Eunice Maina
August 30, 2021

Kenya Needs a Stronger Digital Lending Policy Framework

Kenya is considered one of the most robust innovation hubs in Sub-Saharan Africa. It is ranked second after South Africa by the  World Intellectual Property Organization.

Over the past two decades, fin-tech innovations have been mushrooming in the country, with mobile financial apps being the most popular. According to Communications Authority of Kenya, the number of mobile money subscriptions stood at about 67 million by  June 2021. FSD Kenya estimates that there are over 50 lending apps with approximately 7 million active members, some of them borrowing from more than 10 lenders at the same time. In fact, the Digital Lenders Association of Kenya indicated in 2020 that its members were providing about KSh4 billion worth of credit every month on average pre- Covid-19 pandemic. This is largely attributed to significant strides in increasing access to mobile telephony, interment and broadband services and progressive legal and policy environment in the country’s ICT sector.

Source: Mutei Advocates

Across the East African region, the fin-tech revolution has equally been experienced. In Tanzania and Uganda, the Fintech industry has had a significant growth in the last decade. Although the market is still small in Uganda, the average annual growth rate over the past two years has been approximately 35%, according to FSD Uganda. According to the Bank of Tanzania, around 43% of Tanzanians actively use mobile services. The presence of digital lenders and the interconnection between providers such as banks, finance institutions and mobile operators has facilitated financial inclusion in Tanzania which now stands at 56%. Out of the 56%, 55% are financially included through mobile money accounts.

These thriving Fintech innovations have also spawned digital money lenders, offering quick loans. Loans are processed instantly or within 24 hours and sent to borrowers’ mobile money accounts. Due to their convenient access on mobile phones, digital loans have had explosive growth over the past decade.

Source: Techweez.com

Despite the declines occasioned by pandemic-induced economic downturns, digital lending still remains a lucrative industry, attracting many players. Digital lending apps have made it easy for people who do not have formal bank accounts or stable source of income to access credit, thus expanding financial inclusion in Kenya, from 26.7% in 2006 to 83% in 2019. According to a report by FSD Kenya, 35% of people who borrow loans use it for consumption,37% for business and 7% for emergencies.

Although digital lenders have created a getaway for empowerment and opportunities financial inclusion, some have been accused of engaging in unethical practices such as predatory lending, levying high interest rates and data breaches. This is compounded by lack of adequate education of users on the terms and conditions, limitations in financial and digital literacy and an underdeveloped regulatory environment.

According to a survey by FSD Kenya, most of the 13.6% of Kenyans who owe digital lenders do not clearly understand the terms and conditions. Also, desperate borrowers often unknowingly surrender important personal data to third parties by agreeing to terms and conditions that they do not understand. This exposes them to the risk of invasion of privacy, appropriation of private data as they unwittingly grant lending apps access to their contact lists, text messages and financial history among other sensitive and proprietary information.

They target the poor and desperate youth and women and coerce them through constant unsolicited text messages of readily available loans. Women are particularly susceptible due to lack of collateral to take loans from traditional lenders.

Unlike traditional banks, digital lenders do not run credit risk assessments. They rely on borrowers’ willingness, as opposed to capacity, to repay, which leaves them with many defaulters. Some charge high interest rates of up to 43%, leaving many Kenyans indebted and in poverty traps.

The limited regulation in the sector has resulted in some digital lenders engaging in unethical practices like debt shaming. Some have been accused of contacting defaulters’ friends and family demanding payment, with threats.

Recently, there have been several legislative proposals presented to parliament aimed at addressing the regulatory gaps in the sector. For instance, in 2018, the National Treasury drafted the Financial Markets Conduct Bill, aimed at regulating consumer credit providers but it never saw light of day as it was never tabled in parliament. In  August 2021, Parliament passed the Central Bank of Kenya Amendment Bill that aims to regulate the business of digital lending and safeguard interests of consumers of digital lending products. It seeks to curb steep digital lending rates and rogue actors who use debt shaming to collect repayment. The law allows the Central Bank of Kenya to control products put out by digital lenders as well as borrowers’ data.

However, it allows digital lenders access to Credit Information Systems (CIS) and empowers them to list Kenyans who have defaulted their loans on Credit Reference Bureaus (CRB). This move is likely to spike the number of Kenyans listed in the CRB. The CBK has also been allowed to license digital lenders and also set parameters for pricing digital loans. Digital lenders have six months to comply with the new regulations and the CBK has 60 days to respond to license applications.

Although it is important to regulate the sector, the CBK law might have adverse effects on the very consumers that it seeks to protect by regulating the interest rates and capital requirements. Lenders are required to expressly announce their interest rates when advertising. Digital lenders do not require any securities for them to lend out money which justifies their high interest rates, just in case the borrower defaults payment. Currently, digital lenders don’t pay any fee to operate in the country but with the enactment of the new law, they will be required to apply for a license and accompanied by a fee as may be prescribed. It also requires one to be incorporated as a company and an agreement with the telecommunications provider that will provide the platform for digital lending services. These requirements might limit innovation due to increased costs and uncertainty in the market.

Kenyans who previously relied on these digital lending platforms to empower themselves might not have anywhere to turn to as traditional banks require securities before lending out money. Protecting consumers will stifle the digital lending industry therefore there it would be advisable for the government to strike a balance with the stakeholders involved in the sector.

 

 

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Eunice Maina
August 30, 2021

Kenya Needs a Stronger Digital Lending Policy Framework

Kenya is considered one of the most robust innovation hubs in Sub-Saharan Africa. It is ranked second after South Africa by the  World Intellectual Property Organization.

Over the past two decades, fin-tech innovations have been mushrooming in the country, with mobile financial apps being the most popular. According to Communications Authority of Kenya, the number of mobile money subscriptions stood at about 67 million by  June 2021. FSD Kenya estimates that there are over 50 lending apps with approximately 7 million active members, some of them borrowing from more than 10 lenders at the same time. In fact, the Digital Lenders Association of Kenya indicated in 2020 that its members were providing about KSh4 billion worth of credit every month on average pre- Covid-19 pandemic. This is largely attributed to significant strides in increasing access to mobile telephony, interment and broadband services and progressive legal and policy environment in the country’s ICT sector.

Source: Mutei Advocates

Across the East African region, the fin-tech revolution has equally been experienced. In Tanzania and Uganda, the Fintech industry has had a significant growth in the last decade. Although the market is still small in Uganda, the average annual growth rate over the past two years has been approximately 35%, according to FSD Uganda. According to the Bank of Tanzania, around 43% of Tanzanians actively use mobile services. The presence of digital lenders and the interconnection between providers such as banks, finance institutions and mobile operators has facilitated financial inclusion in Tanzania which now stands at 56%. Out of the 56%, 55% are financially included through mobile money accounts.

These thriving Fintech innovations have also spawned digital money lenders, offering quick loans. Loans are processed instantly or within 24 hours and sent to borrowers’ mobile money accounts. Due to their convenient access on mobile phones, digital loans have had explosive growth over the past decade.

Source: Techweez.com

Despite the declines occasioned by pandemic-induced economic downturns, digital lending still remains a lucrative industry, attracting many players. Digital lending apps have made it easy for people who do not have formal bank accounts or stable source of income to access credit, thus expanding financial inclusion in Kenya, from 26.7% in 2006 to 83% in 2019. According to a report by FSD Kenya, 35% of people who borrow loans use it for consumption,37% for business and 7% for emergencies.

Although digital lenders have created a getaway for empowerment and opportunities financial inclusion, some have been accused of engaging in unethical practices such as predatory lending, levying high interest rates and data breaches. This is compounded by lack of adequate education of users on the terms and conditions, limitations in financial and digital literacy and an underdeveloped regulatory environment.

According to a survey by FSD Kenya, most of the 13.6% of Kenyans who owe digital lenders do not clearly understand the terms and conditions. Also, desperate borrowers often unknowingly surrender important personal data to third parties by agreeing to terms and conditions that they do not understand. This exposes them to the risk of invasion of privacy, appropriation of private data as they unwittingly grant lending apps access to their contact lists, text messages and financial history among other sensitive and proprietary information.

They target the poor and desperate youth and women and coerce them through constant unsolicited text messages of readily available loans. Women are particularly susceptible due to lack of collateral to take loans from traditional lenders.

Unlike traditional banks, digital lenders do not run credit risk assessments. They rely on borrowers’ willingness, as opposed to capacity, to repay, which leaves them with many defaulters. Some charge high interest rates of up to 43%, leaving many Kenyans indebted and in poverty traps.

The limited regulation in the sector has resulted in some digital lenders engaging in unethical practices like debt shaming. Some have been accused of contacting defaulters’ friends and family demanding payment, with threats.

Recently, there have been several legislative proposals presented to parliament aimed at addressing the regulatory gaps in the sector. For instance, in 2018, the National Treasury drafted the Financial Markets Conduct Bill, aimed at regulating consumer credit providers but it never saw light of day as it was never tabled in parliament. In  August 2021, Parliament passed the Central Bank of Kenya Amendment Bill that aims to regulate the business of digital lending and safeguard interests of consumers of digital lending products. It seeks to curb steep digital lending rates and rogue actors who use debt shaming to collect repayment. The law allows the Central Bank of Kenya to control products put out by digital lenders as well as borrowers’ data.

However, it allows digital lenders access to Credit Information Systems (CIS) and empowers them to list Kenyans who have defaulted their loans on Credit Reference Bureaus (CRB). This move is likely to spike the number of Kenyans listed in the CRB. The CBK has also been allowed to license digital lenders and also set parameters for pricing digital loans. Digital lenders have six months to comply with the new regulations and the CBK has 60 days to respond to license applications.

Although it is important to regulate the sector, the CBK law might have adverse effects on the very consumers that it seeks to protect by regulating the interest rates and capital requirements. Lenders are required to expressly announce their interest rates when advertising. Digital lenders do not require any securities for them to lend out money which justifies their high interest rates, just in case the borrower defaults payment. Currently, digital lenders don’t pay any fee to operate in the country but with the enactment of the new law, they will be required to apply for a license and accompanied by a fee as may be prescribed. It also requires one to be incorporated as a company and an agreement with the telecommunications provider that will provide the platform for digital lending services. These requirements might limit innovation due to increased costs and uncertainty in the market.

Kenyans who previously relied on these digital lending platforms to empower themselves might not have anywhere to turn to as traditional banks require securities before lending out money. Protecting consumers will stifle the digital lending industry therefore there it would be advisable for the government to strike a balance with the stakeholders involved in the sector.

 

 

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