Capital Markets

New bid to place digital lenders on CBK watch


Central Bank of Kenya. FILE PHOTO | NMG

The Central Bank of Kenya (CBK) will license all mobile loan providers if Parliament passes a proposed law seeking to weed out predatory lending.

Digital lenders without operating licences will be barred from business in a bid to push out rogue players amid concerns of unethical practices such as over pricing of loans, illegal mining of customer private data and shaming of borrowers who default on repayment.

The Central Bank of Kenya (Amendment) Bill of 2020, if passed, will also compel the CBK to publish the names of all digital lenders every four months to review those that are compliant.

“The proposed amendment seeks to achieve the following objectives; prohibit any person, institution or firm form lending money to Kenyans unless licensed by the Central Bank of Kenya,” says a notice of the Bill sponsored by nominated Member of Parliament Gideon Keter.

The CBK currently regulates banks and micro-lenders but the proposed changes will now grant it supervisory and licensing powers to oversee hundreds of digital lenders operating in the country.

There has been a proliferation of digital lenders targeting the banked and unbanked alike, saddling borrowers with high interest rates and leaving regulators scrambling to keep up.

The digital lenders have been accused of listing individuals with credit reference bureaus (CRBs) over very small amounts and failing to reveal their terms and conditions that include lifetime of SMS notifications, full surrenders of their personal data to third parties and waiver of their right to dignity.

Last year the CBK revoked the approval of digital lenders, barring 337 unregulated digital mobile lenders from forwarding the names of loan defaulters to CRBs. An internal memo showed that only 39 banks, 14 microfinance banks, 1,353 unregulated saccos, 164 regulated saccos were allowed to continue using the mechanism from the end of August.

The proposed new law underlies concerted efforts to tame the businesses which only needed an Android Package- APK to distribute to mobile phone users as free downloads to start issuing loans.

The Digital Lenders Association of Kenya (DLAK) -- a group of mobile-based lenders -- proposed of self-regulation to promote ethical lending, a suggestion which was rebuffed by CBK Governor Patrick Njoroge.

DLAK members include Tala, Alternative Circle, Stawika Capital, Zenka Finance, MyCredit, Okolea, Lpesa, Kopacent, Four Kings Investment, Kuwazo Capital and Finance Plan.

Another proposed amendment targeting regulation of the digital lenders is still awaiting approval in Parliament. The amendment tabled in July last year by Bonchari MP John Oroo Oyioka seeks to give CBK powers to regulate monthly interest rates charged by the digital mobile lenders and borrowers’ non-performing loans.

Under the proposed law, the CBK would also have powers to approve upward reviews on digital loan charges as well as put a ceiling on non-performing loans at not more than twice the defaulted credit.

US tech giant, Google has tried to limit the number of platforms that enjoy this low barrier of entry by asking Apps for personal loans to disclose maximum Annual Percentage Rate (APR), which generally includes interest rate plus fees and other costs for a year, or similar other rate calculated consistently with local law. It also banned those issuing loans that mature in less than two months.

Scores of unregulated digital lenders have flooded the Kenyan market to tap into the huge demand for quick loans.

The loans, however, attract high interest rates rising up to 520 percent when annualised, leading to mounting defaults and an ever ballooning number of defaulters who have been adversely listed with CRBs.

Digital lenders have, however, been accused of abusing personal information collected from defaulters’ mobile phone contacts list to bombard relatives and friends with messages asking third parties to enforce repayment.