Mobile phone lenders have six months to register with the Central Bank of Kenya (CBK) under new rules that bar the firms from sharing borrowers’ information with third parties and require them to seek CBK approval for interest on their loans.
This is after CBK on Monday gazetted the Digital Credit Providers regulations, 2022 that will require all digital lenders to apply for licences from the banking regulator before September.
The lenders will from September apply to CBK for approval of interest rates on their loans, disclose all terms of their credit to borrowers and have also been barred from sharing information of loan defaulters with third parties.
Digital lenders have been blamed for breaching the confidentiality of information of borrowers who default on loans and hiding terms of their loans, opening an avenue for predatory lending.
“The Regulations are now operational, all previously unregulated DCPs are required to apply to CBK for a license within six months of the publication of the Regulations, i.e., by September 17, 2022, or cease operations,” CBK said on Monday.
Gazettement of the regulations follows signing into law of the Central Bank Act, 2021 in December, bringing digital lenders under the watch of the banking regulator for the first time.
CBK Governor Patrick Njoroge last week said that the regulations will bring sanity into an industry that has for years been blamed for predatory lending and debt-shaming borrowers in a bid to recover defaulted loans.
Digital lenders have been accused of not disclosing the full terms of their credit leading to costly interest rates that rise up to 520 percent when annualised, triggering mounting defaults.
The lenders resort to sending messages to friends and relatives of loan defaulters in debt-shaming tactics to recover the loans.
Debt collection agents have also been accused of threatening to tell their employers of loan defaulters in efforts to force them repay the loans. Borrowers share personal information, including their professions and monthly earnings, when registering with digital lenders.
Digital firms have in recent years flooded the local market, attracted by demand for quick credit that does not require collateral.
Borrowers get loans within minutes via their mobile phones, making digital loans a quick fix for daily bills.
CBK says that borrowers tapping the digital loans from the unregulated lenders grew to more than two million two years ago from an estimated 200,000 in 2016, highlighting their popularity.
The regulations will see digital lenders operate for the first time under similar regulations like banks and micro-financiers.