Why Safaricom, east Africa's biggest telecom, is getting sued by its customers

Unable to prove that M-Pesa is a bank, Safaricom has been sued for using customer money to lend out as overdrafts, and doing little to curb SIM swap fraud
Sim swap fraud cases are rampant in Nairobi 
Sim swap fraud cases are rampant in Nairobi 
Photo: MONICAH MWANGI (Reuters)
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East Africa’s leading telecommunications company Safaricom is in trouble. Pressure is mounting on it, with two major lawsuits from its customers now demanding accountability from the telco giant.

The Nairobi-based firm has in the past few months faced renewed criticism over the credibility of its mobile overdraft facility Fuliza, which runs on the popular mobile money service M-Pesa, and rising cases of SIM swap fraud targeting Fuliza limits.

Three Kenyan M-Pesa users have filed a class-action suit against Safaricom, arguing that Kenya’s most profitable company uses its customers’ money to engage in profit-making financial lending services without consent, despite it not being registered as a bank. This is in contravention of section 2 (1) of the country’s Banking Act.

They say that in spite of making profit through its 15-year partnership with the country’s KCB and NCBA commercial banks to offer lending services, Safaricom is yet to pay any interest to its more than 32 million M-Pesa account holders, whose money “it uses to lend and earn profits.”

Yet despite its awareness of Safaricom’s ‘banking business’, the Central Bank of Kenya (CBK) failed to regulate the telco’s activities as per the Banking Act.

Predatory lending tactics

The three complainants are seeking $2.38 billion in damages from the telco and Vodafone Group, for what they term as fraudulent misrepresentation, material non-disclosure of facts, illegal and unlawful investment of M-Pesa account holders’ funds, predatory lending practices, and charging exorbitant interest rates.

In 2022, CBK announced its idea to push for the split of M-Pesa from its parent company, Safaricom. But this was largely due to complaints of unfair competition from other telcos operating in the country.

The perceived split had been expected to reduce Safaricom’s dominance which has largely been attributed to its more profitable mobile money component. M-Pesa has been a lot more popular among ordinary Kenyans compared to its competitors’ similar services, thus giving Safaricom’s services an edge.

Why can’t Safaricom stop SIM swap fraud?

Safaricom’s woes are compounded by a perception that it is not doing enough to address SIM swap fraud which has seen customers losing millions through scams and fraud targeting its mobile money services.

So rife has the menace been that in 2019, Safaricom, introduced a raft of measures to check its spread and warned its customers to be vigilant about the globally-prevalent trend, which is not restricted to only the east African country or the continent.

Safaricom has numerous times fallen victim to the widespread trend. Its customers have been targets of scammers who swept clean their bank accounts or used the victim’s identification details to perpetrate crime.

Just this past week, Safaricom, alongside the country’s Communication Authority were embroiled in a legal tussle in which at least four Kenyans are suing the institutions after falling victim to an alleged SIM swap fraud.

The class-action lawsuit which features a widower whose late husband took loans using his mobile phone ‘right from the grave’ soon after his burial, also has other individuals who have lost cash amounting to millions.

Such legal lawsuits cause, not just reputational damage to the telco, but also financial loses when the victims are required to be compensated.

SIM swap fraud, also called SIM splitting fraud, port-out scamming, or SIM jacking continues to rise, not just in Africa, but also beyond continental borders with victims losing millions in cash from their bank accounts, without their knowledge.

In the US, the Federal Bureau of Investigation (FBI) reports that SIM swap scammers netted $68 million in 2021 alone, highlighting the threat of the trend that appears to be steadily growing.