering the loan far outweigh the doubtful debts.
“In view of the aforesaid, the Tribunal is satisfied that the Appellant reasonably demonstrated that all the reasonable steps were taken to collect the debts during the subject year of income 2016, and confirmed the same uncollectable,” said the tribunal in ruling delivered on March 8, 2024.
“Further it demonstrated and proved that the cost of further pursuing the said debts through other means including third-party agents, would far outweigh and exceed the amount of doubtful debts likely to be collected through such an additional venture,” added the tribunal, which was chaired by Robert Mutuma.
M-Kopa, which works closely with telecommunications firm Safaricom to facilitate payment, also admitted that it could neither locate the customers nor repossess the devices.
M-Kopa also demonstrated its bad debts provisioning policy and the elaborate steps it took in following up the debtors from daily monitoring through regular calls and SMS, flagging, blocking, reference to CRB, and incentives to return gadgets for refund of deposit.
The tribunal said the company further demonstrated that, where practicable, it undertook tracing of the defaulting customers through the Safaricom SIM card and base stations despite being curtailed by lack of GPS in the kits.
M-Kopa, which was co-founded by Nick Hughes who helped create M-Pesa, has received billions of shillings from banks and equity investors to power its growth.
Last year, M-Kopa signed a total of $255 million (Sh32.9 billion) in new debt and equity from Standard Bank and Sumitomo Corporation among others to fund its expansion in Sub-Saharan Africa.
M-Kopa said Standard Bank led and arranged $200 million (Sh25.8 billion) in sustainability-linked debt financing, while Sumitomo had injected $36.5 million (Sh4.7 billion) in new equity investment.
Other participants in the fund-raising included U.K-based investment firm Lightrock.
M-Kopa claims to have allowed millions of customers to access over $1 billion (Sh129 billion) in credit to buy items like smart phones, solar power systems and health insurance.
