Ideas & Debate

Regulation shouldn't stifle digital lending

digital lending
The future is digital lending and looking at it as easy credit is unfair and one-sided. FILE PHOTO | NMG 

When the history of Kenya’s vibrant mobile money ecosystem is documented, digital lending will definitely clamour for equal attention, if not a storyline of its own, given its role in expanding Kenya’s financial inclusion.

The revolution of what is today the cradle of mobile money dates back to 2012, with the launch of M-Shwari — which offers a savings account and access to digital credit. Six years later, the micro-lending space has expanded rapidly, attracting admiration and loath in almost equal measure.

Lately, the digital lending space has been accused of over lending and attracting proceeds of crime. This has heightened calls for regulation to shield borrowers from over-indebtness, terrorism financing or a credit bubble.

On the line are commercial banks, venture capitalists, financial technology firms (fintechs) and non-banking institutions which have been innovating products and revamping existing ones to cater to a market once shunned by many. And now formal financial institutions that had no interest in the ‘unbankable’ are now accommodating these customers.

Indeed, to realise financial inclusion, it is crucial that the sub-sector is regulated and operates within a defined ecosystem. While this holds true, it is even more important that the said regulation does not destabilise what is the preparatory school for access to formal banking.


The birth of digital lenders is one that was quite circumstantial; fuelled by consumers considered too risky for formal banking. These were individuals were pushed away to unstructured money lenders called Shylocks who secured risk with an item of equal if not more value to the loan amount — a process that sometimes came with shame when borrowing and brutality upon default. When all else failed, friends became lender of last resort.

Fast forward to half a decade later, the needs have almost remained constant but the limits have doubled. You borrow to finance a business, pay school fees, bills and other household needs, but the need to seek a willing shylock, and the pain that comes with earning endorsement of a past borrower to attest to your moral standing, are no longer a pre-requisite to access credit.

So, what is the anatomy of a digital borrower? At the heart of each of these customers, is an urgent need; emergency or recurrent and ease of access to credit, the arising costs of the credit sometimes notwithstanding.

When a borrower seeks credit for the first time, their credit risk is weighted against information in the public domain and cross-lender data from Credit Reference Bureaus. This, coupled with additional Know-Your-Customer practices by the lender, including algorithms help build a basic credit profile with a score, that helps with the consideration for credit.

The availability of this data not only provides a good base to build targeted financial products; based on consumer credit profiles, but should be the best bet yet for the formal banking system to target customers. Look at it this way, digital lenders with all the associated risks are not capable of providing credit beyond a certain limit and will more often than not be confined to short-term micro-lending, a temporary fix to recurrent needs.

Why not let formal banks collaborate with digital lenders who bear the risk, to perfect the customer experience and groom potential customers to make them attractive for banks? This means that banks better focus on improving current processes, develop better products and deliver customer value once the customers are accepted into banking.

The place of the mobile phone is that it has given rise to products and solutions that fix every facet of life. It is a platform for the production, enabling of consumption and financing for production for different activities.

In a phone survey report on Kenya’s digital revolution by The Consultative Group to Assist the Poor, 37 percent of digital borrowers do so for business, another 35 percent (household needs, 20 per cent (school fees) and a paltry 3 percent for betting needs.

Considering that 98 percent of the businesses in our country are SMEs who in turn drive digital borrowing, it is time we appreciate the correlation between building healthy borrowing habits and growth. That digital lenders indeed have a role in developing the basic financial etiquette that instil borrowing and repayment discipline, which would in turn benefit them beyond these mobile based micro-loans. The ultimate goal should be that of rewarding businesses and individuals alike with more credit at better terms, sustainably.

The future is digital lending and looking at it as easy credit is unfair and one-sided. The truth is that digital lending is no longer just targeted at the poor but complementary to formal banking, a key component in the development of a progressive and inclusive financial ecosystem.

Even with regulation, let us therefore not undermine the gains made but strengthen the opportunities for collaboration. Any new policies should be aimed at supporting further growth if not increasing access to financial products for all Kenyans.

Judith Papai, Operations Manager, Stawika.