Capital Markets

What regulated mobile digital lending market will look like


The Central Bank of Kenya. PHOTO | DENNIS ONSONGO | NMG

Players in the digital loans industry now have two weeks left to apply for licences as consumers move into a new era where their friends and relatives will no longer be hounded by intrusive phone calls when in default.

The Central Bank of Kenya (CBK) is expected to issue a list of compliant players by September 17 and shut down digital lenders that fail to meet strict consumer protection rules introduced under Digital Credit Providers Regulations, 2021.

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

Digital Lenders Association of Kenya (Dlak) Chair Kevin Mutiso said Kenyans should expect better services, stronger customer protection laws and fewer compliant players in two weeks.

“Most people have applied and there is just a bit of small documents being asked for. We expect in the two weeks a memo from CBK with a list, some names will be there, others will drop off,” he said.

President Uhuru Kenyatta last December approved a change in law that allowed the central bank to regulate digital lenders, a move that gave the bank power to rein in lenders who violate consumer privacy.

Under the new rules, the lenders were supposed to furnish the regulator with a Certificate of Incorporation, Memorandum and Articles of Association of the applicant and that of any significant shareholder.

Directors, Chief Executive, Senior Officers and Significant Shareholders would also undergo a fit and proper test from the regulator who also required disclosure of the source of funds and pricing models.

The new law also gave CBK powers to revoke licences of firms which send information about loan defaulters to third parties in name-and-shame tactics meant to recover the money.

Failure to reveal interest charges, late payment and rollover fees has also been cited as a major problem bedevilling customers who turn to digital loans due to their ease of access given that they do not require collateral.

Most Kenyans are not aware of their rights and do not read the terms of the loans when signing up for credit.

This leaves them vulnerable to being saddled with costly interest rates that rise up to 520 percent when annualised, triggering mounting defaults.

The use of mobile loans has grown exponentially over the last few years as low-income households have been lured into easily accessible mobile loans.

The CBK told parliament about 200,000 Kenyans were borrowing money on their mobile phones in 2016 but that had grown to 2 million in 2019, tenfold jump.

The easily accessible mobile loans however have aggressive recovery methods including being too quick to list borrowers for very small defaults.

The regulator estimated there are more than 100 unregulated digital lenders that lack of transparency in pricing, mine personal data and use aggressive debt collection methods.

Most of the mobile loan takers are oblivious to the conditions that include lifetime of SMS notifications, full surrenders of their personal data to third parties and waiver of their right to dignity.

The lack of regulation meant that customer privacy was never guaranteed as these digital lenders arbitrarily shared user data with third parties.

Besides, customers defaulting on loan repayments faced unending reminder calls from debt collectors, who also used shaming tactics like calling friends and family to compel defaulters to pay.

CBK kicked the digital lenders out of the Credit Information Sharing mechanism for misuse of Credit Reference Bureaus to report small defaults that were less than Sh1000 and used the mechanism to leverage loan recovery by threatening to list clients.

[email protected]