Kenyan lenders rethink trust and access in collateral-free credit

Kenya’s long-entrenched dependence on collateral and guarantors in its credit markets is facing new criticism as lenders re-examine what truly drives repayment performance.

For decades, the two requirements have been treated as non-negotiable pillars of responsible lending.

But new insights from Demulla, a financial services firm working closely with MSMEs, indicate that these conventions may be less protective and more obstructive than once believed.

According to Demulla executives, the traditional safeguards increasingly slow loan access, frustrate borrowers and skew credit decisions.

“Collateral and guarantors were supposed to protect repayment. But what we found is that they were actually distracting us from the real indicators of repayment behaviour," said Demulla CEO Sir Keloti Kelvin.

One of the most problematic areas, the company reports, is the guarantor system.

Borrowers routinely struggle to find someone willing to sign for them, often delaying approvals by several days.

“Clients would spend days chasing relatives and friends who didn’t even want to be involved. A loan that should take hours to process ends up taking a week," Kelvin noted.

He explained that repayment issues eventually surface, guarantors become noticeably absent.

“Many guarantors simply disappear. They avoid calls, deny responsibility or admit they only signed out of social pressure. They add friction at the beginning but almost no support at the end," Kelvin said.

Collateral presents a different challenge. Demulla’s analysis shows that assets frequently distort credit judgment by elevating the importance of paperwork above borrower behaviour.

“A client with a logbook could be high-risk, but because they have collateral, the system automatically favours them. Meanwhile, a disciplined client without assets is excluded. It’s a bias that punishes character and rewards property," Kelvin Explained.

The presence of collateral, he added, also changes the borrower’s mindset.

“When clients feel that the lender’s first instinct is to seize their property, they stop being open. They hide challenges instead of communicating them," he noted.

According to Demulla, the threat of asset loss often undermines transparency, an essential ingredient in successful repayment.

Instead, the firm says its data points repeatedly to behaviour as the strongest predictor of repayment.

Patterns such as communication consistency, business discipline, transaction regularity and responsiveness to challenges have proved far more reliable than any physical asset.

“Repayment is protected by behaviour, not belongings. A committed borrower  pays because they value the relationship and the opportunity, not because they fear losing a motorbike or a logbook," Kelvin said.

This understanding has pushed the company to move away from collateral and guarantor requirements altogether.

Demulla argues that the absence of these traditional pillars forces lenders to adopt more rigorous systems focused on relationship management, business insights and behavioural analysis.

“Unsecured lending, when done properly, is not reckless. It is disciplined lending. It demands better appraisal and deeper engagement," the CEO stated.

Critics, however, continue to warn that unsecured lending increases risk exposure but Demulla disagrees.

“The real risk is relying on paperwork instead of people. When you focus on behaviour, you build stronger, more transparent lending relationships," he said.

Kenya’s MSME sector is dominated by entrepreneurs with limited formal assets but high levels of resilience and daily discipline.

Analysts note that these characteristics often go unrecognised in traditional lending frameworks.

Kelvin argues that the system must evolve.

"Most MSMEs do not have title deeds. But they have consistency, grit and hustle. Those qualities are stronger than any collateral," he said.

He notes that as the credit landscape shifts, institutions adopting behaviour-based lending models may play a pivotal role in expanding financial inclusion.

“Kenya will not grow because assets sit in vaults. It will grow because people are given fair access based on character, consistency and commitmentnot on what they own," Kelvin said.