After years of self-regulation, the digital credit providers last year came under the Central Bank of Kenya (CBK) regulations.
The Business Daily spoke to Kevin Mutiso, the chairperson of the Digital Financial Services Association of Kenya (DFSAK) on how the regulations have shaped the digital credit market, the fate of unlicensed players and the plan to roll out a credit repair window to help those in debt distress.
Over a year since the coming into effect of the CBK (Digital Credit Providers) Regulations, 2022, what has been the major change in the industry?
The main thing is trust. Customers started trusting us more and repaying their loans. This gave those that got the licence the confidence to diversify their products and so there have been a lot of new and exciting products.
Tala, for instance, launched a product that allows customers to choose when and where to pay and 4G Capital launched Kuuza while M-Kopa has a product for phones that has been scaled across the country.
The second big thing has been financing. Investors had held back on investment decisions because a lot of the transactions were hinged on the license. So, people like M-Kopa have seen a $250 million (Sh36.9 billion) funding.
CBK directory has 32 licensed digital credit providers. What about the lenders who are yet to secure the licence?
The association agreed with the CBK on a clause that allowed those who were already in business to continue until they get the licence for as long as they had submitted the application for the licence within the deadline set by the regulator.
So, what this meant is that if a digital lender put in their submission by September 17, 2022, they could continue lending. But what has happened is that businesses without licences have not grown as fast as those that are licensed. We know the CBK is doing as fast as possible to get the rest of the licences out and we are confident that this year we are going to see more licences being released.
What will happen to those who will get negative feedback after such a long period of doing business without a licence?
I think it is only in adverse scenario that the CBK is going to deny one a licence. Mostly it is about the ultimate beneficial owner, source of funds, directors and key staff record that could deny one a licence if in breach.
How has your membership grown in this period of transitioning to the regulated environment?
When we started, the association had half of the 10 big lenders. Today we have almost everyone except M-Kopa. Every major credit-only lenders is now part of DFSAK.
We are now at 27 and are going to approve four more to become 31. I know there are about 400 such lenders on the market but about 10 to 15 have more than 80 percent of the market share.
What is the association prioritising?
The big issue is tax. We are pushing for tax predictability and fairness. What we have now is an unpredictable tax policy. So, in 2021, we got hit with the Finance Act. In 2022 something changed in the Act and this year there was another change too.
What such close changes do is that they scare investors and also make planning difficult. Investors don’t know if they should plan to invest say Sh100 million next year and charge X percent and model what the return will look like because tax is changing.
The second thing is debt counselling. We want to push for a debt counselling mechanism and we believe it is going to be a game-changer.
What will the debt counselling mechanism entail?
It will ensure that a borrower who has, for instance, borrowed from say 10 apps and defaulted can go to the credit reference bureaus (CRBs) apps and file for debt distress.
The CRBs will call the borrower to disclose all the loans they have and how much is outstanding. The debt counselling team will then go to the lenders and negotiate on behalf of the borrowers for a resettlement plan.
The debt counselling team will sign an agreement with the borrower where he or she will be paying in instalments the agreed amount. The debt team will put a fee on top of the loan repayment but offer a flexible repayment period.
We believe it will be a game-changer because it will pull defaulters out of the debt distress so that they don’t have, say 10 people, chasing after them for the loan but just one entity collecting money that one is comfortable paying.
At the CRBs, it will be shown that one has paid all the loans because they will close all those loan accounts and show that one is under counselling debt repayment.
That way, if another lender wants to lend you money, they will know they are doing something about their previous debts instead of seeing them as defaulters.
This sounds like last year’s CBK’s credit repair framework that didn’t quite excite the market…
The difference is that the credit repair framework required borrowers to go to all the institutions they had borrowed from.
The debt counselling mechanism will consolidate all the debts and make it one debt, leaving the counselling team to negotiate the (repayment) rate on behalf of the borrower, based on the age of the loan.
The expectation is that the arrangement will also involve waivers on the penalties that may have accrued over time. We have applied for a grant of up to Sh50 million and we are waiting for feedback. We are doing it in partnership with the Credit Information Sharing Association of Kenya which brings all the CRBs together.
What will be the role of the Sh50 million grant?
This will be used to set up the debt counselling mechanism. We need to build the technology so that it is on all the CRBs' apps and all the digital lending apps. We need to create the back office system and pre-negotiate all the contracts.
How soon can this platform get running?
We were hoping that we receive the grant financing in this quarter so that we can start working on the project in the first quarter of next year and have something ready by the third quarter of next year.
What has been the gain of your members returning to the CRB platform after a long period out following the ejection by the CBK?
The biggest gain has been to the customer because they are not at risk of being over-indebted and they can build a more robust credit record.
From the business point of view, we have the sight of a customer’s credit health. What we never want is to get someone who is in loans distress and give them more loans.