The ongoing proliferation of digital lenders who are saddling borrowers with heavy debt burden arising from high interest rates calls for urgent regulatory action.
Without regulatory oversight, this fast-growing grey market will cause total devastation on individual and family finances with dire consequences on the economy.
While financial sector regulators such as the Central Bank of Kenya (CBK) can sit pretty arguing that these are non-deposit taking lenders, the sheer size of these lenders is already signalling that there will be big trouble should anything go wrong in this nascent market.
The crux of the matter is that technology that allows people to transact business on cellphones without a bank account has made it easy for digital loan providers to thrive without much intervention from the regulators.
Left with little or no access to credit from formal financial market, thousands of Kenyans have found digital loans, which are disbursed within minutes, quite convenient.
Yet unchecked growth in household debt often produces disastrous consequences, whatever the source. This has often required strong regulation of key aspects of the business such as interest rates to prevent predatory practices that are the bane of such markets.
It is even more worrying that some of the grey market lenders are using formal sector practices such as payment of registration fee to lock down potential customers yet they remain outside the purview of the CBK’s regulation.
Payment of registration fees is taking deposits by another name.
Most important is the fact that the positioning of these lenders outside the ambit of the CBK, allows providers, including banks, to escape the cap on interest rates.
M-Shwari, Kenya’s first savings and loans product, for instance, charges a “facilitation fee” of 7.5 per cent on credit regardless of its duration. Most digital loans have to be paid within a month meaning they come at an annualised interest rate of 90 per cent.
Fact is that no business can survive this level of interest rates and survive in the long term.
This is worrying in an economy where SMEs have been touted as our best route to taming the bourgeoning unemployment crisis.
There is certainly a strong case for regulating microlenders in order to keep them within the ambit of good lending practices that are fair to borrowers and do not expose the economy to the danger of implosion.
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