In an interesting tax dispute with the Kenya Revenue Authority, M-Kopa, one of the most successful solar power kit providers in Kenya, divulged how tracking and recovering payments from defaulters had cost the company a total of nearly KSh 5.22 billion. Incurring such a cost to track debtors makes it costly and reflects the challenges faced by M-Kopa in running its pay-as-you-go business model targeted majorly at rural, low-income households with no access to traditional sources of energy.
M-Kopa's Debt Recovery Predicament
Financial strain at M-Kopa reveals the complexity that goes with their BNPL model. The company had been cornered over KSh 308.5 million owed by 47,625 "hardcore" defaulters. In a bid to recover these loans, M-Kopa weighed three major options:
- Private Investigators: Given the cost was KSh 20,000 per defaulter, the sum would surge to almost KSh 952.5 million.
- Litigation: Using the legal fee estimate of KSh 109,640 per case would be extremely expensive at a total of KSh 5.22 billion.
- Out-of-Court Settlements: This was the cheapest estimated to cost KSh 1.77 billion or KSh 37,260 per customer.
KRA Dispute and Tax Tribunal Ruling
M-Kopa, in the case of tax disputes, won an argument such that such debts would be uneconomic to pursue and, therefore, lobbied for a tax write-off against those amounts. KRA had earlier declined this because it believed it was an avoidance scheme. The Tax Appeals Tribunal, however, ruled in favour of M-Kopa, noting that the cost of debt recovery was way higher than the gain, allowing its case for tax write-off.
Shifting Business Models and New Territories
Despite the challenges, M-Kopa has diversified its product list to include electric bikes and health insurance, with expansion to newer regions in Sub-Saharan Africa. The fintech company has also attracted considerable funding, including raising $255 million, around KSh 32.9 billion, in debt and equity last year alone. The funding includes sustainability-linked financing from Standard Bank and an equity investment from Sumitomo Corporation.