CBK wants return of CRB listing for digital loans

The Central Bank of Kenya (CBK) has asked Parliament to revise a proposed law to allow digital lenders to resume reporting customer loan defaults to credit reference bureaus (CRBs).

Digital lenders were ordered to stop filing reports with CRBs in April last year in what the regulator said was in response to widespread abuse of the credit profiling system.

The CBK Tuesday told the National Assembly’s Committee on Finance and National Planning that the digital lenders could return to working with CRBs since they will be regulated should MPs adopt the Central Bank of Kenya (Amendment) Bill, 2021.

“The Central Bank Amendment Bill 2021 should empower digital lenders to share credit information,” CBK Governor Patrick Njoroge told Parliament Finance Committee.

The lenders, comprising those issuing credit through mobile phones and the Internet, were accused of aggressive tactics, including threatening borrowers with negative listing.

Once digital lenders fall under the watch of the CBK, the regulator will be able to supervise their use of credit information sharing like banks, saccos and other entities currently using the system.

The Bill gives the unregulated digital lenders six months to fall under the regulation of the CBK, which will license compliant firms.

Besides threats of negative listing, digital lenders have also been accused of erroneous negative listing of borrowers with no processes put in place to resolve such mistakes.

Credit information sharing is one of the most powerful risk-management tools for microlenders who typically don’t take collateral from borrowers when issuing the short-term loans.

A negative listing makes it nearly impossible for one to take a loan from another credit provider, serving as a deterrence against default.

The lock-out of digital lenders from CRB listings saw a 50 percent decline in loans issued over mobile phones. The Digital Lender Association of Kenya (DLAK) estimates that the value of loans issued each month fell by half to Sh2 billion.

The unregulated digital lenders have issued a total of Sh4 billion, less than one percent of the banking sector’s Sh3.1 trillion gross loan portfolio.

They have, however, caught the attention of the government for their predatory business practices, including sky-high interest rates and aggressive loan recovery.

It is not clear whether interest charged by the alternative lenders, which typically runs up to hundreds of percentage points when annualised, will be among the issues that will be regulated.

The CBK says it will hold public participation before publishing specific guidelines once the Bill is enacted into law.

The regulator says it will borrow from the experience in other jurisdictions like South Africa to regulate digital lenders offering credit in the local market.

Besides curbing predatory business practices by the digital lenders, the Bill seeks to address concerns of illicit financial transactions, including money laundering.

Customers of digital lenders have made many complaints, including being charged fees they did not expect and not being made to fully understand the costs or fees associated with loans.

Most of them are oblivious of the terms and conditions that include frequent SMS notifications and surrender of their personal data to third parties.

Some alternative lenders have used social pressure tactics to collect loans like informing their customers’ relatives and friends of their default.

China is among the countries that have intensified their control of microlenders.

The Asian nation recently banned the firms from issuing credit to college students to curb over-lending.

China also caps interest rates on microloans at up to four times the rate set by its central bank, the People’s Bank of China.

Use of digital loans in Kenya has grown exponentially over the last few years as low-income households have been attracted to the easily accessible credit facilities.

The CBK told Parliament about 200,000 Kenyans were borrowing money on their mobile phones in 2016 but that number had increased to two million in 2019, a tenfold growth.

The regulator estimates there are more than 100 unregulated digital lenders operating in the country.