‘Big brother’ regulation bad for digital credit

One of the theories peddled around before the demonetisation was that the economy is experiencing a liquidity problem largely because a lot of money has been sucked out of circulation and stashed in vaults and bedrooms in palatial homes. Some even estimated it to be more than Sh.100 billion (almost half) as what has been withdrawn out of circulation.

This theory has been blown under the water after the Central Bank of Kenya(CBK) released final data on the demonetisation exercise. Only 3.3percent was the cash found to be illicit since those holding them didn’t come forward and convert them, so this was the portion of money that was not circulating. At the same time, 92percent of the converted cash were transactions below 2 million, so it would also be correct to say that the 92 percent were individuals not hoarding large amounts of cash out of circulation. Therefore, this means that more than 90percent of the 1000notes have been in circulation.

So, the question is where was the illiquidity coming from?

The remaining explanation apart from Govt failure to pay its suppliers and contractors is that banks are the ones holding the larger portion of money in circulation, and not lending much of it to the public. So, it will be proper for CBK to provide information on how much cash banking institutions have in their possession against what is in the public.

If this case is true, banks are withholding lending money from the public, the situation is about to become worse. A few weeks ago, Parliament amended the Law of Contract providing that before the creditor pursues a guarantor, he/she has to seize all assets of the defaulting borrower. This means banks will be applying stringent risk profiling setting up barriers to credit access.

But looking at the FinAccess report 2019 produced by FSD in collaboration with Kenya National Bureau of Standards and Central Bank of Kenya it provides a bigger picture of credit market. 2019 has seen increased growth in usage of shopkeeper credit (from 10 to 30percent) and borrowing from friends and family possibly due to tough economic times. Loans from other sources including Sacco and chama loans have remained stagnant, whilst digital loans have been on an increase suggesting that digital loans are not substituting traditional sources of credit, instead, they are reaching out to a new audience of borrowers. This was evidenced by Fuliza which lend out Sh.6.2 billion worth of credit in one month and 200m daily, proving that there is demand for instant access to relatively low value and short-term loans in the credit market space that digital loans are filling

So, there is an existing demand for low value and short-term loans that digital loans are providing in the credit market space. But we find ourselves caught up in the “big brother syndrome” where the posh and serious bureaucrats presume to know best the interest of poor masses who access digital loans by arguing that these credit lines are a debt trap impoverishing them.

The reality is different, the 2017 FinAccess Digital Credit Tracker survey shows that 35 per cent of digital borrowers use digital loans to meet day-to-day needs, while 7 per cent use digital loans for medical emergencies. On the other hand, 37 per cent use digital loans for business purposes, which might include working capital needs, while about 21 per cent use them for education.

So, the conversation about regulation of digital credit market should be looked at from the perspective that digital loan providers invest their money to earn return therefore won’t expose their capital to unnecessary risk whilst borrowers look at not exposing themselves to over-indebted risk because these consumption loans are a life-line conveniently financing and managing their welfare.

So, lets drop this restrictive “big-brother” regulatory eyes and focus on financial sector development and consumer protection regulatory policy that will streamline the growing digital credit space