Last week, the Treasury released new guidelines barring mobile application lenders from using credit reference bureaus (CRBs) to share information on defaulters and basically disabled fintech innovations in the country.
Although they gave no reason for this policy change, their action will slow down innovation. They see these lenders as immorally benefitting from poor citizens.
However, analysts see the hand of the banking sector that has had sleepless nights from emerging fintech innovations. In general, legacy banking institutions see fintechs as a threat to their enterprise.
Let us not forget that prior to the entry of fintechs, the banking sector in Kenya treated their customers and potential customers with a lot of contempt. To open a bank account, you needed references. Loans required huge collateral and guarantees. Even in cases of credit guarantee schemes for MSMEs, the sector has had no energy to stimulate growth.
Some of the banks pay more attention to noninterest income, charging for practically everything, including monthly service charges, deposit and transaction fees, penalty fees, insufficient funds fees, statements, annual fees, inactivity fees, transaction fees, over-the-limit fees, cheque and deposit slip fees, late payment fees and so on.
In the past, some banks operated like the mafia, colluding with valuers to auction client assets at throwaway prices for defaulting on loan repayment. Lending rates were artificially inflated so that some loan portfolios could double in value within a short period of time.
It is hard to imagine that a sector with this track record would have the audacity to point fingers at fintechs as charging exorbitant rates of interest.
Fintech innovations have played a major role moderating the banking sector in Kenya. Their use of artificial intelligence to create credit scoring for offering non collateralized loans is novel. As a result, research now shows that they have brought about greater financial inclusivity.
There is enormous amount of data that the government should have used to understand who in spite the high interest rates benefits from the emerging model of lending.
A 2017 study by the Financial Sector Deepening Kenya, a financial inclusion organisation, established that the majority of Kenyans access digital credit for business purposes such as investing and paying salaries, and to meet everyday household needs.
The borrowers are largely microenterprise organisations that had been fleeced by shylocks for many years until they found refugee in fintechs. Most borrow in the wee hours of the morning to buy supplies and refund in the evening to avoid paying too much in interest.
Of course, there are those who default, hence the reason why the non-performing loans (NPLs) for fintechs are high.
In such a situation, the Treasury and the Central Bank of Kenya should have made intervention that would promote innovation while seeking to lower the lending rates by mobile lenders.
The solution still remains weeding out the bad apples and helping build a bigger pool of creditworthy borrowers.
The policy pronouncement will have no impact on any of the defaulters. They perhaps don’t know the fact that being delisted from CRBs doesn’t absolve them from paying for their financial mischievousness. Digital footprints rarely go away easily. They could come up in future to haunt them. The best thing for them is to pay up.
In theory, fintech innovation in Kenya has put the country on a path to greater competitiveness, improved productivity and better services. These are all ingredients that with time will lower lending rates and facilitate inclusivity.
We could have dealt with poverty more easily than any other country, but we have now put the brakes on innovation under the guise of creating access to credit during the raging pandemic.
Banks don’t lend Sh1,000. They have far too much baggage in cost to lend that much but that is the amount most people need to borrow to make a living. If those who borrowed to bet defaulted, must we punish microenterprises for sins committed by irresponsible gamblers?
The truth is that those who defaulted will have no way of getting into banking halls for access to credit. In the absence of a financial inclusion strategy in Kenya, innovation would have dealt with the financial oligopolies (a market structure controlled by a few institutions).
The entire financial services sector needs diversity. Parliament should not pass the law that is meant to kill fintechs. Their decisions must be data driven.