Understanding Overdraft Services In Kenya: What You Should Know Before Using One

In Kenya,overdraft services have become a common and popular financial tool for various individuals and businesses alike.From Fuliza helping you to complete an M-PESA transaction when you are short on money,or a bank overdraft covering that temporary cashflow gap,overdrafts often come in handy,offering quick and flexible financial help,this does not mean that they are devoid of costs and risks.

This post will help guide and explain to you how overdraft services work in Kenya,the types available,and what you should consider before using one.It is designed to help you make informed decisions,avoid unnecessary charges and help you make use of overdraft services responsibly.

Types Of Overdraft Services Available In Kenya

Overdraft services come in various forms depending on the provider and the borrower's financial profile.The most common types of overdraft services are:

1. Mobile Overdrafts

This is the most widely used type of overdraft service used by Kenyans,this is due to rise in popularity of smartphones.One popular overdraft service used by most Kenyans is Fuliza,a service offered by Safaricom in partnership with NCBA and KCB.Fuliza simply allows M-PESA users to complete transactions even when their M-PESA wallet balance is insufficient.It is triggered when you attempt to make a payment that exceeds your available funds.

Fuliza is popular for small everyday payments that most people incur,such as purchasing airtime,paying bills or sending money.It is fast,convenient and widely accessible,but it can become expensive if used frequently over extended periods.

2. Bank Overdrafts

Popular commercial banks such as Equity,KCB,Absa and Stanbic have all introduced overdraft services as part of their banking experience,overdraft services in this banks are often linked to current accounts whereby customers can easily have access to them.These bank overdraft services are typically used by salaried individuals or businesses to manage short-term cash flow gaps.Overdraft limits here are assigned based on account activity,income,and credit worthiness.

Bank overdrafts offer higher limits compared to mobile overdrafts,but they require customers to already have a bank account,formal application and approval.Interest may be charged daily on the amount used or could have different model depending on the bank's terms,and repayment is expected as soon as funds are deposited into the account.

3.Business Overdrafts

Small and medium-sized enterprises(SMEs) aren't left out either,business overdraft are best designed to cover their needs.SMEs can apply for business overdrafts to cover their operational expenses,payrolls or inventory purchases.These facilities are usually larger and may require collateral or formal financial documentation.Business overdrafts are structured to support working capital needs and are often negotiated with relationship managers at the bank.

How Overdrafts Work

An overdraft simply allows you to spend more than the available balance in your wallet.Users can spend up to a pre-approved limit.

Let us break down how overdrafts work:

• Activation - First,you opt-in or apply for the overdraft service.For Fuliza,activation is done via USSD or the M-PESA app.For bank overdrafts,this can be banking institution dependent,or could also be dependent on the size of the overdraft service you intend to access.Some banks will simply give you overdraft access via their bank apps while others would require you to submit an application and await for approval.

• Overdraft Limit Assignment - Your overdraft limit is typically determined by your account activity,such as,transaction history,income or credit profile.Mobile overdrafts are algorithm based,meaning that for service like Fuliza, the algorithm may assign a limit based on your M-PESA usage.Banks may assess your financial record to assign you an overdraft limit.

• Usage - When your wallet balance is depleted or insufficient,the overdraft service kicks in automatically to complete the transaction at hand.You can use the overdraft service multiple times as long as you stay within your limit.

• Charges - This is also dependent on the overdraft service,but basically interest or fees get charged on the amount used.Though overdraft charges may vary by provider,they are often higher on mobile overdraft services.

• Repayment - Most overdraft services often get repaid automatically when you deposit funds into your account or wallet.Partial repayments reduce your outstanding balance and restore your limit.

tip

Outstanding balance in the context of an overdraft service refers to the amount you owe your provider.

For example If you use Fuliza to pay KSh 500 and haven’t repaid it yet,your outstanding balance is KSh 500 plus any accumulated fees and interest.Once you receive money into your M-PESA wallet, Fuliza will automatically deduct this outstanding balance.

Fuliza : Kenya's Most Popular Overdraft Service

Let us take a closer look into Fuliza,a popular mobile overdraft service that has transformed how Kenyans manage short-term financial gaps in their daily lives.Here is how it works:

• Opt-In - to opt into Fuliza,simply dial *234# using your safaricom line or activate it using the M-PESA App
• Fuliza Limit - Limits are based on your M-PESA usage and repayment history.Limits range from a few hundred shillings to tens of thousands of shillings.
• Fees - Fuliza attracts daily fees ranging from KSh 5 to KSh 30 depending on the amount borrowed.Fuliza interest is charged at 1%.
• Repayment - Repayments are automatically deducted from incoming M-PESA deposits.If you receive money,Fuliza takes its share first.

Example: You use Fuliza to pay KSh 500,if you repay eventually repay after 5 days,you'll end up paying KSh 25 in fees plus 25 interest,which would cost you KSh 550 in total.If you delay payment further,the charges continue to accumulate.

Though convenient,when Fuliza is frequently used it can lead to higher cumulative costs.It is often best suited for emergencies or short-term gaps and not regular spending.

Bank Overdrafts: Features And Considerations

Banks offer a more structured overdraft service.Here is what you need to know:

• Eligibility - You must have an active current account with the bank.Some banks might require minimum income or a certain transaction volume threshold.

• Application Process - This process is dependent on the banking institution,here is a common process of overdraft application.

  • Submit a formal request,and await approval.
  • Some banks offer pre-approved overdrafts to select customers.
  • Some banks might automatically grant you overdraft access based on your transaction history,such overdraft services can be accessed through their banking applications.

• Interest Rates - Overdraft services by Kenyan banks typically attract interest rates ranging from 13% to 20% annually,charged daily on the amount used.Some banks may also charge arrangement or renewal fees.

• Repayment Terms - Repayment terms for most banks are flexible.This means that you repay when funds are deposited.However failure to repay may lead to penalties such as overdraft limit amount reduction or even account restriction.

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Scenario Overview

Example: You have a KSh 100,000 overdraft limit.You use KSh 20,000 for 10 days. If the interest rate is 15% annually, you’ll pay about KSh 82 in interest. If you repay quickly, the cost remains manageable.

Let us break down the example above for better understanding:

• Overdraft Limit: KSh 100,000 - this is the maximum amount you’re allowed to borrow.
• Amount Used: KSh 20,000 - the portion of the overdraft that you actually used.
• Duration: 10 days - how long you took before repaying the overdraft amount.
• Annual Interest Rate: 15% - the cost of borrowing over a full year.

Step-by-Step Calculation

1. Annual Interest on KSh 20,000

   • 15% of KSh 20,000 = KSh 3,000 per year

2. Daily Interest Rate

   • KSh 3,000 ÷ 365 days = KSh 8.22 per day

3. Total Interest for 10 days

   • KSh 8.22 × 10 days = KSh 82

Bank overdrafts are suitable for managing short term gaps,but they require financial discipline and planning.

note

This is generalization of bank overdrafts.Read through the overdraft service terms of specific banking institutions to get accurate information.

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Comparing Overdraft Services and Loans

Overdraft and loans serve different purposes.Here's is a tabular guide to help you decide which option best suits your needs:

Feature	Overdraft	Loans
Purpose	Short-term cash flow gaps	Planned expenses and projects
Repayment	Flexible and automatic	Fixed repayment schedule
Interest	Charged daily on amount used	Charged on full amount
Access	On a need basis,up-to limit	Lump sum disbursement
Approval	Often pre-approved	Requires application

Overdrafts are ideal for emergencies or timing mismatches.Loans are best suited for structured needs such as school fees,business expansion or asset purchase.

Risks And Misconceptions

Despite their flexibility and convenience,overdraft comes with some risks associated with them,lets tackle some of the risks and misconceptions:

• "It is free money" - This couldn't be further from the truth.Overdrafts are loans which accrue interests and carry fees and penalties.
• High Cost - Daily fees and interests charged on overdrafts can add up quickly,especially on mobile overdraft services.
• Dependency - Frequent use of overdraft services can lead to reliance.
• Limited Transparency - Due to the nature of overdraft services,some users may find it hard to track how much they owe or how charges accumulate overtime.

tip

Always check your overdraft balance and repayment history,avoid using overdraft services for non-essential expenses.

Smart Use Of Overdraft Services

Overdraft can be useful in your financial journey if used wisely,here a some tips to make good use of overdraft services:

• Use in emergencies only - Use overdrafts when you absolutely have to rather than for lifestyle expenditure.
• Repay Quickly - The longer you delay repaying overdraft services,the heftier the cost,so ensure that you repay any outstanding balances as soon as you can.
• Track Usage - most overdraft services such as Fuliza have tools that can help you monitor your balance and charges.
• Compare Options - Sometimes a short-term loan might be a better or cheaper alternative
• Understand Terms - The most important action you can take before getting into debt is to read the terms of service,this will let you know your limit and the repayment fees

If you are using Fuliza or any other overdraft service on the regular,consider reviewing your budget or exploring alternative credit options.

Conclusion

We can not deny the value that overdraft services(both mobile and bank based), has brought to Kenyans,especially when managing short-term financial gaps,but it is important to know that they are not free money,rather they are a subset of loans,this means that they are subject to terms of service.Every overdraft shilling borrowed comes with a cost,and those costs can escalate quickly if mismanaged.

Before using an overdraft service,understand the terms,track your usage,and prioritize quick repayment.Whether you are a student,salaried worker,or an SME owner,responsible use of overdrafts can help you stay a float,but misuse can lead to financial strain.

note

This post is for educational purposes only. Always confirm overdraft terms with your provider before opting into the service.