Editorials

It's time to properly regulate lending apps

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • CBK has finally cracked the whip after prevaricating for months and barred the lenders from listing defaulters with CRBs.
  • It has also ordered that those listed for defaults of less than Sh1,000 be removed from the list.
  • The regulator has rightly observed that the withdrawal was in response to numerous public complaints over misuse of the CIS (credit information sharing) by unregulated digital and credit-only lenders.

When the government started to regulate interest rates charged on bank loans, it created an unintended consequence in the proliferation and massive growth of credit-only app-based loan vendors. Not even the lifting of the loan cap has blunted the reach of the lenders.

This is for the simple reason that through simplicity and efficiency, they cater for a lot of Kenyans that banks seldom reach out to. While mainstream bankers have roped in pretty everyone when it comes to taking deposits, a lot of people in need of credit, especially the youth and SMEs, have been sidelined because of lack of credit history or simply because they find banks unable to address their unique needs besides being overly bureaucratic when handling loan applications.

This is a gap the apps—competition from similar and practically cheaper products from commercial banks and telcos notwithstanding—have happily stepped into and exploited. The first negative impact of these loans has been the growth of binge borrowing.

This has resulted in defaults and subsequent mass listing on credit reference bureaus (CRBs) that are ironically regulated by the Central Bank of Kenya (CBK), unlike the apps that remain outside the ambit of the regulator. A lot of borrowers, including small businesses, have thus ended up being economically grounded as a result of being listed by CRBs.

CBK has finally cracked the whip after prevaricating for months and barred the lenders from listing defaulters with CRBs. It has also ordered that those listed for defaults of less than Sh1,000 be removed from the list.

The regulator has rightly observed that the withdrawal was in response to numerous public complaints over misuse of the CIS (credit information sharing) by unregulated digital and credit-only lenders. We agree with CBK on the need to give relief to Kenyans listed for small amounts, but we believe such a measure is a short-term response to a bigger issue.

At the end of the day what the country needs is to balance the needs of the borrower, the lender and the economy by checking the excesses of all players on both the demand and supply sides.

Indeed, it might knock out the lenders who have their own useful place in the market, leading to more monopolies and financial pain for those at the bottom of the pyramid.

The government — not necessarily CBK as the apps don’t take deposits — should find ways to properly regulate app-based lenders over the long term. This will not only rescue Kenyans from usury but also streamline the app-based lenders‘ place in the economy.