Economy

Mobile lenders to disclose charges before loan offers

lenders

Digital mobile apps and micro-lenders are at the forefront of expanding the Shylock economy. FILE PHOTO | NMG

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Summary

  • The Competition Authority of Kenya (CAK) said they would apply the same model used on mobile money transfer operators where cost is displayed before sending cash to increase transparency in the digital sector.
  • The ease of disbursement of mobile loans by digital lenders is attracting many Kenyans but the high costs have ended up saddling borrowers with costly interest rates.
  • The Central Bank of Kenya (CBK) says borrowers tapping digital loans from unregulated lenders grew from 200,000 in 2016 to more than two million in 2019.

Mobile digital lenders will be required to disclose the total charges including interest rates, late payment and rollover fees for their loans before disbursing credit to customers.

The Competition Authority of Kenya (CAK) said they would apply the same model used on mobile money transfer operators where cost is displayed before sending cash to increase transparency in the digital sector.

CAK director-general Kariuki Wang’ombe said a study by the watchdog disclosed most Kenyans are not aware of their rights and do not read the documents when they are signing up for a loan.

The study revealed that only 27 percent of digital borrowers were aware of the fees and costs of other digital loan providers in the market.

The ease of disbursement of mobile loans by digital lenders is attracting many Kenyans but the high costs have ended up saddling borrowers with costly interest rates, which rise up to 520 percent when annualised, leading to mounting defaults.

“If you remember we forced the mobile network operators to be indicating the money they are charging when sending money. We are seeing a situation where we have to force the digital lenders maybe through legislation or a framework in the coming year,” he said.

Tens of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans.

The competition watchdog said the shorter the amount of time for the credit, the higher the effective annual percentage rates. This had led to very high default rates with the CAK study showing seven out of 10 people have at least once failed to pay their loan on time.

The watchdog said this meant that 77 percent of mobile loan borrowers have been forced to pay penalty fees and charges to roll over their debts.

Kenyans have also been forced to juggle debts, borrowing from one mobile loan provider to pay another ending up in a vicious cycle of debt.

The CAK said 33 percent of mobile loan users reported they had multiple mobile loans.

Kenyans are desperate to get their hands on extra cash to survive the tough economic times, especially in the fallout of the Covid-19 pandemic that saw thousands lose their jobs that they fail to consider the cost of their loans.

From having little or no access to credit, many Kenyans now find they can get loans in minutes via their mobile phones.

The Central Bank of Kenya (CBK) says borrowers tapping digital loans from unregulated lenders grew from 200,000 in 2016 to more than two million in 2019.

The competition regulator is stepping up on the digital lenders at a time the CBK has also sought regulatory powers to police the sector to curb their exorbitant monthly interest rates and predatory lending.

MPs have offered the Central Bank of Kenya (CBK) express powers to control lending rates of digital mobile lenders under a proposed law that will see the regulator control their products, management, and sharing of borrower information.

The Central Bank Amendment Bill 2021 the parliamentary Committee on Finance and National Planning approved added a clause that gives the CBK powers to price interest rates for digital loans.

“We will continue working with the CBK on the Bill that they are currently putting in place which is informed by the study we had done and the other angle we will take is that we will be forcing them to publicise their rates so that borrowers can compare prices and see A is more expensive than B,” said Mr Wang’ombe.

“Consumers should also know their rights and they should be borrowing loans not on Fridays at midnight but they should be borrowing on Monday in the morning.”

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