“Self-regulation is to regulation what self-importance is to importance.” - Central Bank of Kenya Governor Patrick Njoroge.
Self-regulation is an industry practice common in addressing various industry issues, from establishing professional standards to developing, setting and applying code of professional ethics and enhancing consumer confidence.
One of the most remarkable examples of self-regulation commonly referenced is that within the accounting discipline where group of accountancy firms have come up with industry rules that govern the profession under the International Accounting Standards Board which have become transnationally incorporated.
To delve into the subject of discussion, leading digital-first lenders in the country have announced the launch of Digital Lenders Association of Kenya to promote industry best practice and drive a coordinated approach in addressing emerging industry issues.
This strategic move is timely because financial consumers at the lower end of the market are opting for informal funding given the limitations in banking accessibility, and lack of credit history and documents which can serve as proof for cashflow – leaving them out of the financial-banking system giving rise to the rapid growth of digital finance. In 2009, only one in 10 adults with a mobile phone had ever used a formal loan from a bank, then came accelerated growth of digital credit from 2013, by 2017 over a third of Kenya’s adult mobile phone owning population have used digital credit with 64 percent being active borrowers.
So, with digital credit emerging as a frontier in the credit market, the establishment of a self-regulatory body that will roll out industry’s best practice is a step in the right direction. One of the biggest regulatory case for industry self-regulation is that government intervention always comes in ex-post rather than ex-ante in addressing industry’s systemic issues.
But the heart of the association should be more than ex-ante just like the many self-regulatory associations. First, building an inclusive fintech market has been a long-standing agenda for the Kenyan financial industry. But going by the various media reports, the conducts of a number of digital lenders have been put to question especially the methods used in collecting debts. Therefore, the association should help bolster market confidence in the industry by aligning the long-term interests of members collectively with those of the industry consumers.
Second, one of the biggest challenges the digital lending space is experiencing is the lacuna in regulation. Since members of the association are not deposit taking institutions, looking at the 12 founding members, they do not fall under the strict regulatory gambit of the central bank. Therefore, self-regulation by conducting regular financial, systemic and operational risk analysis gauging the stability of digital financial institutions and the market itself by the association is paramount.
Third, the big question asked by researchers about our rapidly growing digital finance industry is whether the proliferation of digital loans can be supportive of long-run improvements in welfare without placing undue debt stress and risks on borrowers.
For example, digital credit contributes significantly to the number of individual defaulters reported to the credit bureau and according to Microsave, over 2.7 million Kenyans have been reported to a credit bureau with a negative listing for late repayment or default. Therefore, the association will have to generate rules and policies focused on institutional design of digital lenders to mitigate against profit-driven risk-taking, basically aligning digital lenders short-term profit interests with long-term security of digital loan-takers and the mutual interest of both parties in market stability.
Lastly, the potential of any self-regulatory framework is always assessed according to how it promotes participation, transparency and accountability which are the main elements of self-regulatory approach. Therefore, the association will have to avoid the self-regulatory tendency of promoting short-time self-interest of its members at the expense of long-term market confidence.