New Rules Signal Clock Is Ticking On Rogue Digital Lenders In Kenya

The unending debate around instances of unwholesome practice and outright malpractice associated with digital lending platforms in Africa has perhaps been loudest in Kenya.

There, over several years, an expanding band of obscure and under-regulated (or totally unregulated) mobile lenders mushroomed with a ‘no-holds-barred’ play while the authorities seemed to look the other way. But it appears some much-needed intervention is on the way.

The menace of rogue mobile lenders, which made Kenya seem like the ‘Wild West for quick loans’ for quite some time, might be about to subside as local regulators step up efforts to keep mobile lenders in line and weed out predators.

The latest development on that front is that mobile lenders have been given 6 months to register with the Central Bank of Kenya (CBK) under new rules that bar the firms from sharing borrowers’ information with third parties and require them to seek CBK approval for interest on their loans.

This was established after the CBK on Monday gazetted the Digital Credit Providers regulations, 2022 that will require all digital lenders to apply for licenses from the banking regulator before September.

As part of the provisions in the new regulations, the lenders will from September apply to CBK for approval of interest rates on their loans and disclose all terms of their credit to borrowers. Mobile loans platforms are also now prohibited from sharing information of loan defaulters with third parties.

The malpractice of digital lenders in Kenya is well documented, they have been criticised for unwholesome and predatory practices. Hidden terms of service and abuse of user data are some of the most common misdeeds of mobile lenders on record. The government has long been urged to step in to sanitise the space and that may finally be happening even though some might say it took too long.

“The Regulations are now operational, all previously unregulated DCPs are required to apply to CBK for a license within six months of the publication of the Regulations, i.e., by September 17, 2022, or cease operations,” CBK said on Monday.

With the regulations now gazetted following the signing into law of the Central Bank Act, 2021 in December, digital lenders have been placed under the control of the banking regulator for the first time, effectively shepherded by the same regulations as banks and micro-finance institutions.

CBK Governor Patrick Njoroge last week said that the regulations will “bring sanity into an industry that has for years been blamed for predatory lending and debt-shaming borrowers in a bid to recover defaulted loans.”

From absurd interest rates of over 500 percent when annualised which trigger mass defaults to not being completely transparent with the terms of their service, the problems with digital lenders have piled up and festered over the years. Many such platforms are known to debt-shame, sending threatening and inappropriate messages to friends and relatives of loan defaulters – key to their favourite social-shaming strategy.

In addition, their debt collection agents have been implicated in various unsavoury episodes, including instances of agents threatening to expose loan defaulters to their employers in an effort to force them to repay the often inflated debts. Typically, borrowers share personal information, including their professions, contacts, and monthly earnings, when registering with digital lenders, at times unconsciously.

The proliferation of digital lenders in the local market in recent years has been swift. A surge in the demand for non-collateralised small loans offered via mobile phones (within minutes at times) has fed the emergence of a slew of mobile loans platforms that locals have taken to, to take care of everything from daily needs and emergencies.

Indeed, the bulk of digital loans is found to fuel consumption among folks whose creditworthiness and ability to repay is often not properly gauged by the lenders who are often too eager to meet disbursement quotas. Hence, a vicious circle of defaults, inflated debt, inability to repay, and debt-shaming becomes the order of the day.

The CBK says that borrowers tapping the digital loans from the unregulated lenders grew to more than 2 million two years ago from an estimated 200,000 in 2016, highlighting their popularity. It follows that regulation is a necessary move.

Like Kenya, Nigeria has also been hit by a digital lending epidemic. And although Nigeria is yet to make structured regulatory in-roads, recent crackdowns have been seen in the form of a fine and a raid that saw the authorities raid the offices of six “illegal” digital lenders and shut them down.

Featured Image Courtesy: Mutie Advocates