Borrowers need vital lessons on pitfalls of mobile money lending

The African e-Commerce Week recently held in Nairobi provided a platform to discuss the importance of digital trade for Africa’s development and structural transformation. Different panelists spoke of its potential to generate benefits and opportunities that could empower and promote inclusive growth. Agriculture, MSMEs, women traders and the youth were identified as potential gainers. With regards to digitisation, Kenya was singled out as a global benchmark in the advancement of mobile money technologies for broader financial inclusion.

Dating back to March 2007, mobile money platforms in the country have provided financial services to the unbanked, made it easier to transact business as well as conveniently pay utility bills. At present, mobile money lending services is the latest innovation in the arena with numerous applications offering instant loans which are disbursed via mobile money.

These mobile money lending applications or so called loan apps have made it faster and easier for customers to borrow unsecured loans with varying repayment periods and interest rates.

The loans, if put in the right use, can enable a small-scale trader acquire business stock; assist a parent to take care of a medical emergency; or fund an unexpected trip among many other examples.

Despite these gains, Kenya does not have institutional and legal frameworks targeting the novel digital lenders. Are they, for instance, classified as commercial banks, non-banking financial institutions or micro finance providers or private lenders? In light of the growing competition by various players to lend out money digitally to customers, a clear cut categorization would determine which specific regulations would be applicable to them.

Serious consumer issues also arise out of these facilities as many of the borrowers are able to access simultaneous loans from different mobile lenders. This leads them into a debt trap. Furthermore, disclosure of the total cost of credit and terms and conditions of the loans are usually not clear to the digital borrowers who select “I Agree” without necessarily reading them.

Consumers therefore make uninformed decisions when they apply for the loans and suffer the consequences associated with the burden of servicing the repayments. Many borrowers have been adversely listed in credit reference bureaus as a result, thus, locking them out of future loans from other mobile lenders as well as more established financial institutions.

The Draft Financial Markets Conduct Bill, 2018 seeks to address some of these challenges arising from the adoption and usage of mobile money lending services.

Specifically, Section 51 of the Bill sets the ground for lender-borrower relationships and compels the former to accord fair treatment and provide and full information to their customers with a view to avoiding over-indebtedness and multiple borrowing. Nonetheless, the Bill does not have any clauses on mobile money lending platforms.

COLLINS OWEGI, Programme officer, Consumer Unity and Trust Society.