Digital lenders will be required to disclose their full fees and penalties to the competition watchdog every four months as part of efforts to fix the problem of hidden charges.
The Competition Authority of Kenya (CAK) said the mobile lenders will disclose interest charges, late payment and rollover fees after investigations revealed 73 percent of borrowers do not know the cost of their loans.
The competition watchdog says the disclosure will be implemented before June next year in the latest attempt to curb the steep digital lending rates that have plunged many borrowers into a debt trap as well as predatory lending.
Dozens 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.
Now, the CAK reckons that full disclosure of the fees, pricing rules and development of structures to guide the costs of digital loans will boost awareness among borrowers.
“The policy recommendations from the study are requiring digital lenders to provide periodic reports on the actual total charges paid by borrowers, including late payment and loan rollover charges,” CAK director-general Wang’ombe Kariuki said in the 2021 Auditor-General’s report.
“This reporting, which can be done on a quarterly basis, will ensure actual fees and charges are monitored.”
The recommendations followed the CAK’s investigation of complaints that the lenders do not provide full information to borrowers on pricing, punishment for defaults and recovery of unpaid loans.
The probe revealed that only 27 percent of digital borrowers were aware of the fees and costs 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.
“Pricing of digital loans was not an important factor to borrowers in choosing the lender. The two main considerations are speed of disbursement and ease of repayment,” Mr Wang’ombe said.
The competition regulator reckons the consumers need protection from digital borrowers preying on their desperation by failing to provide full information on pricing, punishment for defaults and recovery of unpaid loans.
The law empowers the competition watchdog to reverse borrowing terms based on misleading representations on loans issued to their customers.
The Act empowers the regulator to impose a financial penalty of up to 10 percent of the value of sales of the goods or services under investigation.
Digital lenders have also 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 nearly two years 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 back 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 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 90 percent.
Tala and Branch, the other top players in the mobile digital lending market, offer annualised interest rates of 84 to 152.4 percent and 156 to 348 percent respectively.
In April, the CBK barred unregulated digital mobile lenders from forwarding the names of loan defaulters to credit reference bureaus (CRBs).
The CAK’s pursuit of digital lenders comes at a time when Parliament has offered the CBK powers to control lending rates of digital loans providers under a proposed law that will see the regulator control their products, management, and sharing of borrower information.