Kenyans have a reputation for quick adoption of disruptive technologies with the most recent trend being the adoption of digital lending where 91 percent of loans are disbursed through mobile platforms.
More Kenyans can access short-term loans from their phones and this has gone a long way to sorting emergencies such as hospital bills, fees top ups or filling cash flow gaps, among other benefits. For a long time, players in the fintech industry in Kenya faced a single hurdle: passing the android app requirements.
That meant many lenders joined the industry with a sole aim of making a kill on the high appetite for loans among millennial consumers.
Some unprecedented trends have come to define digital borrowing, like loan stacking whereby individuals take more than one loan within a period of 30 days.
This behaviour can be blamed for the high levels of defaults (16 percent) compared to five percent in the traditional banking sector.
While traditional banks have a provision for non-performing loans, digital lender operate on some “sub-prime” lending approach where the risk of default is covered by high interest rates.
It is understandable why government bodies would want to introduce regulations to the mobile lending industry, as the legal lacuna exposes the country to money laundering where illegally obtained money is “washed” to become legitimate.
Recently, parliamentarians proposed a law that would expand the powers of the Central Bank to control the digital lending space by prescribing capital requirements and licensing market players.
The rationale of this law is easy; the need to scrutinize lenders and protect consumers from possible exploitation.
However, in a disruptive environment shaped by new technologies and data, the introduction of capital requirements and stringent licensing procedures may discourage innovation and competition.
In May 2019, the Reserve Bank of India recognised the need to support the fintech sector by encouraging the development of software and technologies that support micro and peer-to-peer lending.
The argument by the Indian regulator was that the industry has contributed to financial inclusion, expansion of credit and funding for small businesses.
Kenya can learn from this approach and encourage fintech companies to copy the accountancy field that has implemented self-regulation to great success.
Self-regulation operates on a broader spectrum that recognises the need to allow space for innovation.
For instance, a self-regulated fintech sector should recognize the role of creativity in innovation and allow market players to experiment with different business models that achieve the same objective.
Good news is that the Kenyan fintech industry has already begun to recognise the importance of order and sanity in the market through the formation of the Digital Lenders of Kenya Association (DLAK), earlier this year.
It would be overly ambitious to expect digital lenders to achieve effective self-regulation in the foreseeable future and this is where Kenya can learn from the United Kingdom on the use of sandbox experiments to guide innovation regulation.
The writer is Finance Expert and Management Consultant.