Economy

Digital lenders risk ban for revealing borrowers

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The Central bank of Kenya, Nairobi. FILE PHOTO | NMG

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Summary

  • Rogue digital lenders who share personal data of loan defaulters will be stripped of their operating licences if Parliament passes proposed changes to the law to curb abuse of confidential records.
  • The proposed law aims to stop a trend where some lenders resort to “debt shaming” tactics to recover loans.
  • There are reports of debt collection agents pursuing borrowers either by informing their friends and family using contact information scraped from their phones or by threatening to tell their employers.

Rogue digital lenders who share personal data of loan defaulters will be stripped of their operating licences if Parliament passes proposed changes to the law to curb abuse of confidential records.

The National Assembly committee on Finance and National Planning has added a clause to the Central Bank Amendment Bill 2021, granting the banking regulator powers to revoke the permits of digital lenders who breach the confidentiality of personal information to pursue defaulting borrowers.

The proposed law aims to stop a trend where some lenders resort to “debt shaming” tactics to recover loans.

There are reports of debt collection agents pursuing borrowers either by informing their friends and family using contact information scraped from their phones or by threatening to tell their employers.

“The bank may suspend or revoke a licence by written notice to the holder of the licence, if the licensee (digital lender) is in breach of subsection (2A) or the conditions of the Data Protection Act or the Consumer Protection Act,” says the Bill.

The Data Protection Act bars sharing of data with third parties without consent and gives individuals the right to be told when their data is being shared and for what purposes.

Borrowers share personal information, including their professions and monthly earnings, when registering with digital lenders.

But besides the pursuit of unpaid loans, digital lenders share personal information with data analysing firms and for marketing.

The Central Bank of Kenya (CBK) has previously raised concerns about the abuse of the personal data of borrowers and called on lawmakers to fast-track legislation to provide for the regulation of digital lenders.

Lobbies that had petitioned Parliament during the review of the Bill also said that loan applications are private affairs that should be treated as confidential information.

Digital lenders have saddled borrowers with high-interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and an ever-ballooning number of defaulters.

Tala and Branch, some of the top players in the mobile digital lending market, offer annualised interest rates of 84- 152.4 percent and 156- 348 percent respectively.

Market leader M-Shwari, Kenya’s first mobile-based savings and loans product introduced by Safaricom and NCBA in 2012, charges a “facilitation fee” of 7.5 percent on credit regardless of its duration, pushing its annualised loan rate to 90 percent.

The Data Protection Act further compels firms to disclose to individuals and customers the reasons for collecting their data and ensure that the confidential information is safe from infringement by unauthorised parties.

The CBK will also have powers to revoke or suspend licences of digital lenders who do not disclose full information on loan facilities to borrowers, in line with the Consumer Protection Act.

There have been concerns that digital lenders do not reveal full information on pricing, punishment for defaults, and recovery of unpaid loans.

The Consumer Protection Act requires sellers to disclose to consumers all relevant information tied to the purchase of a good or a service.

The parliamentary committee also added a clause that will require digital lenders seeking licences to get clearance from the Data Commissioner, highlighting the stiff measures that the State is eyeing to protect abuse of borrowers’ information.

The Committee on Finance and National Planning backed the Bill in August, paving the way for its passage into law.

The enactment into law will see digital lenders operate under the same rules as commercial banks, including having to seek the CBK’s nod for new products and pricing that includes loan charges.

The Bill gives the CBK powers to supervise digital lenders for the first time and curb the steep digital lending rates that have plunged many borrowers into a debt trap.

Digital lenders will put a ceiling on non-performing loans at not more than twice the defaulted amount if the Bill becomes law.

Scores of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans, where borrowers can get loans in minutes via their mobile phones.

Digital lenders without operating licences will be barred from business in a bid to push out rogue players amid concerns of unethical practices.