Digital mobile lenders will have six months to be licensed by the Central Bank of Kenya (CBK) if Parliament adopts a proposed law that will see the regulator control their products, management, and sharing of borrowers' information.
A key aim of the government-backed Central Bank of Kenya (Amendment) Bill, 2021, which seeks to empower the banking regulator to supervise digital lenders for the first time, is to curb the steep digital lending rates that have plunged many borrowers in a debt trap as well as predatory lending.
It will also seek to push out rogue players amid concerns of unethical practices such as money laundering, illegal mining of customer private data and shaming of borrowers who default on repayment.
The banking regulator will be expected to determine minimum liquidity and capital adequacy requirements for digital credit providers akin to conditions set for operating a bank in Kenya.
The digital lenders will play under the same rules as commercial banks, including having to seek the CBK’s nod for new products and pricing that includes loans charges and putting a ceiling on non-performing loans at not more than twice the defaulted amount if the Bill becomes law.
The regulator will have to vet the management of digital loan providers, signalling a requirement to have a local office.
“Any person who before coming into force of this was in the business of offering credit facilities or loan services through a digital channel and is not regulated under any other law shall register with The Bank (CBK) within six months of coming into force of this Act,” says the Bill tabled in Parliament by Gladys Wanga in her capacity as chair of the Committee on Finance and National Planning.
The CBK had earlier raised the alarm of the credit-only mobile lending institutions being easily used to launder illicit cash.
Money laundering, which involves transferring and disguising illegally obtained cash to make it look legitimate, is mostly used by criminals and the corrupt to clean their wealth.
The Bill demands that the firms disclose to the CBK the source of funds that the institutions are lending to curb money laundering and terrorism financing.
Those in breach face a fine of Sh5 million or a jail term of three years or both as regulators scramble to keep up with boom in lending by financial technology (fintech) firms, including US start-ups.
Analysts reckon that a majority of the fintechs will struggle to meet the tough licensing conditions.
Tens of unregulated microlenders have invested in Kenya’s credit market in response to the growth in demand for quick loans.
Their proliferation has 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.
From having little or no access to credit, many Kenyans now find they can get loans in minutes via their mobile phones.
The Bill also comes amid complaints that digital lenders do not provide full information to borrowers on pricing, punishment for defaults and recovery of unpaid loans.
Digital lenders have been accused of abusing personal information collected from defaulters to bombard relatives and friends with messages regarding the default and asking third parties to enforce repayment.
The push to control the activities of digital lenders comes more than a year after Kenya removed the legal cap on commercial lending rates.
The cap, which was introduced in September 2016, slowed down private sector credit growth as commercial banks turned their backs on millions of low-income customers as well as small and medium-sized businesses deemed too risky to lend to.
The subsequent credit crunch triggered an appetite for digital loans, attracting unregulated microlenders to Kenya’s credit market in response to the growth in demand for quick loans.
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 395 percent.
Tala and Branch, the other top players in the mobile digital lending market, offer annualised interest rates of 152.4 percent and 132 percent respectively.
In April, the CBK barred unregulated digital mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs).