The gift that keeps on taking

Kenya vs Digital Lenders: A Not-So-Brief Look At The Gift That Keeps On Taking

By  |  April 27, 2021

Sometime in September 2016, the Kenyan government decided to do something about the soaring interest rates on loans offered by financial institutions in the country.

The grand plan? Put a cap on interest rates chargeable by banks and limit the rate to no more than 4 percent; equal to the base rate set by the Central Bank of Kenya (CBK).

The reasoning at the time was that such a move would address the issue of poor availability of credit to working people and boost economic activity overall. In a society plagued by rising consumer debt levels, the cap placed on loan rates seemed like a welcome policy.

But it wasn’t, at least the banks felt so. Hence, they (the banks) turned their backs on millions of low-income customers, as well as small and medium-sized businesses deemed too risky to lend to. Ultimately, private sector credit crumbled.

What followed was an unintended consequence that continues to reverberate to this day – even as it’s been over a year since Kenya scrapped the cap on loan rates. As banks basically refused to lend to ordinary people, Kenyans sought alternatives and a new brand of lenders spotted an opportunity.

Things change quickly

Enter: digital lenders/micro-lending platforms brandishing quick loans granted within minutes from a mobile phone by means of an app or USSD channel.

Although Kenya had some mobile-based quick loan products like M-Shwari operating in the local micro-lending space since 2012, it was from that 2016 period when the country’s government introduced the now-withdrawn loan rate cap that unregulated microlenders started to proliferate in Kenya.

In light of the heightened appetite for small, quick loans, these digital lenders capitalised on a rising demand.

Hence, digital lending, which provides people with easy access to loans of various amounts, has become especially popular in Kenya, and there are now over 120 digital lending platforms in Kenya, according to some estimates. But as the local lending scene expanded, it also became very problematic and that has triggered calls for sanity in the sector.

No stranger to getting bad press, mobile lenders in Kenya have been mired in less-than-proper dealings for quite some time. From absurd interest rates and abusing private user information to debt-shaming loan defaulters and hiding disturbing terms and conditions on certain loans in the fine print, it’s quite the gamut of bad practices.

Hence, they (digital lenders) have found themselves on the wrong side of Kenya’s banking regulator in recent times.

Last year, the CBK stopped digital lenders from forwarding defaulters’ names to credit reporting agencies, citing misuse of the credit information-sharing process. The CBK also went on to stop the blacklisting of defaulters for amounts less than USD 10.00.

Obviously irritated, many digital lenders moaned. But the CBK Governor, Patrick Njoroge, who has on several occasions lambasted the practices of digital lenders –  describing them as shylock and fleas at certain points – seems to be unrelenting in the drive to rein in digital lenders.

Time to wield the big stick?

According to the latest reports, a government-backed CBK Amendment Bill, 2021, is being fast-tracked through Parliament to empower the CBK to supervise digital lenders for the first time. The aim is to curb predatory lending and overwhelming instances of outrageously huge digital lending rates that have many Kenyans stuck in a debt trap.

If Parliament adopts the proposed law, digital mobile lenders will have six months to be licensed by CBK. Also, foreign players will have to set up structures in the country and see their leadership undergo a thorough vetting process.

The proposed piece of legislation also grants power to the banking regulator to control the products, management, and information sharing practice among digital lenders.

Part of the proposal dictates that the products and pricing of digital lenders, including loan charges, will only be released to the public upon getting the CBK’s approval.

The proposed law also puts a ceiling on non-performing loans at not more than twice the defaulted amount – meaning that lending platforms will not be allowed to keep upping the amount to be paid back by charging late fees indefinitely in the case of repeated defaults.

Another part of the provisions in the proposed law seeks to fish out dirty players with respect to concerns about illicit and unethical practices such as money laundering, illegal mining of customer private data, and shaming of borrowers who default on repayment.

If the Bill scales the parliamentary process, the CBK will effectively have the power to determine minimum liquidity and capital adequacy requirements for digital credit providers, not unlike set conditions for operating a bank in Kenya.

As it is, there’s a feeling that things are about to get very uncomfortable for digital lenders in Kenya. It seems quite likely that it won’t be business as usual for long.

An arm and a leg

Currently, the CBK licenses, regulates, and supervises deposit-taking institutions. But digital lenders happen to be outside the CBK’s regulatory purview given that their operations do not involve taking deposits. Thus, digital lenders have essentially progressed unchecked in Kenya.

And over the years, reports of digital lenders adopting predatory and unsavoury practices in Kenya have only intensified.

Apart from the earlier-mentioned M-Shwari, Kenya’s digital lending space has players like Zenka, Tala, Branch, OPesa, OKash, Kopa Chapaa, Pesa na Pesa, etc..

They offer specific loans with interest rates anywhere between 2 percent to 50 percent per month. When annualised, such loans come with 400-500 percent interest. And banks aren’t helping matters either; the average bank loan in Kenya has an interest rate of approximately 12 percent.

The result? Mounting defaults and an ever-rising number of defaulters. From being unable to access loans from banks, Kenyans suddenly find themselves getting loans within minutes from their mobile phones. Some 13.6 percent of Kenyans had borrowed loans from a digital lender because of its convenience and ease of access, according to a 2019 survey.

But it’s come at huge costs – small loans with outrageous interest rates and short repayment periods, continuous and unlimited mounting charges on the balance in the event of a default or roll-over, and mining data on location, call records, and text messages, many times unbeknownst to customers.

In some cases, digital lenders access user data and even utilise that data to make threatening calls or send abusive texts to defaulters or other contacts on their phone book. Such is the malpractice that has become a staple of the local digital lending space in the absence of proper regulation.

A case can be made for digital loans in that they have helped ease access to finance. However, the other side of the argument paints a picture of digital loans increasing personal debt since the funds usually go into basic needs, thereby plunging already cash-strapped individuals into a deeper financial hole.

Hence, Kenya’s leadership has set out to sanitise the space, and the proposed law seeking to put digital lenders totally under the control of the CBK seems like an adjustment that may happen sooner than later.

Featured Image Courtesy: Inc42

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